Overview of Business Performance - Investis
Overview of Business Performance - Investis
Overview of Business Performance - Investis
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<strong>Overview</strong> <strong>of</strong> <strong>Business</strong> <strong>Performance</strong><br />
the group, and the life industry in general, is <strong>of</strong> the view<br />
that the new IFRS basis is less satisfactory in terms <strong>of</strong><br />
the measurement and reporting <strong>of</strong> the pr<strong>of</strong>i tability and<br />
the value added from writing long-term life assurance<br />
business, specifi cally what is now categorised as<br />
“investment” business. Accordingly, the group continues<br />
to manage all <strong>of</strong> its life assurance business on the basis<br />
<strong>of</strong> embedded value metrics and to provide embedded<br />
value results to shareholders and the market by way <strong>of</strong><br />
supplementary fi nancial reporting.<br />
Embedded value seeks to measure the value <strong>of</strong> the<br />
shareholders’ interest in a life assurance business. This<br />
consists <strong>of</strong> the shareholders’ equity - represented by<br />
net assets - plus the present value (i.e. a discounted<br />
cash fl ow) <strong>of</strong> future pr<strong>of</strong>i ts to be earned from the<br />
existing book <strong>of</strong> in-force business less the cost <strong>of</strong><br />
required capital. Future pr<strong>of</strong>i ts are estimated using<br />
actuarial methods and best estimate assumptions<br />
regarding future expenses, lapses, mortality, interest<br />
rates etc. Embedded value does not include any value<br />
attributable to future new business.<br />
The embedded value methodology adopted is in<br />
accordance with the European embedded value<br />
principles introduced by the CFO forum in May 2004,<br />
and updated in October 2005.<br />
The IL&P group has adopted the EV framework for the<br />
fi nancial reporting <strong>of</strong> its group results. In the group EV<br />
basis results, life assurance activities - covering both<br />
insurance and investment contracts - are accounted for<br />
on an embedded value basis and banking and other<br />
activities are accounted for on an IFRS basis.<br />
Supplementary Group Reporting - European<br />
Embedded Value Basis (“EV”)<br />
2007 2006<br />
bm<br />
Operating pr<strong>of</strong>i t on continuing operations<br />
am<br />
Insurance and investment business 346 274<br />
Banking 219 202<br />
Other (4) (2)<br />
561 474<br />
Share <strong>of</strong> associate / joint venture<br />
Operating pr<strong>of</strong>i t before tax on<br />
29 55<br />
continuing operations 590 529<br />
Short-term investment fl uctuations (114) 101<br />
Effect <strong>of</strong> economic assumption changes (14) (38)<br />
Other non operational costs (3) –<br />
Pr<strong>of</strong>i t on sale <strong>of</strong> property 1 –<br />
Pr<strong>of</strong>i t before tax 460 592<br />
Taxation (52) (28)<br />
Pr<strong>of</strong>i t after tax 408 564<br />
Minority interest<br />
Pr<strong>of</strong>i t after tax attributable to<br />
(4) (3)<br />
equityholders 404 561<br />
Group Income Statement<br />
Total pr<strong>of</strong>i t after tax attributable to equityholders was<br />
a404m compared to a561m in 2006. This outcome<br />
refl ects strong growth in pre-tax operating pr<strong>of</strong>i t - which<br />
was ahead 12% to a590m (2006: a529m) - but which<br />
was <strong>of</strong>fset by the impact <strong>of</strong> weaker investment markets<br />
and rising interest rates on the embedded value <strong>of</strong> the<br />
group’s life business which resulted in negative short<br />
term investment fl uctuations <strong>of</strong> a114m, compared to<br />
a positive a101m in 2006, and economic assumption<br />
changes which were a negative a14m (2006: negative<br />
a38m).<br />
At the operating level pre-tax pr<strong>of</strong>i ts <strong>of</strong> the group’s core<br />
banking and life assurance business grew 18% to a561m<br />
from a474m in 2006. This principally refl ects growth<br />
<strong>of</strong> 26% in the life business embedded value pr<strong>of</strong>i ts to<br />
a346m (2006: a274m) - driven by strong growth in the<br />
new business contribution and the expected return on<br />
the existing business - and 8% growth in the banking<br />
business to a219m (2006: a202m). The outturn in<br />
the banking business was depressed by a once <strong>of</strong>f<br />
charge <strong>of</strong> a11.7m in respect <strong>of</strong> exposures created by<br />
the fraudulent activities <strong>of</strong> a rogue solicitor. Excluding<br />
this once-<strong>of</strong>f specifi c provision the underlying level <strong>of</strong><br />
growth in the bank was 14% refl ecting good growth in<br />
net interest income driven by balance sheet growth.<br />
The post tax return from the group’s interest in Allianz<br />
(Ireland) Limited was a31m compared to a56m in 2006.<br />
This reduction in pr<strong>of</strong>i ts principally refl ects a lower<br />
underwriting result due to further s<strong>of</strong>tening <strong>of</strong> premium<br />
rates in the market in 2007 combined with the fact that<br />
the 2006 outcome benefi ted from signifi cant prior year<br />
claims reserve releases.<br />
Short-term investment fl uctuations refl ect the impact<br />
<strong>of</strong> actual against assumed investment returns on the<br />
embedded value <strong>of</strong> the group’s life operations. The<br />
outcome was a negative a114m in 2007 compared to a<br />
positive a101m in 2006 and refl ects the signifi cant down<br />
turn in investment markets in the second half <strong>of</strong> 2007.<br />
In 2007, changes in the economic assumptions used to<br />
calculate the life assurance embedded value resulted in<br />
a negative a14m outcome (2006: negative a38m). This<br />
principally relates to the impact <strong>of</strong> an increase in the<br />
risk discount rate used to compute the embedded value<br />
from 7.4% to 7.8%, refl ecting increases in medium term<br />
euro bond rates. In 2006, changes in the risk discount<br />
rate from 6.5% to 7.4% had a a38m negative impact on<br />
the embedded value.<br />
The taxation charge <strong>of</strong> a52m is comprised <strong>of</strong> two<br />
elements, a a54m (2006: a42m) charge on insurance<br />
and banking operating pr<strong>of</strong>i ts and a credit <strong>of</strong> a2m (2006:<br />
a14m) attributable to investment fl uctuations and<br />
economic assumption changes in the life embedded<br />
value. The effective tax rate <strong>of</strong> 10% on operating<br />
pr<strong>of</strong>i t (combined insurance and banking) is lower than<br />
expected, benefi ting from the release <strong>of</strong> some a10m <strong>of</strong><br />
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