NFU Mutual With-Profits "Realistic Basis" Financial Statement at 30 June 2009
The with-profits "realistic basis" financial statement below shows the total assets that are available to cover liabilities relating to with-profits business after meeting liabilities on other long-term business.
The with-profits liability consists of the asset shares (or similar) plus further reserves for policy guarantees and smoothing. In addition a with-profits risk capital requirement is calculated which reflects the capital that is required to cover the risk that assets fall in value by more than liabilities in extreme conditions. The conditions considered are a combination of a fall in equity values of 20.0%, a fall in property values of 12.5%, an increase in credit risk on corporate bonds which reduced market values by around 6.6%, the more onerous of a 17.5% fall or rise in the yields on fixed interest securities and a 32.5% adverse change in with-profits discontinuance rates.
The statement below shows the Society’s long-term business in a strong financial position. However, certain important risks are not the subject of the stress testing in the calculation of the with-profits risk capital requirement, in particular those related to annuitant longevity and increased volatility of equities. In practice, the Society has to set aside further capital to support these risks.
With-profits Realistic Financial Statement
Total statutory assets of the with-profits fund (1) |
2,974 |
Valuation adjustments to statutory assets and additional assets arising on a realistic basis (2) |
241 |
Total Realistic Basis Assets |
3,215 |
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Policyholder realistic basis liabilities (3) |
2,503 |
Other liabilities |
55 |
Total Liabilities |
2558 |
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Realistic Basis Assets in excess of Total Liabilities |
657 |
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With-profits capital requirements on a realistic basis (4) |
221 |
Realistic Basis Assets in excess of Total Liabilities and Capital Requirements |
436 |
Notes to the table
(1) The total statutory assets of the with-profits fund equals the long-term business admissible assets less the mathematical reserves and required minimum margin relating to non profit business.
(2) This arises from the release of both margins in the mathematical reserves and the required minimum margin relating to non-profit business.
(3) The liabilities for with-profits business are calculated on a market consistent basis. The base liability for most business is taken as the asset share, although for business where asset shares are not used to set bonus rates (traditional whole of life assurances and paid-up policies where terminal bonus follows the scales of other contracts) a prospective bonus reserve valuation (BRV) is used for this purpose. The BRV allows for the declaration of future annual and terminal bonuses at rates consistent with the investment returns assumed on the assets backing with-profits business in the projection.
In addition to this base reserve, a further reserve is calculated for policy guarantees and smoothing. These figures take full account of policyholder reasonable expectations and are consistent with the Society’s Principles and Practices of Financial Management.
The models used in the calculations have been calibrated to produce values consistent with observable market data at 30th June 2009. The calibration was based on the volatilities implied by swaptions, a 50-year gilt yield curve increased by 10 basis points at each duration and At-The-Money FTSE 100 option prices. The key assumptions are a UK equity return volatility parameter of 26.7% and a property return volatility parameter of 18.0%.
(4) The with-profits capital requirement has been calculated in accordance with the rules contained in the Financial Services Authority’s Prudential Sourcebook for Insurers.
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