Proforma reconciliation to group operating profit to profit after tax – IFRS basis
7. Long-term business investment return variances and economic assumption changes
- a. Definitions
- Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
- b. Economic volatility
- The investment variances and economic assumption changes excluded from the long-term business operating profit were as follows:
| long-term business | |||
|---|---|---|---|
| 6 months 2009 £m |
6 months 2008 £m |
Full year 2008 £m |
|
| Investment variances and economic assumptions | 155 | (636) | (1,631) |
- c. Assumptions
- The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.
- Within the 2008 results, the expected rate of investment return was calculated by reference to the one year swap rate in the relevant currency plus an appropriate risk premium for equities and properties. For 2009, the group considers that the return over the typical duration of the assets held is more appropriate and is more consistent with the group's expectation of long term rates of return. Therefore, the expected return on equities and properties has been calculated by reference to the 10 year swap rate in the relevant currency plus an appropriate risk premium.
- If the IFRS operating profit had been calculated by reference to the one year swap rate, IFRS operating profit would have been £120 million lower. There is no impact on IFRS profit before tax.
- The principal assumptions underlying the calculation of the expected investment return for equities and property are:
| Equities | |||
|---|---|---|---|
| 6 months 2009 % |
6 months 2008 % |
Full year 2008 % |
|
| United kingdom | 7.0% | 7.6% | 9.2% |
| Eurozone | 7.3% | 7.4% | 8.3% |
| Properties | |||
|---|---|---|---|
| 6 months 2009 % |
6 months 2008 % |
Full year 2008 % |
|
| United kingdom | 5.5% | 6.6% | 7.7% |
| Eurozone | 5.8% | 6.4% | 6.8% |
For fixed interest securities classified as fair value through profit and loss, the expected investment returns are based on average prospective yields for the actual assets held. Where fixed interest securities are classified as available for sale, such as in the United States, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
