Embedded value

Life New Business Profitability

We use the ‘internal rate of return’ (IRR) as a measure of profitability of new life and pension business written. The IRR decreased by one percentage point from 9% in 2011 to 8% in 2012. This decline was attributable to lower expected investment returns due to persistently low interest rates and a change in mortality assumptions. The target in 2011 was for IRR to be at least 8%. The target for 2012 was set to at least 9%.

Embedded value

Embedded value gives insight into the performance of the life insurance business, the main activity of Delta Lloyd Group. A detailed explanation and overview of the results can be found on the website of Delta Lloyd Group in the ‘Embedded Value 2012’ report.

The European Embedded Value (EEV) is a valuation of the life assurance business that takes into account inherent insurance business risks. The valuation takes account of differences in the economic risk of the various portfolios and makes allowances for non-financial risks, including insurance and operational risks, and non-hedgeable financial risks.

The EEV consists of the market value of own funds (net worth) and the present value of expected future profits of the life policies (value in force). This involves a detailed calculation of expected (future) income from insurance and investment portfolios and the operational and economic conditions under which these results are achieved. Thus, the group makes specific assumptions for investment returns on, for example, bonds, shares and property, but also for economic factors such as interest rates and inflation.

The EEV is determined for the existing in-force portfolio, as well as for new business written in the year ended (New Business Value – NBV).

The development of embedded value gives good insight into the various components that drive the annual results, including investment and economic conditions.

Analysis of the change in embedded value

The table below shows an analysis of developments in embedded value for our Life activities.

Development Embedded Value
(in millions of euros)
20122011
EEV at 1 January
4,8904,736
Operating earnings (LEOR)
Value of new business
5746
Value of in-force business
285738
Total operating earnings (LEOR)
342784
Exceptional items
--81
Asset outperformance
-648-538
Capital (re)allocation
-374-11
Life EEV at 31 December
4,2104,890

Life embedded value decreased by 14% to € 4.2 billion. This is mainly due to the effects of continued low interest rates and the transfer of Delta Lloyd Lebensversicherung in Germany to non-covered business.

The operating result (LEOR) is lower because profitable new business and the positive effects of cost reductions are more than offset by the introduction of new mortality assumptions and lower operating variances compared to 2011, which saw a number of positive variances. The low interest rates had a negative effect on economic variances in 2012.

The table below shows the Life EEV by country for 2011 and 2012.

Embedded value by country
(in millions of euros, unless otherwise stated)
20122011
Netherlands
3,7134,214
Belgium
497436
Germany
-181
Diversification
-60
Total
4,2104,890

New business value

One of the main activities of an insurer is the writing of new policies, which over the term of the contract increase the value of the company. This is known as the new business value. The following table shows the premium volumes and the value of the new business generated by life insurance activities.

New business value
(in millions of euros, unless otherwise stated)
20122011
New business value
5746
Internal rate of return (IRR)
8%9%
Single premiums (excluding Germany)
- Life insurance and savings
84120
- Pensions and annuities
1,6792,361
Total single premiums (excluding Germany)
1,7622,481
Regular premiums (excluding Germany)
- Life insurance and savings
2834
- Pensions and annuities
197193
Total regular premiums (excluding Germany)
225227

The new business contribution to embedded value, produced by the new business written over the reporting period, is equal to the present value of the projected distributable profits after tax, taking into account the required capital needed for these products.

The value of new business is calculated using economic assumptions at the beginning of the quarter and the operating assumptions that apply at the end of the period. This value is rolled forward to the end of the reporting period.

The IRR is the expected rate of return on new policies and contracts on an annual basis.

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