L&G Interim Results 2006 PT 6
Legal & General Group PLC
27 July 2006
P63
Appendices
----------
I UK funds under management
At 30.06.06 At 30.06.05 At 31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Total investments 211,140 177,626 204,328
=======================================================================================================================
Represented by
Index tracking funds:
- UK equities 61,726 52,200 58,739
- Overseas equities 37,460 29,417 36,468
- Fixed interest 25,686 20,859 23,364
- Index linked 20,390 16,665 18,906
- Cash/deposits 938 411 170
-----------------------------------------------------------------------------------------------------------------------
Total index tracking funds 146,200 119,552 137,647
Actively managed funds 64,940 58,074 66,681
-----------------------------------------------------------------------------------------------------------------------
211,140 177,626 204,328
=======================================================================================================================
By investment approach
Indexed equities 99,186 81,617 95,207
Active bonds (including index linked funds and cash) 45,163 40,319 46,419
Indexed bonds (including index linked funds and cash) 47,014 37,935 42,440
Active equities 10,406 10,248 11,542
Property 9,081 7,107 8,388
Private equity 290 400 332
-----------------------------------------------------------------------------------------------------------------------
211,140 177,626 204,328
=======================================================================================================================
By source of business
Institutional funds under management(1):
- Managed pension funds pooled 128,231 105,114 122,116
- Managed pension funds segregated 7,837 8,070 8,921
- Other 5,658 2,809 4,069
-----------------------------------------------------------------------------------------------------------------------
Total institutional funds under management 141,726 115,993 135,106
UK Operations (unit trusts - excluding life fund investment) 10,339 8,363 10,378
UK Operations (life and general insurance funds) 59,075 53,270 58,844
-----------------------------------------------------------------------------------------------------------------------
211,140 177,626 204,328
=======================================================================================================================
1. Excludes institutional investments in unit trust funds.
=======================================================================================================================
P64
II Reconciliation of shareholder net worth (SNW)
At At At At At At
30.06.06 30.06.06 30.06.05 30.06.05 31.12.05 31.12.05
Restated
UK life and Total UK life and Total UK life and Total
pensions pensions pensions
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
SNW of long term operations (IFRS basis) 2,591 3,520 2,301 3,188 2,560 3,481
Other assets (IFRS basis) - 732 - 609 - 776
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on the IFRS basis 2,591 4,252 2,301 3,797 2,560 4,257
Purchased interests in long term business (9) (29) (11) (24) (10) (25)
Sub-fund 292 292 258 258 287 287
Deferred acquisition costs / income liabilities (360) (927) (228) (780) (216) (790)
Deferred tax(1) (850) (686) (680) (528) (810) (646)
Other(2) 50 8 (176) (172) (49) (63)
-----------------------------------------------------------------------------------------------------------------------
Shareholder net worth on the EEV basis 1,714 2,910 1,464 2,551 1,762 3,020
-----------------------------------------------------------------------------------------------------------------------
Represented by:
SNW of long term operations (EEV basis) 1,714 2,178 1,464 1,942 1,762 2,244
Other assets (IFRS basis) - 732 - 609 - 776
=======================================================================================================================
1. Deferred tax represents all tax which is expected to be paid under current legislation, including tax which would
arise if shareholders' assets were eventually distributed.
2. Other relates primarily to the different treatment of sterling reserves and other long term reserves under EEV
compared with IFRS.
III New business
a) UK life and pensions new business APE by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Protection 55 56 46 54 54 54
Annuities 38 33 40 35 35 44
Savings
Unit linked bonds 60 61 60 54 51 43
Pensions - stakeholder and other non profit 50 41 39 41 41 31
With-profits 54 48 40 38 37 35
-----------------------------------------------------------------------------------------------------------------------
Total 257 239 225 222 218 207
=======================================================================================================================
b) UK life and pensions new business annual premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Protection 55 56 46 54 54 54
Annuities - - - - - -
Savings
Unit linked bonds - - - - - -
Pensions - stakeholder and other non profit 36 27 26 26 26 19
With-profits 34 29 18 19 21 19
-----------------------------------------------------------------------------------------------------------------------
Total 125 112 90 99 101 92
=======================================================================================================================
=======================================================================================================================
P65
III New business (continued)
c) UK life and pensions new business single premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Protection - - - - - -
Annuities 375 333 401 352 348 438
Savings
Unit linked bonds 608 605 599 544 505 434
Pensions - stakeholder and other non profit 138 142 128 146 151 124
With-profits 199 190 217 192 161 159
-----------------------------------------------------------------------------------------------------------------------
Total 1,320 1,270 1,345 1,234 1,165 1,155
=======================================================================================================================
d) International life and pensions new business APE by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
USA 10 11 12 11 9 10
Netherlands 7 9 7 8 6 8
France 13 7 6 8 17 5
-----------------------------------------------------------------------------------------------------------------------
Total 30 27 25 27 32 23
=======================================================================================================================
e) International life and pensions new business annual premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
USA 10 11 12 11 9 10
Netherlands 4 3 3 4 3 3
France 8 1 1 3 12 1
-----------------------------------------------------------------------------------------------------------------------
Total 22 15 16 18 24 14
=======================================================================================================================
f) International life and pensions new business single premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
USA - - - - - -
Netherlands 37 59 41 39 32 46
France 48 59 50 49 48 44
-----------------------------------------------------------------------------------------------------------------------
Total 85 118 91 88 80 90
=======================================================================================================================
g) Retail investments new business APE by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK 218 124 67 79 94 75
France 1 - - 1 1 -
-----------------------------------------------------------------------------------------------------------------------
Total 219 124 67 80 95 75
=======================================================================================================================
=======================================================================================================================
P66
III New Business (continued)
h) Retail investments new business annual premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK 6 4 3 2 7 3
France - - - - - -
-----------------------------------------------------------------------------------------------------------------------
Total 6 4 3 2 7 3
=======================================================================================================================
i) Retail investments new business single premiums by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK 2,120 1,195 642 765 874 718
France 5 5 4 11 5 5
-----------------------------------------------------------------------------------------------------------------------
Total 2,125 1,200 646 776 879 723
=======================================================================================================================
j) Analysis of the distribution of UK individual life and pensions products by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Independent financial advisers 196 222 165 185 180 137
Tied 226 85 76 69 95 87
Direct 15 10 7 5 10 9
-----------------------------------------------------------------------------------------------------------------------
Total UK individual 437 317 248 259 285 233
=======================================================================================================================
k) UK new business APE summary
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Individual life and pensions 219 193 181 180 191 158
Retail investments 218 124 67 79 94 75
-----------------------------------------------------------------------------------------------------------------------
Total UK individual 437 317 248 259 285 233
Group life and pensions 38 46 44 42 27 49
-----------------------------------------------------------------------------------------------------------------------
Total UK 475 363 292 301 312 282
=======================================================================================================================
l) Institutional fund management new business by quarter
3 months 3 months 3 months 3 months 3 months 3 months
30.06.06 31.03.06 31.12.05 30.09.05 30.06.05 31.03.05
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Managed pension funds(1)
Pooled funds 4,500 3,763 5,129 2,939 3,396 3,314
Segregated funds 538 61 94 41 63 42
-----------------------------------------------------------------------------------------------------------------------
Total managed funds 5,038 3,824 5,223 2,980 3,459 3,356
Other funds(2) 157 1,739 1,705 351 3 57
-----------------------------------------------------------------------------------------------------------------------
Total 5,195 5,563 6,928 3,331 3,462 3,413
=======================================================================================================================
1. New monies from pension fund clients of Legal & General Assurance (Pensions Management) Ltd. Corporate pensions gross
new business excludes £1.7bn (1H05: £1.8bn; FY05: £4.1bn) which was held through the year on a temporary basis,
generally as part of a portfolio reconstruction.
2. Includes segregated property, property partnerships, ventures, alternative investments and institutional clients
excluding institutional trusts.
=======================================================================================================================
P67
IV European Embedded Value Methodology
Basis of preparation
--------------------
The supplementary financial statements have been prepared in accordance with the European Embedded Value (EEV)
Principles issued in May 2004 by the European CFO Forum.
Covered business
----------------
The Group uses EEV methodology to value Individual and Group life assurance, pensions and annuity business written in
the UK, Continental Europe and the US and within our UK managed pension funds company.
All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.
There is no distinction made between insurance and investment contracts in our life and pensions businesses as there is
under IFRS.
Description of methodology
--------------------------
The objective of EEV is to provide shareholders with more realistic information on the financial position and current
performance of the Group than is provided within the primary financial statements.
The methodology requires assets of an insurance company as reported in the primary financial statements to be attributed
between those supporting the covered business and the remainder. The method accounts for assets in the covered business
on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary financial statements.
The EEV methodology recognises as profit from the covered business the total of:
i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and
ii. the movement in the present value of future distributable profits to shareholders arising from the covered
business over the relevant reporting period.
Embedded value
--------------
Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity
on other businesses, less the value included for purchased interests in long term business.
The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is
defined as those amounts, within covered business, which are regarded either as required capital or which represent free
surplus.
The VIF is the present value of future shareholder profits arising from the covered business, projected using best
estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time
value of financial options and guarantees.
Service companies
-----------------
All services relating to the UK life and pensions business, including investment management services, are charged on a
cost recovery basis.
New business
------------
New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes
to existing contracts, which were not anticipated at the outset of the contract.
In-force business comprises previously written single premium, regular premium and recurrent single premium contracts.
DWP rebates have not been treated as recurrent and they are included in single premium new business when received.
New business contribution arising from the new business premiums written during the reporting period has been calculated
on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has
then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the
reporting period.
The present value of future new business premiums (PVNBP), has been calculated and expressed at the point of sale. The
PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received
over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end
of the financial period. The new business margin is defined as new business contribution at the end of the reporting
period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as
those used to calculate new business contribution.
=======================================================================================================================
P68
IV European Embedded Value Methodology (continued)
Projection assumptions
----------------------
Cash flow projections are determined using realistic assumptions for each component of cash flow and for each policy
group. Future economic and investment return assumptions are based on conditions at the end of the financial year.
Future investment returns are projected by one of two methods. The first method is based on an assumed investment return
attributed to assets at their market value. The second, which is used in the US, where the investments of that
subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and
assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are
consistent with the investment return assumptions.
Detailed projection assumptions including mortality, persistency, morbidity and expenses reflect recent operating
experience and are reviewed annually. Allowance is made for future improvements in annuitant mortality based on
experience and externally published data. Favourable changes in operating experience are not anticipated until the
improvement in experience has been observed.
All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are
allocated to that business. The expense assumptions used for the cashflow projections therefore include the full cost of
servicing this business.
Tax
---
The projections take into account all tax which is expected to be paid under current legislation, including tax which
would arise if surplus assets within the covered business were eventually to be distributed.
Allowance for risk
------------------
Aggregate risks within the covered business are allowed for through the following principal mechanisms:
i. Setting required capital levels with reference to both the Group's internal risk based capital models, and an
assessment of the strength of regulatory reserves in the covered business;
ii. Allowing explicitly for the time value of financial options and guarantees within the Group's products; and
iii. Setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free
rates.
Required capital and free surplus
---------------------------------
Regulatory capital for UK life and pensions business is provided by assets backing the with-profits business or by the
SNW. The SNW comprises the sum of the values of the Shareholder Retained Capital (SRC) and the Sub-fund.
For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund
and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment
is consistent with the Principles and Practices of Financial Management for this fund.
For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency
requirement. This level together with the margins for adverse deviation in the regulatory reserves is, in aggregate, in
excess of internal capital targets assessed in conjunction with the Individual Capital Adequacy (ICA) assessment.
The SRC is either required to cover EU solvency margin or is encumbered because its distribution to shareholders is
restricted due to previous understandings with the Financial Services Authority. It is therefore classified as required
capital and not as free surplus for the purposes of EEV reporting. SRC is valued by assuming it is distributed from the
LTF over a 20 year period with allowance for tax payable on distribution. For this purpose, distribution of the SRC is
restricted such that there is always sufficient SRC and subordinated debt left to cover the EU solvency margin for
in-force non profit business.
The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by
releases from existing non profit business and the SRC. As a consequence, the writing of new business defers the release
of capital from the SRC to free surplus. Cost of holding required capital is defined as the difference between the value
of the required capital and the present value of future releases of that capital. For new business, the cost of capital
is taken as the difference in the value of that capital assuming it was available for release immediately and the
present value of the future releases of that capital. As the investment return, net of tax, on that capital is less than
the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.
The Sub-fund is also treated as required capital, because its distribution to shareholders is restricted by Legal &
General Assurance Society's Articles of Association.
For our UK managed pension funds business, management's capital policy has been used to set the level of required
capital. The balance of net assets within the UK Managed Funds business is treated as free surplus.
For L&G America, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes.
The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of
plans to the State insurance regulator, but would be able to continue operating on the existing basis. The CAL is
currently twice the level of capital at which the regulator is permitted to take control of the business.
For L&G Netherlands (LGN), required capital has been set at 100% of EU minimum solvency for all products which do not
have any related financial options and guarantees (FOGs). For those products with FOGs, capital of between 112.5% and
150% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital
techniques.
=======================================================================================================================
P69
IV European Embedded Value Methodology (continued)
In France (LGF), 100% of EU minimum solvency margin has been used for EV modelling purposes for all products both with
and without FOGs. The level of capital has been determined using risk based capital techniques.
The contribution from new business for our Overseas businesses reflects an appropriate allowance for the cost of holding
the required capital.
Financial options and guarantees
--------------------------------
In the UK, all FOGs are within the UK Life & Pensions business.
Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is
exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits
part of the fund and their time value is recognised within the with-profits burn-through cost described below.
Additional financial options for non profit business exist only for a small amount of deferred annuity business where
guaranteed early retirement and cash commutation terms apply when the policyholder chooses their actual retirement date.
Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or
collared restrictions apply. Due to the nature of these restrictions and how they vary depending on the prevailing
inflation conditions we have also treated these as FOGs and recognised a time value cost of FOG accordingly.
The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived
from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions
where applicable. The management action primarily relates to the setting of bonus rates where for example future regular
and terminal bonuses on participating business within the projections are set in a manner consistent with expected
future returns available on assets deemed to back the policies within the stochastic scenarios.
In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the
deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of
the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling there may
be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are
insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost
arising from this shortfall has been included in the time value cost of options and guarantees and is referred to as
the with-profits burn-through cost.
The same economic scenarios have been used to assess the time value of the financial guarantees for non profit business
by using the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will
be constrained in certain real world scenarios, for example where negative inflation occurs but the annuity payments do
not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these
constrained payments for the index-linked annuities and also allows for the small additional cost of the guaranteed
early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have
been written.
In the US, FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The
guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest.
The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The
majority of the guaranteed minimum crediting rates are between 4% and 5%. The assets backing these contracts are
invested in US dollar denominated fixed interest securities.
In the Netherlands, there are two types of guarantees which have been separately provided for: interest rate guarantees
and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate
based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis. Certain
unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund
value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest
securities.
In France, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender
values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract
including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income
and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values.
Local statutory accounting rules require the establishment of a specific liability when the accounting income for a
company is less than 125% of the guaranteed minimum credited returns, although this has never been required. In general,
the guaranteed annual bonus rates are between 1.5% and 4.5%.
Risk Discount Rate
------------------
The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks
inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the
required capital and the specific allowance for financial options and guarantees.
The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). This
assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share price to
movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the
business relative to other companies in the chosen index.
=======================================================================================================================
P70
IV European Embedded Value Methodology (continued)
The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's
capital structure measured using market values. Each of these three parameters should be forward looking, although
informed by historic information. The cost of equity is calculated as the risk free rate plus the equity risk premium
for the chosen index multiplied by the company's beta. Forward-looking or adjusted betas make allowance for the observed
tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a better
estimate of the company's beta for the future period. We have computed the WACC using an arithmetical average of
forward-looking betas against the FTSE 100 index.
The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and
subordinated long term debt. For the Group's convertible debt, which matures in 2006, the probability of conversion is
considered low given current market conditions. The cost of debt therefore assumes an equivalent long term market cost
for this debt based on 5-year swap rates rather than the actual rate of 2.75%. All debt attracts tax relief at a rate of
30%.
Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a
number of the assumptions. Management believe that the chosen margin, together with the levels of required capital,
the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and
guarantees, is appropriate to reflect the risks within the covered business. For these interims results the risk margin
has been maintained at 3.0%.
A similar approach will be adopted when risk margins are reassessed in future periods.
Key assumptions are summarised below:
Risk free rate: Derived from gross redemption yields on relevant gilt portfolio
Equity risk premium 3.0% (UK only)
Property risk premium 2.0% (UK only)
Risk margin 3.0%
Analysis of Profit
------------------
Operating profit is identified at a level which reflects an assumed longer term level of investment return.
The contribution to operating profit in a period is attributed to four sources:
i. new business;
ii. the management of in-force business;
iii. development costs; and
iv. return on shareholder net worth.
Further profit contributions arise from actual investment return differing from the assumed long term investment return
(investment return variances), and from the effect of economic assumption changes.
The contribution from new business represents the value recognised at the end of each period from new business written
in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical
provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated
using closing assumptions.
The contribution from in-force business is calculated using opening assumptions and comprises:
i. expected return - the discount earned from the value of business in-force at the start of the year;
ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the
value of business in-force as at the start of the year; and
iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic
assumptions from those used in valuing the business at the start of the year. These changes are made
prospectively from the end of the year.
Development costs are associated with investment in building a new enterprise or exceptional development activity over a
defined period.
The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start
of the year in respect of:
i. encumbered assets within the covered business - principally the unwind of the discount rate; and
ii. residual assets - the expected investment return.
Further profit contributions arise from actual investment returns differing from the assumed long-term investment
returns (investment return variances) and from the effect of economic assumption changes.
=======================================================================================================================
P71
IV European Embedded Value Methodology (continued)
Investment return variances represent the effect of actual investment performance and changes to investment policy on
shareholder net worth and in-force business from that assumed at the beginning of the period.
Economic assumption changes comprise the effect of changes in economic variables, beyond the control of management,
including associated changes to valuation bases to the extent that they are reflected in revised assumptions.
V IFRS basis of preparation
The Group's financial information for the period ended 30 June 2006 has been prepared in accordance with the Listing
Rules of the Financial Services Authority. The Group's financial information has been prepared in accordance with the
accounting policies that the Group expects to adopt for the 2006 year-end which are consistent with the principal
accounting policies which were set out in the Group's 2005 consolidated financial statements. The principal
accounting policies adopted by the Group for the 2005 year-end, as set out in the Group's 2005 consolidated financial
statements, were consistent with IFRSs issued by the IASB as adopted by the European Commission (EC) for use in the
European Union (EU). The Group has chosen not to adopt IAS 34 'Interim Financial Reporting' in preparing its 2006
interim accounts since adoption of this standard is not mandatory until the EU Transparency Directive is implemented
through the FSA's Listing Rules.
The preparation of the financial information includes the use of estimates and assumptions that affect items reported in
the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the
date of the financial information. Although these estimates are based on management's best knowledge of current
circumstances and future events and actions, actual results may differ from those estimates, possibly significantly.
The accounting policies have been consistently applied to all periods presented.
This information is provided by RNS
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