EEV basis

EEV basis operating profit

Total EEV basis operating profit from continuing operations based on longer-term investment returns was £1,430 million up seven per cent from the first half of 2007 at CER and up eight per cent at RER.

In the first six months of 2008 the Group generated long-term business profits of £1,408 million comprised of new business profits £602 million (HY 2007: £543 million), in-force profits of £809 million (HY 2007: £773 million) and Asia development expenses of £(3) million (HY 2007: £(6) million). New business profit from insurance business of £602 million was 11 per cent higher than the first half of 2007, reflecting the growth in sales over the period with good growth from Asia and the UK and a resilient performance from the US. At RER, new business profit was up 13 per cent. The average Group new business profit margin was 40 per cent (HY 2007: 40 per cent) on an APE basis and 5.5 per cent (HY 2007: 5.5 per cent) on a PVNBP basis. In-force profits increased five per cent at CER, on the first half of 2007 to £809 million. In aggregate, net assumption changes were £59 million positive, and experience variances and other items were £42 million positive.

Operating profit from the asset management business was in line with the first half of 2007 at £181 million (HY 2007: £181 million), a very satisfactory performance following a strong performance from M&G in difficult trading conditions.

The charge for other income and expenditure of £144 million, an improvement of £11 million over the first half of 2007, included £47 million profits crystallised on the sale of a seed capital investment on an Indian mutual fund, and £28 million expenditure relating to the assessment of the reattribution of the inherited estate.

New business capital usage

The Group wrote £1,513 million of sales on an APE basis. To support these sales, the Group invested £361 million of capital. This amount covers both new business acquisition expenses, including commission of £147 million and the required capital of £214 million. The total investment of capital for new business amounts to approximately £24 million per £100 million of APE sales. These sales provided a post-tax new business contribution to embedded value of £430 million.

In Asia, capital was invested to support sales at an average rate of £15 million per £100 million of APE sales.

In the US, capital was invested to support sales at an average rate of £44 million per £100 million of APE sales.

In the UK, capital was invested to support sales at an average rate of £22 million per £100 million of APE sales.

In the calculation of EEV operating profit longer-term investment return assumptions are used rather than actual investment returns achieved. Short-term fluctuations in investment returns are the difference between the actual investment return and the unwind of discount on the value of in-force and expected returns on net worth.

The following year-on-year comparisons are presented on a RER basis.

In Asia, long-term business short-term fluctuations in investment returns were negative £(536) million, which principally arose in Vietnam £(151) million, Singapore £(103) million, Taiwan £(84) million and Hong Kong £(59) million. The Vietnam reduction primarily reflects a significant fall in the Vietnamese bond and equity markets, the latter falling by 58 per cent in the first half of 2008. The Singapore and Hong Kong reduction reflects the effect of market falls of 21 per cent and 15 per cent respectively on unit-linked and with-profit business. The Taiwan reduction principally reflects a 12 per cent equity market fall and a £29 million value reduction for an investment in a Collateralised Debt Obligation (CDO) fund.

The US business short-term fluctuations in investment returns of negative £(297) million is primarily as a result of: a negative £(85) million in respect of the difference between actual investment returns and longer-term returns included in operating profit in respect of fixed income securities (mainly as a result of impaired residential mortgage backed-securities); and a negative £(138) million in relation to changed expectations of fees to be earned on variable annuity business due to the actual variable investment account (separate account) return being lower than the long-term return reported within operating profit, offset by the impact of the associated hedging position and a negative £(74) million in respect of the difference between actual investment returns and longer-term returns included within operating profit for equity type investments and other items.

The UK business component of short-term fluctuations in investment returns of negative £(959) million primarily reflects the £(855) million effect of the difference between the actual investment return for the with-profits life fund of negative (6.8) per cent and the long-term assumed return of 4.1 per cent.

The actuarial loss of £(98) million for the first half of 2008 (HY 2007: gain of £39 million) included in total profit reflects the shareholders' share of actuarial gains and losses on the Group's defined benefit pension schemes. On the EEV basis, this loss includes a 10 per cent share of the actuarial gains and losses on the share attributable to the PAC with-profits sub-fund for the Scottish Amicable Pension Schemes. The half year 2008 shareholder actuarial losses reflect the shortfall of market returns over long-term assumptions and the effect of increases in inflation rates which more than offset the effect of an increase in risk discount rate.

In Asia economic assumption changes were negative £(120) million, mainly due to a change in Taiwan of negative £(87) million arising from higher economic capital requirements. This was as a result of holding bonds with a longer duration.

In the US, economic assumption changes of positive £23 million primarily reflect the impact of increased credit spreads that allow for reinvestment of the cash flows at a higher rate.

In the UK, economic assumption changes of negative £(78) million primarily reflect the net effect of changes to the assumed fund earned rate and the risk discount rate. For with-profits business, the assumed rate for corporate bonds has not reflected the effect of the credit spread widening that has occurred in the first half of 2008. For shareholder-backed annuity business, assets are generally held to match long duration liabilities. Accordingly, after allowance for credit risk a liquidity premium is included in the risk discount rate used. The allowance for credit risk at 30 June 2008 comprises 16 basis points for long-term expected defaults, eight basis points in respect of long-term credit risk premium, and 19 basis points for credit contingency that reflects 25 per cent of the increase in credit spreads over swaps that has occurred since 31 December 2006.

The mark to market movement on core borrowings was a positive £171 million (HY 2007: positive £113 million) reflecting the continued reduction in the fair value of core borrowings due to increases in UK interest rates and further widening of credit spreads.

The effective tax rate at an operating tax level was 28 per cent (HY 2007: 28 per cent), generally reflecting expected tax rates. The effective tax rate at a total EEV level was 26 per cent (HY 2007: 26 per cent) on a loss of £635 million.

The profit from discontinued operations in 2007 was £241 million. This was the profit on disposal of Egg net of the post-tax loss from 1 January 2007 to the date of sale.