A growing and sustainable [VIF] profile provides a solid foundation for future sustainable cash generation. The following table demonstrates how the VIF is being replaced by the new business written in the period and illustrates the movements between the opening and closing UK long term Risk and Savings VIF. The contribution to VIF from new business written in 2010 and the unwind of the discount rate from business written in previous periods more than covers the expected releases from the non-profit and with-profits businesses. Experience variances, investment variances and assumption changes have been positive overall.
(Download XLS:)  |
|
Reconciliation of UK long term |
Discounted |
Undiscounted | ||
|---|---|---|---|---|
| ||||
|
Opening VIF at 1 January 2010 |
3.68 |
7.9 | ||
|
Contribution from new business |
0.32 |
0.7 | ||
|
Unwind of discount rate |
0.30 |
n/a | ||
|
Expected release from non-profit and with-profits businesses1 |
(0.57) |
(0.6) | ||
|
Closing operational VIF at 31 December 2010 |
3.73 |
8.0 | ||
|
Experience variances/assumption changes |
(0.03) |
(0.1) | ||
|
Investment variance/economic assumption changes |
0.19 |
0.1 | ||
|
Closing VIF at 31 December 2010 |
3.89 |
8.0 | ||
The contribution from long term Risk and Savings new business has grown the VIF on both a discounted and undiscounted basis in 2010. In every year since 2005, when we first published the analysis of the embedded value, the discounted and undiscounted operational VIF has increased; i.e. the contribution from new business written in the period and the unwind of the discount rate on business written in previous periods has exceeded the cash released in the period.
The operational VIF is largely dependent on sales of annuity, protection and workplace pensions products. Shrinking corporate pension deficits and an ageing UK population will stimulate growth in the Annuities market in which we remain a market leading competitor. In the Protection business, new business sales are resilient and have become less reliant on the housing market. Market growth is likely to be slow but we are set to continue to maintain and increase our market share as these markets consolidate. The Workplace pensions market is set to benefit from auto-enrolment and an expansion of our targeted fee-based market when the Retail Distribution Review (RDR) is implemented. Growth in the scale of the Annuity, Protection and Workplace pensions businesses will benefit the generation of VIF in future years.
In the Savings business, the strategy of selling more capital light products such as mutual funds resulted in growth of 38% in 2010 new business. Sales of Pensions and Bonds are included in the VIF; however sales of unit trusts and ISAs are included in Investments savings on an [IFRS] basis.
In 2011, £690m of VIF is expected to monetise and come through into surplus. This comprises:
- The expected flows from the UK non profit business. These flows represent the [operational cash generation] of the UK non profit Risk and Savings business and are broadly equivalent to the release of profit using best estimate assumptions. In 2011, these are anticipated to be £550m;
- the UK with-profits transfer of £70m of which approximately £50m, depending on market conditions, is included in operational cash generation; and
- the modelled one-off short term capital releases of £90m in 2011 which is expected to manifest itself in experience and/or investment variances and augment the [IGD surplus]. These items primarily relate to the modelled benefit of brought forward tax losses in Legal & General Assurance Society (LGAS) and, over time, should reduce to zero.
