Pro forma reconciliation of group operating profit to profit after tax – MCEV basis

Pro-forma reconciliation of group operating profit to profit after tax – MCEV basis

For the year ended 31 December 2009

	2009 £m	Restated 2008 £m
Operating profit before tax attributable to shareholders’ profits
Long-term business
United Kingdom	787	883
Europe	2,235	1,647
North America	266	201
Asia Pacific	101	79
Total long-term business	3,389	2,810
General insurance and health	960	1,198
Fund management	51	42
Other operations and regional costs	(173)	(163)
Corporate centre	(108)	(141)
Group debt costs and other interest	(636)	(379)
Operating profit before tax attributable to shareholders	3,483	3,367
Adjusted for the following:
Investment return variances and economic assumption changes on long-term business	759	(12,469)
Short-term fluctuation in return on investments on non-long-term business	95	(819)
Economic assumption changes on general insurance and health business	57	(94)
Impairment of goodwill	(62)	(66)
Amortisation and impairment of intangibles	(135)	(108)
Profit on the disposal of subsidiaries and associates	72	7
Integration and restructuring costs	(286)	(326)
Exceptional items	(248)	(754)
Profit/(loss) before tax	3,735	(11,262)
Tax on operating profit	(924)	(841)
Tax on other activities	124	4,396
	(800)	3,555
Profit/(loss) after tax	2,935	(7,707)

Total MCEV operating profit before shareholder tax was £3,483 million (2008: £3,367 million), an increase of 3%. Within this total the long-term business operating profit before shareholder tax was £3,389 million (2008: £2,810 million), an increase of 23%. This includes the impact, reported through expected returns, of a change in the basis of setting normalised investment returns consistently with 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. At half year we reported that the return over the typical duration of the assets held was more appropriate and are 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 ten year swap rate in the relevant currency plus an appropriate risk premium. For fixed interest investments a similar change has been made to reflect the actual duration of the assets held. If the previous basis, which referenced the one year swap rate, had been used the total expected return would have been around £700 million lower. However, this benefit has been offset by the impact of the underlying falls in opening swap rates between 2008 and 2009. There is no impact on MCEV profit before tax.

This mainly impacts Aviva UK and Delta Lloyd, where the additional investment earnings on assets backing certain policyholder liabilities flow straight to shareholders. In the US, the assumed return on bonds net of defaults, includes a partial recovery of the unrealised losses reported in previous periods and £240 million has been reported for this through expected returns on existing business and on shareholders’ net worth.

Investment variances and economic assumption changes in 2009 of £759 million reflect the large benefit from the reduction in credit spreads on corporate bonds, offset by the reduction in the adjustment to risk free rates. In 2008, the loss of £12,469 million was driven by bond yields falling in the United Kingdom and Eurozone, significant falls in equity markets down between 30% and 50% and credit spreads widening significantly in the final quarter of 2008.