9

### Risk-Adjusted Yield

9.1

A *risk-adjusted yield* on an asset must be calculated by:

- (1) taking the asset together with any covering
*derivatives*, forward transactions and*quasi-derivatives*; - (2) assuming that the factors which affect the yield will remain unchanged after the valuation date;
- (3) valuing the asset (together with any
*offsetting transaction*) in accordance with Insurance Company – Overall Resources and Valuation 3 to 8; - (4) making reasonable assumptions as to whether, and if so when, any options or other rights embedded in the asset (or in any
*offsetting transaction*) will be exercised.

- 01/01/2016

9.2

For the purpose of 9.1(2), the factors that affect yield should be ascertained as at the valuation date (that is, the date to which present values of cash flows are being calculated). All changes known to have occurred by that date must be taken into account including:

- (1) changes in the rental income from
*real estate*; - (2) changes in dividends or audited profit on equities;
- (3) known or forecast changes in dividends which have been publicly announced by the
*issuer*by the valuation date; - (4) known or forecast changes in earnings which have been publicly announced by the
*issuer*by the valuation date; - (5) alterations in capital structure; and
- (6) the value (at the most recent date at or before the valuation date for which it is known) of any determinant of the amount of any future interest or capital payment.

- 01/01/2016

9.3

The *risk-adjusted yield* is either:

- (1) for equities and
*real estate*, a*running yield*; or - (2) for all other assets, the
*internal rate of return*.

- 01/01/2016

9.4

The *risk-adjusted yield* on a basket of assets is the arithmetic mean of the *risk-adjusted yield* on each asset weighted by that asset's *market value*.

- 01/01/2016

9.5

The *running yield*:

- (1) for
*real estate*, is the ratio of: - (a) the rental income arising from the
*real estate*over the previous 12*months*; to - (b) the
*market value*of the*real estate*. - (2) for equities, is:
- (a) the
*dividend yield*, if the*dividend yield*is more than the*earnings yield*; - (b) otherwise, the sum of the
*dividend yield*and the*earnings yield*, divided by two.

- 01/01/2016

9.6

For the purposes of 9.5(2):

- (1) the
*dividend yield*is the ratio (expressed as a percentage) of dividend income over the previous 12*months*from the equities for which the*running yield*is being calculated ("the relevant equities") to the*market value*of those equities; - (2) the
*earnings yield*is the ratio (expressed as a percentage) of the audited profit (including exceptional items and extraordinary items) for the preceding*financial year*of the*issuer*of the relevant equities to the*market value*of those equities; - (3) the
*earnings yield*must be calculated in accordance with whichever is most appropriate (to the*issuer*of the relevant equities) of*UK,*US or international generally accepted accounting practice.

- 01/01/2016

9.7

The *internal rate of return* on an asset is the annual rate of interest which, if used to calculate the present value of future income (before deduction of tax) and of repayments of capital (before deduction of tax) would result in the sum of those amounts being equal to the *market value* of the asset.

- 01/01/2016

9.8

In both the *running yield* and *internal rate of return* the yield must be reduced to exclude that part of the yield that represents compensation for credit risk arising from the asset.

- 01/01/2016

9.9

Provision for credit risk for securities that are not credit-rated must be made on principles at least as prudent as those adopted for credit-rated securities.

- 01/01/2016