The table below reports the breakdown of VIF for 2011 and 2010 into its components:

Breakdown of Value in-force as at 31 December 2011 and 2010 (€ mln)

2011 2010 Change
PVFP before Time Value of FG&O 14,502 18,233 -20.5%
Time Value of FG&O -3,311 -2,611 26.8%
PVFP after Time Value of FG&O 11,191 15,622 -28.4%
Cost of capital -1,402 -1,211 15.8%
Cost of NHR -1,556 -1,461 6.5%
Value in-force 8,233 12,951 -36.4%

Compared with 2010, the decrease (-20.5%) in the present value of future profits (PVFP) before Time Value of FG&O is mainly explained by the impact of the extraordinary widening of government spreads in many European countries where the Group operates. In the projection of future investment returns, indeed, companies investing in such government bonds are penalised not only by the adoption of swap interest rates (which treats the government bond excess return as credit risk, and therefore eliminates it), but also by the unrealised loss which emerges at valuation date on those existing bonds (as a consequence of the disruption of the sovereign bonds’ market) and is spread across the future projection horizon.

The Time Value of FG&O shows an increase (+26.8%), on account of the combined effect of lower projected investment returns and higher interest rates and equity volatilities.

As a result, the PVFP after Time Value of FG&O decreases by 28.4%.

After the allowance for the cost of required capital (+15.8%, mainly driven by the increase in the required capital) and for the cost of non hedgeable risks (+6.5%), the VIF decreases by 36.4% to 8,233mln. 

The following table shows the expected run-off pattern of VIF emergence across future projection years, grouping discounted distributable profits into 5 year buckets. In particular, the table reports the contribution of each time-bucket’s profits to the total VIF at year-end 2011. The calculation has been performed considering distributable profits (i.e. including the release of required capital) generated by the value in-force and calculated according to a deterministic projection based on “real-world” best estimate assumptions (see Annex B1).

Contribution of future years to VIF as at 31 December 2011

of VIF
Years 1-5 41% 41%
Years 6-10 28% 70%
Years 11-15 16% 86%
Years 16-20 8% 94%
Years 21-25 4% 98%
Years 26-30 2% 99%
Years 31-onwards 1% 100%