Realistic balance sheet

NFU Mutual With-Profits "Realistic Basis" Financial Statement at 31 December 2011

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%, a fall in property values of 12.5%, an increase in credit risk on corporate bonds which reduced market values by around 7.5%, 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

	£m
Total statutory assets of the with-profits fund (1)	3,325
Valuation adjustments to statutory assets and additional assets arising on a realistic basis (2)	291
Total Realistic Basis Assets	3,616

Policyholder realistic basis liabilities ⁽³⁾	2,801
Other liabilities	84
Total Liabilities	2,885

Realistic Basis Assets in excess of Total Liabilities	731

With-profits capital requirements on a realistic basis ⁽⁴⁾	182
Realistic Basis Assets in excess of Total Liabilities and Capital Requirements	549

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 31st December 2011. The calibration was based on the volatilities implied by swaptions, a 50-year gilt yield curve and At-the-Money FTSE 100 option prices. The key assumptions are a UK equity return volatility parameter of 25.0% and a property return volatility parameter of 15.0%.

(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.