Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Six – The awkward squad
the event that we wished to do so, we could attempt to forecast and value L&G’s
general business just as we did Sundance’s above.
Turning to the long term business, its contribution to L&G’s 2003 profit and loss
on the AP basis is shown in detail below, taken directly from the group’s 2003
annual report and accounts.
Segmental Analysis of Results
Contribution from long term business
Life and pensions
UK International UK managed pension funds* Total
2003 2002 2003 2002 2003 2002 2003 2002
£m £m £m £m £m £m £m £m
Contribution from: 271 211 34 38 31 32 336 281
New business
In-force business 215 264 45 46 13 15 273 325
– expected return
– experience 9 (25) (8) (18) 5 14 6 (29)
variances**
– operating (107) (105) 1 1 20 16 (86) (88)
assumption
changes**
Development costs (2) (3) – – (1) (1) (3) (4)
Shareholder net 151 159 11 13 3 7 165 179
worth
Operating profit 537 501 83 80 71 83 691 664
Investment return 346 (1,045) 4 (18) 16 (48) 366 (1,111)
variances
Effect of economic (16) (14) (16) 8 0 0 (32) (6)
assumption changes
Profit/(loss) before tax 867 (558) 71 70 87 35 1,025 (453)
Attributed tax (231) 56 (24) (25) (26) (10) (281) 21
Profit/(loss) after tax 636 (502) 47 45 61 25 744 (432)
* Included in the institutional fund management result of £80m (2002: £92m).
** The largest impact on UK life and pensions business in 2003 was from the tightening of
future persistency assumptions and the strengthening of provisions for claims on the
endowment book, and in 2002, was from an annuitant mortality and other related demographic
assumption changes.
There are four components to the contribution from AP operating profit:
1. Value added through writing new business (net of acquisition costs)
2. Development costs associated with building new business lines (not
acquisition cost of new business included in item above)
3. Contribution from already in-force business
4. Return on shareholder net worth
It will be noted that the third item was modelled in our simplified example above
as if all went according to plan. In reality, there are experience variances (such as
failure to achieve expected investment returns) and changes in operating
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