Adoption of ABI's SORP
February 18 2003 - 9:43AM
UK Regulatory
RNS Number:6469H
Irish Life & Permanent PLC
18 February 2003
Irish Life & Permanent plc - Achieved Profits/Embedded Value Reporting Update
Adoption of ABI's SORP on Achieved Profits reporting
1. Background
Irish Life & Permanent plc accounts for the results of its life assurance
activities on an embedded value (or achieved profits) basis. The Association
of British Insurers' statement of recommended practice ("SORP") for
financial reporting on this basis came into force in 2002. In line with best
practice Irish Life & Permanent propose to adopt the SORP in respect of its
life assurance activities for the purposes of its 2002 financial statements.
The adoption of the SORP will not impact the overall profit after tax figure
reported for the group's life operations but does require presentational
changes as well as additional disclosures. Financial reporting under the
SORP focuses on profit before tax and significantly on the contribution to
profit before the impact of short-term fluctuations in investment markets.
The SORP will require a restatement of the reported 2001 results albeit the
reported net profit from life assurance after tax will remain unchanged.
There will be no change in the primary financial statements and the
accounting for banking and other activities is unchanged.
2. Required Presentational Changes
Reporting of pre-tax profits
To date IL&P has calculated and disclosed the embedded value (EV) profits of
its life assurance activities on an after tax basis and disclosed the
components of the EV profit on an after tax basis. The SORP requires that
total profit and the components of profit be calculated and disclosed gross
of tax. Profits should be grossed-up at the effective tax rate.
For the new business component of earnings the tax rate utilised on Irish
business will be 12.5% being the standard corporation tax rate and the
effective rate at which new business profits will be taxed going forward.
All other components of life assurance profits will be grossed up at the
effective tax rate for the period.
New Business Contribution
The SORP defines the value of new business as the contribution to the
profits of the accounting period from new business written in the period.
The new business contribution on this definition includes the profit
calculated at the point of sale as heretofore plus other items, principally
the unwind of the discount rate on the profit to the end of the accounting
period less the interest cost of new business strain from the sale over the
same period. Previously IL&P would have treated the latter items as part of
in-force and investment earnings.
The impact of the change in the basis of calculation is to increase reported
new business earnings with a corresponding reduction in earnings from the
in-force book.
Investment Return
The SORP distinguishes between the expected investment return on assets
backing the long-term life assurance business and the shareholders net worth
in the life business, and the actual return which may be more or less than
that expected due to short term fluctuations in investment returns.
In terms of presentation, variances resulting from the disparity between
expected and actual investment returns, such as the unit-linked management
fee variances, will be included under the heading "Short term fluctuations
in investment returns". This is a below the line item, i.e. a deduction
from, or addition to, the total contribution for the period.
The approach which IL&P is proposing to adopt is to calculate the expected
investment return using the embedded value assumed long term investment
return for equities and property combined with actual earnings on short-term
cash holdings.
Other Operating Income
The principal items included under this heading are earnings from the
subsidiary companies Cornmarket Financial Group and Irish Progressive
Services International (IPSI). These companies are engaged in the provision
of brokerage and third party administration services respectively. The
earnings of these subsidiaries, which are not accounted for on an embedded
value basis, have previously been included in investment earnings.
Assumption changes
Under the SORP any variances arising from changes in embedded value
operating assumptions are identified separately and disclosed as a separate
line item in arriving at the total contribution for the period. The
principal assumptions here would include persistency (how long the business
will stay on the books), risk (mortality and morbidity experience) and
maintenance or renewal expense levels.
The effect of changes in assumptions relating to changes in extraneous
economic variables (i.e. interest rates and inflation rates), including
associated changes to valuation bases, will continue to be shown as a
separate item but below the total contribution line. However the SORP
requires that changes to interest rates and other economic assumptions which
are not due to extraneous economic factors, for example a change in the risk
element of the discount rate, be included with other operating assumption
changes.
3. Presentation of Life Assurance Earnings
To illustrate the impact of changes under the SORP, restated life assurance
earnings for the Irish and UK businesses for 2001 are set out below. This
chart shows the adjustments as between the different components of earnings,
the tax gross-ups and the reclassification of earnings. The overall post tax
result remains unchanged at Euro138.0m but there are significant movements as
between the various line items.
ROI/UK Life Assurance 2001 Earnings (Unaudited)
As Previously Change arising Revised Tax Pre Tax Profit
Reported from SORP Post tax Gross Up
Eurom Eurom Eurom Eurom Eurom
Contribution from new 48.2 4.7 52.9 7.5 60.4
business
Contribution from existing
business
Unwind of discount rate 86.8 (6.0) 80.8 2.3 83.1
Experience variances 32.8 (10.0) 22.8 1.1 23.9
Unit Linked Management fee (29.5) 29.5 - - -
variance
Operating assumption changes - 15.6 15.6 0.5 16.1
Expected investment returns 1.6 (0.1) 1.5 0.2 1.7
Other Income - 8.0 8.0 2.0 10.0
Contribution 139.9 41.7 181.6 13.6 195.2
Short-term fluctuations in
investment returns 0.0 (41.7) (41.7) (1.3) (43.0)
Effect of changes in
economic assumptions (1.9) - (1.9) (0.1) (2.0)
Profit Before Taxation 138.0 ( -) 138.0 12.2 150.2
Taxation (12.2)
Profit after Taxation 138.0
The increased contribution from new business of Euro4.7m reflects a transfer
from the unwind of the risk discount rate, less the interest cost of funding
new business in the year. The reduction in the experience variances
principally reflects amounts now disclosed separately under operating
assumption changes. The unit linked management fee variance of Euro29.5m drops
below the contribution line into short term fluctuations in investment
returns which also now includes the shortfall of actual investment returns
(on shareholders' net worth) against expected returns.
4. Presentation of Total Earnings
The move to reporting pre-tax life earnings means it is now more appropriate
to present and analyse all earnings before tax. Total earnings for 2001 are
restated below both for the tax gross-up and to identify the items making up
the total contribution and the "below the line" deductions to arrive at
total profit before tax.
Restatement (unaudited) of Total 2001 Earnings
Contribution before:
short term investment fluctuations, goodwill
amortisation and other credits/charges
Pre-tax Tax Post Tax
Eurom Eurom Eurom
ROI
Banking & Other 70.5 (10.9) 59.6
Activities
Life Assurance 174.4 (10.7) 163.7
Activities
Other Investment 15.2 (1.4) 13.8
Earnings
260.1 (23.0) 237.1
UK
Banking & Other 20.6 (6.0) 14.6
Activities
Life Assurance 20.8 (2.9) 17.9
Activities
41.4 (8.9) 32.5
US
Life Assurance (37.9) 8.5 (29.4)
Activities
Group Contribution 263.6 (23.4) 240.2
Share of associated company 6.8 (1.2) 5.6
Total Contribution (Group & Associate) 270.4 (24.6) 245.8
Short term investment fluctuations
Life assurance (43.3) 1.4 (41.9)
activities
Share of associated (14.0) 0.3 (13.7)
company
Goodwill amortisation (14.8) - (14.8)
Effect of economic assumptions changes on life assurance activities (6.2) 1.0 (5.2)
Other credits/charges
Restructuring charges (63.0) 11.7 (51.3)
Loss on the disposal of US businesses (50.0) (19.5) (69.5)
Total Profit before minority interest 79.1 (29.7) 49.4
Previously reported profits 79.1 (29.7) 49.4
At the post tax level there is no change to the disclosure from the previous
presentation.
5. Additional Disclosures
The SORP also requires some additional disclosures regarding assumptions and
methodology as well as an analysis of the sensitivity of the value of new
business and the value of in-force to changes in key economic assumptions. This
information will be provided as part of the 2002 annual report.
Contact Details:
Barry Walsh +353 1 7042678
David McCarthy +353 1 8563050
NOTE:
Irish Life & Permanent plc will announce its preliminary results
for 2002 on March 5th 2003
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCNKFKBQBKDNBD