Group Finance Director's Report
Supplementary Embedded Value Information for the UK Investment Business
Introduction
The introduction of IFRS in 2005 resulted in a change to the timing of reported profit recognition in respect of Investment Business. Under IFRS, insurance contracts continue to be accounted for on an Embedded Value (‘EV’) basis but investment contracts are now all accounted for under IAS 39. This has the effect of delaying the recognition of profit in respect of some investment contracts and, in particular, has resulted in the reporting of losses in the year of their sale.
To assist in the understanding of the underlying performance and value generation of our UK Investment Business, the supplementary information set out below provides the financial results for our UK Investment Business as if both insurance and investment contracts (including mutual funds) were accounted for on an EV basis. We refer to this as the ‘Full EV’ basis. The Full EV basis uses the same methodology as that which is applied to the calculation of EV on insurance contract business under IFRS. The economic assumptions used for the Full EV basis are the same as used under the reported IFRS basis set out above.
Applying the Full EV basis results in the earlier recognition of profit on new investment contract business, but subsequently a lower contribution from existing business, when compared to the recognition of profits on investment contracts under IAS 39. Differences between actual and expected experience on existing business often have a greater impact on a Full EV basis, as changes in experience can result in significant adjustments to modelled future cashflows. In contrast, under IAS 39, variations in experience compared to expectations are recognised in the income statement in the year in which they arise.
No additional information has been provided in relation to General Insurance or European Financial Services as the investment business not already accounted for on an EV basis under IFRS on these businesses is immaterial.
Key Financial Highlights
The key highlights of the Full EV basis are as follows:
- Group embedded value on a Full EV basis was £7,684m as at 31 December 2007 (2006 £7,086m), £2,724m higher than reported under IFRS.
- Underlying earnings per share on the Full EV basis increased 5% to 110.8p (2006 105.5p), 4.6p (4%) higher than reported under IFRS.
- Overall, underlying profit before tax for the UK Investment Business increased 21% to £652m (2006 £539m), £240m higher than reported under IFRS.
- Contribution from new business in the UK Investment Business increased by 10% to £505m (2006 £461m),
£457m higher than reported under IFRS.
A comparison of the Group’s financial results on a Full EV basis and the IFRS basis is set out below.
| Year ended 31.12.2007 Full EV Basis |
Year ended 31.12.2007 IFRS Basis |
Year ended 31.12.2006 Full EV Basis |
Year ended 31.12.2006 IFRS Basis |
|
| Underlying profit before tax | £5,948m | £5,708m | £5,799m | £5,537m |
| Underlying EPS | 110.8p | 106.2p | 105.5p | 100.5p |
| Post tax return on mean equity | 19.3% | 19.7% | 20.2% | 20.8% |
| As at 31.12.2007 Full EV Basis |
As at 31.12.2007 IFRS Basis |
As at 31.12.2006 Full EV Basis |
As at 31.12.2006 IFRS Basis |
|
| Group embedded value (net of tax)* | £7,684m | £4,960m | £7,086m | £4,561m |
| Net asset value per ordinary share | 589p | 551p | 561p | 516p |
* Includes Europe of £665m (2006 £488m) and UK General Insurance of £225m (2006 £214m).