| Wed 4 Mar 2009, 9:24 | | OML/OLM - Old Mutual Plc - Preliminary Results for the year ended 31 December |
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OML
OLOML
OML/OLM - Old Mutual Plc - Preliminary Results for the year ended 31 December
2008
OLD MUTUAL plc
Issuer code: OLOML
JSE Share code: OML
NSX share code: OLM
ISIN: GB0007389926
Old Mutual plc Preliminary Results for the year ended 31 December 2008
Solid performance in SA and Europe with challenges in US Life
OMSA and Nordic: excellent growth in sales; adjusted operating profits up 14%
and 23% (in local currency) respectively
UK: sales impacted by equity market decline although strong unit-linked
market position maintained
US Asset Management: diversified asset mix provided resilience
US Life: disappointing result although management actions to derisk and
return to profitability
The Group and its businesses remain well capitalised
Group pro-forma FGD surplus at 31 December in excess of GBP0.7 billion, 1.2
times coverage ratio
Available cash and facilities of over GBP600 million
Strong capital surpluses in individual business units
UK: 2.6 times required capital
Nordic: 9.9 times required capital
OMLACSA: 3.8 times required capital
Nedbank: Tier 1 capital at 9.6%
US Life: RBC ratio of 305% in onshore and significant excess capital in
offshore
Board decision not to pay dividends in 2009 to give further buffer on cash
and capital position
Improved business structure, risk management and governance
New Long-term Savings division
Risk appetite agreed for major subsidiary companies
Enhanced governance and operational oversight from the centre
Simplification of business will take place as global financial climate allows
Financial Summary 2008 2007
Net client cash flows GBP1.2bn outflow GBP23.4bn inflow
Funds under management GBP264.8bn GBP278.9bn
Profit before tax (IFRS) GBP595m GBP1 750m
Adjusted operating profit before tax
(IFRS basis)* GBP999m GBP1 624m
Adjusted operating profit before tax
(MCEV basis) GBP978m GBP1 631m
Adjusted operating earnings per share
(IFRS basis)** 12.2p 16.9p
Basic earnings per share (IFRS) 8.6p 19.2p
Adjusted operating earnings per share
(MCEV basis) 11.0p 17.0p
Adjusted MCEV per share 117.6p 166.3p
Julian Roberts, Chief Executive, commented:
"2008 presented major challenges for the Group. The rapid deterioration
combined with volatility in global financial markets, most notably in the
fourth quarter, gave rise to an extremely difficult operating environment,
while we faced a number of specific issues in our US Life business.
Nevertheless, many parts of the Group delivered strong performances, especially
in the markets where we have scale and strong market positions.
"As a Group we remain well capitalised with strong surpluses over required
capital levels in each of our business units, but due to the very uncertain
market conditions, we have decided to conserve capital and cash levels despite
our ability to withstand significant further deterioration in market
conditions.
"Going forward, I am determined to rigorously drive performance improvement and
strengthen governance, while at the same time reshaping the Group."
Enquiries
Investor Relations
Aleida White UK +44 (0)20 7002 7287
Deward Serfontein SA +27 (0)82 810 5672
Media
Matthew Gregorowski UK +44 (0)20 7002 7133
Finsbury
Mike Smith/Brian Cattell +44 (0)20 7251 3801
Notes
Wherever the terms asterisked in the Financial Highlights are used, whether in
the Financial Highlights, the Chief Executive`s Statement, the Group Finance
Director`s Review or the Business Review, the following definitions apply:
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business, it includes compensation costs in respect of certain
long-term incentive schemes defined as minority interests in accordance with
IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, put revaluations related to
long-term incentive schemes, the impact of closure of unclaimed shares trusts,
profit/(loss) on disposal of subsidiaries, associated undertakings and
strategic investments, dividends declared to holders of perpetual preferred
callable securities, and fair value (profits)/losses on certain Group debt
movements.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and minority interests. It excludes income
attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and BEE trusts.
Cautionary statement
This announcement has been prepared solely to provide additional information to
shareholders to assess the Group`s strategies and the potential for those
strategies to succeed. It should not be relied on by any other party or for any
other purpose.
This announcement contains forward-looking statements with respect to certain
of Old Mutual plc`s plans and its current goals and expectations relating to
its future financial condition, performance and results. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond Old Mutual plc`s control,
including, among other things, UK domestic and global economic and business
conditions, market-related risks such as fluctuations in interest rates and
exchange rates, policies and actions of regulatory authorities, the impact of
competition, inflation, deflation, the timing and impact of other uncertainties
or of future acquisitions or combinations within relevant industries, as well
as the impact of tax and other legislation and other regulations in territories
where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc`s actual future financial condition, performance
and results may differ materially from the plans, goals and expectations set
forth in Old Mutual plc`s forward-looking statements. Old Mutual plc undertakes
no obligation to update any forward- looking statements contained in this
announcement or any other forward-looking statements that it may make.
Notes to Editors:
A webcast of the presentation and Q&A will be broadcast live at 9:00 am (GMT),
10:00 am (CET), 11:00 am (South African time) today on the Company`s website
www.oldmutual.com. Analysts and investors who wish to participate in the call
should dial the following numbers:
UK (toll-free) 0500 101 630
US (toll-free) 877 491 0064
Sweden (toll-free) 0200 887 651
South Africa (toll-free) 0800 991 468
International +44 20 7162 0025
Playback (available for 14 days from 4 March), using passcode 824733:
UK (toll-free) 0800 358 1860
US (toll-free) 888 365 0240
Sweden (toll-free) 08 5052 0333
International +44 20 7031 4064
There will also be a separate conference call at 1:30 pm GMT (2:30 pm CET/
3:30 pm South African time) today on Old Mutual`s supplementary life reporting
under Market Consistent Embedded Value ("MCEV"). Analysts and investors who
wish to participate in the call should dial the following numbers, quoting
confirmation code 9824696:
UK (toll-free) 0800 028 1277
US (toll-free) 888 935 4577
Sweden (toll-free) 08 5352 6407
South Africa (toll-free) 0800 991 539
International +44 207 806 1956
This conference call will use VisionCast web meeting facility and slides can be
viewed at
http://www.livemeeting.com/cc/premconfeurope/join?id=9824696&role=attend&pw=pw7
894 or by entering the VisionCast website http://www.euvisioncast.com using
Meeting ID 9824696 and password pw7894. The presentation slides will also be
available for download on the Company`s website, www.oldmutual.com from 8:00 am
GMT.
Playback (available for 14 days from 4 March), using passcode 9824696#:
UK (toll-free) 0800 559 3271
US (toll-free) 866 239 0765
Sweden (toll-free) 08 5876 9441
International +44 207 806 1970
Copies of these Preliminary Results, together with high-resolution images and
biographical details of the Executive Directors of Old Mutual plc, are
available in electronic format to download from the Company`s website at
www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company`s Preliminary Results
can be found on the website. This contains key financial data for 2008 and
2007.
Chief Executive`s Statement
Overview
2008 presented major challenges for the Group. The rapid deterioration in
global financial markets, most notably in the fourth quarter, resulted in an
extremely difficult operating environment, while we faced a number of specific
issues in our US Life businesses. Despite these setbacks, we delivered a strong
performance across many parts of the Group, especially in the markets where we
have significant scale and strong market positions.
During the second half of the year, we took major strides to address the issues
in our US Life offshore business and, with these largely contained, toward the
end of the year we turned our attention to the future and began a full review
of the Group`s activities. During that time we welcomed Philip Broadley to Old
Mutual as our new Group Finance Director and we are already benefiting from his
experience and skills. The actions following this review are outlined in more
detail below.
Capital adequacy position
The Group`s pro-forma FGD surplus at 31 December 2008 was in excess of GBP0.7
billion. This is in line with our self- imposed target range which ensures we
have sufficient headroom to cover any capital issues across the Group`s
operations.
Our Nordic and UK businesses are well capitalised with solvency ratios of 9.9
times and 2.6 times the required level respectively. Our European businesses
are capital light by their nature and therefore present very little capital
risk. In South Africa, we have the strongest capital position and credit rating
in the long-term insurance industry, with a surplus in OMLACSA of 3.8 times the
required level. Nedbank`s key ratios also demonstrate its capital strength. In
the case of US Life, during 2008 we took action to maintain capital in the
onshore business at three times its required level. GBP314 million of cash was
injected into the US Life offshore business during 2008. This business now has
significant excess capital over its regulatory requirement.
We have carried out significant capital stress testing. Historically, the
highest global default rates during a recession have averaged 1.6% for
investment grade (Source: Moody`s). Applying these historical high default
rates to our portfolio would generate losses which can be absorbed within our
FGD surplus. Actual defaults on our corporate bonds for the year were
GBP85 million resulting in a default rate of approximately 1.3% on our corporate
bond portfolio. Our FGD surplus would enable us to withstand eight times that
rate in a single year.
The Group has available cash and facilities of over GBP600 million as at
31 December 2008.
Dividend
During 2008 we paid an interim dividend of 2.45p per share. However, in view of
the unpredictability of market conditions and continued uncertainty around the
performance of financial markets, we believe it is prudent for us to conserve
our capital and retain cash. Accordingly, the Board has determined that in
order to conserve cash and capital during the current period of economic
stress, no dividends will be paid by the Company during 2009. The Board will
consider the position in respect of a final dividend for 2009 at the
appropriate time in light of the then prevailing market and economic
conditions. Longer term, the Board will look to pay a dividend based on the
Group`s capital, cash flow and earnings, with a view to maintaining cover of at
least two times.
Strong sales and earnings growth in South Africa
In the markets where our businesses are highly developed and we have strong
brands, we delivered excellent growth in both sales and profit. In South
Africa, life and unit trust sales in local currency grew by 14% and 33%
respectively and there was a significant reduction in net client cash outflows.
The boutique model of our South African investment management business has
continued to bed down well, with the majority of our boutiques delivering a
better investment performance than in 2007. Old Mutual South Africa`s adjusted
operating profit on an IFRS basis was up 14% to R8 billion and the return on
equity was up nearly four percentage points to 27.8%. This is an excellent
result given the fall in equity markets and tightened consumer spending, and
demonstrates the strength of our diverse product offering and our ability to
adapt to an ever-changing market environment.
In contrast to the negative forecast GDP in the UK and US, the South African
economy is forecast to grow by 1.2% in 2009 (Source: South African National
Treasury) and, while it is facing its own challenges, the South African banking
sector remains in good health, with the inter-bank lending market continuing to
operate efficiently. Despite an increased level of impairments, Nedbank
delivered an adjusted operating profit on an IFRS basis of R8.8 billion, down
just 5% on 2007, and a return on equity of 17.7% with Tier 1 capital at 9.6%.
Skandia building market share across Europe
Skandia saw positive net client cash flows across all its divisions and the
drop in funds under management relative to the much larger fall in the equity
markets was very pleasing, reflecting good product innovation and investment
performance. In Nordic, strong cash inflows were driven by a 30% increase in
life sales to SEK2.6 billion and adjusted operating profit on an IFRS basis was
up 23% to SEK1.1 billion. This was largely as a result of the introduction of
new products and, in particular, growth in the unit-linked business in Sweden.
This was very much against the trend seen in the UK and across the rest of
Europe, given the general flight from equities which resulted in a significant
drop in unit-linked sales. However, across Europe, we increased our market
share, which will stand us in good stead when equity markets recover.
In the UK, the relative decline in sales was largely due to reduced demand for
unit-linked products, especially bonds and single premium pensions, although
Skandia`s market share across the entire pensions market, and especially single
premium personal pensions, remained strong. The core of our business is
providing customers with a choice of products which are transparent, flexible
and tailored to their specific needs and risk appetite, but which also provide
attractive returns. Therefore, unlike many of the UK life insurers, we do not
undertake any with-profits or bulk annuity business and therefore our capital
requirement is much lower. While our sales have been affected by market
volatility in the short term, we believe that Skandia`s open-architecture model
is at the forefront of the modern savings and investment market and that this
will deliver excellent long-term value.
We also launched a repricing initiative in order to build our share of the
platform market, while increasing the range of investment solutions to create
wider customer appeal during this period of market volatility. For example, the
Spectrum range of risk-controlled funds launched in April attracted more than
GBP120 million of subscriptions by the year-end and the UK Strategic Best Ideas
Fund was the best performing UK fund out of any sector during 2008.
Resilient net client cash flows in US Asset Management
US Asset Management continued to deliver strong long-term investment
performance and our diversified asset mix provided resilience in difficult
markets. Fixed income and alternatives make up over half of the total funds
under management, which were down 28% to USD240 billion compared to an overall
US
market decline of approximately 40%. Excluding the cessation of
securities-lending at Dwight Asset Management, net client cash flows were
positive. This is an excellent result at a time when significant net outflows
are being experienced across the industry. However, the equity market decline,
especially in the fourth quarter, caused a significant reduction in performance
fees, although this was partially off-set by a much reduced cost base.
Actions to stabilise US Life and return to profitability
Overall, the performance of our US Life businesses were heavily impacted by
increased reserves related to certain single-premium immediate annuities,
write-downs in relation to deferred acquisition costs and hedge losses related
to variable annuity products. Difficult credit markets resulted in higher
impairment losses than in 2007 and market conditions had a major impact on the
level of unrealised losses on our fixed income portfolio, as is the case across
the industry. Both oversight and governance have been strengthened considerably
and the management team has taken a number of actions in the second half of
2008 aimed at derisking the business and generating profitable returns.
We are in the process of transforming our onshore business into a sustainable
operation, based on lower, but more profitable, sales from a considerably
reduced cost base. We have eliminated unprofitable product lines, and are
focused on selling less capital-intensive, more customer-centric products
through closer relationships with our core distribution partners. We have
consolidated a number of locations from which the business operated and reduced
headcount. A strong expense discipline has been established along with a more
conservative risk culture.
In the offshore business more precise fund-mapping has improved our hedging,
which was 92% effective during the fourth quarter, and we have a much better
understanding of sensitivities to further market and currency movements.
Whilst sales have fallen dramatically due to the withdrawal of problem
products, we are now focused on rebuilding this business through writing
sensible, specialist investment products tailored to our international
customers` needs, which will underpin a good recovery in future profitability.
Review of Business
Over the last four months, with the help of management consultants, we have
conducted a thorough review of every part of our business. Our overriding
conclusion is that while we have some valuable businesses with high-quality
people, there is a fundamental need for change. We have therefore identified
five key priority areas.
1. Maintain and strengthen our capital position
As outlined above, our capital and liquidity position remains healthy. However,
in the current environment, continuing to manage our capital responsibly must
be our top priority.
2. Streamline the portfolio over time
We recognise that our portfolio of businesses is too broad. We operate in too
many geographies and have too many lines of business, a number of which are
sub-scale in their respective markets. This makes the Group complex and
difficult to manage on a decentralised basis as we have done in the past. It
therefore requires simplification.
However in the current environment, major rationalisation of our portfolio of
businesses would be extremely difficult and, if achievable, would almost
certainly destroy value for our shareholders. At this stage, we have therefore
concluded that it will take some time to achieve our optimal business
structure. That said, we have already taken some actions where it has been
sensible to do so, namely:
- We have agreed to the sale of our Australian business.
- We have exited Portugal.
- We have rationalised our businesses in continental Europe, creating two hubs
based in Berlin and Paris for the mass market and affluent markets respectively.
- While we remain committed to our established businesses in India and China,
we will scale back significantly our aspirations in the Far East and will
therefore close our office in Hong Kong.
We are also moving the governance of our businesses to a more centralised model
which we believe will reduce risk and bring better control.
We will look for opportunities to make further changes as market conditions
allow and we can create value for shareholders. We do not need asset sales in
order to raise capital and any streamlining activity will be based on enhancing
efficiency and our strategic focus.
3. Leverage scale in our long-term savings businesses
We intend to bring all our long term savings businesses into a single operating
structure. Skandia, OMSA, US Life and Asia Pacific will report to a single
executive, Paul Hanratty, who will relocate to London as Head of Long-term
Savings.
We believe that there is a significant amount of value that can be unlocked by
these businesses working more closely together. For example:
- We can deploy the distinctive technology and capabilities within our South
African, UK and Nordic platform businesses more effectively across the Group.
- We believe there are operational cost efficiencies that can be achieved.
- We have product capability that can be used across the business.
4. Drive value creation within, and between our South African businesses
We have already created significant value through co-operation between Nedbank
and OMSA, delivering synergies in excess of R1 billion in annual pre-tax
profit. We now have a firm commitment to all our South African businesses and
believe that there is more value that can be achieved through their closer
co-operation.
Tom Boardman remains a member of my executive committee and both he and Paul
Hanratty will be tasked with delivering greater synergies between Nedbank and
OMSA as well as agreeing and delivering on new bancassurance targets.
Nedbank, which has several wealth management joint ventures with Old Mutual,
may also acquire those joint ventures during the year, in exchange for
Old Mutual taking an increased shareholding in Nedbank.
Mutual & Federal will focus on increasing profitability, strengthening the
balance sheet and driving greater co-operation with Nedbank and OMSA.
5. Strengthen governance and risk management
In 2008 we started to invest in additional risk resources (people and systems)
and, as a result, our risk and governance processes have been significantly
strengthened. The next priority is to embed those processes across the Group.
One consequence of these initiatives is that we are rolling out a business
level risk appetite, which sets the mandatory risk levels each business must
adhere to.
We have also formed iCRaFT - "integrated Capital, Risk and Financial
Transformation". This programme is essentially aimed at ensuring we become
fully compliant with Solvency II, the new regulatory regime being introduced
for all European-domiciled insurers. Over and above compliance, our programme
aims to implement best practice in the way that we measure and manage risk,
capital and financial performance. We then integrate these in the way that we
run our businesses, and in the implementation of best practice financial
controls.
To ensure we manage these various Group initiatives effectively, we have
appointed Paul Maddox on secondment from Ernst and Young as Head of Strategic
Implementation. Paul will be a member of the Executive Committee with
responsibility for driving through the change programme.
Outlook
Many of our businesses have performed well in a very difficult operating
environment. This performance provides us with an excellent base from which to
deal with the challenges presented by the current economic climate and the
continued financial market volatility.
Going forward, I am determined to rigorously drive performance improvement and
strengthen governance, while at the same time looking for opportunities to
reshape the Group.
Julian Roberts
Chief Executive
4 March 2009
Group Finance Director`s Review
GROUP RESULTS
Group Highlights (GBPm) 2008 2007 % Change
Adjusted operating profit (IFRS
basis) (pre-tax) 999 1 624 (38%)
Adjusted operating earnings per share (IFRS
basis) 12.2p 16.9p (28%)
Profit before tax (IFRS) 595 1 750 (66%)
Basic earnings per share (IFRS) 8.6p 19.2p (55%)
Adjusted operating profit (MCEV basis)
(pre-tax) 978 1 631 (40%)
Adjusted operating profit (MCEV basis)
(post-tax) 575 922 (38%)
Adjusted operating earnings per share (MCEV
basis) 11.0p 17.0p (35%)
Adjusted group embedded value (GBPbn) 6.2 9.0* (31%)
Adjusted group embedded value per share 117.6p 166.3p* (29%)
Life assurance sales (APE) 1 611 1 748* (8%)
Unit trust/mutual fund sales 6 600 8 383** (21%)
Value of new business 104 230* (55%)
PVNBP 12 262 14 046* (13%)
Net Client Cash Flows (GBPbn) (1.2) 23.4 (105%)
Funds under management (GBPbn) 264.8 278.9 (5%)
Total shareholders` equity 9 577 9 597 -
Return on equity*** 9.0% 13.2%
Return on embedded value 7.8% 13.7%
Full dividend in respect of the financial
year 2008 2.45p 6.85p
* Restated, as now reporting on an MCEV basis
** Restated net of Institutional sales in Australia
*** Return on equity is calculated using adjusted operating profit after tax
and minority interests on an IFRS basis with allowance for accrued coupon
payments on the Group`s hybrid capital. The average shareholders` equity used
in the calculation excludes minorities and hybrid capital.
Funds under management held up well during year of market volatility
During 2008, Old Mutual delivered robust investment performance in challenging
markets. Although net client cash flows were negative overall, we produced
positive flows of GBP3.2 billion in our Skandia businesses and GBP0.1 billion
in our combined South Africa businesses. However, these were off-set by outflows
in our US and Asia Pacific businesses. Excluding the outflows due to a
cessation of securities lending which one of our US Asset Management affiliates
suspended during the year, net client cash flows were GBP2.4 billion for the
year. The result is pleasing, considering the challenges of delivering on
absolute investment performance in the extremely volatile markets in 2008. This
is demonstrated through our closing funds under management, which held up well
in the year overall, down 5% to GBP264.8 billion, in a period when markets such
as the FTSE 100, the JSE Africa All Share Index and S&P 500 all fell more than
25%.
Breadth of sales product offering in diverse geographic markets
Overall life sales on an APE basis held up well, supported by our core
businesses in Nordic and South Africa. We continued to see the benefits of our
investment in the Nordic sales channel, where life APE sales were up 30% in
local currency. South Africa life sales were up 14% in rand terms. However in
the US, sales were constrained, down 23% in local currency. UK and Offshore
sales were disappointing, down 19%, with single premium sales being impacted by
the market conditions mainly through lower pension sales.
Southern Africa (including Rest of Africa) unit trust sales were up an
impressive 46% in local currency with investors moving to lower risk money
market funds, but declines in unit trust sales in all other regions more than
off-set these gains due to the ongoing tough market conditions.
Value of new business
The value of new business (VNB) was down 55% to GBP104 million but excluding US
Life, at negative GBP66 million, was down 15% for the year on a like-for-like
basis. Excellent volumes in Nordic and a strong contribution from OMSA were
off-set by lower volumes in the UK, ELAM and US Life. The APE profit margin was
6%. The margin was steady in the UK and South Africa compared with 2007, but
down marginally in Nordic and to a greater extent in ELAM, where it fell to 6%
mainly due to lower volumes and a change in product mix. The US Life margin was
negative because of a reduction in the margin of variable annuities as a result
of increased guarantee costs and the exclusion of capitalised corporate bond
spreads in the Old Mutual MCEV methodology.
Adjusted operating earnings (IFRS basis)
Adjusted operating profit for the year held up in most regions with good
contributions from our African, European and US Asset Management businesses,
however profits were adversely impacted by adjustments in our US Life
businesses. Credit markets remained under stress at the end of 2008. Following
review of our asset portfolio we impaired a total of GBP414 million, of which
GBP28 million affected the 2008 adjusted operating profit as the total
impairments are amortised over five years through adjusted operating profit. We
are reviewing this policy for US Life and expect to move to an "expected
return" approach for impairments from 2009 onwards.
We also reviewed our deferred acquisition costs balances and accelerated
amortisation by GBP159 million for the combined US Life businesses. Further, in
our onshore business we stopped selling the single premium immediate annuities
("SPIA") block of business and made a GBP235 million adjustment in respect of
additional mortality reserves where we have increased our life expectancy
assumption to over 90 years. Finally in our offshore business we incurred a
charge of GBP68 million which reflects the inefficiency of hedge mapping. A
further charge of GBP206 million was made below the line which reflects market
volatility, in line with standard industry practice.
Rand currency depreciation substantially contributed to lower earnings however
this was partially off-set by US dollar, Euro and Swedish Krona strengthening
and in total the Group delivered adjusted operating profit before tax and
minority interests 38% below 2007 and 36% below on a constant currency basis.
2008 2007 2007 restated
at 2008 rates
Group Highlights (GBPm)
Adjusted operating profit
(IFRS basis) (pre-tax)
Europe 266 268 280
Africa 1 191 1 254 1 157
United States (270) 260 281
Asia Pacific (17) 2* 2
1 170 1 784 1 720
Finance costs (140) (119) (119)
Other shareholders` expenses (31) (41) (41)
Adjusted operating profit
before tax and minority
interests 999 1 624 1 560
Tax (86) (418) (401)
Minority interests (272) (292) (271)
Adjusted operating profit
after tax and minority
interests 641 914 888
Adjusted operating EPS
(pence) 12.2 16.9 16.4
* Includes Bermuda Asset Management (now included in USAM)
Assuming constant exchange rates, 2007 adjusted operating EPS would have been
16.4p with the currency impact being negative 0.5p. Financing costs increased
over the 2007 mainly due to foreign exchange as the sterling value of non-
sterling-denominated debt payments increased. Other shareholders expenses
principally comprise head office costs.
Taxation
The Group`s effective adjusted operating profit (IFRS basis) tax rate decreased
to 9% from 26% in the comparative period. This tax rate is anomalously low due
to the unprecedented market conditions in 2008 coupled with a reduced adjusted
operating profit which magnifies the rate effect of any adjustment. The
reduction in the tax rate is due to a number of factors. These include releases
of tax provisions as a result of the closing of issues being agreed with tax
authorities, consistent levels of tax exempt dividend income now representing a
greater proportion of the reduced adjusted operating profit, the effect of the
different basis of taxation of life tax companies, non-taxable foreign exchange
gains, reduction in tax rates and more profits being earned in lower taxed
jurisdictions and the utilisation of previously unrecognised deferred tax
assets. These factors were partially off-set by increased secondary tax on
companies charges and a decreased adjusted operating profit, non-recognition of
deferred tax assets arising in US Life and adjustments in respect of prior
periods.
In the longer term, it is expected that the tax rate would tend to return to
the 2007 level.
Return on equity
Return on equity for the Group declined to 9.0% in 2008 from 13.2% in 2007,
primarily due to losses from the US Life businesses. This contained some very
satisfactory performances from our South African businesses where OMSA achieved
a return on allocated capital of 27.8%, Nedbank a return on equity (excluding
goodwill) of 20.1% and Mutual & Federal achieved a return on capital of 33.9%.
Shareholders` equity
Throughout the year, shareholders` equity remained steady with retained profits
and foreign exchange gains on consolidation being off-set by unrealised losses
in the US Life businesses and the payment of dividends.
Old Mutual Market Consistent Embedded Value (MCEV)
The Market Consistent Embedded Value Principles (the "Principles") were
published in June 2008 by the CFO Forum, a group representing the Chief
Financial Officers of major European insurers, and compliance with these
Principles is mandatory in 2009. These Principles provide a framework intended
to improve comparability and transparency in Embedded Value reporting across
Europe. Old Mutual plc has published European Embedded Value ("EEV") results
since 2004. The Principles have been fully complied with for all businesses as
at 31 December 2008, with the exception of the use of an adjustment of 300
basis points in the risk free rate due to current market conditions for the
US Life Onshore business. This adjustment reflects a liquidity premium as at
31 December 2008, and has been determined after reviewing published and
proprietary literature and data relating to corporate bond spreads with in the
US Life corporated bond portfolio. The Group has replaced the European Embedded
Value basis with the MCEV basis for the covered business and figures for
31 December 2007 have been restated accordingly, and comply fully with all of
the Principles. The MCEV supplementary information provides details on the
methodology, assumptions and results of the MCEV for the Old Mutual Group in
accordance with the disclosure requirements of the Principles and includes
conversion of comparative supplementary information for 2007, previously
prepared on the EEV basis, to a MCEV basis.
The impact as at 31 December 2007 of moving from an EEV to a MCEV methodology
is a reduction in Embedded Value of the covered business of 7.5% from
GBP6 861 million to GBP6 349 million. Within the European and Southern African
businesses, the aggregate allowance for risk within the EEV and MCEV approaches
is broadly aligned and hence relatively minor impacts were experienced on these
businesses when moving from an EEV to a MCEV approach. Most of the reduction in
Embedded Value was attributable to the United States business which decreased
by 57% from GBP1 069 million to GBP462 million. For this business the aggregate
allowance for risk under EEV is not aligned with the requirements under the
Principles and a number of factors contribute to the difference in approaches
as explained in detail in the supplementary information. However, it should be
noted that compared to EEV reporting, MCEV reporting merely changes the timing
of recognition of profits and not the ultimate profitability that will emerge
on covered business.
Adjusted Group MCEV per share 117.6p
The adjusted Group MCEV per share was 117.6p and adjusted Group MCEV was
GBP6.2 billion at 31 December 2008 (31 December 2007: 166.3p and GBP9.0 billion
respectively). The 48.7p decrease in adjusted Group MCEV per share was driven
by the fall in equity markets and the impact of lower global interest rates and
higher volatility which increased the cost of policyholder financial options
and guarantees.
Return on Group MCEV
Return on Group MCEV declined to 7.8% from 13.7% at 31 December 2007. The lower
adjusted operating MCEV earnings in 2008 were the net effect of higher earnings
in the South African and European life businesses driven by positive operating
assumption changes and the reduction in the number of shares following the
share buy-back programme, off-set by lower new business contributions, adverse
persistency, higher financial guarantee costs, hedge losses and impairments in
the United States, impairments in Nedbank and lower asset-based charges in the
asset management companies.
Capital position
The Group`s gearing level remains within our target range, with senior debt
gearing at 31 December 2008 of 4.0% (2.0% at 31 December 2007) and total
gearing, including hybrid capital, of 26.7% (21.2% at 31 December 2007).
Capital requirements are set by the Board, taking into account the need to
maintain desired credit ratings and to meet regulatory requirements at both the
Group and local business level.
Our share buy-back programme announced at the beginning of October 2007 was
completed in May 2008. A total of approximately 239 million shares were
repurchased through the London and Johannesburg markets at a total cost of
GBP351 million.
The Group is in compliance with the Financial Groups Directive ("FGD") capital
requirements, which apply to all EU-based financial conglomerates. Our pro-forma
FGD surplus was in excess of GBP0.7 billion at 31 December 2008. The FSA
requirement is to maintain a positive surplus at all times. Sensitivities
to market movements, although not linear, are that a 1% fall in South African
rand against sterling is broadly equivalent to a GBP14 million reduction in
FGD, a 1% gain in the US dollar against sterling broadly equivalent to a
GBP4 million fall in FGD and a 1% fall in the JSE broadly equivalent to a
GBP4 million decline in FGD. The level of defaults, impairments and realised
losses in our US corporate bond portfolio also impact on the FGD surplus. We
improved the pro-forma FGD sensitivity to the dollar since our Q3 Interim
Management Statement as a result of hedging activities undertaken.
Unrealised losses
In our US Life onshore business, as at 31 December 2008, 97% of our investment
portfolio is cash, government backed or investment grade securities of triple B
and higher. Concentration risk is low as the top ten holdings account for 5.5%
of the portfolio. The portfolio is well-matched since the assets have an
average duration of 6.0 years against an average duration of 5.9 years for the
liabilities. US Life`s net unrealised losses increased over the year to
GBP1.8 billion at 31 December 2008 reflecting the market-wide repricing of
credit spreads and other risks which do not relate to specific factors within
the US Life portfolio. The unrealised losses account for 13% of our total
portfolio on an IFRS basis. We have the ability and we intend to hold these
fixed income securities to maturity, which in economic terms limits the impact
of the current market dislocation.
We have adopted the reclassification amendment to IAS 39 and have elected to
classify around 150 securities from the "available-for-sale" category to the
"loans and receivables" category as at 1 July 2008. This is on the basis that
the securities in question are no longer regarded as being traded in the active
market. For "available-for-sale" investments, the securities are revalued and
the unrealised losses are accounted for in shareholders` equity whereas for
"loans and receivables" no revaluations are recorded.
Holding company net debt
The table below shows the net reported debt of the Old Mutual plc holding
company and its sub holding companies.
2008 2007
GBPm GBPm
Total net debt at start of period (2 420) (2 407)
Operational flows
Operational receipts 822 868
Operational expenses (191) (152)
Other expenses - 631 (71) 645
Capital flows
Capital receipts 316 69
Acquisitions - (66)
Organic investment (565) (249) (220) (217)
Debt and equity movements
Old Mutual plc dividend paid (353) (333)
Share repurchase (175) (177)
New equity issuance 5 12
Other non-cash movements 298 (225) 57 (441)
Total net debt at end of period (2 263) (2 420)
Total net debt within the holding company at the end of 2008 was
GBP2 263 million. A total of GBP1 138 million of operational and capital
receipts were received from business units during 2008. GBP565 million was
invested in the businesses and GBP353 million was used to pay the 2007 final and
the 2008 interim dividend. In addition, GBP175 million was spent on repurchasing
shares during the year. Other movements of GBP298 million mainly reflect a
positive impact of the marking to market of our debt liabilities.
Risks and uncertainties
There are a number of potential risks and uncertainties that could have a
material impact on the Group`s performance and that could cause actual results
to differ materially from expected and historical results.
We have included our view of these principal risks as well as the impact of
current economic and business conditions in the Business Review sections of
this report. The current economic conditions create uncertainty particularly
over the future levels of world equity markets, defaults in corporate bond
portfolios, particularly in the United States, currency fluctuations, demand
for the Group`s products and other economic factors. These uncertainties have
been considered individually and in combination in the Group`s forecasts and
projections, taking account of reasonably possible changes in trading
performance and economic conditions in the markets in which the Group operates.
The results show that the Group should be able to operate within the level of
its available credit facilities and with an adequate level of capital, both at
a Group level and within each of its major regulated Group entities. To the
extent that changes in trading performance and economic conditions prove to be
more severe than thought reasonably possible, the Group has evaluated and
concluded on feasible management actions that would be possible in such
circumstances so as to ensure adequate levels of liquid and capital resources
are maintained.
The Group continues to meet Group and individual entity capital requirements,
and day-to-day liquidity needs through the Group`s available credit facilities.
The Company`s primary existing revolving current facility of GBP1.25 billion
does not mature until September 2012.
The Board of Directors has the expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis in
preparing the financial statements contained with this announcement.
The Listing Rules of the UK Listing Authority (LR 9.7A.1) require that
preliminary unaudited statements of annual results must be agreed with the
listed company`s auditors prior to publication, even though an audit opinion
has not yet been issued. In addition, the Listing Rules require such statements
to give details of the nature of any likely modification that may be contained
in the auditors` report to be included with the annual report and accounts.
Old Mutual plc confirms that it has agreed this preliminary statement of annual
results with KPMG Audit Plc and that the Board of Directors has not been made
aware of any likely modification to the auditors` report required to be included
with the annual report and accounts for the year ended 31 December 2008.
Related party transactions
There have been no related party transactions or changes in the related party
transactions described in the Company`s latest Annual Report during 2008 that
could have a material effect on the financial position or performance of the
Group.
Philip Broadley
Group Finance Director
4 March 2009
Business Review
EUROPE: UNITED KINGDOM AND OFFSHORE
Strong profit performance in a challenging year
Highlights (GBPm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 167 173 (3%)
Return on equity 5.0% 6.8%
Return on equity (excluding goodwill) 12.0% 21.4%
Adjusted operating profit (covered business)
(MCEV basis) (post-tax) 235 206 14%
Return on embedded value (covered business) 15.3% 15.5%
Total life assurance sales (APE) 596 740 (19%)
UK life assurance sales (APE) 335 468 (28%)
Offshore life assurance sales (APE) 261 272 (4%)
Unit trust/mutual fund sales 1 715 2 275 (25%)
Value of new business 67 81* (17%)
APE margin 11% 11%*
PVNBP 4 902 6 311* (22%)
PVNBP margin 1.4% 1.3%*
Net client cash flows (GBPbn) 1.7 3.9 (56%)
Funds under management (GBPbn) 34.9 41.9 (17%)
* Restated, as now reporting on an MCEV basis
Positive net client cash flows despite low investor confidence
Skandia UK and Offshore continued to deliver positive net client cash flows for
the year with net inflows of GBP1.7 billion representing 4% of opening funds
under management. This comprised strong International net inflows and positive
UK net inflows which were lower than 2007. The market downturn contributed to a
17% decrease in funds under management but this compared favourably with the
31% drop in the FTSE 100 in 2008. Investment performance was driven by the
diversity of our offering with significant changes in asset mix occurring as
investors moved into cash based investments. Foreign currency denominated funds
benefited from the weakened sterling.
Investment volatility affects sales
Life assurance sales APE declined in line with the market. The largest relative
falls in sales were in the bonds and single premium pensions products and
because the 2007 pensions business figure benefited from the lingering benefits
of pensions "A-day" and higher investor confidence at the time. In 2008 the
market for single premium bonds was affected by the introduction of an 18% flat
rate of CGT confirmed in the March 2008 Budget. Skandia`s market share across
the entire pensions market remained strong particularly in the core product
area of single premium personal pensions. Regular premium business held up
better, ending the year 9% up on 2007.
Skandia International performed very well in 2008 due to its geographical
diversity, full open-architecture proposition, strong distribution
relationships and a focus on high net worth customers. Product and e-business
developments greatly enhanced our customer proposition in 2008.
Unit trust performance impacted by volatile markets
Unit trust sales were down 25% on 2007 as a result of one of the lowest ISA
seasons on record for the whole industry and again a reflection of the
turbulent market conditions. Within this, institutional mutual fund business of
GBP239 million was up by 45% over 2007. Skandia`s market share in platform
business fell marginally in the year but there were indications that the
repricing of the platform business in the latter part of the year was starting
to have a positive impact on sales. Skandia continue to increase investment
solutions on the platform to create wider appeal, especially during periods of
market volatility.
New business contribution
VNB fell by 17% to GBP67 million due to lower new business volumes. The
reduction was partially mitigated by a strengthening of the assumptions for the
amount of fee income rebated from fund managers, as communicated at the Interim
Results aligning Skandia more closely to the market. New business contribution
was also positively impacted by the mix of business effects, with a shift
towards sales of more profitable portfolio bond charging structures within
Skandia International. The new business margin ended the year at 11%, in line
with 2007.
Adjusted operating profit (IFRS basis) level with 2007 despite market
conditions
An excellent adjusted operating profit (IFRS basis) was generated in the
current climate with a decrease of 3% to GBP167 million for the year, in part
reflecting the reduction in funds under management and sales. This was
partially off-set by changes to the policyholder taxation basis for Skandia UK
following the market falls experienced in 2008. Additional integration costs
were incurred in 2007, as previously communicated. A favourable variance of
GBP33 million arose following the implementation of PS06/14 - the prudential
reserving requirements that permit non-linked insurance business to be valued
on a more realistic basis.
Increase in adjusted operating profit (covered business) (MCEV basis)
The adjusted operating profit (MCEV basis), on covered business after tax,
increased by 14% to GBP235 million. This increase includes a positive impact of
GBP56 million from operating assumption changes. This mainly resulted from the
recognition of retained unit trust company rebates (referred to above) as
Skandia outsources the investment of policyholder funds to unit trust companies.
Other operating assumption changes included adjustments to expense assumptions
to reflect current maintenance expense experience and modelling improvements.
Experience variances were positive in aggregate at GBP17 million due to impacts
on charges and continued positive experience in relation to retained rebates
assumptions.
Capital
Current levels of statutory capital for Skandia UK and Skandia International
are within or above the target ranges set by management. The businesses are
well capitalised with a solvency ratio of 2.6 times the required level.
Continued investment innovation at Skandia
During the year, we continued our track record of innovation in multi-manager
investment solutions. The Spectrum range of risk-controlled funds was launched
in April 2008 and attracted over GBP120 million of gross subscriptions by
31 December 2008. In the volatile market, the risk controlled nature of the
funds proved very effective from both a return and risk perspective. In
June 2008, we launched the Skandia Alternative Investments Fund which has an
absolute return focus and has funds under management in excess of GBP30 million.
The high-profile Best Ideas fund range continued to attract new sales with funds
under management of over GBP391 million at 31 December 2008. The UK Strategic
Best Ideas Fund had funds under management of GBP80 million at 31 December, and
continues to be one of the best selling funds. The continued deterioration in
equity markets boosted the performance of the UK Strategic Best Ideas Fund,
with the fund being the best performing UK fund out of any sector during 2008
(a universe of over 450 funds).
Skandia supports changes in the UK distribution landscape
The FSA published its paper on the Retail Distribution Review on
25 November 2008 moving the Review from the consultation phase into the
implementation stage. The paper focused on the clarity of the service
(distribution channels), remuneration, professional standards and prudential
requirements. Skandia has already started to support its distribution channel
through offering assistance in preparing our businesses for the change and
assisting advisers in obtaining the necessary qualifications. The intention of
the FSA is to consult with the industry on implementing the proposed changes
over a period running through to 31 December 2012.
On 3 November 2008 Skandia UK announced that it is ending its membership of the
Association of British Insurers ("ABI") as evidence that its proposition is
clearly differentiated from old style life and pensions companies, finding
little alignment of interests with the broader ABI membership.
Skandia UK announced a new pricing structure in September 2008 removing the
initial charge on platform sales. This move not only made Skandia`s proposition
very competitively priced but it also made the charging structure simple and
transparent. The price changes have been positively received by financial
advisers.
Skandia continues to receive awards for its service and investment innovation
In recognition of its leading customer service Skandia achieved a five-star
rating in the industry Financial Adviser Awards for the eleventh year running
and became the first company to win the Outstanding Achievement Award for
Pensions and Investments. Skandia has now won more than 30 five-star awards in
the 18 year history of the Financial Adviser Awards.
Skandia won the MultiManager of the Year award at the annual Investment Life &
Pension Moneyfacts Awards in September 2008 and was also Commended in the Best
Unit Trust/OEIC Provider category. These awards recognise the outstanding
achievements of providers who manage to stand out from the crowd by offering
high calibre products and delivering first-class service.
Principal risks and uncertainties
The principal risks to Skandia UK arise from operational experience, along with
market risk as Skandia UK derives income from fees which are charged as a
percentage of funds under management. The broader financial risks are limited.
Skandia UK does not offer material investment guarantees. Although we offer
protection business, and so have exposure to mortality and morbidity risk, the
majority of the risk is transferred to reinsurance counterparties. Credit risk
exposures are small; the main exposures are the risk of default on the
investment of company assets. Skandia UK has exposure to risk arising from
operating experience in respect of factors including persistency and management
expenses. These risks are managed within the operational functions who have
primary responsibility for the identification, mitigation and monitoring of
risks. Risks exceeding predetermined thresholds are escalated and reported to
management and to the Group CRO, along with details of the mitigating management
action. Recent falls in investment markets have adversely impacted fund-related
revenues and new business volumes. The profitability and capital position of
Skandia UK remains strong.
Outlook
Details of the changes to be introduced as part of the FSA`s Retail Distribution
Review are still under discussion. Meanwhile, Skandia is already preparing its
response, with the aim of optimising its position in the new model of financial
services and the distribution landscape that is likely to emerge. It will be
particularly important to secure significant funds under management to ensure
scale in the platform market that this review will stimulate. To secure assets
on Skandia UK`s platform we are running an aggressive campaign which began in
2008 with the removal of the initial margin on platform products to make our
charges highly competitive.
Our offshore business is geographically diversified with sales in Europe, the
Middle East, the Far East, Africa and Latin America, as well as in the UK.
Skandia International is a high-growth business with high potential for further
growth in 2009 and beyond. Investment in the operating infrastructure to drive
efficiencies and continued excellence in customer services will create further
market, product and distribution opportunities. Whilst 2009 will be a
challenging year, Skandia International remains confident about long-term
future growth prospects owing to a growing customer base, robust regulatory and
compliance infrastructure and a strong offshore brand.
EUROPE: NORDIC
Strong year with excellent sales performance and strengthened relations with
distributors
Highlights (SEKm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 1 076 874 23%
Return on equity 5.6% 4.3%
Return on equity (excluding goodwill) 17.0% 16.3%
Adjusted operating profit (covered business)
(MCEV basis) (post-tax) 1 839 880 109%
Return on embedded value (covered business) 12.9% 7.6%
Life assurance sales (APE) 2 599 1 992 30%
Unit trust/mutual fund sales 3 207 3 474 (8%)
Value of new business 397 313* 27%
APE margin 15% 16%*
PVNBP 12 108 9 329* 30%
PVNBP margin 3.3% 3.3%*
Net client cash flows (SEKbn) 7.0 2.7 159%
Funds under management (SEKbn) 91.9 116.7 (21%)
* Restated, as now reporting on an MCEV basis
Strong net client cash flows
Net client cash flows for the year were an exceptional SEK7.0 billion,
representing 6% of opening funds under management. The positive performance was
largely driven by strong net inflows in the life business benefiting from an
excellent sales performance and reduced outflows. However, volatile equity
markets negatively impacted asset growth during the year, with funds under
management at 31 December 2008 down 21% to SEK91.9 billion.
Sales performance continued to improve
Nordic delivered excellent growth in sales during 2008 with life sales on an
APE basis up 30% mainly due to strong sales in Sweden. The broker sales channel
accounted for the majority of this increase as a result of strengthened
relationships supported by the new investment portfolio product and faster
introduction of new funds to the market. A focus on the selling of unit-linked
products has continued throughout the internal sales force, which together with
several sales initiatives contributed to the improved sales. The very strong
upward trend in new sales continued throughout 2008 and so far there have been
no negative effects on sales performance from the volatile markets.
Mutual fund sales were down 8% on 2007, mainly due to lower inflows to fund
deposits within our bank offering, partially off-set by growth through other
channels. This growth was mainly through deposits in fixed income and money
market funds and through a hedge fund launched in the third quarter.
VNB grew strongly in 2008
VNB of SEK397 million for the year was up 27% on 2007, in line with the
excellent life sales. In addition to strong volume growth, the APE margin
benefited from the introduction of currency spreads and tighter cost controls.
These largely off-set the business mix impact in Sweden, particularly from the
removal of Kapitalpension product tax advantages as well as the strengthened
retention assumptions in 2008 and the negative economic changes in 2007. The
life new business margin ended the year at 15% just below the margin in 2007.
In the medium term, the new business margin is expected to improve to reach the
high teens.
Strong underlying adjusted operating profits despite market turbulence
Adjusted operating profit (IFRS basis) increased 23% over 2007 despite the
equity market downturn. This was largely due to excellent cost control and
SkandiaBanken continuing to benefit from an improved interest margin.
The adjusted operating profit (MCEV basis) was up 109% on 2007 mainly due to
strong VNB growth and the positive effect from assumption changes. In 2007
there was a negative effect of SEK526 million relating to strengthened
retention assumptions and lower fund charges on "tick-the-box" collective
agreements and tendered corporate business. In 2008 the effect from operating
assumption changes was SEK391 million which was mainly attributable to the
introduction of currency spreads and increased assumption for the take-up rate
for unit-linked contracts on retirement, partly off-set by strengthened
retention assumptions. Experience variances in 2008 of SEK142 million were
driven by a higher level of fee income than assumed, tax and profits not valued
within the value of in-force (e.g. Healthcare Business) partly off-set by a
negative retention effect mainly caused by premium reductions due to a Swedish
legislative change relating to the level of tax deductible pension savings
contributions.
Continued growth in banking business benefiting from market conditions with
improved interest margin
SkandiaBanken is completely funded by deposits and therefore has a unique
liquidity position enabling it to benefit from the current market situation
with an improved interest margin and increased business volumes. SkandiaBanken
has sufficient surplus liquidity and management continue to ensure that the
liquidity position remains strong. The capital ratio as at 31 December 2008 was
14.1% (Basel II, pillar one). SkandiaBanken`s lending portfolio has been built
on sound lending practices and is comprised of 95% mortgages which have
excellent credit worthiness with the remaining 5% comprised of unsecured loans.
The average loan-to-value in the portfolio at the end of the year was
approximately 40% to 45%. As a consequence, the bank has only been marginally
affected by the market turbulence. The credit loss ratio (credit losses as a
percentage of the opening lending balance) remains low at only 0.13%. The net
interest margin was 1.67% in 2008 compared to 1.32% in 2007. We are confident
SkandiaBanken`s conservative lending policy means it is well positioned to
respond to any adverse market developments.
Both deposit and loan books at SkandiaBanken increased in 2008. Excluding the
divested car finance business, lending increased to SEK43.8 billion, up 9%
since 2007. The increase related mainly to successful mortgage campaigns during
the year in Sweden together with a highly competitive floating interest rate
which led to increased lending volumes. As a consequence of the turbulent
market conditions, customers have been switching funds from ordinary saving
accounts with variable interest rates to saving accounts with fixed interest
rates. Deposits of SEK52.0 billion were up 3% since 2007 and the number of
customers increased 7% over 2007. SkandiaBanken`s operating profit for 2008 was
SEK283 million, 48% higher than 2007.
Capital
Skandia Nordic`s capital position is stable with sufficient surplus equity
exceeding both external requirements and internal buffers. The businesses are
well capitalised with a surplus 9.9 times the required level.
Other
During the year we announced that Skandia and Livfosakringsaktiebolaget Skandia
(publ) (Skandia Liv) are reviewing the potential benefits to both the Group and
to Skandia Liv policyholders of demutualising Skandia Liv. The review is at a
very preliminary stage and a conclusion is not likely before late 2009.
As announced on 3 October 2008, a ruling has been passed in respect of the
arbitration proceedings between Skandia AB and Skandia Liv. The arbitration
board did not accept Skandia Liv`s claim to any part of the purchase price
paid, but ruled that Skandia AB is obliged to pay Skandia Liv a total sum of
SEK580 million (GBP47 million) plus interest by way of compensation in relation
to fees under the asset management agreement which Skandia Liv deemed to be
higher than prevailing market rates. Old Mutual had already set aside
SEK500 million (GBP41 million) to cover the arbitration within our pre-
acquisition balance sheet. Skandia AB will also have to compensate Skandia Liv
for future payments to DnB NOR that are higher than prevailing market rates
until the contract with DnB NOR expires in 2013. A new provision of
SEK426 million has therefore been set up.
Principal risks and uncertainties
Nordic`s main risks relate to strategic and operational risks as well as market
risks. The market risks mainly relate to asset based income which reduces when
the value of the unit-linked funds declines. Having a diversified product range
and a wide range of investment options address some of the market risks. Risks
arising from operating experience (e.g. persistency and management expenses)
are managed through the risk framework which includes a three lines of defence
model and risks exceeding predefined risk tolerance levels are escalated to
the Group Chief Risk Officer. Political and regulatory changes which could have
an impact on the businesses are continuously monitored and managed.
Outlook
The continuing financial crisis will make 2009 a challenging year. In addition,
there will be more legislative changes that will impact on our business.
Our corporate clients have been affected by the economic downturn and the
effects of that will start to be seen during 2009. The private client market is
now already under pressure and customer behaviour will be impacted. This could
lead to lower customer activity during the year however we continue to focus on
developing innovative financial product solutions to address customer needs in
the current economic climate.
We continue to benefit from a combination of a broad product mix, a range of
insurance, banking and investment business, market-leading expertise and a
proven business model. As such, we are well positioned to handle the challenges
ahead as demonstrated by the delivery of excellent 2008 results despite the
market turbulence.
EUROPE: EUROPE AND LATIN AMERICA (ELAM)
Continuous innovation and customer focus in response to difficult market
conditions
Highlights (Eurm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 14 43 (67%)
Return on equity (0.3%) 1.5%
Return on equity (excluding goodwill) (1.3%) 7.3%
Adjusted operating profit (covered business)
(MCEV basis) (post-tax) 5 13 (62%)
Return on embedded value (covered business) 0.6% 1.5%
Life assurance sales (APE) 211 276 (24%)
Unit trust/mutual fund sales 2 077 3 071 (32%)
Value of new business 13 57* (77%)
APE margin 6% 20%*
PVNBP 1 559 2 182* (29%)
PVNBP margin 0.8% 2.6%*
Net client cash flows (Eurbn) 1.1 1.8 (39%)
Funds under management (Eurbn) 10.3 13.0 (21%)
* Restated, as now reporting on an MCEV basis
Strongly positive net client cash flow during market volatility
Net client cash flows at ELAM were robust considering the market volatility,
especially in the highly unstable fourth quarter of 2008. With the market in
some of our operating countries, such as France and Italy, showing substantial
outflows during the fourth quarter, our own performance compares strongly.
Strong persistency, driven by proactive retention campaigns and the ability
for clients to switch to more conservative portfolios, provided support to
strong net client cash flows.
Funds under management ended the year 15% below 2007 on a like-for-like basis
(net of Pallayne divested during 2008). This included negative market movements
on portfolio values of 27% of opening funds under management, reflecting the
fall in financial markets across the globe throughout 2008. In comparison, the
majority of European equity indices fell between 30% and 50% in 2008. Funds
under management were partially supported by the effective asset mix of the
portfolio which incorporates non-equity asset classes and reflects the
investment appetite of customers that shifted further during 2008 towards
guaranteed funds and other less risky asset classes.
Life sales impacted by constrained sales environment
Life sales on an APE basis were down throughout the year but especially in the
fourth quarter due to negative investor sentiment. This effect was stronger in
single premium business where investors typically have access to a wider range
of investment opportunities and seem to have been taking a "wait-and-see"
approach to investing under the current conditions. Regular premium business
has been relatively more stable, reflecting the smaller premium sizes and
habitual nature of saving on a regular premium basis. Nevertheless, regular
premium sales have also been under pressure during the year, and the market
volatility had a dampening effect on the traditional European seasonal ramp-up
in sales in the final quarter, with the fourth quarter falling short of prior
year levels.
Focused activity to support mutual fund sales
Given the market volatility and our core differentiator of this business line
being international equities, mutual fund sales provided a solid contribution,
although down 20% compared with 2007 on a like-for-like basis. We continued our
efforts to deliver innovative products and quality service. During 2008, much
focus was placed on improving the productivity of financial planners in Latin
America. Increased training, new product offers and planning tools assisted
financial planners in generating sales in the current conditions.
Value of new business and profit margins down
VNB of Eur13 million was down 77% over 2007, mainly as a result of lower sales
in 2008 in light of the market crisis. In addition, VNB was negatively affected
by changes in operating assumptions, where in particular the changed regulation
on policyholder profit participation reduced the German VNB. The APE margin
deteriorated to 6% from 20% in 2007. This was attributed to lower APE sales,
which for the more recently established businesses was aggravated by a
relatively fixed expense base leading to acquisition expense over-runs. In
addition, the strong sales of high margin business in Poland in 2007 was not
sustained in 2008.
Adjusted operating profit (IFRS basis) impacted by wider market environment
ELAM generates a significant element of its revenues from funds under management
and these fees were lower in line with reduced levels of funds under management.
This negative impact was partially off-set by the growth of the in-force book of
business during the year. Furthermore the revised policyholder participation
regulations implemented in Germany during 2008 both widened the definition of
revenues to be shared with policyholders and increased the level of
participation. This had a Eur20 million impact on the IFRS adjusted operating
profit for the year. This calculation is net of acquisition expenses and these
were lower, in line with new sales levels, and so policyholder participation
levels were relatively high. To protect the bottom line, ELAM maintained its
expense base at 2007 levels, identifying efficiencies to off-set growth in sales
force and inflationary impacts.
Adjusted operating profit (MCEV basis) suffered from weak new business
contribution and negative experience variances
MCEV adjusted operating profit was Eur5 million for 2008, 62% lower than 2007.
This was largely due to lower VNB and poorer experience variances which
included divisional restructuring costs. The operating assumption changes had a
negative impact on the adjusted operating profit, but not to the same magnitude
as for 2007. Changes have been made to persistency rates and expense levels,
both of which have been strengthened.
Capital
ELAM`s businesses continue to measure and monitor their capital resources on an
ongoing basis to ensure compliance with the minimum capital requirements of the
regulators in each territory in which we operate. Internally we manage our
businesses to maintain a buffer of at least 25% in excess of the local
requirements. Due to the decrease in funds under management levels, solvency
requirements across our markets reduced, while our capital employed increased
and therefore solvency coverage increased significantly over the year.
Market recognition of customer focus and innovation
We continued to focus strongly on our customers, delivering a number of new
products and service innovations throughout the year. Examples include annuity
features in Germany, a second Easy Plan product in Switzerland, various
distributor products in Italy and France, dollar cost averaging and rebalancing
features in Europe and new investment alternatives in Latin America. We also
improved service to our customers and distributors through differentiated
service offers to top distributors, proactive service and retention campaigns,
and improved distributor tools.
These innovations have been well received by the market, as can be judged from
the various product and service awards won during the year, as well as from
feedback on internal and external surveys undertaken.
Business restructure
From January 2009 we have restructured the business in continental Europe to
reflect our principal customer segments in order to leverage capabilities and
operational efficiencies across geographies. The transition to two main
business structures will take place throughout 2009:
"Affluent" targets the affluent segment and currently comprises the businesses
in France, Italy and Spain. "Mass Retail" meets the savings needs of this
significant part of the population and comprises the businesses in Germany,
Austria, Switzerland, Poland and eastern Europe. This foundation for efficiency
in Central Europe and the integration of the Southern European businesses will
allow us to take advantage of further efficiency opportunities in the future in
the Mass Retail and Affluent businesses.
Principal risks and uncertainties
ELAM`s business model carries limited guarantee and liability risk. Strategic
and operational risk is reviewed regularly and managed through our risk
framework. Our ongoing focus to build and diversify distribution aims to reduce
concentration risk. The existing concentration levels remain within a
reasonable range and we expect that future planned activities will assist us to
manage this risk further.
ELAM`s business mix, which includes regular and single premium, retail and
institutional business, provides mitigating support to impacts on business
results in the current volatile market conditions. However, uncertainty about
the future extent and length of a global recession remains and market trends
remain difficult to predict. ELAM`s geographic diversity reduces the economic,
market political and legal/regulatory risks that would typically exist in
single-market businesses. The transition to our new business line structure
carries some change risk. A strong change management programme has been defined
to reduce impacts to new and existing business.
Outlook
The global financial crisis and recessionary pressures are expected to be the
main influence on the market in 2009. We expect new business to be constrained
during the year as investor confidence remains suppressed.
Guaranteed products are likely to remain important to investors in 2009,
temporarily slowing the growth of the unit-linked segment compared with
traditional life. Products such as our traditional life fund in France and our
rebalancing features will help us win sales in the current climate.
Regular premium business, which has been relatively unaffected by the market
crisis, is expected to help our sales development in 2009 as the averaging
effect of regular premium inflows should support our sales propositions.
Our strong performance in net client cash flows and client asset values has
supported our market share. We believe that we will be able to capitalise on
this further once confidence returns and markets return to more stable growth
patterns.
SOUTH AFRICA: LONG-TERM BUSINESS AND ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA
(OMSA)
Excellent results in a very tough environment
Highlights (Rm) 2008 2007 % Change
Long-term business adjusted operating
profit 3 390 3 082 10%
Asset management adjusted operating profit 1 078 946 14%
Long-term investment return (LTIR) 3 521 2 988 18%
Adjusted operating profit (IFRS basis)
(pre-tax) 7 989 7 016 14%
Return on allocated capital 27.8% 24.0%
Adjusted operating profit (covered
business) (MCEV basis) (post-tax) 4 972 3 857 29%
Return on embedded value (covered
business) (post-tax) 14.4% 11.7%
Life assurance sales (APE)* 5 145 4 516 14%
Unit trust/mutual fund sales** 20 648* 15 547 33%
Value of new business 831 694# 20%
APE margin 16% 15%#
PVNBP 35 440 32 010# 11%
PVNBP margin 2.3% 2.2%#
Net client cash flows (Rbn) (5.5) (18.7) 71%
SA client funds under management (Rbn) 443.0 445.0 -
* Life sales now exclude healthcare business. 2007 sales have been restated
from R4 699
** Unit trust / mutual fund sales now include Marriott
# Restated as now reporting on MCEV basis
Funds under management were flat over 2007 mainly due to lower asset values in
volatile markets and improved net client cash outflows of R5.5 billion off-set
by the inclusion of Futuregrowth`s R35 billion of funds under management. The
acquisition of Futuregrowth has resulted in an expanded set of fixed income
products available to the Old Mutual customer base. Retention of third party
assets has improved significantly with the bedding down of the OMIGSA boutique
structure leading to the overall reduction in client outflows relative to 2007.
Outflows remained a challenge, affected by higher bonuses declared in 2007 and
early 2008, which increased the level of normal benefit payments, particularly
in Employee Benefits (EB), as well as higher member withdrawals from pension
funds as a result of the deteriorating economic environment.
Life assurance sales increased 14% in 2008. This improvement was particularly
pleasing considering the effect of the current economic climate on consumer
spend. We achieved excellent growth in life single premium sales of 26%
compared to 2007, but we experienced a slow down in single premium sales in the
fourth quarter. Savings products sales grew by 12% as investors opted for more
conservative fund options under the life wrapper in response to volatile
investment markets, particularly in the Retail Affluent market. Annuity sales
were up 85% with some good flows in the Corporate Segment`s new guaranteed term
annuity product as well as with-profit annuities. Our focus on working closely
with consultants advising institutional investors has helped us grow our sales
pipeline, although the sales process is longer as investors are more cautious
in the current markets before deciding to move assets.
Life recurring premium sales were strong, up 8% over 2007. Sales of recurring
premium savings products increased by 16% compared to 2007 driven by an
expansion in the Retail Mass segment sales force. High interest rates adversely
affected our credit life sales through the banking channel as loan advances
dropped. Sales of risk products to the Retail Affluent market were largely flat
over 2007 as customers faced affordability problems. In December 2008 we reached
an agreement to sell our healthcare business to Lethimvula. As a result we now
exclude healthcare sales from our life sales and from our embedded value
calculations.
Unit trust sales of R20.6 billion were 33% higher than in 2007, showing
excellent growth, albeit from a low base with investors moving to lower risk
money market funds. We continue to focus on improving investment performance,
as well as focus on the alignment of our unit trust fund offering to our
boutique capability and allowing the OMIGSA boutiques to operate with
independent investment philosophies and processes.
VNB grew 20% over 2007 driven by the increase in sales and the increase in the
margin as a result of strong with-profit annuity sales in the Corporate Segment
where the APE margin increased from 15% in 2007 to an outstanding 23% for 2008.
The contribution of the with-profit annuity sales to the APE margin was partly
off-set by the higher frictional tax costs after reducing the proportion of
capital invested in equities. The Retail Affluent margin also declined as a
result of the lower proportion of high margin risk business following the fall
in credit life sales.
Adjusted operating profit (IFRS basis) increased strongly, up 14% over 2007.
Despite challenging markets, our long-term business profits increased 10%,
driven by lower costs due to sound management of expenses with the lower Old
Mutual plc share price impacting incentive costs. In addition we gained some
significant non-repeating items including a reduction in employee benefit
obligations of R128 million, interest on SARS refund of R64 million and an
insurance claim of R37 million. We also saw improved general experience
variances. Although we increased our allowance for worsening persistency and we
increased our investment guarantee reserve (IGR) by R409 million during the
year, these assumption changes were not as adverse as in 2007 when we
determined the IGR on a market consistent basis for the first time. These
positive factors were partially off-set by lower capital charges as a result of
lower asset values and the move to lower margin products such as the move by
Old Mutual Staff Fund to Absolute Growth Portfolios as well as negative
termination experience especially in the mass market segment.
Our asset management adjusted operating profit was up 14% due to lower expenses
attributable to the impact of a lower Old Mutual plc share price on incentive
costs. The impact of the move to performance based income in the current
environment resulted in lower asset management fee income which was off-set by
strong performance in our credit operation (OMSFIN).
The LTIR increased by 18% after increasing the rate applied at the beginning of
the year by 100bps to 16.6%, reflecting the high investment returns on
shareholder funds achieved in 2007 and higher investible asset balances.
Adjusted operating profit (MCEV basis) increased by 29% over 2007, mainly due
to higher expected return (based on higher one-year swap rates), higher new
business contribution and the higher adjusted operating profits (IFRS basis)
discussed above. These positive factors were partly off-set by the impact of
adverse termination experience particularly in the Retail segments as a result
of the tougher economic environment.
Capital position
Rm 2008 2007 % Change
Admissible capital 42 582 45 039 (6%)
Statutory capital adequacy requirement
(SCAR) 11 176 11 739 (4%)
Statutory capital cover 3.8 times 3.8 times
Old Mutual South Africa`s life company capital position remains strong in spite
of turbulent markets. The statutory capital cover remained stable at 3.8 times
since December 2007. Admissible capital was lower than December 2007 levels due
to a fall in market values, off-set by the effect of our hedging programme and
increased cash holdings.
At 31 December 2008 the statutory capital requirement reduced 4% to R11,176
million as a result of a decision to hold more cash and reduce our exposure to
equities. The impact of lower equity markets and the new regulatory requirement
to include allowance for operational risk, credit risk and investment guarantee
reserve sensitivity in capital requirements, was off-set by higher assumed
management actions in the investment resilience scenario used for calculating
the capital requirement.
Retail Mass
Rm 2008 2007 % Change
Life sales (APE)
Savings 736 613 20%
Protection 576 477 21%
Total 1 312 1 090 20%
Value of new business 270 240# 13%
APE margin 21% 22%#
Net client cash flows (Rbn) 2.0 1.9 5%
# Restated, as now reporting on an MCEV basis
Retail Mass sales were up a pleasing 20% over 2007 largely due to strong growth
in salaried adviser manpower. The broker and direct channels also delivered
strong sales growth. Net client cash flows were 5% ahead of last year. The
impact of higher surrenders (indicative of the current economic conditions) and
greater volumes of maturing savings business (introduced ten years ago and
short term savings business introduced five years ago) was off-set by favourable
mortality experience.
VNB increased at a slower rate than sales due to the repricing of our
protection product range and the impact of lower expected returns (based on
assumed lower future swap yields) on the value of future profits on the
segment`s protection products.
Retail Affluent
Rm 2008 2007 % Change
Life sales (APE)
Savings 1 428 1 321 8%
Protection 996 1 056 (6%)
Annuity 219 197 11%
Total 2 643 2 574 3%
Life sales (APE)
Single 907 868 4%
Recurring 1 736 1 706 2%
Non-life sales
Unit trust/mutual fund sales 17 978 13 339 35%
Other non-life sales 4 782 4 871 (2%)
Value of new business 320 336# (5%)
APE margin 12% 13%
Net client cash flows (Rbn) (1.1) (2.7) 59%
# Restated, as now reporting on an MCEV basis
Net client cash outflows improved over 2007 however remained negative as the
prevailing adverse economic environment increased client withdrawals.
Total Retail Affluent life sales on an APE basis increased a solid 3%.
Recurring premium sales experienced challenges with inflationary pressures and
higher interest rates which impacted negatively on consumer disposable income.
Recurring premium savings sales grew by 13% with Max Investment recurring
premium sales up 6% and a full year contribution from Nedlife`s Dreammaker,
launched in the middle of 2007, producing a 112% increase albeit off a low
base.
The shift from life-wrapped savings business to other wrappers continues with
non-life recurring premiums up 32% from a relatively low base. Greenlight sales
grew by 1% as a result of affordability issues among customers and credit life
sales declined over 2007 after the reduction in loan volumes as a result of the
high interest rate regime and the impact of the National Credit Act.
Life single premium sales were up 4% with living annuities up 20% on 2007 and
conventional annuity sales were also solid as a result of the continued
competitiveness of our annuity rates, enhanced by a recent repricing exercise.
Total annuity sales including living annuities were up 11% on 2007. However,
Max Investment and Investment Frontiers single premium sales were down 10% and
1% respectively on 2007 as a result of the impact of market volatility on
single premium investments.
Non-life single premium savings business was up 25% over 2007 due to investors
moving to money market funds in the volatile investment markets and the
relaunch of Galaxy Elite, an upgrade to our existing investment platform.
VNB decreased by 5% despite the overall increase in sales. In addition to the
higher frictional tax costs following the change in shareholder investment
mandate, (more cash, less equities) the decline was also caused by the lower
credit life sales, which have high margins.
Corporate Segment
Rm 2008 2007 % Change
Life sales (APE)
Savings 386 346# 12%
Protection 125 145 (14%)
Annuity 350 111 215%
Total 861 602 43%
Life sales (APE)
Single 671 393 71%
Recurring 190 209 (9%)
Value of new business 201 91# 121%
APE margin 23% 15%#
Net client cash flows (Rbn) (4.0) (4.1) 2%
# Restated, as now reporting on an MCEV basis
Corporate life sales on an APE basis were 43% higher in 2008, driven by higher
sales in EB savings and annuity products. Single premiums were excellent. The
introduction of the Guaranteed Term Certain product boosted annuity sales, and
there were also good flows into Smoothed Bonus products. Sales of protection
products were below 2007 as insurers stepped up efforts to retain business
thereby reducing potential new business. Our retention of protection business
also improved in 2008.
VNB increased significantly in 2008 relative to the increase in sales. This was
because of higher sales volumes in EB combined with the favourable mix of
sales, notably the higher proportion of with-profit annuity sales. This had a
flow on impact in the new business margin improving relative to 2007.
Net client cash flows in the EB arena were marginally better than in 2007.
Higher inflows were almost off-set by higher outflows. Terminations were similar
to 2007 levels, but benefit payments were much higher. Higher bonus
declarations during 2007 (smoothed bonus) and early 2008 (annuities) increased
the level of normal benefits. In addition to this, a trend of increased benefit
withdrawals from funds as a result of current economic pressures contributed to
increased outflows.
Customers continued to transfer from the old smoothed bonus products to the
Absolute Growth Portfolios launched in 2007. Transfers of R21 billion occurred
during the year. These transfers are not counted as new business.
Old Mutual Investment Group South Africa (OMIGSA)
Rm 2008 2007 % Change
Life sales (APE) 329 250 32%
Unit trust/mutual fund sales 2 669 2 208 21%
Value of new business 40 28 43%
APE margin 12% 11%
Net client cash flows (Rbn) (2.4) (13.8) 83%
Funds under management (Rm) 2008 2007 % Change
Life 296 319 (7%)
Unit trusts 45 48 (6%)
Third party 110 88 25%
Total OMIGSA managed assets 451 455 (1%)
Funds managed by external fund managers 29 34 (15%)
Total OMSA Funds under management 480 489 (2%)
Less: managed by group companies for OMSA (37) (44) (16%)
Total OMSA client funds managed in SA 443 445 -
Life sales were ahead of 2007 as a result of good repeat investments by
existing customers in SYmmETRY. Non-life sales were higher than 2007 as a
result of better unit trust flows on the back of improved stability of our
investment professional teams in the boutiques. Net client cash outflows were
largely from institutional customers to fund benefit payments.
As our boutique structure has bedded down, our teams have stabilised. We have
set strong foundations over the last two years and are seeing improving levels
of acceptance and confidence in individual boutique investment philosophies and
processes. The acquisition of Futuregrowth and merger of the OMIGSA Fixed
Income and Futuregrowth teams has proceeded smoothly, with minimal disruption
to their investment processes.
The South Africa equity market (JSE All Share Index) fell 26% during 2008. The
outperformance of resources during the six months to the end of June reversed
abruptly in the second half of the year, with resources down 46% relative to a
- 1% return from financial stocks. Compelling valuations in the financial
sector meant that a number of OMIGSA boutiques were underweight resources and
overweight financials from the last quarter of 2007. This positioning led to
improved performance over the second half of 2008, with some of the ground lost
since September 2007 regained. Performance in our fixed income area was very
good. The Old Mutual Income Fund and Mining and Resources Fund won certificates
for top straight performance in their respective categories for the three years
ended 31 December 2008 at the Raging Bull Awards.
Investment performance across our diverse boutiques was mixed. Our relative
fund performance across the majority of boutiques nevertheless ended the year
better than at the end of 2007, albeit below our target levels. Over one year
to the end of 2008, 57% of peer group funds outperformed the median (compared
to 39% as at the end of 2007). Over three years to the end of 2008, we improved
from 31% outperforming to the end of 2007 to 40% above median at end 2008, and
similarly measured over five years improved from 36% to 54% above median.
Compared to industry median, overall, 55% of unit trust funds were above median
over one year, 35% over three years and 45% over five years to the end of
December 2008.
On the benchmark performance front, the difficulty of beating inflation and
cash plus benchmarks in an environment where growth assets are very negative,
weighed heavily on the delivery of funds which are measured mostly against an
absolute benchmark. At the end of 2008, 38% of funds measured against benchmark
were outperforming over one year, compared to 50% at the end of 2007. However,
over the longer-term period of five years we improved slightly, with 55% of
funds outperforming benchmarks compared to 50% for the five years to end 2007.
Principal risks and uncertainties
As we go into 2009 we face a number of risks from the economic environment.
These include a weak equity market and the possibility of further equity falls
adversely affect our earnings, our embedded value and our sales (as customers
avoid investment and savings products with equity content). In addition,
increased terminations due to the current economic climate puts more pressure
on the net client cash flow position, earnings and embedded value. Lower sales
may eventuate as a result of job losses and concerns about the global economic
outlook and a further decline in longer-term swap yields and further increase
in equity and swaption volatilities, which would increase the size of the
Investment Guarantee Reserve.
Outlook
National Treasury expects growth in the economy for 2009 to be 1.2%. This
growth rate is vulnerable to demand for our exports from developed markets and
how that will impact on manufacturing output as well as levels of commodity
prices and their impact on our mining sector. Growth will continue to be
supported by the government`s infrastructure drive.
The current economic environment has led to a significant decline in consumer
confidence in the investment markets and increase in concerns about job
security. There has been a shift in demand from investment vehicles with high
levels of market exposure to more traditional smoothed bonus and guaranteed
products, which will benefit OMSA. However, the overall pressure on the
consumer will restrict sales growth until concern over the market settles and
consumer starts feeling the benefits of falling inflation and interest rates.
We have received notification to terminate the existing mandate to manage the
Public Investment Corporation`s (PIC) assets worth about R25 billion early in
2009. This will adversely affect net client cash flows and reduce operating
profit by about R21 million for 2009.
New regulations on commission, implemented at the start of 2009, are
revolutionising the retail market. Changes include minimum early termination
values on long-term savings contracts and a move to spread commission over the
term of a policy rather than the current front-loaded structure. We have
already launched a set of products that meet the new requirements and have been
working with intermediaries to help them move to the new environment. The
legislation presents us with opportunities as our infrastructure is well
equipped to deal with changes of this magnitude.
The year ahead will challenge consumers, businesses and policymakers to adapt
their thinking and behaviour to a changing and more challenging economic
environment. OMSA`s strong capital position, brand loyalty and dominant
presence will allow us to compete more aggressively in a market with declining
margins and capital restrictions. Our capital position, at more than 3.5 times
the required level, and our AAA credit rating are the best in the long-term
insurance industry. As a result, we still see opportunities for growth, albeit
at lower levels than in the recent past.
SOUTH AFRICA: BANKING - NEDBANK GROUP (NEDBANK)
Resilient performance in a challenging environment
The full text of Nedbank`s results for the year ended 31 December 2008,
released on 26 February 2009, can be accessed on Nedbank`s website
http://www.nedbankgroup.co.za
Highlights (Rm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 8 800 9 220 (5%)
Headline earnings* 5 765 5 921 (3%)
Net interest income* 16 170 14 146 14%
Non-interest revenue* 10 729 10 445 3%
Net interest margin* 3.66% 3.94%
Cost to income ratio* 51.1% 54.9%
ROE* 17.7% 21.4%
ROE* (excluding goodwill) 20.1% 24.8%
* As reported by Nedbank in their report to shareholders as at 31 December 2008
Banking environment
The South African banking environment is experiencing the effects of a slowing
domestic economic cycle and the secondary effects of the global financial
crisis. In this challenging economic environment public sector infrastructure
spending is expected to continue to provide some support for economic growth in
the year ahead. Improved inflation statistics allowed for a 50 basis point
decrease in interest rates in December 2008, the first since April 2005. A
second cut of 100 basis points followed in February 2009. These interest rate
cuts will provide some relief for consumers, but are unlikely to stimulate
economic growth in the short term.
The local banking environment faced a number of challenges in 2008. These
included, firstly, pressure on margins as the overall cost of longer-term
funding increased. It was pleasing to note that, throughout the year, rand
liquidity remained stable, with the interbank lending market continuing to
operate efficiently. Local banks have been able to finance new assets in the
normal course of business. Secondly, reduced capacity and increased cost of
funding in the domestic debt capital markets. Thirdly, rising non-performing
loans and lower levels of recoveries, especially in the retail environment as
household finances remained strained and asset prices came under pressure. This
trend intensified in the second half of 2008 and has been increasingly
affecting small and medium-sized businesses, and will undoubtedly also impact
some larger corporates going forward. Finally, sharply slower retail advances
growth, partly off-set by reasonable wholesale advances growth.
The progress made during the recovery programme and over the recent past to
build a sustainable business continues to benefit Nedbank and has resulted in a
number of factors including ongoing growth in the retail mass and middle-income
segments and corporate markets, solid growth in retail deposits, pleasing
growth in transactional banking volumes, improved margins on new advances
through risk-based pricing and increased client activity in foreign exchange
and interest rate markets as well as an intensified focus on improving client
service levels.
The Competition Commission inquiry into bank charges issued a detailed report
in December 2008. Industry stakeholders have been given an opportunity by
National Treasury to comment on the recommendations contained in the report.
This input will be discussed by National Treasury with the Department of Trade
and Industry, the South African Reserve Bank and the Competition Commission and
it is anticipated that the final outcome of the banking inquiry process and the
impact on the banking industry will be finalised during 2009. Nedbank remains
committed to an outcome that provides real benefit to consumers and ensures the
ongoing competitiveness and stability of the financial services industry.
Basel II was successfully implemented on 1 January 2008 and was used as a
catalyst to enhance the management of risk and capital across the industry.
Financial performance
Given the turmoil in the global financial markets and the slower domestic
economy Nedbank is currently adopting a more conservative approach across its
operations. We have intensified our focus on increasing capital levels, growing
deposits and liquidity, proactive risk management, selectively growing assets
in businesses that are well positioned to increase economic profit, continuing
to manage for value in those businesses that have lower economic profit
profiles and managing down positions in riskier lines of businesses. At the
same time we continue to invest for the future and we are not seeking to
maximise short-term profitability at the expense of longer-term sustainability
at this point in the cycle.
Adjusted operating profit (IFRS basis) was down 5% to R8 800 million with
headline earnings down 3% to R5 765 million. Basic earnings grew by 6% to
R6 410 million (2007: R6 025 million). Diluted headline earnings per share
(EPS) decreased by 2% from 1 429 cents to 1 401 cents. Diluted EPS grew 7% from
1 454 cents to 1 558 cents, driven largely by the R622 million after-tax profit
on the sale of Visa shares in the first half of the year.
Nedbank`s return on average ordinary shareholders` equity (ROE), excluding
goodwill, decreased from 24.8% to 20.1%. ROE dropped from 21.4% to 17.7% for
the year. These declines were caused by slightly lower headline earnings,
mainly as a result of increasing retail impairment levels that reduced the
return on assets, together with higher capital levels as capital adequacy
ratios increased during 2008.
Credit quality deteriorated throughout 2008 with Nedbank Retail`s impairments
worsening significantly, while the wholesale banking portfolios showed a
moderate deterioration in the second half of 2008. Overall impairments have
increased, although the impact on earnings was partially off-set by controlled
cost growth. The momentum built from disciplined cost management over the past
few years continued into 2008 and contributed towards the efficiency ratio
improving from 54.9% in 2007 (54.3% excluding Bond Choice) to 51.1% in 2008 and
the "jaws" ratio growing to 7.5% (2007: 6.9%).
We continued to see a steady inflow of customer deposits, resulting in retail
deposits growing in line with retail advances. Pressure on short-dated
maturities has been partially alleviated by market expectations of decreasing
interest rates and a strategy of increasing deposit duration, particularly in
the second half of the year. Given our domestic focus and small foreign-funding
requirements (foreign deposits are 1.3% of total Nedbank deposits), our funding
and liquidity levels have remained sound with limited impact from the global
financial crisis.
Net interest income (NII)
NII grew 14% to R16 170 million on the back of growth in average
interest-earning banking assets of 23%. Nedbank`s net interest margin for the
year was 3.66%, down from 3.94% in 2007. The positive endowment impact of
interest rate increases on capital and current and savings accounts was off-set
by a number of factors including liability margin compression reflecting the
higher cost of term funding and asset margin compression from a changing asset
mix. Asset pricing continues to be a key focus for improving margins, with
higher margins being generated on new assets. Further off-sets include the cost
of holding additional liquidity buffers deemed prudent in the current
environment and debits relating to the accounting for historic
structured-finance transactions with related credits off-set in taxation.
Impairments charge on loans and advances
The credit loss ratio increased from 0.62% in 2007 to 1.17% for the year. The
growth in advances and the increase in the credit loss ratio are reflected in a
123% increase in the impairments charge from R2 164 million to R4 822 million.
Retail credit loss ratios have deteriorated since June 2008 and remain above
expected through-the-cycle levels, largely as a result of continuing increases
in defaulted advances in the Nedbank Retail Home Loan and Vehicle and Asset
Finance Divisions. Wholesale banking credit loss ratios remain below expected
through-the-cycle levels, although the credit loss ratio in Business Banking
increased as expected. The credit quality in the Corporate and Investment
Banking books remains good but is expected to be impacted by worsening credit
quality in the year ahead resulting in increased credit loss ratios on these
books. Notwithstanding seasonal effects, the unsecured retail portfolio
reflected encouraging signs of improvement in the latter part of 2008.
Defaulted advances increased by 75% from R9 909 million to R17 301 million and
total impairment provisions increased by 29% from R6 078 million to
R7 859 million.
Non-interest revenue (NIR)
NIR, excluding Bond Choice`s commission and sundry income from the 2007 base,
grew by 9% on a like-for-like basis. Total NIR (including Bond Choice in the
2007 base) increased by 3% to R10 729 million.
Commission and fee income grew by 14% on a like-for-like basis (5% including
Bond Choice), mainly from volume growth and transactional price increases.
Cheque processing fees continue to decrease with the NetBank electronic banking
system now implemented for all Business Banking clients and a process of
migration initiated for Corporate Banking clients. Cash handling fees and
transactional banking volumes grew strongly due to the growth in customer
numbers, reflecting the success of Nedbank`s strategy to increase delivery
channels, improve customer service and strengthen brand positioning. The sale
of Bond Choice reduced commission and fee income by R578 million.
Trading income increased by 16% from R1,334 million in 2007 to R1 553 million
in 2008, reflecting good trading activity in the foreign exchange and global
market businesses, although equity and debt trading both had a disappointing
year. Adjusting for the loss in the first six months of 2007 in respect of the
Macquarie business alliance, trading income would be at similar levels
year-on-year.
The sharp fall in equity markets resulted in historic unrealised gains in
mark-to-market private equity positions reducing. In spite of these challenging
markets Nedbank managed to record a positive NIR of R303 million from its
private-equity portfolios on the back of revaluations, realisations and
dividend income.
Expenses
Nedbank continues to invest in its franchise while maintaining a disciplined
approach to expenses. Despite high inflation and the increased distribution
footprint, expenses continued to be tightly controlled, increasing by 2% to
R13 741 million (2007: R13 489 million). On a like-for-like basis, excluding
Bond Choice, expenses increased by 5%.
Taxation
The taxation charge decreased by 25% from R2,336 million in 2007 to
R1 757 million. The effective tax rate decreased from 26.3% in 2007 to 21.6%,
mainly due to a reduction in the corporate taxation rate in South Africa from
29% to 28%, a change in tax legislation impacting investments held in private
equity portfolios and increase dividend income.
Non-trading and capital items
Income after taxation from non-trading and capital items increased from
R104 million in 2007 to R645 million for the year. The main contributions were
the R622 million after-tax profit on the sale of Visa shares and the R15 million
profit on the sale of 33.5% in Bond Choice.
Capital adequacy
Nedbank has strengthened capital ratios significantly, with a Tier 1 capital
adequacy ratio of 9.6% (December 2007: 8.2% pro-forma Basel II) and a total
capital adequacy ratio of 12.4% (December 2007: 11.4% pro-forma Basel II).
These ratios are now above the group`s historic target ranges. The core Tier 1
capital adequacy ratio was 8.2% (December 2007: 7.2% pro forma Basel II).
Nedbank currently holds a surplus of R9.5 billion against its regulatory
capital adequacy requirements.
Advances and deposits
Total assets increased by 16% to R567 billion (2007: R489 billion). Growth in
average interest-earning banking assets slowed to 23% (2007 growth: 29%).
Advances increased by 16%, reflecting ongoing growth in Nedbank Corporate but
slower growth from Nedbank Retail and a drop in advances in Nedbank Capital.
Nedbank Capital`s client loan book grew strongly, but this growth was more than
off-set by a reduction in the advances in the trading portfolio. Imperial Bank
showed strong growth through most of the year.
Overall deposits increased by 21% from R385 billion to R467 billion at
December 2008, with higher interest rates increasing demand for savings and
investment products.
Despite strong growth in retail funding, deposit growth was still largely
concentrated in the wholesale market. Management has remained focused on
optimising the funding mix and profile of the group through utilising alternate
funding sources, concentrating especially on the retail and business banking
deposit bases, while pricing competitively for term deposits.
Nedbank`s liquidity remains sound. The impact of the global financial crisis on
South African markets has, to date, been largely limited to an increased cost
of international funding as a result of the reduction in international
liquidity. This decreased the banks ability to access such funding and has led
to an increase in the cost of - and decrease in appetite for - capital market
debt. Given Nedbank`s domestic focus, international funding has traditionally
not been a large portion of the group`s funding base, while the increase in the
pricing of capital market debt has increased the cost of rolling over conduit
paper and new subordinated-debt issues, with volumes issued in this market also
being lower.
During 2008 Nedbank successfully issued hybrid debt, raising R1.75 billion. In
addition, to diversify the funding base, raise further foreign funding and
lengthen the bank`s existing funding profile Nedbank issued foreign syndicated
club loans of USD165 million and Eur165 million; registered a USD2 billion
European medium-term note (EMTN) programme; obtained a USD100 million credit
line from African Development Bank; and continues to focus on the retail deposit
base through competitive products and pricing.
Principal risks and uncertainties
The appropriate level of capital for a bank is a function of its strategy,
individual risk appetite and risk profile. This aligns with one of the key
objectives of Basel II which is to differentiate capital requirements and
capital buffers above the regulatory minimum, to reflect the unique risk
profile on a bank-by-bank basis, rather than following the "one-size-fits-all"
approach that Basel I engendered.
Nedbank has cultivated and embedded a prudent and conservative risk appetite,
primarily focused on the basics of banking in southern Africa. This is
illustrated by reference to a number of factors including having neither direct
exposure to US sub-prime credit assets nor associated credit derivative
transactions and having conservative credit underwriting practices which have
culminated in a high-quality, well-collateralised wholesale book and further
tightening of credit criteria in our retail book since 2007 in anticipation of
the economic downturn and resulting from the introduction of the National
Credit Act. We have reasonable credit concentration risk levels in relation to
the South African market with counterparty credit risk being restricted to
non-complex, vanilla banking transactions. We have a strong, well-diversified
funding deposit base (including a strong retail deposit franchise) and limited
offshore funding, low securitisation risk exposure compared to global banks,
low leverage ratio compared to global banks and higher ratio of risk-weighted
assets to total assets ratio than that of peers, indicative of our
appropriately conservative measurement of risk. In addition, we have a low
level of assets and liabilities exposed to the volatility of IFRS fair value
accounting, our small market trading risk in relation to total bank operations,
we have a low interest rate risk in the banking book and we have low equity
(investment) risk exposure, having successfully completed our non-core asset
disposal strategy in 2007. We have low currency translation risk and an optimal
offshore capital structure. Our earnings streams across our full commercial
banking activities are well-diversified and our well-diversified subordinated
debt profile have no maturities of existing Tier 2 regulatory capital until
2011. We undertake comprehensive stress and scenario testing to confirm the
adequacy of our capital ratios and accompanying capital buffers.
Against this background, we believe that capital levels (both regulatory
capital and internal capital assessment, based on economic capital) and
provisioning for credit impairments are appropriate and conservative, and that
Nedbank and its subsidiaries are appropriately capitalised relative to our
business activities, strategy, risk appetite, risk profile and the external
environment in which we operate. Additionally, Nedbank is currently not holding
excess capital for acquisitions.
Outlook
The domestic economy is expected to continue slowing in 2009, with gross
domestic product (GDP) growth currently forecast by the Nedbank group at 0.4%.
The global financial crisis and resultant recessionary conditions will place
more pressure on an already slowing domestic economy. Weaker international
trade, lower commodity prices and continued volatility on major financial
markets are expected to restrict corporate activity. Consumer finances are
likely to remain strained as a result of continued pressure on disposable
income, falling asset prices, increasing unemployment and the weaker rand.
Lower economic activity is also placing increasing strain on corporates.
Further interest rate cuts are anticipated during the course of 2009. The
benefits of these would be expected to impact positively on the South African
banking environment only in 12 to 18 months` time. In the short term the
decrease in interest rates will have a negative endowment effect on banking
interest margins, while impairments are likely to continue to deteriorate. The
reversal of the higher impairment trend typically takes longer to be reflected
in earnings.
In light of progress made by Nedbank and taking into account the current
economic environment and Nedbank`s interest rate expectations, we have revised
our medium- to long-term targets and have set short-term objectives for the
2009 financial year. The economic environment remains uncertain and this,
together with heightened market volatility, ongoing global uncertainty and the
potential for an extended global recession, increases forecast risk. The
short-term outlook, which is management`s current best estimates for the year
ahead, is that the Nedbank headline earnings will reduce by approximately 10%
in 2009, but Nedbank will continue to improve its efficiency ratio and
strengthen its capital position. This outlook assumes a reduction of 227 basis
points in the average prime rate.
SOUTH AFRICA: GENERAL INSURANCE - MUTUAL & FEDERAL
Challenging trading conditions
The full text of Mutual & Federal`s results for the year ended
31 December 2008, released on 6 February 2009, can be accessed on Mutual &
Federal`s website http://www.mf.co.za
Highlights (Rm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 1 169 1 256 (7%)
Gross premiums* 9 159 9 323 (2%)
Earned premiums* 7 669 7 948 (4%)
Claims ratio* 67.1% 65.8%
Combined ratio* 96.1% 95.4%
Solvency ratio* 41% 42%
Return on capital* (three-year average) 33.9% 31.7%
* As reported by Mutual & Federal in their report to shareholders as at
31 December 2008
Profits impacted by financial turmoil in the investment environment negatively
impacting investment returns
Adjusted operating profit (IFRS basis) declined following the lower underwriting
margin, but was partially off-set by the impact of a higher LTIR. This added
R57 million to our adjusted operating profit. The profit attributable to equity
shareholders declined 117%, primarily as a result of a reduction in the value
of listed equities. The underwriting surplus for the year declined by 18% but
the 2007 result was positively impacted by the release of R96 million from
reserves following refinements to estimation methods. Without this adjustment,
underwriting profit increased by 11%. Although there were further increases in
the frequency and severity of industrial fire claims in the first half of the
year, trading conditions improved during the second half. This, together with
corrective measures on the underperforming group schemes portfolio resulted in
satisfactory levels of underwriting profitability being achieved for the full
year. Gross premium income declined by 2% as growth in the commercial portfolios
was off-set by the cancellation of a number of personal group schemes and a
contraction in the risk finance portfolio.
Investment income reduced sharply during the year following a decline of
approximately 27% in the value of listed equities which was in line with the
JSE. Whilst dividend income declined slightly, interest income increased
strongly as a result of higher levels of cash holdings during the year and
higher interest rates.
Restructuring undertaken during the year
During the year Mutual & Federal undertook a substantial restructure to promote
client service and operating efficiency. Staff numbers declined by more than
600 as a result of the restructure and R55 million in retrenchment costs were
paid. A further non-recurring expense of R147 million was incurred from the
closure of a channel development project. This project was undertaken to seek
growth opportunities from a number of different channels but was prudently
abandoned when it proved to be too ambitious and ill-timed.
Solvency margin in the target range
As a result of the decline in the value of investments, the net asset value per
share declined by 13% during the year to R10.92 at 31 December 2008. The
solvency margin (being the ratio of net assets to net premiums) declined to 41%
at 31 December 2008 but remains in the target range adopted by Mutual &
Federal.
Principal risks and uncertainty
There are two main risks and uncertainties facing the business. The first is
operational risk and the second is a credit risk item. Operational risk arises
from the introduction of a new computer system across all operations and
branches taking place in 2009. A smooth transition and introduction of the new
operating environment is critical to the future profitability and success of
the business, to the degree that some business may be lost if the conversion
fails. While the reinsurance panel of the company is graded on average "A" and
above (Standard and Poors), the failure of a reinsurer could cause significant
solvency strain and going-concern problems to the business.
Outlook
The impact of the turmoil experienced at the end of 2008 in Europe and the
United States is expected to be felt in South Africa in 2009. Economic growth
will be challenged as commodity prices continue to fall. This will further
dampen South African consumer spending in 2009 and inevitably inhibit growth in
the short-term insurance industry. While government infrastructure spending and
the anticipated 2010 Football World Cup may provide some growth opportunities,
much of this business is inadequately rated and will decline. As consumers are
stretched, we are unlikely to see meaningful growth in existing personal
portfolios.
If commodity prices stay low the local currency will remain weak, particularly
if the Reserve Bank follows the example of Europe and the United States with
aggressive interest rate cuts. Any decline in the value of the rand threatens
to increase claims costs because of the large imported component in motor
vehicles and replacement plant and equipment.
Despite these factors, we remain committed to producing underwriting profits in
2009, and although the economic downturn may subdue growth, our streamlined
structure should provide us with a competitive advantage.
UNITED STATES: US LIFE
Immediate annuity mortality experience and market driven challenges in variable
annuity business depress 2008 results
Highlights (USDm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) (679) 195 (448%)
Return on equity (50.0%) 5.9%
Adjusted operating (loss)/profit
(covered business) (MCEV basis) (post-
tax) (1 112) 65 (1 811%)
Return on embedded value (covered business)(121.4%) 4.1%
Life assurance sales (APE) 519 671 (23%)
Value of new business (122) 63* (294%)
APE margin (23%) 9%*
PVNBP 4 990 6 375* (22%)
PVNBP margin (2.4%) 1.0%*
Net client cash flows (USDbn)** 1.0 1.6 (38%)
Funds under management (USDbn)** 20.7 24.1 (14%)
* Restated, as now reporting on an MCEV basis
** Stated on a start manager basis as USAM manages funds on behalf of US Life
Decrease in funds under management driven by unprecedented equity and credit
market movements
Despite the turbulent markets, net client cash flows were 4% of opening funds
under management. Funds under management ended the year at USD20.7 billion, down
14% from the opening position primarily due to a 21% decrease in the market
value of funds under management. The net unrealised loss on the fixed income
portfolio increased by USD2.3 billion to USD2.6 billion and Old Mutual Bermuda
("OMB") variable annuity separate account asset values decreased by
USD2.4 billion. The market value decrease was mainly the result of widening
credit spreads in the bond markets and dramatic declines in global equity
markets.
Sales driven by variable annuities
Total life sales on an APE basis were USD519 million, down 23% over 2007. Sales
by OMB were the largest contributor to APE. However as a consequence of the
high cost of guarantees in the volatile environment, we withdrew the guaranteed
variable annuity riders from the Hong Kong book in May, and from the remainder
of the business effective 15 August 2008, and therefore the OMB sales in the
last four months of the year were significantly lower.
Fixed indexed annuity sales, down 40% over 2007, were affected by difficult
market conditions. However, fixed annuity sales of USD60 million were up 216%
over 2007, following the industry trend as customers seek fixed interest
guarantees during this period of extreme equity market volatility and economic
instability.
Value of new business
VNB reduced by USD185 million in 2008 compared to 2007, with a margin of
negative 23% compared to 9% in 2007. The decrease in margin was mainly due to
the reduction in swap rates, which affects our US Life onshore business by which
reducing management capacity to retain additional income above guaranteed
minimum crediting rates, the additional provisions for non-modelled risk on OMB
variable annuity business sold, and the recognition of higher expected guarantee
costs on variable annuity business, in particular on the Hong Kong book.
Review of reserving basis
We continually monitor our assumptions and make adjustments based on experience
as appropriate. During 2008 we lowered the mortality assumption for life
contingent single premium immediate annuities ("SPIA"), which increased the
IFRS reserve and reduced embedded value. We modified the expected lapse rates
for deferred and indexed annuities to reflect higher expected surrenders when
the contracts exit the surrender charge period, which resulted in DAC
unlocking. We also included a non-performance risk factor in discount rates
used to determine the indexed annuity embedded derivative liability and the
variable annuity guaranteed minimum accumulation benefit (GMAB) liability,
which decreased the liabilities. Finally, we updated the variable annuity GMAB
assumptions related to fund indices, mortality, free partial withdrawal
utilisation, services fees and volatility, which resulted in a net decrease in
the liability.
Underlying adjusted operating profit (IFRS basis) results
Adjusted operating profit (IFRS basis) decreased USD874 million from the level
at 2007 to a loss of USD679 million for 2008. The 2008 loss reflects
USD436 million of additional mortality reserves related to life SPIA`s, a
USD295 million charge in the fourth quarter for revisions to estimates of future
gross profits which resulted in an "unlocking" of the deferred acquisition cost
asset (DAC), and USD126 million of hedge losses related to variable annuity
product guarantees. The latter was part of a total IFRS pre-tax and pre-DAC
charge of USD508 million relating to the variable annuity product with
USD382 million flowing through the short-term fluctuations line.
Difficult credit markets resulted in higher impairment losses and volatile
equity markets increased the costs associated with the guaranteed benefits on
our variable annuity contracts.
Market Consistent Embedded Value results
Adjusted operating profit (MCEV basis) was significantly lower in 2008 than in
2007, mainly due to the large negative assumption changes made in 2008:
strengthening of SPIA mortality reduced the VIF by USD280 million, an increase
in expense assumptions reduced the VIF by a further USD291 million, and the
strengthening of OMB GMAB reserves reduced the ANW by USD126 million. Experience
variances were also significantly adverse due largely to higher than expected
lapses and the impact of reinsurance deals which had been priced to be broadly
cost-neutral on a real world basis. Other negative experience variances
included lighter than expected SPIA mortality and an expense overrun, which
resulted in the operating assumption changes already outlined.
Credit update
The markets finished the year on a slightly positive note, as credit spreads
tightened from historical wide levels in November. Overall, the markets
remained fragile as continued financial sector rescue and economic stimulus
initiatives were required to boost economic activity and confidence. The
recessionary environment projected for 2009-10 depressed all market sectors.
US Life`s fixed income portfolio aggregate credit experience continued to be
affected by poor economic and financial market conditions. For 2008,
impairments total USD768 million on 43 securities with 3 of the 43 being sub-
prime asset-backed securities and another 15 indirectly linked to sub-prime or
monoline insurer exposures. 3.4% of US Life`s fixed income portfolio has direct
exposure to sub-prime mortgage collateral. The majority of the sub-prime
exposure remains highly rated but has experienced several ratings downgrades.
Of sub-prime holdings at 31 December 2008, 67% was rated AAA, 80% AA and
higher, 93% A and higher with an aggregate 68% fair value-to-book value ratio.
Approximately 2.9% of US Life`s fixed income portfolio has exposure to monoline
insurers, of which USD508 million (89% of the total exposure) is indirect
(wrapped) exposure, with an 82% fair value-to-book value ratio, and USD64
million is direct (unsecured) exposure, with a 56% fair value-to-book value
ratio. The indirect exposures include USD197 million of sub- prime asset-backed
securities which are wrapped by monoline guarantees.
Many large, high profile financial firms suffered failures and regulatory
interventions during the year, resulting in creditor losses, almost completely
illiquid credit markets, dramatically wider credit spreads and lower bond
prices in all sectors. In line with other US insurers, our fixed income
portfolio aggregate credit experience and current unrealised loss position have
been affected by these events and market conditions. US Life`s fixed income
portfolio recorded impairments of USD237 million in the fourth quarter of 2008,
contributing to total impairments of USD768 million for the 2008 year. The main
components of this were public fixed income security losses principally in
respect of Washington Mutual (USD78 million), Lehman Brothers (USD50 million),
three foreign financial institutions (USD98 million), several structured
securities (USD165 million), three monoline insurers (USD38 million) and losses
on preferred stocks (USD225 million) of which Freddie Mac and Fannie Mae was the
majority (USD151 million). US Life`s net unrealised losses on the fixed income
security portfolio was USD2.6 billion at 31 December 2008 reflecting the
market-wide repricing of credit spreads and continuing fallout from the
sub-prime mortgage crisis. Actual defaults on our corporate bonds for the year
were USD158 million resulting in a default rate of approximately 1.3% on our
corporate bond portfolio. The value of our US investment portfolio at
31 December 2008, after recognition of these impairments totalled
USD20 347 million.
US Life onshore update
Highlights (USDm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) (425) 111 (483%)
Life assurance sales (APE) 251 312 (20%)
Value of new business (21) (13) (62%)
APE margin (8%) (4%)
PVNBP 2 307 2 778 (17%)
PVNBP margin (0.9%) (0.5%)
Funds under management (USDbn) 14.9 18.1 (18%)
Our US Life onshore business is conducted through OM Financial Life and its
wholly-owned subsidiary, OM Financial Life of New York. US Life onshore is
focused on transforming and scaling its entities to improve performance by
drawing the business back to reduced sales volume but more profitable sales,
lowering new business capital strain and reducing operating expenses while
creating a more efficient foundation for potential future business growth.
The key focus will be on the successful implementation of the business
transformation strategy. The new product profile will be less capital intensive
through streamlining the current product portfolio and eliminating unprofitable
lines. The sales strategy will centre on core distribution partners to produce
more effective relationships. In addition to the consolidation of locations and
reduced headcount, a strong expense discipline will be employed throughout the
organisation. US Life will embed a risk management framework that reinforces a
conservative risk culture into the business operations.
The specifics of the transformation strategy have been finalised, and the
implementation actions required are intended to be in place early in the second
quarter of 2009. The preferred outcome will be to allow the business to focus
on the distribution channels and products which are most efficient and
profitable, such as its fixed annuity products. Key activities for the
remainder of the year include managing the investment portfolio to reduce
exposures to potential impairment losses in the current fragile credit market
conditions.
An additional capital injection of USD225 million was made in February 2009 to
US Life onshore from the Group to maintain the Risk Based Capital in line with
the operating target. The total capital injection for 2008 and early 2009 was
USD325 million, resulting in and RBC ratio of 305%.
Principal risks and uncertainties
US Life onshore is exposed to a number of risks, including the attraction and
retention of key staff during the business restructure, retaining the capital
required to meet target risk-based capital levels, funding and meeting product
guarantees, and asset liability management, including the need to maintain
sufficient liquidity to protect the bond portfolio from crystallising losses in
the current volatile market. In addition, defaults, downgrades or other events
impairing the value of our fixed maturity securities portfolio may reduce our
earnings. Changes in market interest rates may significantly affect our
profitability and a downgrade in our financial strength or credit rating could
result in a loss of business. A further decline in equity markets or a
sustained increase in volatility may adversely affect sales of our investment
products and our profitability.
Outlook for 2009
Despite the economic conditions we remain optimistic about our core products,
which offer customers guarantees, flexibility and transparency as we work with
them to meet their risk and retirement needs.
Experience in previous recessions suggests that this economic downturn will
have only a limited effect on sales in the life industry. During the last
recession, total new premiums for individual life insurance dipped but were
trending upward again before the recession ended. We expect traditional
insurance sales to small businesses to be strong as companies recognise the
need for asset protection and indemnification, and look for simpler solutions
to meet their objectives.
We will continue working proactively to improve capital efficiency and
investment portfolio performance through measures such as the defensive
restructuring of the asset portfolio, reducing exposures to corporations in
recession prone sectors, reducing financial credit exposures, upgrading CMBS
and sub-prime portfolios and increasing treasury and liquidity balances
US Life offshore update
Highlights (USDm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) (254) 84 (402%)
Life assurance sales (APE) 268 359 (25%)
Value of new business (101) 76 (233%)
APE margin (38%) 21%
PVNBP 2 683 3 597 (25%)
PVNBP margin (3.8%) 2.1%
Funds under management (USDbn) 5.8 6.0 (3%)
Our US Life offshore business is conducted through Old Mutual Bermuda ("OMB").
During the year, continuing market volatility and significant strengthening of
the US dollar led to further increases in guarantee reserves in respect of
variable annuity contracts. In 2008, we recognised a total loss in respect of
this business of USD508 million, of which USD126 million was recognised in
adjusted operating profit. Cash of USD582 million was transferred to OMB during
2008; it now has a significant excess to the minimum Bermuda regulatory capital
requirement.
The Universal Guarantee Option ("UGO"), which was launched in January 2007, was
an optional benefit connected to the Universal Investment Plan ("UIP"). When
selected, the UGO provided a Guaranteed Minimum Accumulation Benefit ("GMAB"),
that guaranteed the policyholder`s account value would grow by 5% over five
years (i.e. if the fund is below 105% of the initial premium, it would be
"topped up") and by 20% over 10 years. There was also in some cases a Highest
Anniversary Value ("HAV") guarantee on death and / or maturity. The UGO was
withdrawn from the Hong Kong book in May, and from the rest of the market on
15 August 2008.
The death and living benefit guarantees, which are embedded within the variable
annuity products issued by OMB, have similar risk profiles to "put-type"
options. This means that OMB bears the risk associated with market downturns as
a result of having sold these guarantees. These "put-type" options are
considered to be exotic in nature since policyholder behaviour influences the
ultimate payoff. In addition, since the guarantees are defined in US dollars
but are backed by funds that are invested in foreign currency denominated
securities, OMB bears foreign currency exchange risk in connection with these
exposures. Since the funds backing the guarantees are not directly hedgeable,
linear combinations of liquid market indices are used to proxy the return of
every fund ("fund mapping"). For effective hedging, the explanatory power of
these fund mappings should be as high as possible establishing good linkage
between the funds and the chosen set of hedgeable indices.
The turbulent economic conditions and failure to fully hedge certain risks,
coupled with hedge ineffectiveness, meant that the cost of providing the
guarantees increased substantially in 2008. This resulted in swift and decisive
action in the second half, including senior management changes, the withdrawal
of the UGO, strengthening of governance and risk management practices, the
adoption of more conservative assumptions, implementation of improved fund
mapping and the launch of the "Accelerated Universal Guarantee Option (UGO)"
offer.
Improved fund mapping has enabled OMB to have a much clearer understanding of
its exposures in terms of the guarantees it has offered. While considerable
basis risk remains, OMB has been able to significantly improve hedge
effectiveness, from around 75% measured over the full year, to around 92% in
the fourth quarter of 2008. Enhanced attribution reporting has also resulted in
a better understanding of the sensitivity of our reserves to changes in the
underlying markets. As a general guidance, a 1% decrease in equity markets
results in a loss of approximately USD10 million, a 1% strengthening in the
US dollar results in an adverse impact of around USD4 million and a 1% parallel
increase in volatility costs approximately USD15 million.
Better asset and liability management of the margin and bank accounts was
instituted in the fourth quarter of 2008 to help increase yields, reduce
counterparty exposure and minimise unintentional currency exposure. 24-hour
monitoring and trading began in October 2008 to improve reaction time as
markets moved around the globe. Moreover, enhanced valuation methodologies to
ensure assets and liabilities were calculated on a consistent basis helped
remove unnecessary profit and loss volatility. A new product development
process has been implemented, which includes the sign-off of product by the
Group Chief Actuary, as well as the sign-off of the hedging strategy and hedge
cost by the Chief Investment Officer and risk tolerance by the Chief Risk
Officer.
On 5 November 2008, OMB announced an offer permitting direct customers
(excluding the Hong Kong book, on which OMB is the reinsurer) who had elected
the UGO guarantee riders, many of whom had seen their initial investments fall
substantially, to accelerate the guarantees under these riders. The UGO
Acceleration Plan enabled customers to receive an immediate top-up to their
account value to 85% of their initial investment (less any subsequent
redemptions). In return, all guarantees would be terminated and the fees
associated with these guarantees would no longer be charged. The offer was
closed on 28 November 2008, with 14% of policyholders subjected to the offer
accepting the take-up. Such measures represented a further step in derisking the
business and resulted in a cash payout of USD94.5 million, and a release of
reserves of USD133.4 million.
OMB has also delivered significant operational improvements, including the
development of a multi-currency facility and the implementation of process
improvements that will substantially eliminate breakage (costs arising form a
mismatch in the pricing contractually agreed with a customer and the actual
price achieved, resulting from inefficiency of systems and/or processes).
Looking forward, further action will be taken on a number of fronts, including
restructuring the business to further improve governance, risk management and
accountability; further derisking the existing book through improved hedge
performance and regular monitoring of fund performance and the soft closing of
funds that exhibit poor hedging characteristics. Further action will also be
taken in the development of new investment and insurance products that meet
customers` needs, such as Shariah compliant funds and guaranteed funds based on
quoted indices, asset allocation models or volatility-controlled funds that
facilitate effective hedging.
OMB is confident that a return to more normal market conditions and the launch
of a range of new hedgeable products will underpin a good recovery in
profitability, although some modest volatility in earnings is still expected in
the medium term.
Principal risks and uncertainties
OMB is primarily exposed to risks which include basis risk, being the risk that
customers` investments in the underlying mutual funds underperform relative to
the liquid market indices used to hedge the exposure, or the assumptions as to
currency exposure prove to be inaccurate; and credit risk in connection with
its fixed account assets. Another risk is an increase in the cost of hedging as
a result of increased market volatility. OMB does not currently hedge
volatility, but would look to hedge on a strategic basis, should this be deemed
appropriate. One further risk is that of further reductions in terms of fee
income should the value of the assets under management upon which the company
earns fees continue to fall.
Outlook for 2009
In 2009, OMB aims to rebuild its position as a leading distribution platform.
It does face challenges in terms of delivering innovative new products that
will meet customers` needs within our risk appetite. However, a return to more
normal market conditions and the launch of a range of new hedgeable products
will underpin a good recovery in profitability.
UNITED STATES: US ASSET MANAGEMENT
Results dampened due to difficult market conditions
Highlights (USDm) 2008 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 181 324 (44%)
Return on Capital 7.2% 11.3%
Operating margin 20% 27%
Unit trust/mutual fund sales 1 892 3 782 (50%)
Net client cash flows (USDbn) (5.2) 35.2 (115%)
Funds under management (USDbn) 240.3 332.6 (28%)
Investment performance strong through a difficult investing environment
Aggregate long-term investment performance from our member firms remained
strong. Over three years, 53% of institutional assets had outperformed their
benchmarks and 54% of institutional assets were ranked above the median of
their peer group over the trailing three-year period. These numbers represent
significant improvement from the third quarter and demonstrate that our
affiliates` disciplined investment processes, based on sound valuation and
business fundamentals, continue to deliver for clients.
Net flows and funds under management impacted by market turbulence
Net client cash flows for the year were a solid USD1.5 billion, however
including securities lending at Dwight Asset Management which we suspended in
the third quarter, total outflows were USD5.2 billion. Given the difficult
market conditions and the net outflows being experienced across the industry,
our result for the year was encouraging and favourable to our peers. Affiliates
contributing positive flows included Heitman, The Campbell Group, Rogge Global
Partners, Ashfield Capital Partners, 2100 Xenon Group and Larch Lane Advisors.
Our track record of investment performance coupled with our diverse
multi-boutique model positions us well to continue to attract net inflows
despite the current market climate.
Funds under management ended the year at USD240.3 billion, a 28% decrease from
2007. USD89 billion (96%) of the reduction was due to negative market returns.
Our diversified asset mix helped to lessen the impact with fixed income and
alternatives being less volatile and uncorrelated in periods of market
instability. Such asset classes represented over half of the total funds under
management at year-end. On 1 July 2008, Rogge Global Partners acquired ING
Ghent, which contributed USD1.5 billion to funds under management during the
year.
Retail sales challenges
Like most of our competitors, retail sales faced a challenging year in 2008.
OMAM UK unit trust sales and Old Mutual Capital mutual fund sales for the year
were USD1.1 billion and USD831 million, respectively, down a combined
USD1.9 billion (50%) from 2007. At 31 December 2008, 12 of Old Mutual Capital`s
mutual funds carried four or five star rankings by Morningstar, and we remain
confident in the competitiveness of the underlying products we offer.
Adjusted operating profit (IFRS basis) down 44%
Adjusted operating profit for the year was down 44% over 2007. The decrease was
primarily a result of lower management fees as well as performance fees, both
of which were negatively impacted by the volatile markets. In addition, while
we recorded USD11 million in realised gains on seed investments in 2008, we also
recorded USD35 million of unrealised losses in adjusted operating profit. The
operating margin, which is calculated inclusive of minority interest expense,
also declined from 2007. Actions were taken to reduce costs across the business
in the fourth quarter, and we remain committed to managing expenses through the
current operating climate.
Continued focus on product development and distribution
We remain committed to the delivery of unique and innovative investment
options. Recent product focus has included asset allocation and risk-adjusted
return objectives which have positioned us well in the current market
environment. Specifically, we recently launched Old Mutual Target Plus
Portfolios, the only target-retirement mutual funds with three risk-specific
asset allocation strategies. These funds enable Old Mutual to capitalise on the
trend of target date funds as retirement plan default options.
To capitalise on the movement of asset flows towards both global and
alternative products we launched the following strategies: Copper Rock
International Small Cap Growth (managed by a newly acquired team), Barrow
Hanley International Value, Thomson Siegel & Walmsley Global Equity, Acadian
Emerging Market Debt, 2100 Managed Futures, and 300 North Capital Long/Short.
In addition to our continued focus on product quality we have begun to build
out the next generation distribution model adding several new team members
covering Alternatives, Defined Contribution Investment Only, and Wall Street
and Global Distribution. This is an example of our commitment to grow the
business and bring in talented experienced people to serve the evolving needs
of our clients.
Risk management
Old Mutual is committed to the objective of increasing shareholder value by
operating in a manner consistent with our risk appetite. Risk management is not
limited solely to consideration of downside impacts or risk avoidance, but also
encompasses taking risk knowingly for competitive advantage.
An independent review of risk management across Old Mutual involving external
experts was completed during 2008, and we have implemented a number of
initiatives to improve our governance, risk management and internal control
processes including implementation of an Enterprise Risk Management programme.
These improvements include the recruitment of significant additional risk and
compliance personnel at Group and Business Unit level; the development and roll-
out of a global risk appetite framework; the development of comprehensive and
focused risk reporting, including introduction of a risk recording and
reporting tool; the implementation of a revised and more comprehensive risk
categorisation model at Group; the revision of the Old Mutual policy suite and
framework to reflect increased oversight from Group Risk over Business Units;
and the development of formal standards for internal loss data collection and
increased use of Key Risk Indicators.
Our priority for 2009 is to embed these enhancements and further strengthen our
system of risk management.
Principal risks and uncertainties
The broad market downturn had, and will continue to have, an impact on the US
asset management business ("OMAM"). The exposure to current market fluctuation
continues to impact assets under management, revenues and earnings targets
thereby affecting our ability to execute against the overall business strategy.
In addition, given activities over the last year, there is a high likelihood of
regulatory reform across the financial services industry. In aggregate, these
factors create an environment that could result in OMAM facing continuing
pressure on earnings as well as higher than normal levels of litigation and
reputational risks.
Outlook
We see good potential both in the US and globally. Difficulties within
financial institutions have created a significant opportunity to attract
investment talent within the US. Market volatility also creates opportunities
for managers to provide outperformance for customers at a time when the gap
between the top and bottom quartile performers has widened.
Before the current market difficulties, client cash flows were driving asset
allocation decisions towards international, global and alternative strategies.
We believe these trends will continue in 2009, but many customer searches have
been halted given the recent volatility. Search activity should return with
client cash flows as the volatility in the financial markets subsides, but
customers will remain wary. They will put a premium on companies that are truly
institutional in quality and offer effective risk management, continuity of
staff, strong ownership structures, transparency of investment process and
longevity of performance.
Until global equity markets recover, our earnings growth will be restricted.
However, our investment track record has positioned us well relative to
competitors, and our diversified asset mix will continue to help us weather
market volatility.
OTHER: ASIA PACIFIC
Continued focus on existing businesses
Highlights (GBPm) 2008 2007 % Change
Adjusted operating (loss)/profit (IFRS basis)
(pre-tax) (17) 2** (950%)
Australia unit trust/mutual fund sales 418 719 (42%)
Australia institutional sales 123 115 7%
Skandia:BSAM (China) Gross Premiums * 28 122 (77%)
KMOM (India) Gross Premiums * 279 163 71%
Net client cash flows (GBPbn) (1.6) - (100%)
Funds under management (GBPbn) 3.5 6.5 (46%)
* This represents 100% of the businesses; OM owns 50% of Skandia:BSAM and 26%
of KMOM
** Includes Bermuda Asset Management (now included in USAM)
During 2008, we continued to focus on broadening our footprint in the Asia
Pacific region through new initiatives, increasing distribution and our
expanding product. Our portfolio of businesses consists of a retail mutual
funds platform and institutional asset manager in Australia, a joint venture
with the Beijing State-owned Asset Management Company in China selling
unit-linked and the newly-launched universal life products (Skandia:BSAM) and a
26% holding in a life assurance venture in India (Kotak Mahindra Old Mutual).
In India, we increased our KMOM business branch network with 197 branches now
open across the country compared to 106 in 2007.
Results impacted by current market conditions
A combination of stock market volatility and increased competition resulted in
tough business conditions for the year. Sales and net client cash flows were
disappointing with total outflows of GBP1.6 billion, primarily as a result of
the lower equity markets and the impact of large institutional client
redemptions in Australia. Funds under management reduced accordingly, partially
off-set by the strengthening of local underlying currencies against sterling.
We incurred an adjusted operating loss (IFRS basis) for the year of GBP17
million. This was largely due to lower revenues which were impacted by weakened
sales and significant market value depreciation caused by the market downturn.
Non-recurring expenses relating to the new regional office set-up and the
inclusion of costs for new initiatives contributed to the higher operating
losses.
Principal risks and uncertainties
As uncertainties in market and economic conditions persist, the market downturn
may continue to impact on the growing economies of emerging markets. The
Chinese local regulator, CIRC, has placed stricter regulations on the
distribution of unit-linked products and has also suspended all new branch
openings, new products and funds placing further strain on business
performance. Given that some of our businesses or investments in the region are
joint venture partners, our challenges remain on managing risks through
adequate representation on the relevant boards, audit committees and working
reports from internal and external auditors.
Outlook
Although we believe there is good long-term growth in the Asia Pacific region,
we have decided for the foreseeable future to scale back our aspirations for
this area. We have therefore reached an agreement to sell our Australian
business and rein back our expansion plans to focus on our established
businesses in India and China. Reflecting this change in strategy we have
decided to close our regional head office in Hong Kong.
Statement of directors` responsibilities in respect of the preliminary
announcement of the Annual Report and the financial statements
We confirm that to the best of our knowledge:
The financial statements, prepared in accordance with the applicable set of
accounting standards, gives a true and fair view of the assets, liabilities,
financial position and profit of the Group and the undertakings included in the
consolidation taken as a whole;
The Group Finance Director`s review and the Business review includes a fair
view of the development and performance of the business and the position of the
Group and the undertakings included in the consolidation taken as a whole,
together with a description of the important events, principal risks and
uncertainties that they face.
Julian Roberts Philip Broadley
Chief Executive Group Finance Director
4 March 2009 4 March 2009
Consolidated income statement
For the year ended 31 December 2008
GBPm
Year ended
Year ended 31 December
31 December 2007
Notes 2008 Restated*
Revenue
Gross earned premiums 3(iii) 5 156 5 566
Outward reinsurance (335) (293)
Net earned premiums 4 821 5 273
Investment return (non-banking) (11 578) 6 318
Banking interest and similar income 4 059 3 190
Banking trading, investment and
similar income 162 170
Fee and commission income, and
income from service activities 2 313 2 475
Other income 270 245
Total revenues 47 17 671
Expenses
Claims and benefits (including
change in insurance contract
provisions) (3 610) (7 193)
Reinsurance recoveries 262 236
Net claims and benefits incurred (3 348) (6 957)
Change in investment contract
liabilities 10 051 (2 618)
Losses on loans and advances (319) (157)
Finance costs 392 (50)
Banking interest payable and similar expenses (2 853) (2 053)
Fee and commission expenses, and
other acquisition costs (937) (778)
Other operating and administrative expenses (2 834) (2 813)
Goodwill impairment 4(ii) (74) (3)
Change in third party interest in
consolidated funds 779 (156)
Amortisation of PVIF and other
acquired intangibles 4(ii) (361) (360)
Total expenses 496 (15 945)
Share of associated undertakings`
loss after tax (1) (1)
Profit on disposal of subsidiaries,
associated undertakings and
strategic investments 4(iii) 53 25
Profit before tax 595 1 750
Income tax credit/(expense) 5(i) 88 (504)
Profit after tax for the financial year 683 1 246
Profit for the financial year
attributable to:
Equity holders of the parent 441 972
Minority interests
Ordinary shares 6(i) 188 224
Preferred securities 6(ii) 54 50
Profit after tax for the financial year 683 1 246
Earnings per share
Basic earnings per ordinary share
(pence) 7(i) 8.6 19.2
Diluted earnings per ordinary share
(pence) 7(i) 8.1 18.1
Weighted average number of shares -
millions 4 755 4 894
* 2007 results have been restated to include Mutual & Federal as a continuing
operation.
Reconciliation of adjusted operating profit to profit after tax
For the year ended 31 December 2008
Reconciliation of adjusted operating profit to profit after tax
GBPm
Year ended
Year ended 31 December
31 December 2007
Notes 2008 Restated*
Europe 3(ii) 266 268
South Africa 3(ii) 1 191 1 254
United States 3(ii) (270) 260
Other 3(ii) (17) 2
1 170 1 784
Finance costs (140) (119)
Other shareholders` expenses (31) (41)
Adjusted operating profit2 before tax 999 1,624
Adjusting items 4(i) (168) 66
Profit for the financial year before
tax (excluding policyholder tax) 831 1 690
Income tax attributable to
policyholder returns 3(ii) (236) 60
Profit for the financial year before tax 595 1 750
Total income tax expense 5(i) 88 (504)
Profit after tax for the financial
year 683 1 246
Adjusted operating profit after tax attributable to ordinary equity holders
GBPm
Year ended
Year ended 31 December
31 December 2007
Notes 2008 Restated
Adjusted operating profit2 before tax 999 1 624
Tax on adjusted operating profit 5(iii) (86) (418)
Adjusted operating profit2 after tax 913 1,206
Minority interest - ordinary shares 6(iii) (218) (242)
Minority interest - preferred
securities 6(ii) (54) (50)
Adjusted operating profit2 after tax
attributable to ordinary equity holders 641 914
Adjusted weighted average number of
shares - (millions) 7(i) 5 230 5 411
Adjusted operating earnings per
share3 - (pence) 7(ii) 12.2 16.9
Basis of preparation
1 The reconciliation of adjusted operating profit has been prepared so as to
reflect the Directors` view of the underlying long-term performance of the
Group. The statement reconciles adjusted operating profit to profit after tax
as reported under IFRS as adopted by the EU.
2 For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain
long-term incentive schemes defined as minority interests in accordance with
IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, revaluations of put options
related to long-term incentive schemes, the impact of closure of unclaimed
shares trusts, profit/ (loss) on disposal of subsidiaries, associated
undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, and fair value profits/(losses) on
certain Group debt movements.
3 Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and minority interests. It excludes income
attributable to Black Economic Empowerment trusts of listed subsidiaries. The
calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and Black Economic Empowerment trusts
* 2007 results have been restated to include Mutual & Federal as a continuing
operation.
Consolidated balance sheet
At 31 December 2008
GBPm
At At
31 December 31 December
2007
Notes 2008
Assets
Goodwill and other intangible assets 5 882 5 459
Mandatory reserve deposits with
central banks 734 615
Property, plant and equipment 682 608
Investment property 1 478 1 479
Deferred tax assets 1 590 683
Investments in associated
undertakings and joint ventures 111 81
Deferred acquisition costs 3 199 2 253
Reinsurers` share of long-term
business policyholder liabilities 1 148 1 394
Reinsurers` share of general
insurance liabilities 115 -
Deposits held with reinsurers 164 213
Loans and advances 35 745 30 687
Investments and securities 83 522 89 627
Current tax receivable 118 83
Client indebtedness for acceptances 220 165
Other assets 3 137 2 774
Derivative financial instruments -
assets 4 633 1 527
Cash and cash equivalents 2 862 3 469
Non-current assets held-for-sale 7 1 623
Total assets 145 347 142 740
Liabilities
Long-term business policyholder
liabilities 81 269 84 251
General insurance liabilities 344 -
Third party interests in consolidated
funds 2 591 3 547
Borrowed funds 8 2 295 2 353
Provisions 9 477 499
Deferred revenue 598 462
Deferred tax liabilities 1 452 1 413
Current tax payable 219 320
Other liabilities 3 733 6 180
Liabilities under acceptances 220 165
Amounts owed to bank depositors 38 171 31 817
Derivative financial instruments -
liabilities 4 395 1 716
Non-current liabilities held-for-sale 6 420
Total liabilities 135 770 133 143
Net assets 9 577 9 597
Shareholders` equity
Equity attributable to equity holders
of the parent 7 737 7 961
Minority interests
Ordinary shares 1 147 933
Preferred securities 693 703
Total minority interests 1 840 1 636
Total equity 9 577 9 597
Consolidated cash flow statement
For the year ended 31 December 2008
GBPm
Year ended Year ended
31 December 31 December
2008 2007
Cash flows from operating activities
Profit before tax 595 1 750
Capital losses/(gains) included in investment
income 14 183 (1 836)
Loss on disposal of property, plant and
equipment 3 4
Depreciation of property, plant and equipment 74 73
Amortisation and impairment of goodwill and
other intangible assets 504 403
Impairment of loans and receivables 320 183
Share-based payment expense 21 15
Share of associated undertakings` loss after tax 1 (1)
Profit arising on disposal of subsidiaries,
associated undertakings and strategic
investments (53) (25)
Other non-cash amounts in profit (397) 29
Non-cash movements in profit before tax 14 656 (1 155)
Reinsurers` share of long-term business
policyholder liabilities 486 (53)
Reinsurers` share of general insurance
liabilities (49) -
Deferred acquisition costs (370) (482)
Loans and advances (5 206) (5 339)
Insurance liabilities 282 1,962
Investment contracts (10 260) 4 124
Amounts owed to bank depositors 6 110 4 647
Other operating assets and liabilities (4 242) (491)
Changes in working capital (13 249) 4 368
Taxation paid (458) (563)
Net cash inflow from operating activities 1 544 4 400
Cash flows from investing activities
Net acquisitions of financial investments (1 170) (3 896)
Net acquisition of investment properties (7) (26)
Net acquisition of property, plant and equipment (110) (186)
Net acquisition of intangible assets (18) (67)
Acquisition of interests in subsidiaries (93) (278)
Disposal of interests in subsidiaries,
associated undertakings and strategic
investments 1 138 106
Net cash outflow from investing activities (260) (4 347)
Cash flows from financing activities
Dividends paid to:
Equity holders of the Company (352) (333)
Equity minority interests and preferred
security interests (208) (205)
Interest paid (excluding banking interest paid) (87) (83)
Proceeds from issue of ordinary shares
(including by subsidiaries to minority
interests) 31 70
Net sale of treasury shares 5 149
Shares repurchased in buy-back programme (175) (177)
Net receipts from unclaimed shares trust - 95
Issue of subordinated and other debt 374 699
Other debt repaid (225) (356)
Net cash outflow from financing activities (637) (141)
Net increase/(decrease) in cash and cash
equivalents 647 (88)
Effects of exchange rate changes on cash and
cash equivalents 399 50
Cash and cash equivalents at beginning of the year 3 596 3 634
Cash and cash equivalents at end of the year 4 642 3 596
Consisting of:
Coins and bank notes 221 211
Money at call and short notice 2 453 3 169
Balances with central banks (other than
mandatory reserve deposits) 188 121
Cash and cash equivalents from non-current
assets held-for-sale - (32)
Cash and cash equivalents 2 862 3 469
Mandatory reserve deposits with central banks 734 615
Short term cash balances held in policy holder
funds 2 043 808
Cash and cash equivalents subject to
consolidation of funds (997) (1 296)
Total 4 642 3 596
Other supplementary cash flow disclosures
Interest income received (including banking interest) 5 370 4 858
Dividend income received 493 388
Interest paid (including banking interest) 3 064 2 130
Cash flows presented in this statement include all cash flows relating to
policyholders` funds for the long-term business.
Cash and cash equivalents subject to consolidation of funds are not included in
the cash flow as they relate to the minority holding in the funds.
Management do not consider that there are material amounts of cash and cash
equivalents which are not available for use by the Group.
Mandatory reserve deposits with central banks held by Nedbank are included in
Cash and cash equivalents for the purposes of the cash flow statement in line
with market practice in South Africa.
Consolidated statement of changes in equity
For the year ended 31 December 2008
GBPm
Millions Attributable to
Number of equity holders
Year ended 31 December 2008 shares issued of the parent
Notes and fully paid
Equity holders` funds at
beginning of the year 5 510 7 961
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation - 16
Net investment hedge - 281
Available-for-sale investments:
Fair value losses - (1 635)
Recycled to the income statement - 414
Shadow accounting - 26
Currency translation
differences/exchange differences on
translating foreign operations - 419
Other movements - (23)
Aggregate tax effect of items
taken directly to or transferred from equity - 366
Net income recognised directly in equity - (136)
Profit after tax for the
financial year - 441
Total recognised income and
expense for the year - 305
Dividends for the year 10 - (395)
Net sale of treasury shares - 5
Shares repurchased in the buy-back programme - (175)
Issue of ordinary share capital
by the Company - 5
Change in participation in
subsidiaries - -
Exercise of share options 6 5
Fair value of equity settled
share options - 26
Equity holders` funds at end of
the year 5 516 7 737
GBPm
Total Total
Year ended 31 December 2008 minority interest equity
Equity holders` funds at beginning of the year 1 636 9 597
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation - 16
Net investment hedge - 281
Available-for-sale investments:
Fair value losses - (1 635)
Recycled to the income statement - 414
Shadow accounting - 26
Currency translation differences/exchange
differences on
translating foreign operations 10 429
Other movements 91 68
Aggregate tax effect of items taken directly
to or transferred from equity - 366
Net income recognised directly in equity 101 (35)
Profit after tax for the financial year 242 683
Total recognised income and expense for the year 343 648
Dividends for the year (165) (560)
Net sale of treasury shares - 5
Shares repurchased in the buy-back programme - (175)
Issue of ordinary share capital by the Company - 5
Change in participation in subsidiaries 26 26
Exercise of share options - 5
Fair value of equity settled share options - 26
Equity holders` funds at end of the year 1 840 9 577
GBPm
Year ended 31 Share
December 2008 Notes capital Share premium Other reserves
Attributable to
equity holders of the
parent at beginning
of the year 551 757 2 908
Changes in equity
arising in the year:
Fair value
gains/(losses):
Property revaluation - - 16
Net investment hedge - - -
Available-for-sale
investments:
Fair value losses - - (1 635)
Recycled to income
statement 414
Shadow accounting - - 26
Currency translation
differences/exchange
differences on
translating foreign
operations - - -
Other movements - - 8
Aggregate tax effect
of items taken
directly to
or transferred from
equity - - 367
Net income
recognised directly
in equity - - (804)
Profit for the
financial year
attributable to
equity holders of
the parent - - -
Total recognised
income and expense for - - (804)
the year
Dividends for the
year 10 - - -
Shares repurchased
in the buy-back programme - - -
Issue of ordinary
share capital by the Company - 5 -
Exercise of share options 1 4 -
Fair value of equity
settled share options - - 26
Attributable to
equity holders of the
parent at end of the
year 552 766 2 130
GBPm
Perpetual
preferred
Year ended 31 December Translation Retained callable
2008 reserve earnings securities Total
Attributable to equity
holders of the
parent at beginning of
the year (304) 3 361 688 7 961
Changes in equity
arising in the year:
Fair value
gains/(losses):
Property revaluation - - - 16
Net investment hedge 281 - - 281
Available-for-sale
investments:
Fair value losses - - - (1 635)
Recycled to income
statement - - - 414
Shadow accounting - - - 26
Currency translation
differences/exchange
differences on
translating foreign
operations 419 - - 419
Other movements 3 (34) - (23)
Aggregate tax effect of
items taken directly to
or transferred from equity (13) - 12 366
Net income recognised
directly in equity 690 (34) 12 (136)
Profit for the
financial year
attributable to
equity holders of the parent - 410 31 441
Total recognised income
and expense for 690 376 43 305
the year
Dividends for the year - (352) (43) (395)
Shares repurchased in
the buy-back - 5 - 5
programme - (175) - (175)
Issue of ordinary share
capital by the Company - - - 5
Exercise of share options - - - 5
Fair value of equity
settled share options - - - 26
Attributable to equity
holders of the
parent at end of the year 386 3 215 688 7 737
GBPm
At
31 December
Other reserves 2008
Merger reserve 2 716
Available-for-sale reserve (844)
Property revaluation reserve 85
Share-based payments reserve 171
Other reserves 2
Attributable to equity holders of the parent at end of the year 2 130
Retained earnings were reduced by GBP280 million at 31 December 2008 in respect
of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings.
Included within other reserves is the merger reserve for the additional share
consideration made in respect of the Skandia acquisition, being the difference
between the market value of the shares on the date of issue and the nominal
value included as share capital.
Consolidated statement of changes in equity
For the year ended 31 December 2008 continued
Millions
Number of Attributable to
shares issued equity holders
Year ended 31 December 2007 of the parent
Notes and fully paid
Equity holders` funds at beginning
of the year 5 501 7 237
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation - 95
Net investment hedge - (13)
Available-for-sale investments:
Fair value losses - (197)
Recycled to the income statement - 36
Shadow accounting - 25
Currency translation
differences/exchange differences on
translating foreign operations - 129
Other movements - (4)
Aggregate tax effect of items
taken directly to or transferred
from equity - 34
Net income recognised directly in equity - 105
Profit after tax for the financial year - 972
Total recognised income and
expense for the year - 1 077
Dividends for the year 10 - (373)
Net sale of treasury shares - 149
Shares repurchased in the buy-back programme - (177)
Issue of ordinary share capital by the Company - 3
Change in participation in
subsidiaries - -
Exercise of share options 9 9
Fair value of equity settled share options - 36
Equity holders` funds at end of
the year 5 510 7 961
GBPm
Total minority Total
Year ended 31 December 2007 Interest equity
Equity holders` funds at beginning of the year 1 526 8 763
Changes in equity arising in the year
Fair value gains/(losses):
Property revaluation 1 96
Net investment hedge - (13)
Available-for-sale investments:
Fair value losses - (197)
Recycled to the income statement - 36
Shadow accounting - 25
Currency translation differences/exchange
differences on
translating foreign operations 4 133
Other movements - (4)
Aggregate tax effect of items taken directly to
or transferred from equity - 34
Net income recognised directly in equity 5 110
Profit after tax for the financial year 274 1 246
Total recognised income and expense for the year 279 1 356
Dividends for the year (165) (538)
Net sale of treasury shares - 149
Shares repurchased in the buy-back programme - (177)
Issue of ordinary share capital by the Company - 3
Change in participation in subsidiaries (4) (4)
Exercise of share options - 9
Fair value of equity settled share options - 36
Equity holders` funds at end of the year 1 636 9 597
Other
Share
Year ended 31 December 2007
Notes capital Share premium reserves
Attributable to equity
holders of the parent
at beginning of the year 550 746 2,901
Changes in equity arising
in the year:
Fair value gains/(losses):
Property revaluation - - 95
Net investment hedge - - -
Available-for-sale
investments:
Fair value losses - - (197)
Recycled to income
statement on realisation - - 36
Shadow accounting - - 25
Currency translation
differences/exchange
differences on translating
foreign operations - - -
Other movements - - (10)
Aggregate tax effect of
items taken directly to
or transferred from equity - - 22
Net income recognised
directly in equity - - (29)
Profit for the financial
year attributable to
equity holders of the
parent - - -
Total recognised income
and expense for
the year - - (29)
Dividends for the year 10 - - -
Net sales of treasury - - -
Shares repurchased in the
buy-back programme - - -
Issue of ordinary share
capital by the Company - 3 -
Exercise of share options 1 8 -
Fair value of equity
settled share options - - 36
Attributable to equity
holders of the
parent at end of the year 551 757 2 908
Year ended 31 December 2007
Translation reserve Retained earnings
Attributable to equity holders of
the parent
at beginning of the year (421) 2 773
Changes in equity arising in the
year:
Fair value gains/(losses):
Property revaluation - -
Net investment hedge (13) -
Available-for-sale investments:
Fair value losses - -
Recycled to income statement on
realisation - -
Shadow accounting - -
Currency translation
differences/exchange
differences on translating
foreign operations 129 -
Other movements (2) 8
Aggregate tax effect of items
taken directly to
or transferred from equity 3 -
Net income recognised directly in
equity 117 8
Profit for the financial year
attributable to
equity holders of the parent - 941
Total recognised income and
expense for
the year 117 949
Dividends for the year - (333)
Net sales of treasury - 149
Shares repurchased in the buy-back
programme - (177)
Issue of ordinary share capital
by the Company - -
Exercise of share options - -
Fair value of equity settled
share options - -
Attributable to equity holders of the
parent at end of the year (304) 3 361
GBPm
Perpetual
preferred
Year ended 31 December 2007 callable
Securities Total
Attributable to equity holders of the parent
at beginning of the year 688 7 237
Changes in equity arising in the year:
Fair value gains/(losses):
Property revaluation - 95
Net investment hedge - (13)
Available-for-sale investments:
Fair value losses - (197)
Recycled to income statement on realisation - 36
Shadow accounting - 25
Currency translation differences/exchange
differences on translating foreign operations - 129
Other movements - (4)
Aggregate tax effect of items taken directly to
or transferred from equity 9 34
Net income recognised directly in equity 9 105
Profit for the financial year attributable to
equity holders of the parent 31 972
Total recognised income and expense for
the year 40 1,077
Dividends for the year (40) (373)
Net sales of treasury - 149
Shares repurchased in the buy-back programme - (177)
Issue of ordinary share capital by the Company - 3
Exercise of share options - 9
Fair value of equity settled share options - 36
Attributable to equity holders of the
parent at end of the year 688 7 961
GBPm
At
31 December
Other reserves 2007
Merger reserve 2 716
Available-for-sale reserve (30)
Property revaluation reserve 75
Share-based payments reserve 147
Attributable to equity holders of the parent at end of the year 2 908
Retained earnings were reduced by GBP588 million at 31 December 2007 in respect
of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings.
Included within other reserves is the merger reserve for the additional share
consideration made in respect of the Skandia acquisition, being the difference
between the market value of the shares on the date of issue and the nominal
value included as share capital.
1 Accounting policies
Basis of preparation
The consolidated financial information contained herein has been prepared in
accordance with International Financial Reporting Standards adopted by the EU.
The Group`s results for the year ended 31 December 2008 and the position at
that date have been prepared using accounting policies consistent with those
applied in the preparation of the Group`s 2007 Annual Report and Accounts,
except as set out below.
The financial information set out herein does not constitute the Company`s
statutory accounts for the years ended 31 December 2008 or 2007. Statutory
accounts for 2007 have been delivered to the Registrar of Companies, and those
for 2008 will be delivered in due course. The auditors have reported on those
accounts; their reports were (i) unqualified, (ii) did not include references
to any matters to which the auditors drew attention by way of emphasis without
qualifying their reports, and (iii) did not contain statements under
section 237(2) or (3) of the Companies Act 1985.
Segment presentation
There has been a presentational change in the way segmental information is
reflected in the notes to more closely align the disclosure with the way that
management and the Board of Directors considers information when making
operating decisions and is the basis on which resources are allocated and
performance assessed by management and the Board of Directors. The Group`s
results are now analysed across nine reportable segments. For purposes of
presentation these are grouped in geographical areas. The reported segments are
Skandia UK, Nordic and ELAM, Old Mutual South Africa, Nedbank, Mutual &
Federal, Rest of Africa, US Life and US Asset Management. Information about
other business activities and operating segments is disclosed in the "other
reportable segments" category. Other segments comprise the Asia Pacific asset
management business and Group head office.
There are four principal business activities from which the Group generates
revenues. These are long-term business (premium income), asset management
business (fee and commission income), banking (banking interest receivable and)
and general insurance (premium income). The revenues generated in each reported
segment can be seen in the analysis of profits and losses in note 3(ii).
The information reflected in note 3 reflects the measures of profit and loss,
assets and liabilities for each segment as regularly provided to management and
the Board of Directors. There are no differences between the measurement of the
assets and liabilities reflected in the primary statements and that reported
for the segments. A reconciliation between the reported segment revenues and
expenses and the Group`s revenues and expenses is shown in note 3(ii).
Assets, liabilities, revenues or expenses that are not directly attributable to
a particular segment are allocated between segments where there is a reasonable
basis for doing so. The Group accounts for inter-segment revenues and transfers
as if the transactions were with third parties at current market prices. Given
the nature of the operations, there are no major customers within any of the
segments.
Reallocations of certain comparative segment information have been made
following changes in the Group`s management reporting structure, effective 1
January 2008. There was no impact on net profit or net assets.
Amendments to IAS 39 `Financial instruments: Recognition and Measurement` -
reclassification of financial assets
The amendments to IAS 39 `Financial instruments: Recognition and Measurement`,
issued in October 2008, in respect of the reclassification of financial assets,
have been adopted in these financial statements. Under the extended
reclassification rules introduced by the amendments an entity has the ability
to reclassify financial instruments from the held-for-trading and
available-for-sale categories in certain specified rare circumstances. The
Group`s accounting policies have been updated to reflect the amendments to the
standard. The Group`s US Life business has applied the amendments to certain
financial assets previously categorised as available-for-sale, which it has
reclassified to the loans and receivables category. This reclassification was
implemented as at 1 July 2008 in accordance with the transitional provisions in
the IAS 39 amendment. As a result, assets with a carrying value of
GBP926 million at 1 July 2008 have been reclassified from available-for-sale to
loans and receivables. Net decreases in the fair value of the reclassified
assets in the period from 1 July 2008 to 31 December 2008, amounting to
GBP284 million, have consequently not been reflected in the available-for-sale
reserve in equity. There was no impact on the Group`s IFRS profit or adjusted
operating profit, before or after tax, as a result of the introduction of the
amendments.
2 Foreign currencies
The principal exchange rates used to translate the operating results, assets
and liabilities of key foreign business segments to Sterling are:
Income
statement Balance sheet
(average rate) (closing rate)
31 December 2008
Rand 15.2948 13.7194
US Dollars 1.8524 1.4575
Swedish Kronor 12.2209 11.4494
Euro 1.2594 1.0446
31 December 2007
Rand 14.1109 13.6043
US Dollars 2.0014 1.9827
Swedish Kronor 13.5253 12.8320
Euro 1.4602 1.3596
3 Segment information
(i) Basis of segmentation
The Group`s results are analysed across nine reportable segments. For purposes
of presentation these are grouped in geographical areas. This is consistent
with the way that management and the Board of Directors considers information
when making operating decisions and is the basis on which resources are
allocated and performance assessed by management and the Board of Directors.
The Group generates revenue from four principal business activities: long-term
business, asset management, banking and general insurance. The types of
products and services from which each reportable segment derives its revenues
are as follows:
Europe - Skandia UK - long-term business and asset management
Europe - Nordic - long-term business, asset management and banking
Europe - ELAM - long-term business and asset management
South Africa - OMSA - long-term business and asset management
South Africa - Nedbank - banking and asset management
South Africa - Mutual & Federal - general insurance
South Africa - Rest of Africa - long-term business and asset management
(includes Namibia)
United States - US Life - long-term business
United States - USAM - asset management
Information about other business activities and operating segments is disclosed
in the `other reportable segments` category. Other segments comprise the Asia
Pacific asset management business and Group head office.
Adjusted operating profit is one of the key measures reported to the Group`s
management and Board of Directors for their consideration in the allocation of
resources to and the review of performance of the segments. The Group utilises
additional measures to assess the performance of each of the segments, in
particular the level of funds under management. Additional performance measures
considered by management and the Board of Directors in assessing the
performance of the segments can be found in the Old Mutual Market Consistent
Embedded Value information presented on pages 80-117.
Comparative segment information has been revised in accordance with the
improvements in presentation made in the current financial year.
In the analysis that follows, consolidation adjustments include the elimination
of inter-segment revenues, expenses, assets and liabilities together with the
impacts of the consolidation of the Group`s interest in unit trusts, mutual
funds and similar entities.
3 Segment information continued
(ii) Adjusted operating profit statement - segment information year ended
31 December 2008
Europe
UK Nordic ELAM
Revenue
Gross earned premiums 131 92 92
Outward reinsurance (78) (4) (8)
Net earned premiums 53 88 84
Investment return (non-banking) (6,165) (2,317) (1,436)
Banking interest and similar income - 266 -
Banking trading, investment and similar
income - 24 -
Fee and commission income, and income from
service activities 667 184 316
Other income 14 20 2
Inter-segment revenues 104 104 29
Total revenues (5,327) (1,631) (1,005)
Expenses
Claims and benefits (including change in
insurance contract provisions) (38) (68) (103)
Reinsurance recoveries 34 4 2
Net claims and benefits incurred (4) (64) (101)
Change in investment contract liabilities 5,991 2,390 1,466
Losses on loans and advances - (4) -
Finance costs - - -
Banking interest payable and similar
expenses - (183) -
Fee and commission expenses, and other
acquisition costs (330) (49) (151)
Other operating and administrative expenses (333) (193) (166)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns 283 (52) (1)
Inter-segment expenses (113) (126) (31)
Total expenses 5,494 1,719 1,016
Share of associated undertakings`
profit/(loss) after tax - - -
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - -
Adjusted operating profit/(loss) before
tax and minority interests 167 88 11
Tax expense (56) (11) (14)
Minority interests - - -
Adjusted operating profit/(loss) after tax
and minority interests 111 77 (3)
Adjusting items net of tax and minority
interests 55 (122) (16)
Profit/(loss) after tax attributable to
equity holders of the parent 166 (45) (19)
South Africa
OMSA Nedbank
Revenue
Gross earned premiums 1,587 -
Outward reinsurance (45) -
Net earned premiums 1,542 -
Investment return (non-banking) (305) -
Banking interest and similar income - 3,793
Banking trading, investment and similar income - 138
Fee and commission income, and income from service
activities 185 533
Other income 97 85
Inter-segment revenues 227 19
Total revenues 1,746 4,568
Expenses
Claims and benefits (including change in insurance
contract provisions) (648) -
Reinsurance recoveries 41 -
Net claims and benefits incurred (607) -
Change in investment contract liabilities 184 -
Losses on loans and advances - (315)
Finance costs - -
Banking interest payable and similar expenses - (2,684)
Fee and commission expenses, and other acquisition costs (150) -
Other operating and administrative expenses (487) (928)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns 7 -
Inter-segment expenses (177) (71)
Total expenses (1,230) (3,998)
Share of associated undertakings` profit/(loss) after
tax 6 5
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - -
Adjusted operating profit/(loss) before tax and
minority interests 522 575
Tax expense (155) (123)
Minority interests (5) (227)
Adjusted operating profit/(loss) after tax and minority
interests 362 225
Adjusting items net of tax and minority interests 104 29
Profit/(loss) after tax attributable to equity holders
of the parent 466 254
(ii) Adjusted operating profit statement - segment information year ended
31 December 2008 continued
United States
Other operating
M&F Rest of Africa US Life USAM segments
570 85 2,599 - -
(91) (2) (107) - -
479 83 2,492 - -
56 (14) (332) (3) (13)
- - - - -
- - - - -
16 4 - 473 33
- - 22 17 -
26 3 - 8 66
577 76 2,182 495 86
(401) (52) (2,300) - -
72 1 108 - -
(329) (51) (2,192) - -
- 16 4 - -
- - - - -
- - - - (140)
- - - - -
(101) (6) (264) (10) (10)
(59) (10) (84) (388) (75)
- - - - -
- - - - -
- - - - -
- (1) - - -
(12) (6) (13) - (37)
(501) (58) (2,549) (398) (262)
- - - - (12)
- - - - -
76 18 (367) 97 (188)
(17) (2) 76 2 214
(19) - - - (21)
40 16 (291) 99 5
(49) (13) (569) 1 380
(9) 3 (860) 100 385
United States
GBPm
Adjusted
operating profit IFRS
Consolidation Total reportable Adjusting items Income
adjustments segments (Note 4) statement
- 5,156 - 5,156
- (335) - (335)
- 4,821 4,821
(713) (11,242) (336) (11,578)
- 4,059 - 4,059
- 162 - 162
(1) 2,410 (97) 2,313
13 270 - 270
(586) - - -
(1,287) 480 (433) 47
- (3,610) - (3,610)
- 262 - 262
- (3,348) - (3,348)
- 10,051 - 10,051
- (319) - (319)
- (140) 532 392
- (2,867) 14 (2,853)
(44) (1,115) 178 (937)
(34) (2,757) (77) (2,834)
- - (74) (74)
779 779 - 779
- - (361) (361)
- 236 (236) -
586 - - -
1,287 520 (24) 496
- (1) - (1)
- - 53 53
- 999 (404) 595
- (86) 174 88
- (272) 30 (242)
- 641 (200) 441
- (200)
- 441
(ii) Adjusted operating profit statement - segment information year ended
31 December 2007
Europe
UK Nordic ELAM
Revenue
Gross earned premiums 129 73 28
Outward reinsurance (66) (3) (3)
Net earned premiums 63 70 25
Investment return (non-banking) 1,565 349 50
Banking interest and similar income - 211 -
Banking trading, investment and similar income - 3 -
Fee and commission income, and income from
service activities 706 184 295
Other income 15 17 1
Inter-segment revenues 82 92 44
Total revenues 2,431 926 415
Expenses
Claims and benefits (including change in
insurance contract provisions) (79) (46) (26)
Reinsurance recoveries 47 1 2
Net claims and benefits incurred (32) (45) (24)
Change in investment contract liabilities (1,525) (293) (33)
Losses on loans and advances - (3) -
Finance costs - - -
Banking interest payable and similar expenses - (125) -
Fee and commission expenses, and other
acquisition costs (327) (35) (131)
Other operating and administrative expenses (325) (223) (149)
Goodwill impairment - - -
Change in third party interest in consolidated
funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder returns 42 (39) -
Inter-segment expenses (91) (98) (48)
Total expenses (2,258) (861) (385)
Share of associated undertakings`
profit/(loss) after tax - - -
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - - -
Adjusted operating profit/(loss) before tax
and minority interests 173 65 30
Tax expense (43) (10) (15)
Minority interests - - (1)
Adjusted operating profit/(loss) after tax and
minority interests 130 55 14
Adjusting items net of tax and minority
interests (13) (69) (14)
Profit/(loss) after tax attributable to equity
holders of the parent 117 (14) -
South Africa
OMSA Nedbank
Revenue
Gross earned premiums 1,474 -
Outward reinsurance (39) -
Net earned premiums 1,435 -
Investment return (non-banking) 3,006 -
Banking interest and similar income - 2,979
Banking trading, investment and similar income - 167
Fee and commission income, and income from service
activities 209 529
Other income 100 65
Inter-segment revenues 190 39
Total revenues 4,940 3,779
Expenses
Claims and benefits (including change in insurance
contract provisions) (2,842) -
Reinsurance recoveries 38 -
Net claims and benefits incurred (2,804) -
Change in investment contract liabilities (768) -
Losses on loans and advances - (154)
Finance costs - -
Banking interest payable and similar expenses - (1,928)
Fee and commission expenses, and other acquisition costs (148) -
Other operating and administrative expenses (533) (977)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns (62) -
Inter-segment expenses (139) (75)
Total expenses (4,454) (3,134)
Share of associated undertakings` profit/(loss) after
tax 11 8
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - -
Adjusted operating profit/(loss) before tax and
minority interests 497 653
Tax expense (128) (173)
Minority interests (6) (252)
Adjusted operating profit/(loss) after tax and minority
interests 363 228
Adjusting items net of tax and minority interests 121 23
Profit/(loss) after tax attributable to equity holders
of the parent 484 251
(ii) Adjusted operating profit statement - segment information year ended 31
December 2007 continued
United States
Other operating
M&F Rest of Africa US Life USAM segments
625 89 3,148 - -
(92) (2) (88) - -
533 87 3,060 - -
60 77 774 13 8
- - - - -
- - - - -
18 5 - 570 42
- - 9 12 3
33 3 - 12 17
644 172 3,843 607 70
(390) (139) (3,671) - -
52 1 95 - -
(338) (138) (3,576) - -
- 1 - - -
- - - - -
- - - - (119)
- - - - -
(128) (5) (102) (10) (11)
(74)
(53) (6) (54) (435)
- - - - -
- - - - -
- - - - -
- (1) - - -
(36) (8) (13) - (4)
(555) (157) (3,745) (445) (208)
- - - - (20)
- - - - -
89 15 98 162 (158)
(28) (1) (33) (27) 40
(20) - - - (13)
41 14 65 135 (131)
2 1 (49) 8 48
43 15 16 143 (83)
GBPm
Adjusted IFRS
operating profit Income
Consolidation Total reportable Adjusting items statement
adjustments segments (Note 4) Restated
- 5,566 - 5,566
- (293) - (293)
- 5,273 - 5,273
211 6,113 205 6,318
- 3,190 - 3,190
- 170 - 170
- 2,558 (83) 2,475
23 245 - 245
(512) - - -
(278) 17,549 122 17,671
- (7,193) - (7,193)
- 236 - 236
- (6,957) - (6,957)
- (2,618) - (2,618)
- (157) - (157)
- (119) 69 (50)
- (2,053) - (2,053)
(70) (967) 189 (778)
(8) (2,837) 24 (2,813)
- - (3) (3)
(156) (156) - (156)
- - (360) (360)
- (60) 60 -
512 - - -
278 (15,924) (21) (15,945)
- (1) - (1)
- - 25 25
- 1,624 126 1,750
- (418) (86) (504)
- (292) 18 (274)
- 914 58 972
- 58
- 972
(iii) Gross earned premiums
Europe
Year ended 31 December 2008 UK Nordic ELAM
Long-term business-insurance contracts 131 92 92
Long-term business-investment contracts with
discretionary
participation features - - -
General insurance - - -
Gross earned premiums 131 92 92
Long- term business-other investment contracts
recognised as deposits 4,892 976 1,052
South Africa
Year ended 31 December 2008 OMSA Nedbank
Long-term business-insurance contracts 1,111 -
Long-term business-investment contracts
with discretionary participation features 476 -
General insurance - -
Gross earned premiums 1,587 -
Long- term business-other investment
contracts recognised as deposits 1,358 -
Europe South Africa
Year ended 31 December 2007 UK Nordic ELAM OMSA Nedbank
Long-term
business-insurance
contracts 129 73 28 1,011 -
Long-term
business-investment
contracts with
discretionary
participation features - - - 463 -
General insurance - - - - -
Gross earned premiums 129 73 28 1,474 -
Long- term business-other
investment contracts
recognised
as deposits 6,335 694 1,421 1,293 -
(iv) Impairments on financial assets
Europe South Africa
Year ended 31 December 2008 UK Nordic ELAM OMSA Nedbank
Impairment losses - 5 - - 315
Europe South Africa
Year ended 31 December 2007 UK Nordic ELAM OMSA Nedbank
Impairment losses - 2 - 5 154
(v) Funds under management
Europe South Africa
As at 31 December 2008 UK Nordic ELAM OMSA Nedbank
Long-term business
policyholder funds 26,889 6,605 5,297 20,048 425
Unit trusts and mutual
funds 7,108 1,000 4,291 3,613 2,617
Third party client funds - - - 8,613 3,375
Total client funds under
management 33,997 7,605 9,588 32,274 6,417
Shareholder funds 885 418 311 1,596 -
Total funds under
management 34,882 8,023 9,899 33,870 6,417
Europe South Africa
As at 31 December 2007 UK Nordic ELAM OMSA Nedbank
Long-term business
policyholder funds 31,735 7,595 5,344 21,784 430
Unit trusts and mutual
funds 9,211 1,182 4,023 3,918 2,775
Third party client funds - - - 6,945 3,335
Total client funds under
management 40,946 8,777 9,367 32,647 6,540
Shareholder funds 915 315 224 1,846 -
Total funds under
management 41,861 9,092 9,591 34,493 6,540
United States Other GBPm
M&F Rest of Africa US Life USAM Total
- 37 2,599 - - 4,062
- 48 - - - 524
570 - - - - 570
570 85 2,599 - - 5,156
- 33 230 - - 8,541
United States Other GBPm
M &F Rest of Africa US Life USAM Total
- 37 3,148 - - 4,426
- 52 - - - 515
-
625 - - - 625
89
625 3,148 - - 5,566
- 22 177 - - 9,942
United States Other GBPm
M &F Rest of Africa US Life USAM Total
- - 414 - - 734
United States Other GBPm
M &F Rest of Africa US Life USAM Total
- - 32 - - 193
United States Other GBPm
Rest of Africa US Life USAM Total
M&F
- 253 2,642 13,623 193 75,975
- - - 3,127 1,859 23,615
- 228 - 147,956 1,484 161,656
- 481 2,642 164,706 3,536 261,246
145 36 - 177 - 3,568
145 517 2,642 164,883 3,536 264,814
United States Other GBPm
M &F Rest of Africa US Life USAM Total
- 255 2,368 12,454 122 82,087
- - - 5,260 2,535 28,904
- 237 - 149,850 3,833 164,200
- 492 2,368 167,564 6,490 275,191
136 60 - 191 - 3,687
136 552 2,368 167,755 6,490 278,878
(vi) Balance sheet - segment information year ended 31 December 2008
Europe South Africa
At 31 December 2008 UK Nordic ELAM OMSA Nedbank
Assets
Goodwill and other
intangible assets 1,609 1,183 1,138 28 425
Goodwill 644 222 574 24 308
Present value of
acquired in-force
business 713 742 375 - -
Software development 22 1 6 4 117
Other intangibles 230 218 183 - -
Mandatory reserve
deposits with central
banks - - - - 734
Property, plant and
equipment 23 4 17 254 316
Investment property 2 - 1 1,273 15
Deferred tax assets 166 78 51 65 25
Investments in
associated undertakings
and joint ventures - - - 26 75
Deferred acquisition
costs 639 34 315 102 2
Insurance contracts 24 2 25 - -
Investment contracts 552 32 282 92 -
Asset management 63 - 8 10 2
Reinsurers` share of
long-term business
policyholder liabilities 607 13 5 6 9
Insurance contracts 42 10 3 6 9
Unit-linked investment
contracts and similar
contracts 551 - - - -
Outstanding claims 14 3 2 - -
Reinsurers` share of
general insurance
liabilities - - - - -
Deposits held with
reinsurers - 121 - - -
Loans and advances 116 3,846 25 49 31,634
Policyholder loans 116 - 24 49 -
Other loans and advances - 3,846 1 - 31,634
Investments and
securities 27,167 7,595 5,389 21,700 5,043
Government and
government-guaranteed
securities 163 214 610 3,631 2,255
Listed other debt
securities, preference
shares and debentures 2 813 41 1,781 2,172
Unlisted other debt
securities, preference
shares and debentures - - 67 2,106 -
Listed equity securities 1 - 1 6,678 38
Unlisted equity
securities 23 12 9 873 152
Listed pooled investments 638 155 11 283 426
Unlisted pooled
investments 26,340 6,401 4,650 4,233 -
Short-term funds and
securities treated as
investments - - - 2,114 -
Other securities - - - 1 -
Current tax receivable 80 - 8 3 25
Client indebtedness for
acceptances - - - - 220
Other assets 178 138 125 433 486
Derivative financial
instruments - assets - - - 1,614 1,627
Cash and cash equivalents 202 372 183 97 631
Non-current assets
held-for-sale - - - 7 -
Inter-segment assets 163 264 89 1,308 19
Total assets 30,952 13,648 7,346 26,965 41,286
(vi) Balance sheet - segment information year ended 31 December 2008 continued
United States
M&F Rest of Africa US Life USAM
29 4 137 1,305
10 4 - 1,271
- - 120 -
19 - 17 1
- - - 33
- - - -
24 13 1 26
- 8 - -
8 - 1,036 158
- - - -
15 3 2,041 40
15 - 2,041 -
- 3 - -
- - - 40
- - 508 -
- - 480 -
- - - -
- - 28 -
115 - - -
3 - 40 -
2 10 62 -
- 10 61 -
2 - 1 -
322 626 13,960 177
- 64 97 -
1 9 7,555 -
2 7 2,690 -
67 253 - -
5 11 118 -
36 128 2,093 135
- - 18 42
211 150 1,389 -
- 4 - -
- - - -
- - - -
68 10 1,041 139
- - 57 -
56 4 11 220
- - - -
46 14 423 99
688 692 19,317 2,164
GBPm
Total
Other operating Consolidation reportable
segments adjustments segments
24 - 5,882
24 - 3,081
- - 1,950
- - 187
- - 664
- - 734
4 - 682
- 179 1,478
3 - 1,590
10 - 111
8 - 3,199
- - 2,107
- - 961
8 - 131
- - 1,148
- - 550
- - 551
- - 47
- - 115
- - 164
1 - 35,745
- - 260
1 - 35,485
88 1,455 83,522
- 1,942 8,976
- 1,695 14,069
- 175 5,047
- 7,938 14,976
- - 1,203
- 1,310 5,215
- (11,853) 29,831
- 125 3,989
88 123 216
2 - 118
- - 220
100 419 3,137
226 1,109 4,633
89 997 2,862
- - 7
1,632 (4,057) -
2,187 102 145,347
(vi) Balance sheet - segment information year ended 31 December 2008 continued
Europe South Africa
At 31 December 2008 UK Nordic ELAM OMSA Nedbank
Liabilities
Long-term business
policyholder liabilities 27,327 6,884 5,348 22,569 426
Insurance contracts 157 71 700 10,310 -
Unit-linked investment
contracts and similar
contracts 27,154 6,704 4,641 6,525 -
Other investment
contracts - - - 105 426
Discretionary
participating investment
contracts - - - 5,428 -
Outstanding claims 16 109 7 201 -
General insurance
liabilities - - - - -
Third party interests in
consolidated funds - - - - -
Borrowed funds 1 - - 237 960
Senior debt securities 1 - - - -
Mortgage backed
securities - - - - 104
Subordinated debt
securities - - - 237 856
Provisions 22 203 15 126 1
Deferred revenue 401 3 155 22 -
Long-term business 320 3 149 16 -
Asset management 81 - 6 6 -
General insurance - - - - -
Deferred tax liabilities 221 93 212 172 162
Current tax payable 26 22 3 96 18
Other liabilities 508 198 173 826 747
Liabilities under
acceptances - - - - 220
Amounts owed to bank
depositors - 4,622 - - 33,549
Derivative financial
instruments -
liabilities 1 - - 1,436 1,731
Non-current liabilities
held-for-sale - - - 6 -
Inter-segment liabilities 185 174 406 26 427
Total liabilities 28,692 12,199 6,312 25,516 38,241
Net assets 2,260 1,449 1,034 1,449 3,045
Equity
Equity attributable to
equity holders of the
parent 2,260 1,449 1,034 1,441 1,717
Minority interests - - - 8 1,328
Minority interests -
ordinary shares - - - 8 1,081
Minority interests -
preference shares - - - - 247
Total equity 2,260 1,449 1,034 1,449 3,045
The net assets of South African businesses are stated after eliminating
investments in Group equity and debt instruments of GBP236 million (2007:
GBP493 million) held in policyholder funds. These include investments in the
Company`s ordinary shares and subordinated liabilities and preferred securities
issued by the Group`s banking subsidiary Nedbank Limited. All South Africa debt
relates to long-term business. All other debt relates to other shareholders`
net assets.
(vi) Balance sheet - segment information year ended 31 December 2008 continued
United States
M& F Rest of Africa US Life USAM
- 593 18,122 -
- 238 16,630 -
- 137 - -
- - 1,434 -
- 218 - -
- - 58 -
344 - - -
- - - -
- - - -
- - - -
- - - -
- - - -
21 2 - 3
8 1 - -
- 1 - -
- - - -
8 - - -
2 - 578 -
2 1 4 8
71 5 276 299
- - - -
- - - -
- - - -
- - - -
(1) 5 4 1,452
447 607 18,984 1,762
241 85 333 402
193 85 333 365
48 - - 37
48 - - 37
- - - -
241 85 333 402
GBPm
Total
Other operating Consolidation reportable
segments adjustments segments
- - 81,269
- - 28,106
- - 45,161
- - 1,965
- - 5,646
- - 391
- - 344
- 2,591 2,591
1,097 - 2,295
556 - 557
- - 104
541 - 1,634
84 - 477
8 - 598
- - 489
8 - 101
- - 8
12 - 1,452
39 - 219
165 465 3,733
- - 220
- - 38,171
124 1,103 4,395
- - 6
1,379 (4,057) -
2,908 102 135,770
(721) - 9,577
(1,140) - 7,737
419 - 1,840
(27) - 1,147
446 - 693
(721) - 9,577
(vi) Balance sheet - segment information year ended 31 December 2007
Europe South Africa
At 31 December 2007 UK Nordic ELAM OMSA Nedbank
Assets
Goodwill and other
intangible assets 1,716 1,180 939 26 420
Goodwill 639 196 436 14 320
Present value of
acquired in-force
business 794 760 338 - -
Software development 24 1 4 12 100
Other intangibles 259 223 161 - -
Mandatory reserve
deposits with central
banks - - - - 615
Property, plant and
equipment 19 5 14 241 291
Investment property 2 - 1 1,096 13
Deferred tax assets 40 74 13 106 12
Investments in
associated undertakings
and joint ventures - - - 25 62
Deferred acquisition
costs 524 15 182 93 1
Insurance contracts 20 1 3 - -
Investment contracts 439 14 175 86 -
Asset management 65 - 4 7 1
Reinsurers` share of
long-term business
policyholder liabilities 702 8 4 4 13
Insurance contracts 56 5 2 4 13
Unit-linked investment
contracts and similar
contracts 636 - - - -
Outstanding claims 10 3 2 - -
Deposits held with
reinsurers - 183 - - -
Loans and advances 64 3,117 19 83 27,360
Policyholder loans 63 - 15 83 -
Other loans and advances 1 3,117 4 - 27,360
Investments and
securities 31,964 7,867 5,426 24,394 4,686
Government and
government-guaranteed
securities 163 165 44 3,074 1,414
Listed other debt
securities, preference
shares and debentures - 105 80 1,969 2,660
Unlisted other debt
securities, preference
shares and debentures - 16 3 2,083 -
Listed equity securities 1 1 7 9,402 44
Unlisted equity
securities 1 16 3 680 138
Listed pooled investments 2,520 197 11 214 430
Unlisted pooled
investments 29,279 7,367 5,278 4,703 -
Short-term funds and
securities treated as
investments - - - 2,269 -
Other securities - - - - -
Current tax receivable 45 5 2 4 4
Client indebtedness for
acceptances - - - - 165
Other assets 161 63 166 513 611
Derivative financial
instruments - assets - 15 - 43 666
Cash and cash equivalents 599 202 125 195 763
Non-current assets
held-for-sale - 1,024 - 2 2
Inter-segment assets 198 549 137 844 102
Total assets 36,034 14,307 7,028 27,669 35,786
(vi) Balance sheet - segment information year ended 31 December 2007 continued
United States
M&F Rest of Africa US Life USAM
- 4 184 959
- 4 57 932
- - 116 -
- - 11 10
- - - 17
- - - -
- 13 1 17
- 8 - -
- - 327 106
- - - -
- 3 1,398 24
- - 1,398 -
- 3 - -
- - - 24
- 1 662 -
- 1 646 -
- - - -
- - 16 -
- - 30 -
- - 44 -
- - 43 -
- - 1 -
- 675 11,560 192
- 80 240 -
- 15 6,881 -
- - 2,179 -
- 320 - -
- 10 115 -
- 104 1,656 169
- - 11 23
- 106 478 -
- 40 - -
- - - -
- - - -
- 13 876 182
- - 20 -
- 5 3 205
595 - - -
52 11 46 -
647 733 15,151 1,685
GBPm
Total
Other operating Consolidation reportable
segments adjustments segments
31 - 5,459
31 - 2,629
- - 2,008
- - 162
- - 660
- - 615
7 - 608
- 359 1,479
5 - 683
(6) - 81
13 - 2,253
- - 1,422
- - 717
13 - 114
- - 1,394
- - 727
- - 636
- - 31
- - 213
- - 30,687
- - 204
- - 30,483
155 2,708 89,627
- 2,054 7,234
- 911 12,621
- - 4,281
- 11,586 21,361
- - 963
- 897 6,198
- (13,261) 33,400
- 489 3,342
155 32 227
23 - 83
- - 165
85 104 2,774
72 711 1,527
76 1,296 3,469
- - 1,623
2,112 (4,051) -
2,573 1,127 142,740
(vi) Balance sheet - segment information year ended 31 December 2007 continued
Europe South Africa
At 31 December 2007 UK Nordic ELAM OMSA Nedbank
Liabilities
Long-term business
policyholder liabilities 32,311 7,909 5,371 24,632 430
Insurance contracts 188 72 103 11,105 -
Unit-Linked investment
contracts and similar
contracts 32,111 7,738 5,263 6,936 -
Other investment
contracts - - - 85 430
Discretionary
participating investment
contracts - - - 6,194 -
Outstanding claims 12 99 5 312 -
General insurance
liabilities - - - - -
Third party interests in
consolidated funds - - - - -
Borrowed funds 22 20 17 238 845
Senior debt securities 22 20 17 - -
Mortgage backed
securities - - - - 103
Subordinated debt
securities - - - 238 742
Provisions 21 180 5 134 18
Deferred revenue 345 1 76 23 3
Long-term business 261 1 72 16 -
Asset management 84 - 4 7 3
Deferred tax liabilities 332 111 155 281 128
Current tax payable 34 15 8 149 29
Other liabilities 618 219 152 772 2,406
Liabilities under
acceptances - - - - 165
Amounts owed to bank
depositors - 3,936 - - 27,881
Derivative financial
instruments -
liabilities - 21 3 115 840
Non-current liabilities
held-for-sale - 22 - 2 -
Inter-segment liabilities 198 579 212 75 379
Total liabilities 33,881 13,013 5,999 26,421 33,124
Net assets 2,153 1,294 1,029 1,248 2,662
Equity
Equity attributable to
equity holders of the
parent 2,153 1,294 1,024 1,238 1,520
Minority interests - - 5 10 1,142
Minority interests -
ordinary shares - - 5 10 885
Minority interests -
preference shares - - - - 257
Total equity 2,153 1,294 1,029 1,248 2,662
United States
M&F Rest of Africa US Life USAM
- 602 12,996 -
- 269 11,900 -
- 123 - -
- - 1,059 -
- 210 - -
- - 37 -
- - - -
- - - -
- - - -
- - - -
- - - -
- - - -
- 3 - 2
- - - -
- - - -
- - - -
- - 401 -
- 1 13 (5)
- 33 555 364
- - - -
- - - -
- - - -
396 - - -
4 2 - 1,638
400 641 13,965 1,999
247 92 1,186 (314)
200 92 1,186 (346)
47 - - 32
47 - - 32
- - - -
247 92 1,186 (314)
GBPm
Total
Other operating Consolidation reportable
segments adjustments segments
- - 84,251
- - 23,637
- - 52,171
- - 1,574
- - 6,404
- - 465
- - -
- 3,547 3,547
1,211 - 2,353
402 - 461
- - 103
809 - 1,789
136 - 499
14 - 462
- - 350
14 - 112
5 - 1,413
76 - 320
137 924 6,180
- - 165
- - 31,817
30 707 1,716
- - 420
964 (4,051) -
2,573 1,127 133,143
- - 9,597
(400) - 7,961
400 - 1,636
(46) - 933
446 - 703
- - 9,597
4 Operating profit adjusting items
(i) Summary of adjusting items
In determining the adjusted operating profit of the Group certain adjustments
are made to profit before tax to reflect the directors` view of the underlying
long-term performance of the Group. The following table shows an analysis of
those adjustments from adjusted operating profit to profit before and after
tax.
South
Year ended 31 December 2008 Notes Europe
Africa
Income/(expense)
Goodwill impairment and impact of acquisition
accounting 4(ii) (341) -
Profit/(loss) on disposal of subsidiaries,
associated
undertakings and strategic investments 4(iii) 72 (20)
Short-term fluctuations in investment return 4(iv) 145 (239)
Investment return adjustment for Group equity
and
debt instruments held in life funds 4(v) - 234
Dividends declared to holders of perpetual
preferred
callable securities 4(vi) - -
US Asset Management equity plans and minority
holders 4(viii) - -
Credit-related fair value gains on Group debt
instruments 4(ix) - 14
Total adjusting items (124) (11)
Tax on adjusting items 5(iii) 41 45
Minority interest in adjusting items 6(iii) - 37
Total adjusting items after tax and minority
interests (83) 71
GBPm
United
Year ended 31 December 2008 Other Total
States
Income/(expense)
Goodwill impairment and impact of acquisition
accounting (96) (1) (438)
Profit/(loss) on disposal of subsidiaries,
associated
undertakings and strategic investments 1 - 53
Short-term fluctuations in investment return (476) - (570)
Investment return adjustment for Group equity
and
debt instruments held in life funds - - 234
Dividends declared to holders of perpetual
preferred
callable securities - 43 43
US Asset Management equity plans and minority
holders 7 7
Credit-related fair value gains on Group debt
instruments - 489 503
Total adjusting items (564) 531 (168)
Tax on adjusting items 3 (151) (62)
Minority interest in adjusting items (7) - 30
Total adjusting items after tax and minority
interests (568) 380 (200)
South
Year ended 31 December 2007 Notes Europe Africa
Income/(expense)
Goodwill impairment and impact of acquisition
accounting 4(ii) (218) (3)
Profit/(loss) on disposal of subsidiaries,
associated
undertakings and strategic investments 4(iii) 16 1
Short-term fluctuations in investment return 4(iv) 55 191
Investment return adjustment for Group equity
and debt instruments held in life funds 4(v) - 14
Dividends declared to holders of perpetual
preferred
callable securities 4(vi) - -
Closure of unclaimed shares trusts 4(vii) - 13
US Asset Management equity plans and minority
holders 4(viii) - -
Credit-related fair value gains on Group debt
instruments 4(ix) - -
Total adjusting items (147) 216
Tax on adjusting items 5(iii) 51 (98)
Minority interest in adjusting items 6(iii) - 29
Total adjusting items after tax and minority
interests (96) 147
GBPm
United
Year ended 31 December 2007 States Other Total
Income/(expense)
Goodwill impairment and impact of acquisition
accounting (24) - (245)
Profit/(loss) on disposal of subsidiaries,
associated
undertakings and strategic investments 8 - 25
Short-term fluctuations in investment return (55) - 191
Investment return adjustment for Group equity
and
debt instruments held in life funds - - 14
Dividends declared to holders of perpetual
preferred
callable securities - 40 40
Closure of unclaimed shares trusts - (12) 1
US Asset Management equity plans and minority
holders 11 - 11
Credit-related fair value gains on Group debt
instruments - 29 29
Total adjusting items (60) 57 66
Tax on adjusting items 30 (9) (26)
Minority interest in adjusting items (11) - 18
Total adjusting items after tax and minority
interests (41) 48 58
(ii) Goodwill impairment and impact of acquisition accounting
In applying acquisition accounting in accordance with IFRS deferred acquisition
costs and deferred revenue are not recognised. These are reversed in the
acquisition balance sheet and replaced by goodwill, other intangible assets and
the value of the acquired present value of in-force business ("acquired PVIF").
In determining its adjusted operating profit the Group recognises deferred
revenue and acquisition costs in relation to policies sold by acquired
businesses pre-acquisition, and excludes the impairment of goodwill and the
amortisation of acquired other intangibles and acquired PVIF.
Goodwill impairment and acquisition accounting adjustments to adjusted
operating profit are summarised below:
GBPm
South United
Year ended 31 December
2008 Europe Africa States Other Total
Amortisation of acquired
PVIF
UK (86) - - - (86)
Nordic (105) - - - (105)
ELAM (60) - - - (60)
US Life - - (35) - (35)
Amortisation of acquired
deferred costs and
revenue
UK 33 - - - 33
Nordic 22 - - - 22
ELAM 26 - - - 26
Amortisation of other
acquired intangible
assets
UK (30) - - - (30)
Nordic (24) - - - (24)
ELAM (21) - - - (21)
Change in acquisition
balance sheet provisions
UK (8) - - - (8)
Nordic (76) - - - (76)
Goodwill impairment
Nordic (12) - - - (12)
US Life - - (61) - (61)
Other - - - (1) (1)
(341) - (96) (1) (438)
GBPm
South
Year ended 31 December
2007 Europe Africa United Other Total
Restated States
Amortisation of acquired
PVIF
UK (95) - - - (95)
Nordic (92) - - - (92)
ELAM (79) - - - (79)
US Life - - (24) - (24)
Amortisation of acquired
deferred costs and
revenue
UK 35 - - - 35
Nordic 20 - - - 20
ELAM 51 - - - 51
Amortisation of other
acquired intangible
assets
UK (30) - - - (30)
Nordic (22) - - - (22)
ELAM (18) - - - (18)
Change in acquisition
balance sheet provisions
Nordic 12 - - - 12
Goodwill impairment
M&F - (3) - - (3)
(218) (3) (24) - (245)
Notes to the consolidated financial statements
For the year ended 31 December 2008 continued
4 Operating profit adjusting items continued
(iii) Profit on disposal of subsidiaries, associated undertakings and strategic
investments On 11 June 2008, ELAM completed the disposal of its controlling
shareholding in Palladyne, an asset management business, resulting in a profit
on disposal of GBP17 million.
Part of the Nordic segment`s banking business, Skandia`s Nordic vehicle finance
operation, SkandiaBanken Bilfinans, was sold during the six months ended 30
June 2008, resulting in a profit on disposal of GBP55 million.
During 2007, the Nordic segment`s banking subsidiary sold its Danish operation.
An accounting profit on sale of GBP16 million was recognised. The US Asset
Management business disposed of its interests in certain affiliate asset
managers, resulting in a profit on disposal of GBP8 million in 2007.
The Group has closed its project to develop a direct financial services
capability in South Africa due to adverse market conditions. Costs relating to
the closure amounting to GBP25 million have been excluded from the adjusted
operating profit. OMSA realised a profit of GBP4 million on the sale of its
administration business and Nedbank recognised a GBP1 million profit in the
disposal of Bond Choice.
Profits on the disposal of subsidiaries, associated undertakings and strategic
investments are analysed below:
GBPm
South United
Year ended 31 December 2008 Europe Africa States Total
Nordic 55 - - 55
ELAM 17 - - 17
OMSA - (11) - (11)
Nedbank - 1 - 1
M&F - (10) - (10)
USAM - - 1 1
72 (20) 1 53
GBPm
South United
Year ended 31 December 2007 Europe Africa States Total
Nordic 16 - - 16
Nedbank - 1 - 1
USAM - - 8 8
16 1 8 25
(iv) Long-term investment return
Profit before tax includes actual investment returns earned on the shareholder
assets of the Group`s long-term and general insurance businesses. Adjusted
operating profit is stated after recalculating shareholder asset investment
returns based on a long-term investment return rate. The difference between the
actual and the long-term investment returns are short-term fluctuations in
investment return.
Long-term rates of return are based on achieved real rates of return
appropriate to the underlying asset base, adjusted for current inflation
expectations and consensus economic investment forecasts, and are reviewed
frequently, usually annually, for appropriateness. These rates of return have
been selected with a view to ensuring that returns credited to adjusted
operating profit are consistent with the actual returns expected to be earned
over the long-term.
For South Africa long-term business, the return is applied to an average value
of investible shareholders` assets, adjusted for net fund flows. For US and
Europe long-term businesses, the return is applied to average investible
assets.
For all businesses mis-matches attributed to the timing of the recognition of
policyholder tax and related receipts from policyholders are eliminated with
reference to the historic net gains / (losses) in respect of this item.
Year ended Year ended
31 December 31 December
Long-term investment rates 2008 2007
Europe long-term business 4.8% 4.9%
South Africa long-term business 16.6% 15.6%
United States long-term business 5.9% 5.7%
(iv) Long-term investment return continued
Analysis of short-term fluctuations in investment return
At 31 December 2008 UK Nordic ELAM OMSA M & F
Long-term investment return 65 1 - 230 60
Less: Actual shareholder
investment return 205 5 1 76 (12)
Short-term fluctuations in
investment return (140) (4) (1) 154 72
Hedge losses on Bermuda
guarantees treated as
short-term
fluctuations - - - - -
Total short-term fluctuations
in investment return (140) (4) (1) 154 72
GBPm
At 31 December 2008 Rest of Africa US Life Total
Long-term investment return 11 754 1,121
Less: Actual shareholder investment return (2) 484 757
Short-term fluctuations in investment return 13 270 364
Hedge losses on Bermuda guarantees
treated as short-term
fluctuations - 206 206
Total short-term fluctuations in
investment return 13 476 570
At 31 December 2007 UK Nordic ELAM OMSA M & F
Long-term investment return 6 - 1 212 65
Less: Actual shareholder
investment return 60 - 2 406 61
Short-term fluctuations in
investment return (54) - (1) (194) 4
Hedge losses on Bermuda
guarantees treated as
short-term
fluctuations - - - - -
Total short-term fluctuations
in investment return (54) - (1) (194) 4
GBPm
At 31 December 2007 Rest of Africa US Life Total
Long-term investment return 9 582 875
Less: Actual shareholder investment
return 10 527 1,066
Short-term fluctuations in investment
return (1) 55 (191)
Hedge losses on Bermuda guarantees
treated as short-term
fluctuations - - -
Total short-term fluctuations in
investment return (1) 55 (191)
The actual investment return attributable to shareholders for the US long-term
business reflects total investment income, as a distinction is not drawn
between shareholder and policyholder funds.
(v) Investment return adjustment for Group equity and debt instrument held in
life funds Adjusted operating profit includes investment returns on
policyholder investments in Group equity and debt instruments by the Group`s
life funds. These include investments in the Company`s ordinary shares, and the
subordinated liabilities and ordinary securities of the Group`s South Africa
banking subsidiary. These investment returns are eliminated within the
consolidated income statement in arriving at profit before tax, but are
included in adjusted operating profit. In 2008 the investment return adjustment
decreased adjusted operating profit by GBP234 million (2007: decrease of GBP14
million).
(vi) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group`s perpetual preferred callable
securities were GBP43 million in the year ended 31 December 2008 (2007: GBP40
million). These are recognised in finance costs on an accruals basis for the
purpose of determining adjusted operating profit. In the IFRS financial
statements this cost is recognised in equity.
(vii) Closure of unclaimed shares trusts
During 2006 Old Mutual plc announced that the Old Mutual South Africa Unclaimed
Shares Trust (UST), together with similar trusts set up in Namibia, Zimbabwe,
Malawi and Bermuda, would be closed. Proceeds of sale of the Old Mutual plc
shares held by those trusts were remitted to Old Mutual plc in 2006 and 2007.
Old Mutual intends to use substantially all of the proceeds realised to
discharge late claims in cash for a further period of three years (to 31 August
2009), to fund good causes in the jurisdictions of the trust concerned or to
enhance benefits for certain specific groups of policyholders of the Group`s
South African and Namibian life businesses. Provisions are held in this regard.
During 2007 adjustments were made in respect of the realisation of certain
foreign exchange losses (GBP14 million) and the remeasurement of certain
provisions (GBP13 million). Consistent with the original accounting treatment
in 2006, these amounts have been excluded from adjusted operating profit.
(viii) US Asset Management equity plans and minority interests
During 2007, US Asset Management entered into a number of new long-term
incentive arrangements with its asset management affiliates.
In accordance with IFRS requirements the cost of these schemes is disclosed as
being attributable to minority interests. However, this is treated as a
compensation expense in determining adjusted operating profit. The amount
recognised in relation to this in 2008 was GBP7 million (2007: GBP11 million).
The Group has issued put options to employees as part of some of its US
affiliate incentive schemes. The impact of revaluing these instruments is
recognised in accordance with IFRS, but excluded from adjusted operating
profit. As at 31 December 2008 these instruments were revalued, the impact of
which was nil (2007: less than GBP1 million).
(ix) Credit-related fair value gains on Group debt instruments
The widening of credit spread of the Group`s debt instruments in the market
price has resulted in gains of GBP489 million (2007: GBP29 million gain) at
Group head office and GBP14 million (2007: nil) in Nedbank being recorded in
the Group`s income statement for those instruments that are recorded at fair
value.
In the directors` view, this gain is not reflective of the underlying
performance of the Group and will reverse over time. The gain has therefore
been excluded from adjusted operating profit.
5 Income tax (credit)/expense
GBPm
(i) Analysis of total income tax (credit)/expense
Year ended
Year ended 31 December
31 December 2007
2008 Restated
Current tax
United Kingdom tax
Corporation tax 93 436
Double tax relief (145) (399)
Overseas tax
South Africa 264 403
United States 4 26
Europe 68 73
Secondary Tax on Companies (STC) 22 74
Prior year adjustments 1 (25)
Total current tax 307 588
Deferred tax
Origination of temporary differences (548) (66)
Changes in tax rates/bases (1) (13)
Write down/recognition of deferred tax assets 154 (5)
Total deferred tax (395) (84)
Total income tax expense (88) 504
GBPm
(ii) Reconciliation of total income tax
(credit)/expense
Year ended
Year ended 31 December
31 December 2007
2008 Restated
Profit before tax 595 1,750
Tax at standard rate of 28.5% (2007: 30%) 169 525
Different tax rate or basis on overseas
operations (23) (20)
Untaxed and low taxed income (218) (166)
Disallowable expenses 8 90
Net movement on deferred tax assets not
recognised 123 (38)
Effect on deferred tax of changes in tax rates (5) (18)
STC 53 57
Income tax attributable to policyholder returns (169) 51
Other (26) 23
Total income tax (credit)/expense (88) 504
(iii) Income tax on adjusted operating profit
GBPm
Year ended
Year ended 31 December
31 December 2007
2008 Restated
Income tax (credit)/expense (88) 504
Tax on adjusting items
Impact of acquisition accounting 46 65
Profit on disposal of subsidiaries, associated
undertakings and strategic investments 12 (10)
Short-term fluctuations in investment return 35 (37)
Income tax attributable to policyholders returns 236 (60)
Secondary Tax on Companies (STC) on dividends
paid - (35)
Tax on dividends declared to holders of
perpetual preferred callable securities
recognised in equity (12) (9)
Fair value gains on group debt instruments (143) -
Income tax on adjusted operating profit 86 418
6 Minority interests - Income statement
(i) Minority interests - ordinary shares
The minority interest charge to profit for the financial year has been
calculated on the basis of the Group`s effective ownership of the subsidiaries
in which it does not own 100 per cent of the ordinary equity. The principal
subsidiaries where a minority exists are the Group`s banking and general
insurance businesses in South Africa. For the year ended 31 December 2008 the
minority interest attributable to ordinary shares was GBP188 million (2007:
GBP224 million).
(ii) Minority interests - preferred securities
GBPm
At At
31 December 31 December
2008 2007
R2,000 million non-cumulative preference shares 14 13
R792 million non-cumulative preference shares 5 5
R300 million non-cumulative preference shares 1 1
US$750 million cumulative preferred securities 32 30
R364 million non-cumulative preference shares 2 1
Minority interest - preferred securities 54 50
(iii) Minority interests - adjusted operating
profit
The following table reconciles minority interests` share of profit for the
financial year to minority interests` share of adjusted operating profit:
GBPm
Year ended Year ended
31 December 31 December
Reconciliation of minority interests share of
profit for the financial year 2008 2007
The minority interest charge is analysed as
follows:
Minority interest - ordinary shares 188 224
Goodwill impairment and impact of acquisition
accounting - -
Profit on disposal of subsidiaries, associated
undertakings and strategic investments 2 -
Short-term fluctuations in investment return 11 -
Income attributable to Black Economic
Empowerment trusts of listed subsidiaries 30 29
Fair value gains on group debt instruments (6) -
Income attributable to US Asset Management
minority holdings (7) (11)
Minority interest share of adjusted operating
profit 218 242
The Group uses revised weighted average effective ownership interests when
calculating the minority interest applicable to the adjusted operating profit
of its South Africa banking and general insurance businesses. This reflects the
legal ownership of these businesses following the implementation for Black
Economic Empowerment (BEE) schemes in 2005. In accordance with IFRS accounting
rules the shares issued for BEE purposes are deemed to be, in substance,
options. Therefore the effective ownership interest of the minorities reflected
in arriving at profit after tax in the consolidated income statement is lower
than that applied in arriving at adjusted operating profit after tax. In 2008
the increase in adjusted operating profit attributable to minority interests as
a result of this was GBP30 million (2007: GBP29 million).
7 Earnings and earnings per share
(i) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the financial
year attributable to ordinary equity shareholders by the weighted average
number of ordinary shares in issue during the year excluding own shares held in
policyholder funds, ESOP trusts, Black Economic Empowerment trusts and other
related undertakings.
GBPm
Year ended Year ended
31 December 31 December
2008 2007
Profit for the financial year attributable to
equity holders of the parent 441 972
Dividends declared to holders of perpetual
preferred callable securities (31) (31)
Profit attributable to ordinary equity holders 410 941
Total dividends declared to holders of perpetual preferred callable securities
of GBP43 million in 2008 (2007: GBP40 million) are stated net of tax credits of
GBP12 million (2007: GBP9 million).
Millions
Year ended Year ended
31 December 31 December
2007 2007
Weighted average number of ordinary shares in
issue 5,294 5,492
Shares held in charitable foundations (19) (20)
Shares held in ESOP trusts (45) (61)
Adjusted weighted average number of ordinary
shares 5,230 5,411
Shares held in life funds (240) (282)
Shares held in Black Economic Empowerment trusts (235) (235)
Weighted average number of ordinary shares 4,755 4,894
Basic earnings per ordinary share (pence) 8.6 19.2
Diluted earnings per share recognises the dilutive impact of share options held
in ESOP trusts and Black Economic Empowerment trusts which are currently in the
money in the calculation of the weighted average number of shares, as if the
relevant shares were in issue for the full period.
Millions
Year ended Year ended
31 December 31 December
2008 2007
Weighted average number of ordinary shares 4,755 4,894
Adjustments for share options held by ESOP
trusts 61 63
Adjustments for shares held in Black Economic
Empowerment trusts 235 235
5,051 5,192
Diluted earnings per ordinary share (pence) 8.1 18.1
(ii) Adjusted operating earnings per ordinary share
Adjusted operating earnings per ordinary share is determined based on adjusted
operating profit. Adjusted operating profit represents the directors` view of
the underlying performance of the Group. For long-term and general insurance
business adjusted operating profit is based on a long-term investment return,
includes investment returns on life funds` investments in Group equity and debt
instruments and is stated net of income tax attributable to policyholder
returns. For the US Asset Management business it includes compensation costs in
respect of certain long- term incentive schemes defined as minority interests
in accordance with IFRS. For all businesses, adjusted operating profit excludes
goodwill impairment, the impact of acquisition accounting, revaluations of put
options related to long-term incentive schemes, the impact of closure of
unclaimed shares trusts, profit/(loss) on disposal of subsidiaries, associated
undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, income/(expense) from closure of
unclaimed shares trusts and fair value gains/(losses) on Group debt
instruments.
The reconciliation of profit for the financial year to adjusted operating
profit after tax attributable to ordinary equity holders is as follows:
GBPm
Year ended Year ended
31 December 31 December
2008 2007
Profit for the financial year attributable to
equity holders of the parent 441 972
Adjusting items 168 (66)
Tax on adjusting items 62 26
Minority interest on adjusting items (30) (18)
Adjusted operating profit after tax
attributable to ordinary equity holders 641 914
Adjusted weighted average number of ordinary
shares - (millions) 5,230 5,411
Adjusted operating earnings per ordinary share
- (pence) 12.2 16.9
8 Borrowed funds
GBPm
At At
31 December 31 December
Notes 2008 2007
Senior debt securities and term loans 8(i) 557 461
Mortgage backed securities 8(ii) 104 103
Subordinated debt securities 8(iii) 1,634 1,789
2,295 2,353
Borrowed funds
(i) Senior debt securities and term loans
GBPm
At At
31 December 31 December
2008 2007
Floating rate notes 1 85 151
Fixed rate notes 2 152 44
Revolving credit facility 3 294 161
Term loan and other loans 26 26
Investment fund borrowings - 79
Total senior debt securities and term loans 557 461
(i) Senior debt securities and term loans continued
The maturities of the senior debt securities and term loans are as follows:
GBPm
Greater than
1 year and
Less than less than Greater than
At 31 December 2008 1 year 5 years 5 years Total
Floating rate notes 16 69 - 85
Fixed rate notes 96 56 - 152
Revolving credit
facility - 294 - 294
Term loans and other
loans 26 - - 26
Investment fund
borrowings - - - -
Total senior debt
securities and term
loan 138 419 - 557
At 31 December 2007
Floating rate notes - 75 76 151
Fixed rate notes - 29 15 44
Revolving credit
facility - 161 - 161
Term loans and other
loans 17 9 - 26
Investment fund
borrowings 79 - - 79
Total senior debt
securities and term
loan 96 274 91 461
Senior debt securities and term loan comprise:
1 Floating rate notes
- GBP7 million note repayable in December 2010, with holders having the option
to elect for early redemption every 6 months with coupon referenced against 6
month
LIBOR less 0.50 per cent.
- US$150 million repayable September 2014 at 3 month LIBOR plus 0.63 per cent -
repaid.
- US$50 million repayable September 2011 at 3 month LIBOR plus 0.50 per cent.
- US$10 million repayable September 2009 at 3 month LIBOR plus 0.35 per cent.
- SEK100 million repayable March 2009 at 3 month STIBOR plus 0.20 per cent.
- 22 million repayable January 2010 at 3 month EURIBOR plus 0.35 per cent.
- SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38 per cent.
2 Fixed rate notes
- 30 million Euro bond repayable July 2010, capital and interest swapped into
fixed rate US Dollars at 5.28 per cent.
- 10 million Euro bond repayable December 2010, capital and interest swapped
into floating rate US Dollars at 3 month LIBOR plus 0.95 per cent.
- 20 million Euro bond repayable August 2013, capital and interest swapped into
floating rate US Dollars at 3 month LIBOR plus 1.30 per cent.
- 100 million Euro bond repayable December 2009 at 3.46 per cent
The total fair value of the swap derivatives associated with the Senior notes
is GBP11 million (2007: GBP8 million). These are recognised as derivative
assets.
3 Revolving credit facility
The Group has a GBP1,250 million five-year multi-currency revolving credit
facility, which had an original maturity date of September 2010. On 18 August
2007 syndicate banks agreed to extend the maturity date of GBP1,232 million of
the facility until September 2012. At 31 December 2008 GBP826 million (2007:
GBP413 million) of this facility was utilised, GBP294 million (2007: GBP161
million) in the form of drawn debt and GBP532 million (2007: GBP252 million) in
the form of irrevocable letters of credit.
The Group has a SEK1,000 million revolving credit facility, which has a
maturity date of 2 July 2009. At 31 December 2008 this facility was undrawn.
(ii) Mortgage backed securities
GBPm
At At
31 December 31 December
2008 2007
R291 million notes (class A1) repayable 18
November 2039 (11.467 per cent)1 22 21
R1.4 billion notes (class A2A) repayable 18
November 2039 (11.817 per cent)1 73 73
R98 million notes (class B note) repayable 18
November 2039 (12.067 per cent)1 5 5
R76 million notes (class C note) repayable 18
November 2039 (13.317 per cent)1 4 4
104 103
1 Issued on 10 December 2007 by the Group`s South African banking business and
are callable on 18 November 2012.
8 Borrowed funds continued
(iii) Subordinated debt securities
GBPm
At At
31 December 31 December
2008 2007
Banking
US$18 million repayable 31 August 2009 (6 month
LIBOR less 1.5 %)1 12 9
R1.5 billion repayable 24 April 2016 (7.85 %)2 108 103
R1.8 billion repayable 20 September 2018 (9.84%)3 135 135
R515 million repayable on 4 December 2008
(13.5%)4 - Repaid - 39
R500 million repayable on 30 December 2010
(8.38 %)5 36 34
R650 million repayable 8 February 2017 (9.03 %)6 49 47
R1.7 billion repayable 8 February 2019 (8.9 %)7 125 123
R2.0 billion repayable 6 July 2022 (3 month
JIBAR plus 0.47 %)8 150 151
R500 million repayable 15 August 2012 (3 month
JIBAR plus 0.45 %)9 37 37
R1.0 billion repayable 17 September 2015 (10.54%)10 77 77
R500 million repayable 14 December 2017 (3
month JIBAR plus 0.70 %) 11 37 37
R120 million repayable 14 December 2017 (10.38%)12 9 9
R487 million repayable 20 November 2018 (15.05%)13 40 -
R1,265 million repayable 20 November 2018
(JIBAR plus 4.75 %)14 94 -
R300 million repayable on 4 December 2013
(JIBAR + 2.5%)15 11 -
920 801
Other
R3.0 billion repayable 27 October 2020 (8.9 %)16 219 220
GBP300 million repayable 21 January 2016 (5.0%)17 239 291
R250 million preference shares repayable 9 June
2011 18 18 18
750 million repayable 18 January 2017 (4.5 %)19 303 519
779 1,048
Less: banking subordinated debt securities held
by other Group companies (65) (60)
Total subordinated liabilities 1,634 1,789
The subordinated notes rank behind the claims against the Group depositors and
other unsecured, unsubordinated creditors. None of the Group`s subordinated
notes are secured.
1 This instrument is matched either by advances to clients or covered against
exchange rate fluctuations.
2 Unsecured secondary callable note was issued 24 April 2005 with a call date
of 24 April 2011.
3 Unsecured secondary callable note was issued 20 September 2006 at R1.5
billion with a call date of 20 September 2013. On 18 May 2007 an additional
R0.3 billion was issued.
4 Unsecured callable Bonds issued 10 June 2002.
5 Unsecured callable Bonds issued 30 March 2006.
6 Unsecured secondary callable note was issued 8 February 2007 with a call date
of 8 February 2012.
7 Unsecured secondary callable note was issued 8 February 2007 at R1.0 billion.
On 19 March 2007 an additional R0.7 billion was issued.
8 Unsecured secondary capital callable note issued 6 July 2007 and has a call
date of 6 July 2017.
9 This bond issued on 15 August 2007 is an unsecured secondary capital callable
floating rate note with a call date 15 August 2012.
10 This bond issued on 17 September 2007 is an unsecured fixed rate note with a
term of 13 years (non-call 8).
11 This bond issued on 14 December 2007 is a 10 year (non-call 5) floating rate
note. After its call date on 14 December 2012 its terms become JIBAR plus
1.70 per cent until maturity.
12 This bond issued on 14 December 2007 is a 10 year (non-call 5) fixed rate
note. After its call date its terms become floating 3 month JIBAR plus
initial margin over mid swaps plus 1.0 per cent until maturity.
13 This bond issued on 20 May 2008 is a perpetual (non-call 10 year) fixed rate
note with a call date on 20 November 2018.
14 This bond issued on 20 May 2008 is a perpetual (non-call 10 year) floating
rate note with a call date of 20 November 2018.
15 This bond issued on 4 December 2008 is a floating rate note with a call date
of 4 December 2013.
16 These bonds have a maturity date of 27 October 2020 and pay a coupon of 8.92
per cent to 27 October 2015 and 3 month JIBAR plus 1.59 per cent thereafter.
The Group has the option to repay the bonds at par on 27 October 2015 and at 3
monthly intervals thereafter.
17 These bonds, issued on 20 January 2006, have a maturity date of 21 January
2016 and pay a coupon of 5.0 per cent to 21 January 2011 and 6 month LIBOR
plus 1.13 per cent thereafter. The coupon on the bonds was swapped into
floating rate of 6 month STIBOR plus 0.50 per cent. The Group has the option
to repay the bonds at par on 21 January 2011 and at 6 monthly intervals
thereafter.
18 These preference shares are redeemable on 9 June 2011 and pay a variable
cumulative coupon of 61.0 per cent of the Prime Rate as quoted by Nedbank
Limited.
The Group has the option to redeem the shares at par at any time before the
final redemption date but after giving an agreed period of notice.
19 This bond, issued on 16 January 2007, has a maturity date of 18 January 2017
and pays a coupon of 4.5 per cent to 17 January 2012 and 6 month EURIBOR plus
0.96 per cent thereafter. The principal and coupon on the bond were swapped
equally into Sterling and US Dollars with coupons of 6 month LIBOR plus
0.34 per cent and 6 month US LIBOR plus 0.31 per cent respectively. The Group
has the option to repay the bonds at par on 17 January 2012 and at 6 monthly
intervals thereafter.
9 Provisions
GBPm
At At
31 December 31 December
2008 2007
Surplus property 23 29
Client compensation 27 19
Warranties on sale of business 111 87
Liability for long service leave 38 34
Provision for donations 80 82
Litigation claims 36 64
Other provisions 165 183
480 498
Post employment benefits (3) 1
Total 477 499
Warranties Liability for
Surplus Client on sale of long service
Year ended 31
December 2008 property compensation business leave
Balance at
beginning of the
year 29 19 87 34
Unused amounts
reversed (1) (5) (5) -
Unwind of
discount 1 - - -
Charge to income
statement - 8 22 4
Utilised during
the year (7) (14) (3) 1
Foreign exchange
and other
movements 1 19 10 (1)
Balance at end
of the year 23 27 111 38
GBPm
Provision for
Year ended 31
December 2008 donations Litigation claims Other Total
Balance at
beginning of the year 82 64 183 498
Unused amounts
reversed - - (40) (51)
Unwind of discount - - - 1
Charge to income
statement - 37 20 91
Utilised during the year (2) (74) (24) (123)
Foreign exchange
and other movements - 9 26 64
Balance at end of
the year 80 36 165 480
2008 provisions in relation to surplus property amounted to GBP23 million
(2007: GBP29 million). These relate to the onerous costs of vacant properties
leased by the Group.
Provisions in relation to client compensation were GBP27 million (2007: GBP19
million), primarily relating to possible misselling of guarantee contracts in
Nordic.
Provisions in relation to warranties on the sale of businesses amounted to
GBP111 million (2007: GBP87 million). These principally relate to the sale of
American Skandia to Prudential Financial, recognised by the Group on
acquisition of Skandia in 2006.
The liability for long service leave of GBP38 million (2007: GBP34 million)
relates to provision for staff payments for long serving employees.
The provision for donations is held by OMSA. It relates to the payment of
charitable donations in future periods to which the Group is committed, out of
the funds made available on the closure of the Group`s unclaimed shares trusts,
which were set up as part of the demutualisation in 1999 and closed in 2006.
At 31 December 2008 provisions in relation to litigation claims amounted to
GBP36 million (2007: GBP64 million). During the year GBP74 million of the
provision was utilised, principally in respect of payments made in connection
with the outcome of the Skandia Liv arbitration. The balance of the provision
primarily relates to future amounts payable to Skandia Liv in connection with
the arbitration ruling.
Where material, provisions are discounted at discount rates specific to the
risks inherent in the liability. The timing and final amounts of payments in
respect of some of the provisions, particularly those in respect of litigation
claims and similar actions against the Group, are uncertain and could result in
adjustments to the amounts recorded. Of the provisions recorded above, GBP271
million (2007: GBP420 million) is estimated to be payable after more than one
year.
Warranties Liability for
Surplus Client on sale of long service
Year ended 31
December 2007 property compensation business leave
Balance at
beginning of the
year 41 8 113 30
Unused amounts
reversed (3) (1) (11) -
Unwind of
discount 2 - - -
Charge to income
statement - 20 - 4
Utilised during
the year (8) (8) (15) (2)
Foreign exchange
and other
movements (3) - - 2
Balance at end
of the year 29 19 87 34
GBPm
Provision for
Year ended 31
December 2007 donations Litigation claims Other Total
Balance at
beginning of the
year 115 71 151 529
Unused amounts
reversed - (6) - (21)
Unwind of discount - - - 2
Charge to income
statement - - 23 47
Utilised during the
year (33) - - (66)
Foreign exchange
and other movements - (1) 9 7
Balance at end of
the year 82 64 183 498
Dividends paid were as follows:
GBPm
Year ended Year ended
31 December 31 December
2008 2007
2006 Final dividend paid - 4.15p per 10p share - 218
2007 Interim dividend paid - 2.3p per 10p share - 115
2007 Final dividend paid - 4.55p per 10p share 227 -
2008 Interim dividend paid - 2.45p per 10p share 125 -
Dividends to ordinary equity holders 352 333
Dividends declared to holders of perpetual
preferred callable securities 43 40
Dividend payments for the year 395 373
Dividends paid to ordinary equity holders, as above, are calculated using the
number of shares in issue at the record date, less treasury shares held in ESOP
trusts, life funds of Group companies, Black Economic Empowerment trusts and
related undertakings.
As a consequence of the exchange control arrangements in place in certain
African territories, dividends to ordinary equity holders on the branch
registers of those countries (or, in the case of Namibia, the Namibian section
of the principal register) are settled through Dividend Access Trusts
established for that purpose.
In March and November 2008, GBP23 million and GBP20 million respectively were
declared and paid to holders of perpetual preferred callable securities (March
2007: GBP22 million and November 2007: GBP18 million).
11 Contingent liabilities
GBPm
At At
31 December 31 December
2008 2007
Guarantees and assets pledged as collateral
security 1,839 1,489
Irrevocable letters of credit 760 426
Secured lending 383 1,052
Other contingent liabilities 393 136
Nedbank structured financing
Historically a number of the Group`s South Africa banking businesses entered
into structured finance transactions with third parties using the tax base of
these companies. Pursuant to the terms of the majority of these transactions,
the underlying third party has contractually agreed to accept the risk of any
tax being imposed by the South African Revenue Service (SARS), although the
obligation to pay in the first instance rests with the Group`s companies. It is
only in limited cases where, for example, the credit quality of a client
becomes doubtful, or where the client has specifically contracted out of the
re-pricing of additional taxes, that the recovery from a client could be less
than the liability that could arise on assessment, in which case provisions are
made. SARS has examined the tax aspects of some of these types of structures
and SARS could assess these structures in a manner different to that initially
envisaged by the contracting parties. As a result Group companies could be
obliged to pay additional amounts to SARS and recover these from clients under
the applicable contractual arrangements.
American Skandia
The sale of American Skandia to Prudential Financial contained customary
representations and warranties. The indemnity in respect of this is limited to
US$1 billion. Investigations by various US regulators have given rise to
potential settlements and claims in relation to market timing.
American Skandia`s exposure to market timing is part of a wider investigation
of the US industry. The exposure is covered by the aforementioned indemnity
which also covers the matter of American Skandia`s failure to administer the
annuitisation provisions contained in certain contracts. This was an
administrative error made by the American Skandia business between 1996 and
2003.
American Skandia has been provided for in the acquisition accounting
12 Post balance sheet events
On 2 March 2009 the Group announced the sale, by its Group subsidiary, OM Group
(UK) Limited, of the Group`s interests in the Old Mutual Australia group. The
sale is expected to complete on 6 March 2009.
Old Mutual Market Consistent Embedded Value basis supplementary
information
For the year ended 31 December 2008
GBPm
Year ended Year ended
31 December 31 December
Statement of earnings on a Group Market
Consistent Embedded Value basis
2008 2007
Europe
Covered business 505 372
Asset management (13) 26
Banking 23 14
515 412
South Africa
Covered business 463 359
Asset management 102 98
Banking 545 622
General insurance 76 89
1,186 1,168
United States
Covered business (644) 37
Asset management 97 162
(547) 199
Other
Covered business - -
Asset management (17) 2
(17) 2
Finance costs (140) (119)
Other shareholders` expenses (19) (31)
Adjusted operating Group MCEV earnings before
tax* 978 1,631
Adjusting items** (2,037) 21
Total Group MCEV earnings for the financial
year before tax (1,059) 1,652
Income tax attributable to shareholders 13 (423)
Total Group MCEV earnings after tax for the
financial year (1,046) 1,229
Total Group MCEV earnings for the financial
period attributable to:
Equity holders of the parent (1,284) 952
Minority interests
Ordinary shares 184 227
Preferred securities 54 50
Total Group MCEV earnings after tax for the
financial year (1,046) 1,229
*For long-term business and general insurance businesses, adjusted operating
MCEV earnings is based on short-term and long-term investment returns
respectively, includes investment returns on life funds` investments in Group
equity and debt instruments, and is stated net of income tax attributable to
policyholder returns. For the US Asset Management business it includes
compensation costs in respect of certain long-term incentive schemes defined as
minority interests in accordance with IFRS. For all businesses, adjusted
operating MCEV earnings excludes goodwill impairment, the impact of acquisition
accounting, put revaluations related to long-term incentive schemes, the impact
of closure of unclaimed shares trusts, profit/(loss) on disposal of
subsidiaries, associated undertakings and strategic investments, dividends
declared to holders of perpetual preferred callable securities, and fair value
(profits)/losses on certain Group debt movements.
**The breakdown of the adjusting items is detailed in Note 5
GBPm
Year ended Year ended
31 December 31 December
Total Group MCEV earnings per share 2008 2007
Basic total Group MCEV earnings per ordinary
share (25.7) 18.4
Weighted average number of shares - millions 4,995 5,176
Adjusted operating Group MCEV earnings after
tax attributable to ordinary equity holders
Adjusted operating Group MCEV earnings before
tax 978 1,631
Tax on adjusted operating Group MCEV earnings (135) (414)
Adjusted operating Group MCEV earnings after tax 843 1,217
Minority interests
Ordinary shares (214) (245)
Preferred securities (54) (50)
Adjusted operating Group MCEV earnings
after tax attributable to ordinary equity holders 575 922
Adjusted operating Group MCEV earnings per
share* (pence) 11.0 17.0
Adjusted weighted average number of shares -
millions 5,230 5,411
* Adjusted operating Group MCEV earnings per share is calculated on the same
basis as adjusted operating Group MCEV earnings, but is stated after tax and
minority interests. It excludes income attributable to Black Economic
Empowerment trusts of listed subsidiaries. The calculation of the adjusted
weighted average number of shares includes own shares held in policyholders`
funds and Black Economic Empowerment trusts.
Reconciliation of movements in Group Market Consistent Embedded Value (Group
MCEV)
(after tax)
Year ended
31 December
2008
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Opening Group MCEV* 6,349 1,010 7,359
Adjusted operating MCEV
earnings 133 442 575
Non-operating MCEV earnings (2,270) 411 (1,859)
Total Group MCEV earnings (2,137) 853 (1,284)
Other movements in IFRS net
equity (29) (784) (813)
Closing Group MCEV 4,183 1,079 5,262
GBPm
Year ended
31 December
2007
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Opening Group MCEV* 6,145 594 6,739
Adjusted operating MCEV
earnings 591 331 922
Non-operating MCEV earnings (77) 107 30
Total Group MCEV earnings 514 438 952
Other movements in IFRS net
equity (310) (22) (332)
Closing Group MCEV 6,349 1,010 7,359
* The Opening Group MCEV for the year ended 31 December 2007 is gross of
minority interest of GBP29m in Skandia. During 2007 all minority interests were
purchased.
Old Mutual Market Consistent Embedded Value basis supplementary
information
For the year ended 31 December 2008
GBPm
Components of Group Market Consistent Embedded
Value (Group MCEV)
At At
31 December 31December
2008 2007
Adjusted net worth attributable to ordinary
equity holders of the parent 3,462 3,431
Equity 7,737 7,961
Adjustment to include long-term business on a
statutory solvency basis:
Europe (2,749) (2,581)
South Africa 137 147
United States 151 (621)
Adjustment for market value of life funds`
investments in Group equity and debt instruments
held in life funds 173 428
Adjustment to remove perpetual preferred
callable securities and accrued dividends (688) (688)
Adjustment to exclude acquisition goodwill from
the covered business:
Europe (1,299) (1,155)
United States - (60)
Value of in-force business 1,800 3,928
Present value of future profits 2,580 4,583
Additional time value of financial options and
guarantees (261) (199)
Frictional costs (148) (192)
Cost of residual non-hedgeable risks (371) (264)
Group MCEV 5,262 7,359
Group MCEV value per share (pence) 99.7 136.2
Return on Group MCEV (RoEV) per annum 7.8% 13.7%
Number of shares in issue at the end of the
period less treasury shares - millions 5,277 5,405
The adjustments to include long-term business on a statutory solvency basis
reflect the difference between the net worth of each business on the statutory
basis (as required by the local regulator) and their portion of the Group`s
consolidated equity shareholders` funds. In South Africa, these values exclude
items that are eliminated or shown separately on consolidation (such as
Nedbank, Mutual & Federal and intercompany loans). For some European
territories the value excludes the write-off of deferred acquisition costs
which remain part of adjusted net worth for MCEV purposes.
The RoEV is calculated as the adjusted operating Group MCEV earnings after tax
and minority interests of GBP575 million (year ended 31 December 2007: GBP922
million) divided by the opening Group MCEV.
Components of adjusted Group Market Consistent Embedded Value (Group MCEV)
GBPm
At At
31 December 31 December
2008 2007
Pro forma adjustments to bring Group
investments to market value
Group MCEV 5,262 7,359
Adjustment to bring listed subsidiaries to
market value 68 1,162
South Africa banking business 41 956
South Africa general insurance business 27 206
Adjustment for value of own shares in ESOP
schemes* 63 158
Adjustment for present value of Black Economic
Empowerment scheme deferred consideration 169 191
Adjustment to bring external debt to market value 645 120
Adjusted Group MCEV 6,207 8,990
Adjusted Group MCEV per share (pence) 117.6 166.3
Number of shares in issue at the end of the
period less treasury shares - millions 5,277 5,405
* Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2007 and 31 December 2008 is
due to the reduction in the Old Mutual plc share price over the year.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the year ended 31 December 2008
1 Basis of preparation
The Old Mutual Market Consistent Embedded Value methodology (referred to herein
and in the supplementary statements on pages 80 to 126 as `MCEV`) adopts Market
Consistent Embedded Value Principles issued in June 2008 by the CFO Forum (`the
Principles`) as the basis for the methodology used in preparing the
supplementary information. The Principles have been fully complied with for all
businesses as at 31 December 2008, with the exception of the use of an adjusted
risk free rate due to current market conditions for US Life Onshore business.
The Group has replaced the European Embedded Value (`EEV`) basis with the MCEV
basis for the covered business and figures for 31 December 2007 have been
restated accordingly, and complies fully with all of the Principles.
The Principles were designed during a period of relatively stable market
conditions and their application could, in turbulent markets, lead to
misleading results. In December 2008 the CFO Forum announced that they are
reviewing the Principles and guidance of the application of these Principles to
address the notion of market consistency in the current dislocated market
conditions. The particular areas under review include implied volatilities, the
cost of residual non-hedgeable risks, the use of swap rates as a proxy for risk
free reference rates and the effect of liquidity premia. In respect of the 31
December 2008 disclosure, Old Mutual has made an adjustment to the risk free
rate used in determining the value of the US Life Onshore business, to take
account of the liquidity component of corporate bond spreads that is evident in
the market as at 31 December 2008. The Directors consider this adjustment to be
necessary so as to ensure a meaningful basis of reporting the value of the
Group`s life and related businesses. The 31 December 2008 MCEV disclosure in
respect of all other business units complies fully with the Principles.
The detailed methodology and assumptions made in presenting this supplementary
information, including the US adjusted risk free rate for 31 December 2008, are
set out in notes 2 and 3.
This supplementary information provides details on the methodology, assumptions
and results of the MCEV for the Old Mutual Group and includes conversion of
comparative supplementary information for 2007, previously prepared on the EEV
basis, to a MCEV basis.
Throughout the supplementary information the following terminology is used to
distinguish between the terms `MCEV`, `Group MCEV` and `adjusted Group MCEV`:
MCEV is a measure of the consolidated value of shareholders` interests in the
covered business and consists of the sum of the shareholders` adjusted net
worth in respect of the covered business and the value of the in-force covered
business.
Group MCEV is a measure of the consolidated value of shareholders` interests
in covered and non-covered business and therefore includes the value of all
non-covered business at the unadjusted IFRS net asset value detailed in the
primary financial statements.
The adjusted Group MCEV, a measure used by the directors to assess the
shareholders` interest in the value of the Group, includes the impact of
marking all debt to market value, the market value of the Group`s listed
banking and general insurance subsidiaries as well as marking the value of
deferred consideration due in respect of Black Economic Empowerment
arrangements in South Africa (`the BEE schemes`) to market.
The major change in Old Mutual`s overall approach for deriving its MCEV
compared to the approach adopted for EEV is the allowance for risk. Under MCEV
a bottom-up allowance is made for financial risks (in particular, asset and
liability cash flows are valued using risk discount rates consistent with those
applied to similar cash flows in the capital markets and financial options and
guarantees are valued using market consistent models calibrated to observable
market prices) and an explicit allowance is made for the cost of residual non-
hedgeable risks in the covered business. In contrast, under EEV a top-down
allowance was made for all risks by means of the risk margin included in the
single risk discount rate applicable for each geography and the value placed on
the time value of financial options and guarantees. The MCEV methodology
therefore makes a more granular allowance for the differences in the risk
profile of different blocks of business than the EEV methodology.
Further detailed commentary of the key changes from an EEV to MCEV methodology
and the impact of the transition from EEV to MCEV reporting on results for the
financial year ended 31 December 2007 are provided in notes 12 to 18.
2 Methodology
Introduction
MCEV represents the present value of shareholders` interests in the earnings
distributable from assets allocated to the in-force covered business after
sufficient allowance for the aggregate risks in the covered business and is
measured in a way that is consistent with the value that would normally be
placed on the cash flows generated by these assets and liabilities in a deep
and liquid market. MCEV is therefore a risk-adjusted measure to the extent that
financial risk is reflected through the use of market consistent techniques in
the valuation of both assets and distributable earnings and a transparent
explicit allowance is made for non-financial risks.
The MCEV consists of the sum of the following components:
Adjusted net worth, which excludes acquired intangibles and goodwill,
consisting of:
- Free surplus allocated to the covered business
- Required capital to support the covered business
Value of in-force covered business (VIF)
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the year ended 31 December 2008
2 Methodology continued
The adjusted net worth of the covered business is the market value of
shareholders` assets held in respect of the covered business after allowance
for the liabilities of the in-force covered business which are dictated by
local regulatory reserving requirements.
MCEV is calculated net of minority shareholder interests and excludes the value
of future new business.
Coverage
Covered business includes, where material, any contracts that are regarded by
local insurance supervisors as long-term life insurance business. This
generally means that covered business includes all product lines where the
profits are included in the IFRS long-term business profits in the primary
Financial Statements.
For the South African business, healthcare administration business is no longer
recognised as part of the VIF or value of new business of covered business as
previously reported under EEV.
Some types of business are legally written by a life Company, but under IFRS
this business is classified as asset management because `long-term business`
only serves as a wrapper. This business continues to be excluded from covered
business, for example:
New institutional investment platform pensions business written in the United
Kingdom as it is more appropriately classified as mutual fund business; and
Individual unit trusts and some group market-linked business written by the
asset management Companies in South Africa through the life Company as profits
from this business arise in the asset management Companies.
The treatment within this supplementary information of all business other than
the covered business is the same as in the primary financial statements, except
for the adjusted Group MCEV which includes the impact of marking all debt to
market value, the market value of the Group`s listed banking and general
insurance subsidiaries as well as marking the value of deferred consideration
due in respect of Black Economic Empowerment arrangements in South Africa (`the
BEE schemes`) to market.
Free surplus
Free surplus is the market value of any assets allocated to, but not required
to support, the covered in-force business. It is determined as the market value
of any excess assets attributed to the covered business but not backing the
regulatory liabilities, less the required capital to support the covered
business.
Required capital
Required capital is the market value of assets that are attributed to support
the covered business, over and above that required to back statutory
liabilities for covered business, whose distribution to shareholders is
restricted. The following capital measures are considered in determining the
required capital held for covered business so that it reflects the level of
capital considered by the directors to be appropriate to manage the business:
Economic capital;
Regulatory capital (i.e. the level of solvency capital at which the local
regulators are empowered to take action) with appropriate deductions being made
for any implicit items that are not allowed by local regulators;
Capital required by rating agencies in respect of our North American business
in order to maintain our desired credit rating; and
Any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon our own internal
assessment of risks inherent in the underlying business. It measures capital
requirements on an economic balance sheet, with MCEV as the available capital,
consistent with a 99.93 per cent confidence level over a one-year time horizon.
For Europe and South Africa capital determined with reference to internal
management objectives is the most onerous and is the capital measure used,
whereas in the United States the required capital is based on the amount that
management deems necessary to maintain the desired credit rating for the
Company. The required capital in respect of the South Africa covered business
is partially covered by the market value of the Group`s investments in banking
and general insurance in South Africa. On consolidation these investments are
shown separately.
The table below shows the level of required capital expressed as a percentage
of the minimum local regulatory capital requirements.
GBPm Total Europe South Africa United States
31 December 2008
Required capital (a) 2,025 371 1,070 584
Regulatory capital (b) 1,293 229 819 245
Ratio (a/b) 1.6 1.6 1.3 2.4
31 December 2007
Required capital (a) 1,906 323 1,159 424
Regulatory capital (b) 1,257 226 866 165
Ratio (a/b) 1.5 1.4 1.3 2.6
2 Methodology continued
VIF
Under the MCEV methodology, VIF consists of the following components:
Present value of future profits (PVFP) from in-force covered business; less
Time value of financial options and guarantees; less
Frictional costs of required capital; less
Cost of residual non-hedgeable risks
Projected liabilities and cash flows are calculated net of outward risk
reinsurance with allowance for default risk of reinsurance counterparties where
material.
PVFP
The PVFP is calculated as the discounted value of future distributable earnings
(taking account of local statutory reserving requirements) that are expected to
emerge from the in-force covered business, including the value of renewals of
in-force business, on a best estimate basis where assumed earned rates of
return and discount rates are equal to the risk free reference rates. It
therefore represents a deterministic certainty equivalent valuation of future
distributable earnings. The certainty equivalent valuation approach is
described in more detail in note 4. Any limitations on distribution of such
earnings due to statutory or internal capital requirements are taken into
account separately in the calculation of frictional costs of required capital.
PVFP captures the intrinsic and time value of financial options and guarantees
on in-force covered business which are included in the local statutory reserves
according to local requirements, but excludes any additional allowance for the
time value of financial options and guarantees.
Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of
investment returns (i.e. asymmetric impact) on future shareholder cash flows of
policyholder financial options and guarantees within the in-force covered
business.
The time value of financial options and guarantees describes that part of the
value of financial options and guarantees that arises from the variability of
future investment returns on assets to the extent that it is not already
included in the statutory reserves. The calculations are based on market
consistent stochastic modelling techniques where the actual assets held at the
valuation date are used as the starting point for the valuation of such
financial options and guarantees. Projected cash flows are valued using
economic assumptions such that they are valued in line with the price of
similar cash flows that are traded in the capital markets. The time value
represents the difference between the average value of shareholder cash flows
under many generated economic scenarios and the deterministic shareholder value
under the best estimate assumptions for the equivalent business. Closed form
solutions are also applied in Europe provided the nature of any guarantees is
not complex.
The time value of financial options and guarantees also includes allowance for
potential burn-through costs on participating business, i.e.
the extent to which shareholders are unable to recover a loan made to
participating funds to meet either regulatory or internal capital management
requirements or the extent to which reserves are inadequate to cover severely
adverse experience.
In the generated economic scenarios allowance is made, where appropriate, for
the effect of dynamic management and / or policyholder actions in different
circumstances:
Management has some discretion in managing exposure to financial options and
guarantees, particularly within participating business. Such dynamic management
actions are reflected in the valuation of financial options and guarantees
provided that such discretion is consistent with established and justifiable
practice taking into account policyholders` reasonable expectations (e.g. with
due consideration of the PPFM for South African business), subject to any
contractual guarantees and regulatory or legal constraints and has been passed
through an appropriate approval process by the local Executive team and, where
applicable, the Board. Assumptions that depend on the market performance (such
as crediting rates or bonus rates) are set relative to the risk free reference
rates (subject to contractual guarantees) and assuming that all market
participants are subjected to the same market conditions.
Where credible evidence exists that persistency rates are linked to economic
scenarios, allowance is made for dynamic policyholder behaviour in response to
changes in economic conditions.
Modelled dynamic management and policyholders` actions include the following:
- Changes in future bonus and crediting rates subject to contractual
guarantees, including removing all or part of previously declared non-vested
bonuses where circumstances warrant such action;
- Dynamic persistency rates for the United States business and dynamic
guaranteed annuity option take-up rates for the South African business driven
by changes in economic conditions and management actions.
- Changes in surrender values; and
- Option take-up rates vary stochastically for the South African business to
the extent that the value of those options change in different economic
conditions.
In determining the time value of financial options and guarantees at least
1,000 simulations are run to gain comfort that a reasonable degree of
convergence of results has been obtained. Where deemed appropriate, the number
of simulations is increased to reduce sampling error.
Europe
Whilst certain products within the European businesses provide financial
options and guarantees, these are immaterial due to the predominantly
unit-linked nature of the business.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the year ended 31 December 2008
2 Methodology continued
South Africa
The time value of the financial options and guarantees mainly relates to
maturity guarantees and guaranteed annuity options.
As required by the applicable Actuarial Society of South Africa guidance note,
the time value of the financial options and guarantees included in the
statutory reserves in the South African businesses as at 31 December 2008 has
been valued using a risk-neutral market consistent asset model, and is referred
to as an investment guarantee reserve. This reserve includes a discretionary
margin as defined by local guidelines to allow for the sensitivity of the
reserve to interest rate movements. This discretionary margin is valued in the
VIF.
United States
The time value of the financial options and guarantees mainly relates to
minimum crediting (bonus) and growth rates.
Frictional costs of required capital
From the shareholders` viewpoint there is a cost due to restrictions on the
distribution of required capital that is locked in the Company. Where material,
an allowance has been made for the frictional costs in respect of the taxation
on investment return (income and capital gains) and investment costs on the
assets backing the required capital for covered business. The allowance for
taxation is based on the taxation rates applicable to investment earnings on
assets backing the required capital, although such tax rates are reduced, where
applicable, to allow for interest paid on debt which is used to partly finance
the required capital.
The run-off pattern of the required capital is projected on an approximate
basis over the lifetime of the underlying risks in line with drivers of the
capital requirement. The same drivers are used to split the total required
capital between existing business and new business.
Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the
time value of financial options and guarantees by using techniques that are
similar to the approach used by capital markets. In addition the modelling of
some non-hedgeable non-financial risks is incorporated as part of the
calculation of the PVFP (e.g. to the extent that expected operational losses
are incorporated in the maintenance expense assumptions) or the time value of
financial options and guarantees (e.g. dynamic policyholder behaviour such as
the interaction of the investment scenario and the persistency rates).
All residual non-financial risks (e.g. liability risks such as mortality,
longevity and morbidity risks; business risks such as persistency, expense and
reinsurance credit risks; and operational risk) for which no or insufficient
allowance is made in the PVFP or time value of financial options and
guarantees, together with hedge risk and credit spread risk in the United
States, are considered within the allowance for the cost of residual
non-hedgeable risks.
An allowance is made in the cost of residual non-hedgeable risks to reflect
uncertainty in the best estimate of shareholder cash flows as a result of both
symmetric and asymmetric non-hedgeable risks since these risks can not be
hedged in deep and liquid capital markets and are managed, inter alia, by
holding risk capital. Considering the Group as a whole, most residual
non-hedgeable risks have a symmetric impact on shareholder value with the
exception of operational risk.
The cost of residual non-hedgeable risks is calculated using a cost of capital
approach, i.e. it is determined as the present value of capital charges for all
future non-hedgeable risk capital requirements until run-off of the
liabilities. The capital charge in each year is the product of the projected
expected non-hedgeable risk capital held after allowance for some
diversification benefits and the cost of capital rate. The cost of capital rate
therefore represents the return above the risk free reference rates that the
market is deemed to demand for providing this capital.
The residual non-hedgeable risk capital measure is determined using an internal
economic capital model based on appropriate shock scenarios consistent with a
99.5 per cent confidence level over a one-year time horizon. The internal
economic capital model makes allowance for certain management actions, such as
reductions in bonus and crediting rates, where deemed appropriate.
The following allowance is made for diversification benefits in determining the
residual non-hedgeable risk capital at a business unit level:
Diversification benefits within the non-hedgeable risks of the covered
business are allowed for.
No allowance is made for diversification benefits between hedgeable and
non-hedgeable risks of the covered business.
No allowance is made for diversification benefits between covered and
non-covered business.
The table below shows the amounts of diversified economic capital held in
respect of residual non-hedgeable risks.
GBPm Total Europe South Africa United States
31 December 2008
Non-hedgeable risk capital 2,003 720 457 826
31 December 2007
Non-hedgeable risk capital 1,535 714 461 360
A weighted average cost of capital rate of 2.0 per cent has been applied to
residual symmetric and asymmetric non-hedgeable risks at a business unit level
over the life of the contracts. This translates into an equivalent cost of
capital rate of approximately 3.25 per cent being applied to the group
diversified capital required in respect of such non-hedgeable risks.
Participating business
For participating business in South Africa and the United States, the method of
valuation makes assumptions about future bonus or crediting rates and the
determination of profit allocation between policyholders and shareholders.
These assumptions are made on a basis consistent with other projection
assumptions, especially the projected future investment returns, established
Company practice (with due consideration of the PPFM for South African
business), past external communication, any payout smoothing strategy, local
market practice, regulatory/contractual restrictions and bonus participation
rules.
Where current benefit levels are higher than can be supported by the existing
fund assets together with projected investment returns, a downward `glide path`
is projected in benefit levels so that the fund would be exhausted on payment
of the last benefit.
Spread-based products
A market consistent valuation of spread-based products (such as fixed indexed
annuities in the United States, where investment returns are earned at one rate
and policyholders` accounts are credited at a different rate with the
difference referred to as `spread`) is dependent on the extent that management
discretion can target a shareholder profit margin and the decision rules that
management would follow in respect of crediting or bonus rates in any
particular stochastic scenario.
Where guaranteed terms are offered at outset of a contract that dictate the
payments to policyholders throughout the term of the contract, these payments
are valued using the certainty equivalent valuation technique. These products,
for example immediate annuities in payment, may therefore show a loss at point
of sale under MCEV as investment margins are not anticipated while currently
pricing practice does anticipate these margins. If returns in excess of the
risk free reference rates actually emerge in the future, these will be
recognised in the MCEV earnings as they arise.
For business where the crediting (bonus) rate is set in advance, crediting
rates are set by considering management`s target shareholder margins throughout
the contract lifetime (subject to any guarantees). Projected crediting rates
are set equal to the risk free reference rate less the anticipated margin to
cover profit and expenses (subject to any policyholder guarantees eroding the
shareholder margins). However, during the period following the valuation date
the existing crediting rate is applied until the next point at which it can be
varied. Given the guarantees included within such products (including
consideration of a 0 per cent floor for crediting rates), stochastic modelling
is used to value such contracts.
Valuation of assets and treatment of unrealised losses
The market values of assets, where quoted, are based on the bid price on the
reporting date. Unquoted assets are valued according to IFRS and marked to
model.
No smoothing of market values or unrealised gains/losses is applied.
Asset mix
PVFP and the time value of financial options and guarantees are calculated
using assets projected on the actual asset allocation of the policyholder funds
at the reporting date. However, if the current asset mix is materially
different to the long-term strategic asset allocation as a result of market
movements, projected assets are assumed to revert to the long-term strategic
asset allocation in the short to medium term as appropriate.
Defined benefit pension scheme
Where a defined benefit pension scheme within the covered business is in
surplus or deficit, the employer pension fund expense assumptions incorporated
within the VIF allow appropriately for the expected release of surplus or
funding of the deficit.
Look through principle
PVFP and value of new business cash flow projections look through and include
the profits/losses of owned service companies, e.g. distribution and
administration, related to the management of the covered business. Any profit
margins that are included in investment management fees payable by the life
assurance companies to the asset management subsidiaries have not been included
in the value of in-force business or the value of new business on the grounds
of materiality and because a significant proportion of these profits arise from
performance-based fees.
Taxation
In valuing shareholders` cash flows, allowance is made in the cash flow
projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying
current local corporate tax legislation and practice together with known future
changes and taking credit for any deferred tax assets.
No allowance is made for any further additional tax that would be incurred on
the remittance of dividends from the life subsidiaries to Old Mutual plc, apart
from the South African business where full allowance has been made for
Secondary Tax on Companies (STC) at a rate of 10 per cent that may be payable
in South Africa and the impact of capital gains tax. Furthermore, for the South
African business it has been assumed that a reasonable proportion of the
shareholder fund equity portfolio (excluding Group subsidiaries) will be traded
each year. In Europe tax has been allowed for on dividends to be remitted to
Skandia UK from the Isle of Man.
The value of any deferred tax assets is only recognised in the MCEV in so far
as those tax assets are expected to be utilised in future by offsetting it
against expected tax liabilities that are generated on expected profits
emerging from in-force business. Since projected investment returns are based
on the risk free reference rates, MCEV may therefore understate the true
economic value of such deferred tax assets.
New business and renewals
The market consistent value of new business (VNB) measures the value of the
future profits expected to emerge from all new business sold, and in some cases
increases to existing contracts, during the reporting period after allowance
for the time value of financial options and guarantees, frictional costs and
the cost of residual non-hedgeable risks associated with writing the new
business.
VNB includes contractual renewal of premiums and recurring single premiums,
where the level of premium is pre-defined and is reasonably predictable, and
changes to existing contracts where these are not variations allowed for in the
PVFP. Non-contractual increments are treated similarly where the volume of such
increments is reasonably predictable or likely (e.g. where premiums are
expected to increase in line with salary or price inflation).
Any variations in premiums on renewal of in-force business from that previously
anticipated including deviations in non-contractual increases, deviations in
recurrent single premiums and re-pricing of premiums for in-force business are
treated as experience variances on in-force business and not as new business.
VNB is calculated as follows:
Using economic assumptions at the start of the reporting period.
Using demographic and operating assumptions at the end of the reporting
period.
At point of sale and rolled forward to the end of the reporting period.
Generally using a standalone approach unless a marginal approach would better
reflect the additional value to shareholders created through the activity of
writing new business.
Expense allowances include all acquisition expenses, including any
acquisition expense overruns.
Net of tax, reinsurance and minority interests.
No attribution of any investment and operating variances to VNB.
New business margins are disclosed as:
The ratio of VNB to the present value of new business premiums (PVNBP); and
The ratio of VNB to annual premium equivalent (APE), where APE is calculated
as recurring premiums plus 10 per cent of single premiums.
PVNBP is calculated at point of sale using premiums before reinsurance and
applying a valuation approach that is consistent with the calculation of VNB.
Analysis of MCEV earnings
An analysis of MCEV earnings provides a reconciliation of the MCEV for covered
business at the beginning of the reporting period and the MCEV for covered
business at the end of the reporting period on a net of taxation basis.
Operating MCEV earnings are generated by the value of new business sold during
the reporting period, the expected existing business contribution, operating
experience variances, operating assumption changes and other operating
variances:
The value of new business includes the impact of new business strain on free
surplus that arises, amongst other things, from the impact of initial expenses
and additional required capital that should be held in respect of such new
business.
The expected existing business contribution is determined by projecting both
actual assets and actual liabilities (including assets backing the free surplus
and required capital) from the start of the reporting period to the end of the
reporting period using expected real-world earned rates of return. The expected
existing business contribution is presented in two components:
- Expected earnings on free surplus and required capital and the expected
change in VIF assuming that the assets earn the beginning of period risk free
reference rates; and
- Additional expected earnings on free surplus and required capital and the
additional expected change in VIF as a result of real-world expected earned
rates of return on assets in excess of beginning of period risk free reference
rates.
Transfers from VIF and required capital to free surplus includes the release
of required capital and modelled profits from VIF into free surplus in respect
of business that was in-force at the beginning of the reporting period,
although the movement does not contribute to a change in the MCEV.
Operating experience variances reflect the impact of deviations of the actual
operational experience during the reporting period from the expected
operational experience. It is analysed before operating assumption changes,
i.e. such variances are assessed against opening operating assumptions, and
reflects the total impact of in-force and new business variances.
Operating assumption changes incorporate the impact of changes to operating
assumptions from those assumed at the beginning of the reporting period to
those assumed at the end of the reporting period. As VNB is calculated using
operating assumptions at the end of the reporting period, this impact only
relates to the value of in-force business at the end of the reporting period.
Other operating variances include model improvements, changes in methodology
and the impact of certain management actions, such as a change in the asset
allocation backing required capital.
Total MCEV earnings also include economic variances and other non-operating
variances:
Economic variances incorporate the impact of changes in economic assumptions
from the beginning of the reporting period to the end of the reporting period
as well as the impact on earnings resulting from actual returns on assets being
different to the expected returns on those assets as reflected in the expected
existing business contribution. It therefore also includes the impact of
economic variances in the reporting period on projected future earnings.
Other non-operating variances include the impact of changes in mandatory
local regulations and changes in taxation.
An analysis of MCEV earnings requires closing adjustments in respect of
exchange rate movements and capital transfers such as those in respect of
payment of dividends and acquiring/divesting businesses.
Return on MCEV for covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in local currency, except for total
covered business where the calculations are performed in Sterling.
Analysis of Group MCEV earnings
Presentation of Group MCEV consists of the covered business under the MCEV
methodology and the non-covered business valued as the unadjusted IFRS net
asset value. A mark to market adjustment is therefore not performed for
external borrowings and other items not on a mark to market basis under IFRS
relating to non-covered business.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the year ended 31 December 2008
3 Assumptions
Non-economic assumptions
The appropriate non-economic projection assumptions for future experience (e.g.
mortality, persistency and expenses) are determined using best estimate
assumptions of each component of future cash flows, are specific to the entity
concerned and has regard to past, current and expected future experience (e.g.
longevity improvements and AIDS-related claims) as derived from both entity
specific and industry data where deemed appropriate. Material assumptions are
actively reviewed by means of detailed experience investigations and updated,
as deemed appropriate, at least annually.
These assumptions are based on the covered business being part of a going
concern, although favourable changes in maintenance expenses such as
productivity improvements are generally not included beyond what has been
achieved by the end of the reporting period. The only exception is in respect
of the United States business which is currently undergoing a major
restructuring and cost-cutting exercise. The expense assumption used in the
calculation of MCEV takes into account cost reductions already achieved in the
first quarter of 2009, but not any of the additional planned cost reductions.
The management expenses attributable to life assurance business have been
analysed between expenses relating to the acquisition of new business,
maintenance of in-force business (including investment management expenses) and
development projects.
All expected maintenance expense overruns affecting the covered business are
allowed for in the calculations.
Unallocated Group holding Company expenses have been included to the extent
that they relate to the covered business. The future expenses attributable to
life assurance business include 35 per cent of the Group holding Company
expenses, with 14 per cent allocated to South Africa, 4 per cent allocated to
United States and 17 per cent allocated to Europe (31 December 2007: 37 per
cent of the Group holding Company expenses, with 15 per cent allocated to South
Africa, 5 per cent allocated to United States and 17 per cent allocated to
Europe). The allocation of these expenses aligns to the proportion that the
management expenses incurred by the business bears to the total management
expenses incurred in the Group.
The MCEV normally only makes provision for future development costs and
one-off exceptional expenses (such as those incurred on the integration of
businesses following an acquisition and restructuring costs) to the extent that
such project costs are known with sufficient certainty. However no such costs
are allowed for as at 31 December 2008 (or 31 December 2007).
Legislative changes were introduced in Germany in 2008 specifying the
proportion of miscellaneous profits to be shared with policyholders.
According to the regulations, the revenue on in-force business can be reduced
by various expense items, including those costs arising in respect of new
business acquisition expenses in any year. To model this, Skandia Leben has
adopted an approach consistent with German market practice. This approach is to
set best estimate assumptions for the amount to be shared with policyholders in
future years after allowing for the acquisition expenses in relation to the new
business expected to be written over the next three years as per their business
plan projections.
Economic assumptions
An active basis is applied to set pre-tax investment and economic assumptions
to reflect the economic conditions prevailing on the reporting date. Economic
assumptions are set consistently, for example future bonus or crediting rates
are set at levels consistent with the investment return assumptions.
Under a market consistent valuation, economic assumptions are determined such
that projected cash flows are valued in line with the prices of similar cash
flows that are traded on the capital markets. Thus, risk free cash flows are
discounted at a risk free reference rate and equity cash flows at an equity
rate. In practice for the PVFP, where cash flows do not depend on or vary
linearly with market movements, a certainty equivalent method is used which
assumes that actual assets held earn, before tax and investment management
expenses, risk free reference rates and all the cash flows are discounted using
risk free reference rates which are gross of tax and investment management
expenses. The deterministic certainty equivalent method is purely a valuation
technique and over time the expectation is still that risk premiums will be
earned on assets such as equities and corporate bonds.
Risk free reference rates and inflation
The risk free reference rates, reinvestment rates and discount rates are
determined with reference to the swap yield curve appropriate to the currency
of the cash flows. For Europe the swap yield curve is obtained from a number of
sources including Bloomberg, Nordea Bank and Reuters. For the South African and
United States businesses, the swap yield curve is sourced from the third party
market consistent asset model that is used to generate the economic scenarios
that are required to value the time value of financial options and guarantees.
No adjustments are made to swap yields to allow for liquidity premiums or
credit risk premiums, apart from a liquidity adjustment to the United States
Life onshore business at 31 December 2008. Any other risk premiums are
recognised within the MCEV as and when they are earned.
Following a review of a wide range of market data and literature, such as, the
Barriet+Hibbert calibration of US corporate bond spreads at 31 December 2008,
it is the directors` view that the significant widening of corporate bond
spreads during the recent financial market turmoil is partly a function of an
increased liquidity premium rather than only heightened default risk and that
returns in excess of swap rates can be achieved, rather than entire corporate
bond spreads being lost to worsening default experience. For the United States
onshore business we considered the currency, credit quality and duration of our
actual corporate bond portfolio and derived adjusted risk free reference rates
at 31 December 2008 by adding 300bps of liquidity premium to swap rates used
for setting investment return and discounting assumptions (31 December 2007: no
liquidity adjustment was applied as we did not anticipate at that time the
extent to which the bond markets would become even further dislocated). This
adjustment reflects the liquidity premium component in corporate bond spreads
over swap rates that we expect to earn on our portfolio. We believe that the
difference between market yields on our United States onshore bond portfolio
and the adjusted risk free reference rate still provides an adequate implied
margin for defaults.
No liquidity adjustment is applied to risk free reference rates for other
geographies or for Old Mutual Bermuda because:
the nature and management of the products sold onshore in the United States
is materially different to those sold elsewhere in the Group, with greater
opportunity for managing assets in such a manner as to realise liquidity
premiums by holding corporate bonds to maturity;
the widening of corporate bond spreads has been more pronounced in the United
States compared to other geographies; and
it is the only geography with a significant concentration of investments in
the corporate bond market.
At those durations where swap yields are not available, e.g. due to a lack of a
sufficiently liquid or deep swap market, the swap curve is extended using
appropriate interpolation and extrapolation techniques.
Consumer price inflation assumptions are determined as those implied by
index-linked government stocks or real swap yields if a liquid market of
sufficient size exists. In other markets, the consumer price inflation
assumptions are modelled considering a reasonable spread compared to swap
rates. However, where modelling system capabilities are restricted, consumer
price inflation is set as a flat assumption. Other types of inflation such as
expense inflation are derived on a consistent basis and, where deemed
appropriate, include a percentage addition to the consumer price inflation rate
as life Company expenses for example include a large element of salary related
expenses.
The risk free reference spot yields (inclusive of any applicable liquidity
adjustments) and expense inflation rates at various terms for each of the
significant geographies are provided in the table below. The risk free
reference spot yield curve has been derived from mid swap rates at the
reporting date.
Risk free reference spot yields1 year 5 years 10 years 20 years
31 December 2008
GBP 2.0% 3.1% 3.4% 3.5%
EUR 2.4% 3.3% 3.8% 3.9%
USD* 4.3% 5.1% 5.6% 5.8%
ZAR 9.3% 8.0% 7.8% 6.7%
SEK 1.8% 2.9% 3.2% 3.2%
31 December 2007
GBP 5.5% 5.1% 5.0% 4.8%
EUR 4.6% 4.6% 4.7% 5.0%
USD 4.2% 4.2% 4.7% 4.9%
ZAR 11.5% 10.1% 9.1% 8.1%
SEK 4.7% 4.8% 4.9% 4.9%
Expense inflation 1 year 5 years 10 years 20 years
31 December 2008
GBP 0.1% 1.5% 2.8% 4.1%
EUR 2.0%-3.0% 2.0%-3.0% 2.0%-3.0% 2.0%-3.0%
USD 3.0% 3.0% 3.0% 3.0%
ZAR 6.1% 5.4% 5.5% 4.6%
SEK 0.2% 1.0% 1.8% 2.1%
31 December 2007
GBP 3.8% 3.6% 4.1% 4.5%
EUR 2.5%-3.0% 2.5%-3.0% 2.5%-3.0% 2.5%-3.0%
USD 3.0% 3.0% 3.0% 3.0%
ZAR 7.7% 7.1% 6.5% 5.8%
SEK 3.6% 3.4% 3.5% 3.6%
* After 300 bps adjustment to the risk free rate to recognise the liquidity
premium
Volatilities and correlations
Where cash flows contain financial options and guarantees such that they do not
move linearly with market movements, asset cash flows are projected and all
cash flows discounted using risk-neutral stochastic models. These models
project the assets and liabilities using a distribution of asset returns where
all asset types, on average, earn the same risk free reference rate.
Apart from the risk free reference yields specified above, other key economic
assumptions for the calibration of economic scenarios include the implied
volatilities for each asset class and correlations between different asset
classes. The volatility assumptions for the calibration of economic scenarios
that are used in the stochastic models are, where possible, based on those
implied from appropriate derivative prices (such as equity options in respect
of guarantees that are dependent on changes in equity markets or swaptions in
respect of guarantees that are dependent on changes in interest rates) as
observed on the valuation date. However, historic implied and historic observed
volatilities of the underlying instruments and expert opinion are considered
where there are concerns over the depth or liquidity of the market, e.g.
volatilities for property returns. Where strict adherence to the above is not
possible, for example where markets only exist at short durations such as the
equity option market in South Africa, interpolation or extrapolation techniques
are used to derive volatility assumptions for the full term structure of the
liabilities. Correlation assumptions between asset classes that are used in
stochastic models are based on an assessment of historic relationships. Where
historic data is used in setting volatility or correlation assumptions, a
suitable time period is considered for analysing historic data including
consideration of the appropriateness of historical data where economic
conditions were materially different to current conditions.
For the South African stochastic models, due to the immateriality of corporate
bond and property holdings, corporate bonds are assumed to yield the same
returns as equivalent long-term government bonds and property is assumed to be
invested 50 per cent in local equities and 50 per cent in long-term government
bonds.
The at-the-money annualised asset volatility assumptions of the asset classes
incorporated in the stochastic models are detailed below.
ZAR volatilities Option term
1 year 5 years 10 years 20 years
31 December 2008
1 year swap 30.8% 35.1% 32.9% 25.4%
5 year swap 32.9% 33.6% 30.2% 22.5%
10 year swap 30.8% 30.3% 25.9% 18.7%
20 year swap 26.9% 25.1% 19.8% 13.9%
Equity (total return index)* 37.6% 31.6% 29.2% 28.1%
Property (total return index) 23.2% 19.0% 15.6% 15.4%
31 December 2007
1 year swap 14.9% 14.5% 13.6% 13.3%
5 year swap 14.5% 14.1% 13.2% 12.9%
10 year swap 14.3% 13.7% 12.8% 12.5%
20 year swap 14.0% 13.1% 12.1% 11.7%
Equity (total return index)* 24.4% 24.4% 25.4% 26.0%
Property (total return index) 14.8% 13.5% 13.7% 13.6%
* Due to limited liquidity in the ZAR equity option market, the market
consistent asset model has been calibrated by extrapolating equity option
implied volatility data beyond a term of 3 years.
Option term
USD volatilities
1 year 5 years 10 years 20 years
31 December 2008*
1 year swap 44.9% 23.9% 18.3% 16.1%
5 year swap 34.1% 22.8% 17.9% 16.0%
10 year swap 27.7% 21.2% 17.1% 15.4%
20 year swap 24.7% 20.1% 16.3% 14.5%
31 December 2007
1 year swap 35.0% 26.9% 22.2% 19.8%
5 year swap 20.6% 18.7% 17.4% 15.8%
10 year swap 16.1% 15.4% 14.7% 13.3%
20 year swap 14.8% 14.1% 13.5% 12.4%
* Due to limited liquidity in the USD swap market, the market consistent asset
model has been calibrated by reference to volatility data as at 31 September
2008.
Option term
International equity
volatilities (Old Mutual
1 year 5 years 10 years 20 years
Bermuda)*
31 December 2008
SPX 38% 35% 27% 27%
RTY 46% 45% 34% 34%
TPX 41% 39% 31% 31%
HSCEI 57% 51% 43% 43%
TWSE 36% 34% 30% 30%
KOSP12 42% 43% 36% 36%
NIFTY 39% 33% 31% 31%
SX5E 38% 37% 31% 31%
UKX 37% 36% 28% 28%
BCAI 4% 4% 4% 4%
31 December 2007
SPX 22% 24% 10% 18%
RTY 28% 10% 12% 18%
TPX 21% 22% 10% 17%
HSCEI 40% 30% 10% 27%
IBOV 35% 28% 10% 24%
FTSE 21% 26% 10% 18%
SBBIG 4% 4% 4% 4%
*Note that due to improvements in fund mapping during 2008, some different
indices are referenced at 31 December 2008 than those referenced at 31 December
2007
Exchange rates
All MCEV figures are calculated in local currency and translated to GBP using
the appropriate exchange rates as detailed in Note 2 of the IFRS statements.
Expected asset returns in excess of the risk free reference rates
The expected asset returns in excess of the risk free reference rates have no
bearing on the calculated MCEV other than the calculation of the expected
existing business contribution in the analysis of MCEV earnings. Such
real-world economic assumptions are determined with reference to one-year
forward risk free reference rates applicable to the currency of the liabilities
at the start of the reporting period. All other economic assumptions, for
example future bonus or crediting rates, are set at levels consistent with the
real-world investment return assumptions.
Equity and property risk premiums incorporate both historical relationships and
the directors` view of future projected returns in each geography. Pre-tax
real-world economic assumptions are determined as follows:
The equity risk premium is 3.5 per cent for Africa and 3 per cent for Europe
and the United States.
The cash return equals the risk free reference rate less a deduction of 2 per
cent for Africa and 1 per cent for Europe and the United States.
The corporate bond return is based on actual corporate bond spreads on the
reporting date less an allowance for defaults.
The property risk premium is 2.5 per cent in Africa and 2 per cent in Europe.
Tax
The effective tax rates for Nordic, United Kingdom and the balance of Europe
were a range of 2 to 28 per cent (2007: 2 to 28 per cent), 29 per cent (2007:
28 per cent) and a range of 8 to 31 per cent (2007: 14 to 30 per cent)
respectively.
The effective tax rate was 33 per cent for South Africa (2007: 34 per cent) and
0 per cent for Namibia (2007: 0 per cent), except for the investment return on
capital for which the attributed tax was derived from the primary accounts.
For the United States the effective rate was under 1 per cent.
GBPm
4 (i) Adjusted Group Market Consistent
Embedded Value presented per business line
Year ended 31 Year ended 31
December December
2008 2007
MCEV of the covered business 4,183 6,349
Adjusted net worth* 2,383 2,421
Value of in-force business** 1,800 3,928
Adjusted net worth of the asset management
businesses 1,577 1,637
Europe 98 160
South Africa 292 232
United States 1,187 1,245
Value of the banking business 1,976 2,716
Europe (adjusted net worth) 285 305
South Africa (market value) 1,691 2,411
Market value of the general insurance
business
South Africa 219 405
Net other business (161) (35)
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 169 191
Adjustment for value of own shares in ESOP
schemes*** 63 158
Perpetual preferred securities (US$
denominated) (203) (378)
Perpetual preferred callable securities (304) (652)
GBP denominated (174) (328)
Euro denominated (130) (324)
Debt (1,312) (1,401)
Rand denominated (213) (215)
USD denominated (537) (408)
GBP denominated (191) (272)
SEK denominated (252) (506)
Euro denominated (119) -
Adjusted Group MCEV 6,207 8,990
* Adjusted net worth is after the elimination of intercompany loans.
** Net of minority interests.
*** Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2007 and 31 December 2008 is
due to the reduction in the Old Mutual plc share price.
GBPm
4 (ii) Adjusted operating MCEV earnings for the
covered business At At
31 December 31 December
2008 2007
Adjusted operating MCEV earnings before tax for
the covered business* 324 768
UK 333 288
Nordic 164 83
Europe and Latin America 8 1
OMSA 441 355
Rest of Africa 22 4
United States (644) 37
177
Tax on adjusted operating MCEV earnings for the
covered business 191
UK 98 82
Nordic 15 17
Europe and Latin America 4 (6)
OMSA 116 78
Rest of Africa - -
United States (42) 6
Adjusted operating MCEV earnings after tax for
the covered business 133 591
UK 235 206
Nordic 149 66
Europe and Latin America 4 7
OMSA 325 277
Rest of Africa 22 4
United States (602) 31
Tax on adjusted operating MCEV earnings
comprises
Tax on adjusted operating MCEV earnings for the
covered business 191 177
Tax on adjusted operating MCEV earnings for
other business (56) 237
Tax on adjusted operating MCEV earnings 135 414
* Adjusted operating MCEV earnings before tax are derived by grossing up each
of the components of the earnings after tax at the expected tax rates.
GBPm
4 (iii) Components of Market Consistent
Embedded Value of the covered business At At
31 December 31 December
2008 2007
MCEV of the covered business 4,183 6,349
Adjusted net worth 2,383 2,421
Value of in-force business 1,800 3,928
UK
Adjusted net worth 278 276
Free surplus 121 89
Required capital 157 187
Value of in-force business 1,393 1,255
Present value of future profits 1,439 1,305
Additional time value of financial options and
guarantees - -
Frictional costs (7) (10)
Cost of non-hedgeable risks (39) (40)
Nordic
Adjusted net worth 163 122
Free surplus 58 47
Required capital 105 75
Value of in-force business*** 882 992
Present value of future profits 943 1,058
Additional time value of financial options and
guarantees - -
Frictional costs (8) (9)
Cost of non-hedgeable risks (53) (57)
Europe and Latin America
Adjusted net worth 126 50
Free surplus 17 (11)
Required capital 109 61
Value of in-force business 587 522
Present value of future profits 659 574
Additional time value of financial options and
guarantees (13) (1)
Frictional costs (13) (10)
Cost of residual non-hedgeable risks (46) (41)
OMSA
Adjusted net worth* 905 1,392
Free surplus (128) 266
Required capital 1,033 1,126
Value of in-force business 1,040 1,154
Present value of future profits 1,228 1,344
Additional time value of financial options and
guarantees - -
Frictional costs** (113) (122)
Cost of residual non-hedgeable risks (75) (68)
Rest of Africa
Adjusted net worth 70 76
Free surplus 33 43
Required capital 37 33
Value of in-force business 48 48
Present value of future profits 57 55
Additional time value of financial options and
guarantees - -
Frictional costs (4) (2)
Cost of residual non-hedgeable risks (5) (5)
United States
Adjusted net worth 841 505
Free surplus 257 81
Required capital 584 424
Value of in-force business (2,150) (43)
Present value of future profits (1,746) 246
Additional time value of financial options and
guarantees (248) (198)
Frictional costs (3) (38)
Cost of residual non-hedgeable risks (153) (53)
* The required capital in respect of OMSA is partially covered by the market
value of the Group`s investments in banking and general insurance in South
Africa. On consolidation these investments are shown separately.
** For the South African business there has been a material change in the asset
allocation of assets backing required capital from 31 December 2007 to 31
December 2008. As at 31 December 2008, significantly fewer assets are held in
equities and more in cash compared to 31 December 2007.
*** The defined benefit plan funds allocated to the Nordic covered business are
currently showing an aggregate surplus of GBP45m on an IAS 19 basis. This
amount has not been incorporated within the VIF by allowing for the expected
release of surplus, nor has it been allowed within the ANW of the business.
For the United States, the material decrease in frictional costs from GBP38
million as at 31 December 2007 to GBP3 million as at 31 December 2008 reflects
the changed tax position of the business between these two reporting dates on a
market consistent basis. The fact that there are greater losses projected on an
MCEV basis at 31 December 2008 compared to 31 December 2007 (mainly due to
lower risk free reference rates) means that future income on the capital
required to back the business is to a large extent not subject to tax as such
future income can be offset against current projected losses.
4 (iv) Analysis of covered business MCEV earnings (after tax)
Year ended
31 December
Total covered business* 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV ** 515 1,906 2,421 3,928 6,349
New business
value (608) 172 (436) 540 104
Expected
existing
business
contribution
(reference rate) 63 117 180 289 469
Expected
existing
business
contribution
(in excess of
reference rate) 4 15 19 81 100
Transfers from
VIF and
required
capital
to free surplus 939 (189) 750 (750) -
Experience
variances 160 (75) 85 (250) (165)
Assumption
changes (55) - (55) (375) (430)
Other operating
variance 172 (156) 16 39 55
Operating MCEV
earnings 675 (116) 559 (426) 133
Economic
variances (722) 5 (717) (1,485) (2,202)
Other
non-operating
variance
Total MCEV (111) 43 (68) - (68)
earnings (158) (68) (226) (1,911) (2,137)
Closing
adjustments 1 187 188 (217) (29)
Capital and
dividend flows (22) - (22) - (22)
Foreign
exchange
variance 23 187 210 (217) (7)
Closing MCEV 358 2,025 2,383 1,800 4,183
Return on MCEV
(RoEV) % per
annum 2.1%
GBPm
Year ended
31 December
Total covered business* 2007
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV ** 199 1,903 2,102 4,043 6,145
New business value (588) 181 (407) 637 230
Expected existing
business
contribution
(reference rate) 15 127 142 269 411
Expected existing
business
contribution
(in excess of
reference rate) 3 19 22 67 89
Transfers from
VIF and required
capital
to free surplus 850 (201) 649 (649) -
Experience
variances 132 (29) 103 (119) (16)
Assumption changes 26 (1) 25 (226) (201)
Other operating
variance 102 (121) (19) 97 78
Operating MCEV
earnings 540 (25) 515 76 591
Economic variances 190 13 203 (364) (161)
Other
non-operating
variance (5) 3 (2) 86 84
Total MCEV
earnings 725 (9) 716 (202) 514
Closing
adjustments (409) 12 (397) 87 (310)
Capital and
dividend flows (412) - (412) - (412)
Foreign exchange
variance 3 12 15 87 102
Closing MCEV 515 1,906 2,421 3,928 6,349
Return on MCEV
(RoEV) % per
annum 9.6%
* Note that results for the `Rest of Africa` are included in the analysis of
total covered business MCEV earnings, but that no separate analysis is shown
for such business from a materiality perspective.
** The opening MCEV for the year ended 31 December 2007 is gross of minority
interest of GBP29m in Skandia. During 2007 all the minority shares were
purchased.
Return on MCEV for total covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in Sterling.
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
Year ended
31 December
UK covered business 2008
Adjusted Value of
Free Required
MCEV
surplus capital net worth in-force
Opening MCEV 89 187 276 1,255 1,531
New business value (189) (1) (190) 257 67
Expected existing
business
contribution
(reference rate) 31 1 32 58 90
Expected existing
business
contribution
(in excess of
reference rate) - - - 20 20
Transfers from
VIF and required
capital
to free surplus 294 (15) 279 (279) -
Experience
variances 26 (10) 16 1 17
Assumption changes (3) - (3) 59 56
Other operating
variance 11 - 11 (26) (15)
Operating MCEV
earnings 170 (25) 145 90 235
Economic variances (59) (9) (68) 51 (17)
Other
non-operating
variance 8 (1) 7 (10) (3)
Total MCEV
earnings 119 (35) 84 131 215
Closing
adjustments (87) 5 (82) 7 (75)
Capital and
dividend flows (82) - (82) - (82)
Foreign exchange
variance (5) 5 - 7 7
Closing MCEV 121 157 278 1,393 1,671
15.3%
GBPm
Year ended
31 December
UK covered business 2007
Adjusted Value of
Free Required
MCEV
surplus capital net worth in-force
Opening MCEV 73 162 235 1,090 1,325
New business value (190) 12 (178) 259 81
Expected existing
business
contribution
(reference rate) (2) 15 13 56 69
Expected existing
business
contribution
(in excess of
reference rate) - - - 17 17
Transfers from
VIF and required
capital
to free surplus 225 (5) 220 (220) -
Experience
variances 25 3 28 3 31
Assumption changes (8) (1) (9) 17 8
Other operating
variance - - - - -
Operating MCEV
earnings 50 24 74 132 206
Economic variances 1 - 1 5 6
Other
non-operating
variance - - - 27 27
Total MCEV
earnings 51 24 75 164 239
Closing
adjustments (35) 1 (34) 1 (33)
Capital and
dividend flows (35) - (35) - (35)
Foreign exchange
variance - 1 1 1 2
Closing MCEV 89 187 276 1,255 1,531
15.5%
Return on MCEV (RoEV) % per annum
The `expected existing business contribution (in excess of reference rate)` is
not significant. This is reasonable for business comprised mostly of
unit-linked products where most of the profits emanate from premium charges,
acquisition charges and fund based fees. Such fees and charges are largely
captured in the `expected existing business contribution (reference rate)`.
The experience variances were driven by a higher level of fund rebate than that
assumed, offset by a write-down of capitalised software costs.
The main operating assumption changes related to an increased recognition of
fee income which was partly offset by a strengthening of expense assumptions.
The other operating variances mainly reflect the impact of modelling and
methodology improvements.
The capital and dividend flows consist mainly of dividends.
The other non-operating variance is due to the implementation of a new
actuarial system.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in Sterling.
Year ended
31 December
Nordic covered business 2008
Free Required Adjusted Value of
net worth in-force MCEV
surplus capital
Opening MCEV 47 75 122 992 1,114
New business value (50) 3 (47) 79 32
Expected existing
business
contribution
(reference rate) 2 2 4 50 54
Expected existing
business
contribution
(in excess of
reference rate) - - - 23 23
Transfers from
VIF and required
capital
to free surplus 85 1 86 (86) -
Experience
variances 10 18 28 (17) 11
Assumption changes - - - 32 32
Other operating
variance (1) - (1) (2) (3)
Operating MCEV
earnings 46 24 70 79 149
Economic variances 9 (20) (11) (296) (307)
Other
non-operating
variance (85) 19 (66) (3) (69)
Total MCEV
earnings (30) 23 (7) (220) (227)
Closing
adjustments 41 7 48 110 158
Capital and
dividend flows 31 - 31 - 31
Foreign exchange
variance 10 7 17 110 127
Closing MCEV 58 105 163 882 1,045
Return on MCEV
(RoEV) % per
annum 12.9%
GBPm
Year ended
31 December
Nordic covered business 2007
Adjusted Value of
Free Required
net worth in-force MCEV
surplus capital
Opening MCEV (154) 46 (108) 971 863
New business value (36) 2 (34) 57 23
Expected existing
business
contribution
(reference rate) 1 1 2 39 41
Expected existing
business
contribution
(in excess of
reference rate) - - - 21 21
Transfers from
VIF and required
capital
to free surplus 67 2 69 (69) -
Experience
variances (4) 20 16 4 20
Assumption changes - - - (39) (39)
Other operating
variance (5) 5 - - -
Operating MCEV
earnings 23 30 53 13 66
Economic variances 10 (5) 5 (35) (30)
Other
non-operating
variance - - - 1 1
Total MCEV
earnings 33 25 58 (21) 37
Closing
adjustments 168 4 172 42 214
Capital and
dividend flows 165 - 165 - 165
Foreign exchange
variance 3 4 7 42 49
Closing MCEV 47 75 122 992 1,114
Return on MCEV
(RoEV) % per
annum 7.6%
The experience variances were largely driven by tax gains, a higher level of
fee income than assumed and a contribution from profits from healthcare
business which is not valued within the VIF. These were partially offset by
one-off persistency effects due to a Swedish legislative change relating to the
level of tax deductible savings contributions.
The main operating assumption changes related to a release of reserves set up
for costs in the corporate business partially offset by strengthened
persistency assumptions.
The other non-operating variance is mainly driven by legacy issues, such as the
settlement of the Skandia Liv-arbitration and strengthening of various legacy
provisions.
The capital and dividend flows mainly represent dividends received, repayment
of loans and settlement of the Liv-arbitration.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in Swedish Krona.
Year ended
Europe and Latin America covered 31 December
business 2008
Free Required
surplus capital Adjusted Value of
net worth in-force MCEV
Opening MCEV (11) 61 50 522 572
New business value (108) 5 (103) 113 10
Expected existing
business
contribution
(reference rate) 1 1 2 23 25
Expected existing
business
contribution
(in excess of
reference rate) - - - 5 5
Transfers from VIF
and required
capital to
free surplus 136 - 136 (136) -
Experience
variances (5) (6) (11) (10) (21)
Assumption changes - - - (22) (22)
Other operating
variance 2 - 2 5 7
Operating MCEV
earnings 26 - 26 (22) 4
Economic variances 11 (17) (6) (54) (60)
Other
non-operating
variance (34) 25 (9) (5) (14)
Total MCEV earnings 3 8 11 (81) (70)
Closing adjustments 25 40 65 146 211
Capital and
dividend flows 25 - 25 - 25
Foreign exchange
variance - 40 40 146 186
Closing MCEV 17 109 126 587 713
Return on MCEV
(RoEV) % per annum 0.6%
GBPm
Year ended
Europe and Latin America covered 31 December
business 2007
Adjusted
Free surplus Required
Value of
capital net
in-force MCEV
worth
Opening MCEV 59 56 115 470 585
New business
value (103) 4 (99) 137 38
Expected
existing
business
contribution
(reference
rate) - 1 1 18 19
Expected
existing
business
contribution
(in excess of
reference
rate) - - - 5 5
Transfers from
VIF and
required
capital to
free surplus 136 (3) 133 (133) -
Experience
variances (2) (4) (6) (1) (7)
Assumption
changes - - - (49) (49)
Other
operating
variance (5) (6) (11) 12 1
Operating MCEV
earnings 26 (8) 18 (11) 7
Economic
variances (2) 3 1 (7) (6)
Other
non-operating
variance (1) - (1) 25 24
Total MCEV
earnings 23 (5) 18 7 25
Closing
adjustments (93) 10 (83) 45 (38)
Capital and
dividend flows (88) - (88) - (88)
Foreign
exchange
variance (5) 10 5 45 50
Closing MCEV (11) 61 50 522 572
Return on MCEV
(RoEV) % per
annum 1.5%
The experience variances are mainly driven by expense overruns offset by
positive mortality and morbidity experience.
The main operating assumption changes related to strengthening of retention
levels in Austria and revision of expense assumptions in Southern Europe and
Italy.
The other non-operating variance is mainly due to legislative changes that have
been introduced in Germany in 2008 which specifies the proportion of
miscellaneous profits to be shared with policyholders.
The capital and dividend flows mainly represent capital injections into
Southern Europe to support new business, dividends and repayments.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in Euro.
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
Year ended
31 December
OMSA covered business * 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 266 1,126 1,392 1,154 2,546
New business value (81) 68 (13) 67 54
Expected existing
business
contribution
(reference rate) 23 98 121 142 263
Expected existing
business
contribution
(in excess of
reference rate) 3 14 17 13 30
Transfers from
VIF and required
capital
to free surplus 286 (130) 156 (156) -
Experience
variances 13 (18) (5) (17) (22)
Assumption changes 21 - 21 (18) 3
Other operating
variance 161 (157) 4 (7) (3)
Operating MCEV
earnings 426 (125) 301 24 325
Economic variances (139) 51 (88) (135) (223)
Other
non-operating
variance - - - 18 18
Total MCEV
earnings 287 (74) 213 (93) 120
Closing
adjustments (681) (19) (700) (21) (721)
Capital and
dividend flows (640) - (640) - (640)
Foreign exchange
variance (41) (19) (60) (21) (81)
Closing MCEV (128) 1,033 905 1,040 1,945
Return on MCEV
(RoEV) % per annum 14.4%
GBPm
Year ended
31 December
OMSA covered business * 2007
Adjusted Value of
Required
net worth in-force MCEV
Free surplus capital
Opening MCEV 112 1,212 1,324 1,089 2,413
New business
value (75) 63 (12) 62 50
Expected
existing
business
contribution
(reference
rate) 9 92 101 131 232
Expected
existing
business
contribution
(in excess
of reference
rate) 2 17 19 8 27
Transfers
from VIF and
required
capital
to free
surplus 296 (131) 165 (165) -
Experience
variances 33 (30) 3 (19) (16)
Assumption
changes 8 - 8 (33) (25)
Other
operating
variance 95 (120) (25) 34 9
Operating
MCEV
earnings 368 (109) 259 18 277
Economic
variances 201 21 222 8 230
Other
non-operating
variance (1) - (1) 33 32
Total MCEV
earnings 568 (88) 480 59 539
Closing
adjustments (414) 2 (412) 6 (406)
Capital and
dividend
flows (419) - (419) - (419)
Foreign
exchange
variance 5 2 7 6 13
Closing MCEV 266 1,126 1,392 1,154 2,546
Return on
MCEV (RoEV)
% per annum 11.7%
* The MCEV for South Africa is presented after the adjustment for market value
of life funds` investments in Group equity and debt instruments.
The experience variances were driven by negative persistency experience and
one-off and special project costs which were partially offset by favourable
mortality and disability experience and positive maintenance expense
experience.
The main operating assumption changes related to maintenance expense savings
being reflected in the updated assumptions and the positive impact of changes
in annuitant mortality assumptions which were offset by the negative impact of
changes to persistency assumptions that have been reviewed in light of the
recent adverse experience.
The other operating variances mainly include improvements in valuation models
and methodology.
The other non-operating variances relate to reduction in the corporate tax rate
from 29% to 28% and the impact of changing the asset allocation backing
required capital.
The capital and dividend flows mainly include dividend payments (net of
dividends received from Nedbank and Mutual & Federal) and increased investment
in Old Mutual plc loan notes and the purchase of additional shares in Nedbank
and Mutual & Federal. These capital flows arose from excess capital and did not
adversely affect the solvency position of the South African life company.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in Rand.
4 (iv) Analysis of covered business MCEV earnings (after tax) continued GBPm
Year ended
31 December
United States covered business 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV
New business 81 424 505 (43) 462
value (177) 93 (84) 18 (66)
Expected
existing
business
contribution
(reference rate) 2 12 14 10 24
Expected
existing
business
contribution
(in excess of
reference rate) - 1 1 20 21
Transfers from
VIF and
required
capital
to free surplus 128 (41) 87 (87) -
Experience
variances 113 (58) 55 (206) (151)
Assumption
changes (74) - (74) (425) (499)
Other operating
variance - - - 69 69
Operating MCEV
earnings (8) 7 (1) (601) (602)
Economic
variances (529) - (529) (1,047) (1,576)
Other
non-operating
variance - - - - -
Total MCEV
earnings (537) 7 (530) (1,648) (2,178)
Closing
adjustments 713 153 866 (459) 407
Capital and
dividend flows 651 - 651 - 651
Foreign
exchange
variance 62 153 215 (459) (244)
Closing MCEV 257 584 841 (2,150) (1,309)
Return on MCEV
(RoEV) % per annum -121.4%
Year ended
31 December
United States covered business 2007
Adjusted Value of
Free Required
net worth in-force MCEV
surplus capital
Opening MCEV 64 390 454 371 825
New business value (181) 96 (85) 116 31
Expected existing
business
contribution
(reference rate) 3 15 18 20 38
Expected existing
business
contribution
(in excess of
reference rate) - 2 2 16 18
Transfers from
VIF and required
capital
to free surplus 115 (59) 56 (56) -
Experience
variances 84 (15) 69 (99) (30)
Assumption changes 26 - 26 (123) (97)
Other operating
variance 18 - 18 53 71
Operating MCEV
earnings 65 39 104 (73) 31
Economic variances (30) - (30) (333) (363)
Other
non-operating
variance - - - - -
Total MCEV
earnings 35 39 74 (406) (332)
Closing
adjustments (18) (5) (23) (8) (31)
Capital and
dividend flows (18) - (18) - (18)
Foreign exchange
variance - (5) (5) (8) (13)
Closing MCEV 81 424 505 (43) 462
Return on MCEV
(RoEV) % per annum 4.1%
The segment results of United States include Old Mutual Reassurance (Ireland)
Limited (OMRe), which provides reinsurance to the United States Life Companies,
and Old Mutual (Bermuda) Limited.
The negative experience variances were largely driven by higher than expected
lapses on the fixed deferred and indexed annuity products and by reinsurance
deals which were priced to be broadly cost-neutral on a real-world basis. Other
negative experience variances included lighter than expected mortality on the
immediate annuity book and an expense overrun. There was an offsetting positive
tax variance.
The main operating assumption changes related to a strengthening of mortality
assumptions on part of the immediate annuity book, changes to variable annuity
reserving and increased expense assumptions.
The capital and dividend flows were mainly due to capital injections from Old
Mutual plc during the year.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in US Dollar.
5 Adjustments applied in determining total Group MCEV earnings before tax
Year ended
31 December
2008
Covered
Analysis of adjusting items business Non-covered Total Group
MCEV business IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-
covered business acquired
intangible assets and
impact of acquisition accounting - (12) (12)
Economic variances (2,480) (72) (2,552)
Other non-operating variances (79) - (79)
Acquired/divested business - 53 53
Closure of unclaimed share trust - - -
Dividends declared to holders of
perpetual
preferred callable securities - 43 43
Adjusting items relating to US
Asset Management
equity plans and minority holders - 7 7
Fair value gains on Group debt
instruments - 503 503
Adjusting items (2,559) 522 (2,037)
GBPm
Year ended
31 December
2007
Covered
Analysis of adjusting items business Non-covered Total Group
MCEV business IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-
covered business acquired
intangible assets and
impact of acquisition accounting - (11) (11)
Economic variances (114) (7) (121)
Other non-operating variances 48 - 48
Acquired/divested business (1) 25 24
Closure of unclaimed share trust - 1 1
Dividends declared to holders of
perpetual
preferred callable securities - 40 40
Adjusting items relating to US
Asset Management
equity plans and minority holders - 11 11
Fair value gains on Group debt
instruments - 29 29
Adjusting items (67) 88 21
6 Other movements in net equity impacting Group MCEV
Year ended
31 December
2008
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Fair value gains/(losses) - - -
Net investment hedge - (281) (281)
Currency translation
differences/exchange
differences on translating
foreign operations (7) 59 52
Aggregate tax effects of
items taken directly to or
transferred from equity - (1) (1)
Other movements - (49) (49)
Net income recognised
directly into equity (7) (272) (279)
Dividend for the year (22) (373) (395)
Share buy back - (175) (175)
Net issues of ordinary
share capital by the
Company - 5 5
Exercise of share options - 5 5
Fair value of equity
settled share options - 26 26
Other movements in net
equity (29) (784) (813)
GBPm
Year ended
31 December
2007
Covered
business Non-covered Total Group
MCEV business IFRS MCEV
Fair value gains/(losses) - 21 21
Net investment hedge - (13) (13)
Currency translation
differences/exchange
differences on translating
foreign operations 102 18 120
Aggregate tax effects of items
taken directly to or
transferred from equity - 13 13
Other movements - 29 29
Net income recognised directly
into equity 102 68 170
Dividend for the year (412) 39 (373)
Share buy back - (177) (177)
Net issues of ordinary share
capital by the
Company - 3 3
Exercise of share options - 9 9
Fair value of equity settled
share options - 36 36
Other movements in net equity (310) (22) (332)
7 Reconciliation of MCEV adjusted net worth to IFRS net asset value for the
covered business
The table below provides a reconciliation of the MCEV adjusted net worth (ANW)
to the IFRS net asset value (NAV) for the covered business.
Year ended 31 December 2008
Total
UK Nordic ELAM
IFRS net asset value* 5,907 2,064 1,323 1,228
Adjustment to include long-term
business on a statutory solvency
basis (2,461) (1,200) (973) (576)
Adjustment for market value of
life funds` investments in Group
equity and debt instruments 236 - - -
Adjustments to exclude acquisition
of goodwill from the covered
business (1,299) (586) (187) (526)
MCEV adjusted net worth 2,383 278 163 126
GBPm
Rest of United
Africa States
OMSA
IFRS net asset value* 536 66 690
Adjustment to include long-term business on a
statutory solvency basis 133 4 151
Adjustment for market value of life funds`
investments in Group
equity and debt instruments 236 - -
Adjustments to exclude acquisition of goodwill
from the covered business - - -
MCEV adjusted net worth 905 70 841
Year ended 31 December 2007
Total
UK Nordic ELAM
IFRS net asset value* 6,199 2,017 1,222 945
Adjustment to include long-term
business on a statutory solvency
basis (3,055) (1,160) (931) (490)
Adjustment for market value of
life funds` investments in Group
equity and debt instruments 492
Adjustments to exclude acquisition
of goodwill from the covered
business (1,215) (581) (169) (405)
MCEV adjusted net worth 2,421 276 122 50
GBPm
Rest of United
Africa States
OMSA
IFRS net asset value* 757 72 1,186
Adjustment to include long-term business on a
statutory solvency
basis 143 4 (621)
Adjustment for market value of life funds`
investments in Group
equity and debt instruments 492
Adjustments to exclude acquisition of goodwill
from the covered
business (60)
MCEV adjusted net worth 1,392 76 505
* IFRS net asset value is after elimination of intercompany loans.
The adjustment to include long-term business on a statutory solvency basis
includes the following:
The excess of the IFRS amount of the deferred acquisition cost (DAC) and
value of business acquired (VOBA) assets over the statutory levels included in
the VIF.
When projecting future profits on a statutory basis, the VIF includes the
shareholders` value of unrealised capital gains. To the extent that assets in
IFRS are valued at market and the market value is higher than the statutory
book value, these profits have already been taken into account in the IFRS
equity.
8 Value of new business (after tax)
The tables below set out the geographic analysis of the value of new business
(VNB) after tax. New business profitability is measured by both the ratio of
the VNB to the present value of new business premiums (PVNBP) as well as to the
annual premium equivalent (APE), and shown under PVNBP margin and APE margin
below. APE is calculated as recurring premiums plus 10 per cent of single
premiums.
As mentioned earlier for the South African business, healthcare administration
business is no longer recognised as part of the VNB of covered business as
previously reported under EEV. A similar consideration applies to other new
business measures such as PVNBP and APE.
GBPm
Year ended Year ended
31 December 31 December
2008 2007
Annualised recurring premiums
UK 202 186
Nordic 174 128
Europe and Latin America 100 102
OMSA 212 213
Rest of Africa 11 11
United States 33 39
732 679
Single premiums
UK 3,938 5,540
Nordic 384 193
Europe and Latin America 679 879
OMSA 1,248 1,073
Rest of Africa 51 43
United States 2,475 2,962
8,775 10,690
PVNBP
UK 4,902 6,311
Nordic 991 690
Europe and Latin America 1,238 1,494
OMSA 2,317 2,268
Rest of Africa 120 98
United States 2,694 3,185
12,262 14,046
PVNBP capitalisation factors*
UK 4.8 4.3
Nordic 3.5 3.9
Europe and Latin America 5.6 6.1
OMSA 5.1 5.6
Rest of Africa 6.0 5.0
United States 6.7 5.7
APE
UK 596 740
Nordic 213 147
Europe and Latin America 168 190
OMSA 336 321
Rest of Africa 17 15
United States 281 335
1,611 1,748
VNB
UK 67 81
Nordic 32 23
Europe and Latin America 10 38
OMSA 54 50
Rest of Africa 7 7
United States (66) 31
GBPm
Year ended Year ended
31 December 31 December
2008 2007
PVNBP margin
UK 1.4% 1.3%
Nordic 3.3% 3.3%
Europe and Latin America 0.8% 2.6%
OMSA 2.3% 2.2%
Rest of Africa 5.8% 7.1%
United States -2.4% 1.0%
0.8% 1.7%
APE margin
UK 11% 11%
Nordic 15% 16%
Europe and Latin America 6% 20%
OMSA 16% 15%
Rest of Africa 41% 47%
United States -23% 9%
6% 13%
* The PVNBP capitalisation factors are calculated as follows: (PVNBP - single
premiums) / annualised recurring premiums
The value of new individual unit trust linked retirement annuities and pension
fund asset management business written by the South Africa long-term business,
which amounted to GBP458 million in the year ended 31 December 2008 (year ended
31 December 2007: GBP435 million), is excluded as the profits on this business
arise in the asset management business. The value of new business also excludes
premium increases arising from indexation arrangements in respect of existing
business, as these are already included in the value of in- force business.
The value of new institutional investment platform pensions business written in
the United Kingdom, the gross premium of which amounted to GBP239 million for
the year ended 31 December 2008 (year ended 31 December 2007: GBP165 million),
is excluded as this is more appropriately classified as mutual fund business.
9 Product analysis of new covered business premiums
GBPm
Year ended Year ended
31 December
31 December
2008 2007
UK Recurring Recurring
Single Single
Total business 202 3,938 186 5,540
Unit-linked
assurance 202 3,938 183 5,540
Life - - 3 -
GBPm
Year ended Year ended
31 December
31 December
2007
2008
Nordic Recurring Recurring Single
Single
Total business 174 384 128 193
Unit-linked
assurance 174 384 128 193
Life - - - -
GBPm
Year ended Year ended
31 December
31 December
2007
2008
Europe and Latin
America Recurring Single Recurring Single
Total business 100 679 102 879
Unit-linked
assurance 94 401 100 873
Life 6 278 2 6
GBPm
Year ended Year ended
31 December 31 December
2008 2007
OMSA Recurring Single Recurring Single
Total business 212 1,248 213 1,073
Individual business 199 595 198 617
Savings 48 451 47 472
Protection 65 - 74 5
Annuity - 143 - 139
Retail mass market 86 1 77 1
Group business 13 653 15 456
Savings 5 423 5 376
Protection 8 1 10 1
Annuity - 229 - 79
9 Product analysis of new covered business premiums continued
GBPm
Year ended Year ended
31 December
31 December
2008 2007
Rest of Africa Recurring Recurring
Single Single
Total business 11 51 11 43
Individual business 10 27 10 25
Savings 3 26 3 23
Protection 3 - 3 -
Annuity - 1 - 2
Retail mass market 4 - 4 -
Group business 1 24 1 18
Savings 1 21 1 18
Protection - - - -
Annuity - 3 - -
GBPm
Year ended Year ended
31 December 31 December
2008 2007
United States Recurring Single Recurring Single
Total business 33 2,475 39 2,962
Fixed deferred
annuity - 327 - 97
Fixed indexed
annuity - 627 - 960
Variable annuity - 1,339 - 1,757
Life 33 43 39 18
Immediate annuity - 139 - 130
10 Drivers of new business value*
GBPm
Year ended
Total covered business** 31 December
2008
PVNBP
APE Margin %
Margin %
Margin at the end of comparative period 1.7% 13.5%
Change in volume 0.1% 0.2%
Change in product mix -0.2% -1.8%
Change in country mix 0.0% 0.0%
Change in operating assumptions -0.3% -2.7%
Change in economic assumptions -0.3% -2.6%
Exchange rate movements -0.2% -0.5%
Margin at the end of the period 0.8% 6.1%
UK covered business***
Margin at the end of comparative period 1.3% 11.1%
Change in volume 0.0% -0.5%
Change in product mix 0.0% 0.2%
Change in country mix 0.0% 0.0%
Change in operating assumptions 0.1% 1.0%
Change in economic assumptions 0.0% -0.5%
Margin at the end of the period 1.4% 11.3%
Nordic covered business***
Margin at the end of comparative period 3.3% 15.7%
Change in volume 0.4% 2.9%
Change in product mix 0.2% -0.2%
Change in country mix 0.0% 0.0%
Change in operating assumptions -0.5% -2.2%
Change in economic assumptions -0.1% -0.9%
Margin at the end of the period 3.3% 15.3%
ELAM covered business***
Margin at the end of comparative period 2.6% 20.4%
Change in volume -0.7% -5.2%
Change in product mix -0.3% -1.9%
Change in country mix 0.0% -0.3%
Change in operating assumptions -0.8% -6.8%
Change in economic assumptions 0.0% -0.2%
Margin at the end of the period 0.8% 6.0%
OMSA covered business***
Margin at the end of comparative period 2.2% 15.4%
Change in volume 0.2% 1.8%
Change in product mix -0.1% -0.7%
Change in country mix 0.0% 0.0%
Change in operating assumptions 0.1% 0.5%
Change in economic assumptions -0.1% -0.9%
Margin at the end of the period 2.3% 16.1%
United States covered business***
Margin at the end of comparative period 1.0% 9.4%
Change in volume -0.2% -2.1%
Change in product mix -0.7% -6.5%
Change in country mix 0.0% 0.0%
Change in operating assumptions -1.3% -12.7%
Change in economic assumptions -1.2% -11.5%
Margin at the end of the period -2.4% -23.4%
* Prior year MCEV comparatives of drivers of new business value are not
available as no restatement was performed for VNB and PVNBP in 2006. Also note
that results for the `Rest of Africa` are included in the drivers of new
business value of total covered business, but that no separate analysis is
shown for such business from a materiality perspective.
** The PVNBP and APE per cent margin changes are calculated in Sterling.
*** The PVNBP and APE per cent margin changes are calculated in local currency.
11 Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business
at 31 December 2008 and the value of new business for the year ended 31
December 2008 to changes in key assumptions. Note that no sensitivity results
are shown for the `Rest of Africa` from a materiality perspective.
For each sensitivity illustrated all other assumptions have been left unchanged
except where they are directly affected by the revised conditions. Sensitivity
scenarios therefore include consistent changes in cash flows directly affected
by the changed assumption(s), for example future bonus participation in changed
economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder
distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modelling of
dynamic reserves is extremely complex and the effect on value is second-order.
Therefore, in performing the sensitivities, reserving bases have been kept
constant whilst only varying future experience assumptions with similar
considerations applying to required capital. However the sensitivities for
South Africa in respect of an increase/decrease of all pre-tax investment and
economic assumptions and an increase/decrease in equity and property market
values allow for the change in the time value of financial options and
guarantees that form part of the investment guarantee reserves.
The sensitivities for an increase/decrease in all pre-tax investment and
economic assumptions (with credited rates and discount rates changing
commensurately) are calculated in line with a parallel shift in risk free
reference spot rates rather than risk free reference forward rates. However,
the 1 per cent reduction is limited so that it does not lead to negative risk
free reference rates.
The equity and property sensitivities make allowance for rebalancing of asset
portfolios.
VNB sensitivities assume that the scenario arises immediately after point of
sale of the contract. Therefore no allowance is made for the ability to
re-price any contracts in the sensitivity scenarios, apart from the mortality
sensitivities for the South African business where allowance is made for
changes in the pricing basis for products with reviewable premiums.
31 December 2008 GBPm
Value of
UK in-force Value of new
MCEV business business
Central assumptions 1,671 1,393 67
Effect of:
Required capital equal to the minimum
statutory requirement 1,674 1,396 67
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,633 1,364 61
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,712 1,426 74
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,720 1,442 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,623 1,345 -
10bps contraction on corporate bond
spreads 1,671 1,393 -
25 per cent multiplicative increase in
equity and property implied
volatilities 1,671 1,393 67
25 per cent multiplicative increase in
swaption implied volatilities 1,671 1,393 67
Voluntary discontinuance rates
decreasing by 10 per cent 1,742 1,464 79
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 1,703 1,425 70
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,672 1,394 67
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,671 1,393 67
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 60
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 1,676 1,398 68
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent
confidence level which is targeted by
an internal economic capital model 1,660 1,381 66
11 Sensitivity tests continued
31 December 2008 GBPm
Value of
Nordic in-force Value of new
MCEV business business
Central assumptions 1,045 882 32
Effect of:
Required capital equal to the minimum
statutory requirement 1,045 882 32
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,016 853 31
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,076 914 33
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,092 929 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 998 835 -
10bps contraction on corporate bond
spreads 1,045 882 -
25 per cent multiplicative increase in
equity and property implied
volatilities 1,045 882 32
25 per cent multiplicative increase in
swaption implied volatilities 1,045 882 32
Voluntary discontinuance rates
decreasing by 10 per cent 1,077 914 40
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 1,081 918 35
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,048 885 33
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,045 882 32
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 31
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 1,057 894 34
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent
confidence level which is targeted by
an internal economic capital model 1,032 869 31
31 December 2008 GBPm
Value of
Europe and Latin America in-force Value of new
MCEV business business
Central assumptions 713 587 10
Effect of:
Required capital equal to the minimum
statutory requirement 716 591 10
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 674 549 5
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 755 628 16
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 728 602 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 699 574 -
10bps contraction on corporate bond
spreads 713 587 -
25 per cent multiplicative increase in
equity and property implied volatilities 713 587 10
25 per cent multiplicative increase in
swaption implied volatilities 707 581 10
Voluntary discontinuance rates
decreasing by 10 per cent 733 607 13
Maintenance expense levels decreasing by
10 per cent,
with no corresponding increase in policy
charges 741 615 13
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in policy
charges 716 590 10
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in policy
charges 713 587 10
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in policy
charges - - 7
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 715 589 10
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent
confidence level which is targeted by an
internal economic capital model 704 578 10
GBPm
31 December 2008
Value of
OMSA in-force Value of new
MCEV business business
Central assumptions 1,945 1,040 54
Effect of:
Required capital equal to the minimum
statutory requirement 1,968 1,064 56
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,920 1,014 52
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,967 1,064 55
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 2,035 1,094 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,858 990 -
10bps contraction on corporate bond
spreads 1,948 1,040 -
25 per cent multiplicative increase in
equity and property implied
volatilities 1,920 1,015 54
25 per cent multiplicative increase in
swaption implied volatilities 1,919 1,015 54
Voluntary discontinuance rates
decreasing by 10 per cent 1,975 1,071 63
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 2,020 1,115 60
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 2,007 1,102 61
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges* 1,932 1,027 54
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 48
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 1,968 1,063 56
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 1,927 1,023 53
* No impact on with-profit annuities as the mortality risk is borne by
policyholders.
31 December 2008 GBPm
Value of
United States in-force Value of new
MCEV business
business
Central assumptions (1,309) (2,150) (66)
Effect of:
Required capital equal to the minimum
statutory requirement (1,308) (2,148) (66)
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount
rates changing commensurately (1,177) (2,017) (36)
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount
rates changing commensurately (1,494) (2,335) (128)
Increasing all pre-tax investment and
economic assumptions by 3 per cent,
with credited rates and discount
rates changing commensurately (883) (1,723) 41
Decreasing all pre-tax investment and
economic assumptions by 3 per cent,
with credited rates and discount
rates changing commensurately (1,874) (2,715) (274)
Recognising the present value of an
additional 1 per cent of credit and
liquidity spreads on
corporate bonds over and above the
risk free reference rate over the
lifetime of the liabilities
with credited rates and discount
rates changing commensurately (610) (1,450) (36)
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged (1,276) (2,116) -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged (1,339) (2,180) -
10bps contraction on corporate bond
spreads (1,246) (2,087) -
25 per cent multiplicative increase
in swaption implied volatilities (1,698) (2,539) (87)
Voluntary discontinuance rates
decreasing by 10 per cent (1,217) (2,058) (62)
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges (1,289) (2,129) (63)
Mortality and morbidity assumptions
for assurances decreasing by 5 per
cent,
with no corresponding increase in
policy charges (1,298) (2,139) (64)
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges (1,329) (2,169) (66)
For value of new business,
acquisition expenses other than
commission and commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - (72)
Residual non-hedgeable risk capital
reduced to incorporate
diversification benefits between
hedgeable and non-hedgeable risks for
covered business (1,221) (2,062) (51)
Economic capital for residual
non-hedgeable risks calculated
assuming a 99.93 per cent (1,345) (2,186) (71)
confidence level which is
targeted by an internal economic capital model
11 Sensitivity tests continued
The 2007 tables are as follows:
31 December 2007 GBPm
Value of
UK in-force Value of new
MCEV business business
Central assumptions 1,531 1,255 81
Effect of:
Required capital equal to the minimum
statutory requirement 1,536 1,260 81
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,497 1,230 75
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,566 1,282 89
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,575 1,299 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,488 1,212 -
10bps contraction on corporate bond
spreads 1,531 1,255 -
25 per cent multiplicative increase in
equity and property implied
volatilities 1,531 1,255 81
25 per cent multiplicative increase in
swaption implied volatilities 1,531 1,255 81
Voluntary discontinuance rates
decreasing by 10 per cent 1,587 1,311 96
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 1,556 1,280 84
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,532 1,256 82
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,531 1,255 81
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 72
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 1,543 1,267 84
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 1,510 1,234 77
31 December 2007 GBPm
Value of
Nordic Value of new
in-force
MCEV business
business
Central assumptions 1,114 992 23
Effect of:
Required capital equal to the minimum
statutory requirement 1,110 988 23
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,092 970 22
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 1,137 1,016 24
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,183 1,061 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 1,045 923 -
10bps contraction on corporate bond
spreads 1,114 992 -
25 per cent multiplicative increase in
equity and property implied
volatilities 1,114 992 23
25 per cent multiplicative increase in
swaption implied volatilities 1,114 992 23
Voluntary discontinuance rates
decreasing by 10 per cent 1,142 1,020 29
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 1,145 1,023 25
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,116 994 23
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges 1,114 992 23
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 22
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 1,131 1,009 24
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 1,100 978 22
31 December 2007 GBPm
Value of
Europe and Latin America in-force Value of new
MCEV business business
Central assumptions 572 522 38
Effect of:
Required capital equal to the minimum
statutory requirement 571 521 38
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 546 497 33
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 598 547 43
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 588 538 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 556 507 -
10bps contraction on corporate bond
spreads 572 522 -
25 per cent multiplicative increase in
equity and property implied volatilities 572 522 38
25 per cent multiplicative increase in
swaption implied volatilities 571 521 38
Voluntary discontinuance rates
decreasing by 10 per cent 591 541 41
Maintenance expense levels decreasing by
10 per cent, 588 538 41
with no corresponding increase in policy
charges
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in policy
charges 574 524 38
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in policy
charges 572 522 38
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in policy
charges - - 36
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 576 526 38
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 562 512 37
31 December 2007 GBPm
Value of
OMSA in-force Value of new
MCEV business business
Central assumptions 2,546 1,154 50
Effect of:
Required capital equal to the minimum
statutory requirement 2,575 1,182 52
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 2,522 1,127 48
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 2,568 1,178 50
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 2,693 1,210 -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and
economic assumptions unchanged 2,398 1,096 -
10bps contraction on corporate bond
spreads 2,549 1,154 -
25 per cent multiplicative increase in
equity and property implied
volatilities 2,526 1,134 50
25 per cent multiplicative increase in
swaption implied volatilities 2,540 1,147 50
Voluntary discontinuance rates
decreasing by 10 per cent 2,577 1,185 57
Maintenance expense levels decreasing
by 10 per cent,
with no corresponding increase in
policy charges 2,625 1,233 55
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in
policy charges 2,600 1,208 57
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in
policy charges* 2,537 1,145 49
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in
policy charges - - 44
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 2,567 1,175 51
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 2,530 1,138 48
* No impact on with-profit annuities as the mortality risk is borne by
policyholders.
31 December 2007 GBPm
Value of
United States in-force Value of new
MCEV business business
Central assumptions 462 (43) 31
Effect of:
Required capital equal to the minimum
statutory requirement 485 (20) 37
Increasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 253 (252) 52
Decreasing all pre-tax investment and
economic assumptions by 1 per cent,
with credited rates and discount rates
changing commensurately 580 75 2
Recognising the present value of an
additional 1 per cent of credit and
liquidity spreads on corporate
754 (22) 52
bonds over and above the risk free
reference rate over the lifetime of the
liabilities
with credited rates and discount rates
changing commensurately 754 (22) 52
Equity and property market value
increasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 463 (42) -
Equity and property market value
decreasing by 10 per cent,
with all pre-tax investment and economic
assumptions unchanged 461 (44) -
10bps contraction on corporate bond
spreads 494 (11) -
25 per cent multiplicative increase in
swaption implied volatilities 406 (99) (17)
Voluntary discontinuance rates
decreasing by 10 per cent 536 31 56
Maintenance expense levels decreasing by
10 per cent,
with no corresponding increase in policy
charges 465 (40) 35
Mortality and morbidity assumptions for
assurances decreasing by 5 per cent,
with no corresponding increase in policy
charges 464 (41) 32
Mortality assumption for annuities
decreasing by 5 per cent,
with no corresponding increase in policy
charges 447 (58) 23
For value of new business, acquisition
expenses other than commission and
commission related
expenses increasing by 10 per cent,
with no corresponding increase in policy
charges - - 25
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable
and non-hedgeable risks for covered
business 493 (12) 41
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93 per cent confidence
level which is targeted by an internal
economic capital model 449 (56) 27
12 Key changes in MCEV methodology and assumptions
Notes 2 and 3 describe the methodology and assumptions used under the MCEV
reporting framework.
The major change in Old Mutual`s overall approach for deriving its MCEV
compared to the approach adopted for EEV is the allowance for risk. Under MCEV
a bottom-up allowance is made for financial risks (in particular asset and
liability cash flows are valued using risk discount rates consistent with those
applied to similar cash flows in the capital markets and financial options and
guarantees are valued using market consistent models calibrated to observable
market prices) and an explicit allowance is made for the cost of residual non-
hedgeable risks in the covered business. In contrast, under EEV a top-down
allowance was made for all risks by means of the risk margin included in the
single risk discount rate applicable for each geography and the value placed on
the time value of financial options and guarantees. The MCEV methodology
therefore makes a more granular allowance for the differences in the risk
profile of different blocks of business than the EEV methodology.
A summary of the key changes arising in the move from the EEV to MCEV reporting
framework previously adopted is set out in the table below.
EEV
Overall allowance Risk discount rates are calibrated to produce EEV
for risk results which are equal to an Embedded Value that is
approximated using bottom-up market consistent
techniques that were considered acceptable market
practice at the time of implementation of the EEV
Principles in May 2005.
Economic Investment return assumptions are set with reference
assumptions to real-world assumptions, which include allowance for
expected risk premiums on assets such as equities and
corporate bonds, without directly adjusting for the risk
inherent in these returns. A margin is added to the
discount rate to reflect the risks within the business.
Treatment of Any decrease/increase in credit spreads has a limited
unrealised impact on Embedded Value as only the assets backing
corporate bond the adjusted net worth, which in the past were largely
gains/losses for US cash assets, are marked to market. For example, an
business increase in credit spreads would be modelled as
follows:
- On existing assets the only losses capitalised
would be on realised losses on projected sale
of assets.
- For new bond purchases credit is taken for
the increased spread which is recognised as
higher expected future income within VIF,
offsetting some of the losses on the sale of
existing assets.
Valuation of time Not all stochastic models are required to be market
value of financial consistent with real world stochastic models being used
options and in the US.
guarantees
Cost of capital vs. EEV includes allowance for the `cost of required
frictional costs capital`.
Cost of residual No explicit allowance is made for such risks, although
non-hedgeable risks an implicit allowance is permitted in the risk discount
rate for each geography.
PVNBP Under EEV the PVNBP is calculated by discounting the
projected premiums using single risk discount rate
applicable in each geography.
Presentation of The EEV Principles do not prescribe the format of the
earnings presentation of earnings. The expected existing
business contribution is calculated as the sum of the
unwind of the VIF at the risk discount rate and the
expected real world returns on the adjusted net worth.
Sensitivities EEV Principles prescribe less mandatory sensitivities
than the MCEV Principles.
Adjusted Group The treatment of all business other than the covered
MCEV business is the same as in the primary financial
statements.
MCEV
Overall allowance The aggregate allowance for risk across all businesses
for risk under EEV is not aligned with the requirements under
the new MCEV Principles.
Economic Both investment return and discount rate assumptions
assumptions are set in relation to risk free reference rates, defined
as swap yields. As a result of current dislocated
markets, adjusted risk free reference rates for US
onshore business include a liquidity adjustment at 31
December 2008 to reflect the large liquidity premium
inherent in corporate bond spreads at that date. No up-
front value is placed on any risk premiums in excess of
the adjusted risk free reference rates. Such risk
premiums are only recognised in MCEV reporting as
and when they are earned.
Treatment of All assets are marked to market. Since investment
unrealised return assumptions are set with reference to swap
corporate bond rates, any increase in credit spreads will have a direct
gains/losses for US impact on the Embedded Value to the extent that such
business losses can not be passed onto policyholders through
changes in future bonus / crediting rates (where these
are set subject to contractual guarantees and taking
into account competitive considerations and
consequent lapse activity) over the remaining lifetime of
the in-force policies.
Valuation of time MCEV reporting requires the use of market consistent
value of financial stochastic models with volatility assumptions being set
options and with reference to market implied volatilities, as derived
guarantees from derivative quotes in the capital markets for the
relevant term and instrument type.
Cost of capital vs. MCEV explicitly allows for frictional costs, defined as
frictional costs the tax and investment expenses associated with
required capital.
Cost of residual Explicit allowance is made for the cost of these risks
non-hedgeable risks which represents a charge for the uncertainty arising in
the best estimate of shareholder cash flows resulting
from such residual non-hedgeable risks.
OLD MUTUAL plc PRELIMI
PVNBP Discounting uses term dependent risk free reference
rates. As risk discount rates used under EEV are on
average greater than the risk free reference rates used
under MCEV, MCEV provides an increase in PVNBP
and a corresponding decrease in PVNBP margins
(assuming all other things including VNB being equal).
Presentation of MCEV Principles prescribe the formats for the
earnings presentations of analyses of MCEV earnings and
Group MCEV earnings. The following material changes
in the presentation of the analyses of MCEV earnings
have been adopted:
- MCEV calculates the expected existing business
contribution by projecting both actual assets and
actual liabilities (including assets backing the free
surplus and required capital) from the start of the
reporting period to the end of the reporting period
using expected real-world earned rates of return
for the 1-year period.
- Contrary to previous EEV treatment, the impact
of changes in local regulations and taxation are
excluded from operating MCEV earnings.
- Changes and improvement to models and
methodology are reflected as other operating
variances rather than being included as part of
operating assumption changes.
Sensitivities Apart from the mandatory sensitivities, a number of
additional sensitivities are disclosed in order for users
of the supplementary information to better understand
the impact of adopting MCEV.
Adjusted Group Adjusted Group MCEV includes the impact of marking
MCEV all Group debt to market value, the market value of the
Group`s listed banking and general insurance
subsidiaries as well as marking the value of deferred
consideration due in respect of the Black Economic
Empowerment arrangements in South Africa (`the BEE
schemes`) to market.
13 Restatement of adjusted Group Embedded Value per share
The table below provides a restatement of the adjusted Group Embedded Value per
share as at 31 December 2007 from an EEV to MCEV basis.
At
31 December
2007
Previously published adjusted Group EEV per share 173.3p
Change in Embedded Value of covered business as a consequence
of the move to MCEV -9.4p
Marking the present value of future BEE scheme deferred
consideration to market +0.2p
Adjustment to bring external debt to market value +2.2p
Total impact -7.0p
Adjusted Group MCEV per share 166.3p
Percentage impact -4.2%
The change in the adjusted Group Embedded Value per share from 173.3p on an EEV
basis to 166.3p on an MCEV basis is driven mainly by the change in the Embedded
Value of the covered business which is analysed in detail in note 15.
14 Restatement of adjusted Group MCEV operating earnings per share
The table below provides a restatement of the adjusted Group operating earnings
per share for the year ended 31 December 2007 from an EEV to MCEV basis.
Year ended
31 December
2007
Previously published adjusted Group EEV operating earnings per
share 17.2p
Change in operating earnings of covered business as a
consequence of the move to MCEV -0.2p
Adjusted Group MCEV operating earnings per share 17.0p
Percentage impact -1.2%
The conversion from EEV to MCEV reporting has no impact on the operating
earnings of our non-life business and hence the small change in the adjusted
Group operating earnings per share from 17.2p on an EEV basis to 17.0p on an
MCEV basis is driven entirely by the change in the operating earnings of the
covered business which is analysed in more detail in note 18.
15 Restatement of Embedded Value of covered business
The tables below reconcile the Embedded Value of the covered business as at 31
December 2007 and 31 December 2006 from the previously published EEV basis to
the MCEV basis. The transition from the top-down real-world EEV approach to the
bottom-up MCEV approach can be broken down into the following key steps:
a. Release of cost of required capital in published EEV - The cost of required
capital under the previous EEV approach is released and this component of
EEV is replaced by frictional costs (see step c) under the MCEV approach.
This step increases the Embedded Value.
b. Economic assumption changes incorporate a combination of the following:
Any risk margins in the single weighted average EEV discount rate for each of
the geographies are removed and the EEV discount rates are replaced by term
dependent risk free reference rates. This step increases the Embedded Value for
profitable business as expected future profits are discounted at lower rates,
and gives rise to a greater Embedded Value loss for loss making business, as a
result of discounting losses at lower rates.
Any risk margins in real-world EEV investment return assumptions are removed
and the real-world EEV investment return assumptions are replaced by term
dependent risk free reference rates and thereby removing any capitalisation of
investment risk margins. This step decreases the Embedded Value as expected
future investment returns are projected at lower rates.
Other related model refinements including updating all stochastic models to
be market consistent. For the United States business such model refinements
also include a revision of assumptions for dynamic policyholder behaviour
within the stochastic models to allow for lower average returns from
risk-neutral market consistent scenarios compared to the scenarios in the
real-world stochastic model that was used under EEV.
c. Allowance for frictional costs - As mentioned in step (a) above, the cost of
required capital under the previous EEV approach is released and replaced by
an allowance for frictional costs under the MCEV approach. This step
decreases the Embedded Value.
d. Explicit allowance for cost of residual non-hedgeable risks - Previously
under the EEV approach an implicit allowance was permitted for such risks in
the determination of the risk discount rate for each geography. This step
decreases the Embedded Value.
In-force covered business
Total UK Nordic ELAM
Previously published EEV 6,861 1,451 1,084 580
Release of cost of required capital in
published EEV 377 50 27 30
Economic assumption changes (433) 80 69 13
Allowance for frictional costs (192) (10) (9) (10)
Allowance for cost of residual
non-hedgeable risks (264) (40) (57) (41)
Total impact (512) 80 30 (8)
MCEV 6,349 1,531 1,114 572
Percentage impact -7.5% +5.5% +2.8% -1.4%
GBPm
At
31 December
In-force covered business 2007
Rest of United
OMSA Africa States
Previously published EEV 2,549 128 1,069
Release of cost of required capital in
published EEV 175 4 91
Economic assumption changes 12 (1) (607)
Allowance for frictional costs (122) (2) (38)
Allowance for cost of residual
non-hedgeable risks (68) (5) (53)
Total impact (3) (4) (607)
MCEV 2,546 124 462
Percentage impact -0.1% -3.1% -56.8%
In-force covered business
Total* UK * Nordic * ELAM *
Previously published EEV 6,413 1,255 846 600
Release of cost of required
capital in published EEV 393 69 23 49
Economic assumption changes (225) 50 56 (8)
Allowance for frictional costs (186) (14) (8) (9)
Allowance for cost of residual
non-hedgeable risks (250) (35) (54) (47)
Total impact (268) 70 17 (15)
MCEV 6,145 1,325 863 585
Percentage impact -4.2% +5.6% +2.0% -2.5%
GBPm
At
31 December
In-force covered business 2006
Rest of United
OMSA Africa States*
Previously published EEV 2,433 135 1,144
Release of cost of required capital in
published EEV 179 4 69
Economic assumption changes - 2 (325)
Allowance for frictional costs (129) (2) (24)
Allowance for cost of residual non-hedgeable
risks (70) (5) (39)
Total impact (20) (1) (319)
MCEV 2,413 134 825
Percentage impact -0.8% -0.7% -27.9%
* Gross of minority interests
The impact as at 31 December 2007 of moving from an EEV to an MCEV methodology
is a reduction in Embedded Value of the covered business of 7.5 per cent (31
December 2006: 4.2 per cent) from GBP6,861 million to GBP6,349 million (31
December 2006: from GBP6,413 million to GBP6,145 million). Most of the
reduction in Embedded Value is attributable to the United States business which
decreased by -56.8 per cent at 31 December 2007 (31 December 2006: -27.9 per
cent) from GBP1,069 million to GBP462 million (31 December 2006: from GBP1,144
million to GBP825 million).
The frictional costs calculated under MCEV are significantly less than the cost
of required capital under EEV which reflects the difference between the risk
discount rate in each geography, inclusive of an explicit risk margin, and the
expected post-tax investment return on the assets backing the required capital.
Under MCEV risks are modelled explicitly and the risk margin in each geography
is not required.
The impact of the transition from EEV to MCEV also varies by product type.
Under EEV a weighted average risk discount rate was applied to all products
within a specific geography whereas under MCEV separate explicit allowances are
made for financial and non-financial risks for each product.
Risk products, for example term assurance, generally increase in value under
MCEV compared to EEV. Product profitability is mainly driven by non-financial
pricing margins which are discounted at lower risk free reference rates under
MCEV.
The impact on savings products, for example unit-linked policies, is broadly
neutral as the reduced assumed future investment returns which are set in
relation to risk free reference rates are largely offset by the increase in
value due to the lower discount rates (which are also set in relation to risk
free reference rates) that are applied to future cash flows.
Products with a high proportion of financial risk, for example spread-based
contracts such as immediate annuities where profitability relies on achieving a
return in excess of the risk free reference rates to support the pricing bases,
tend to reduce in value under MCEV. No risk premiums in excess of the risk free
reference rates are recognised under MCEV until realised in a particular year,
when it emerges as a combination of expected existing business contribution and
economic variance in that year.
In contrast EEV recognises the capitalised expected profits from taking on
financial risk, i.e. capitalises returns on more risky assets, without
necessarily making appropriate adjustments at a per product level for the fact
that the returns under these assets have a greater degree of inherent risk.
Further commentary on the impact of moving from an EEV to an MCEV methodology
for each geography, in particular for United States business, is provided
below.
15 Restatement of Embedded Value of covered business continued
Europe and Africa
Within the European and African businesses, the aggregate allowance for risk
within the EEV and MCEV approaches is broadly aligned and hence relatively
minor impacts are experienced on these businesses when moving from an EEV to an
MCEV approach for valuing the covered business.
United States
The aggregate allowance for risk under EEV was not aligned with the
requirements under the new MCEV Principles and the major contributors are
discussed below.
Treatment of unrealised corporate bond losses
- Under EEV any increase in credit spreads has a limited impact on Embedded
Value as only the assets backing the adjusted net worth, which in the past were
largely cash assets, are marked to market. This methodology is largely driven
by the book-value accounting basis used for statutory reporting in the United
States. Therefore on existing assets the only losses capitalised following an
increase in credit spreads would be on realised losses on projected sale of
assets. The EEV is only reduced to the extent that the losses realised in the
projections are not passed on to policyholders by reducing future crediting /
bonus rates (subject to contractual guarantees and competitive considerations
that impact on policyholder persistency behaviour) over the remaining lifetime
of the in-force policies. For new bond purchases credit is taken from the
increased spread which is recognised as higher expected future income within
VIF, offsetting some of the losses on existing assets.
- However under MCEV all assets are marked to market and any increase in credit
spreads will be fully recognised in the value of the asset portfolio. Since
investment return assumptions are set with reference to swap rates under MCEV,
in the modelling of future liability cash flows such losses can not necessarily
be passed onto policyholders through changes in future crediting (bonus) rates,
which are subject to contractual guarantees and constrained by competitive
considerations, over the remaining lifetime of the in-force policies.
Pricing basis vs. MCEV basis
- Many of the United States Life products are priced on the basis that a part
of the spread between risk free or swap rates and corporate bonds will be
passed onto policyholders in the form of better crediting (bonus) rates. The
spread of corporate bond yields over risk free rates is assumed to consist of
both a credit default component and a non-credit component. The credit default
component compensates the holder of the instrument for the risk that the issuer
may default. The non-credit related component, generally referred to as the
liquidity premium, compensates the holder of the instrument for the fact that
they may not be able to trade out of the instrument at their choosing.
- For many of the products sold by the US business, profitability therefore
depends on the spread, over risk free rates, earned on corporate bond assets.
For such spread-based business, there is no recognition in the MCEV at 31
December 2007 or 31 December 2006 of any liquidity or credit risk premiums in
excess of risk free reference rates until such profits have been realised. The
earnings from corporate bond spreads in excess of the risk free reference
rates, which had previously been capitalised at point of sale under EEV, are
now only recognised as an additional source of earnings in each future time
period as the margin over risk free reference rates is earned. Hence the timing
of recognition of profits under EEV and MCEV for such business is materially
different.
- A similar issue occurs with the deferred tax assets currently held. As
earnings are expected to emerge over time, it is anticipated that these assets
could be utilised to offset future tax liabilities. However since in the
current economic environment taxable profits are not projected in aggregate on
an MCEV basis, these deferred tax assets are not recognised in the MCEV. Hence
it is expected that the benefit of this asset will emerge over future periods
as returns in excess of risk free reference rates are earned.
- It is important to appreciate that the change in reporting basis does not
change the underlying profitability of spread- based business, but merely the
representation of profitability, particularly early in the life of such
contracts.
Financial guarantees
- To expand further on why the impact of the move to MCEV reporting is so
marked on spread-based business, crediting (bonus) rates are generally set with
anticipation of earning some risk premiums over and above the risk free
reference rates. However this non-recognition of projected investment risk
premiums under MCEV reporting can not necessarily be offset by reduced
policyholder crediting rates as, once these crediting rates are locked in or
guaranteed over a future period, they must be valued at that level. For
example, for annuities in payment claim payments are locked in for the duration
of the contract at a level which was priced taking into account the expected
future corporate bond spreads to be earned. Hence an initial loss will be shown
under MCEV as the annuity payments are larger than can be supported by risk
free reference returns on the asset portfolio on a prospective basis, and the
Embedded Value valuation assumes that none of these future margins are earned.
- For other spread-based products (such as fixed indexed annuities where there
is an accumulation phase), the loss of capitalised risk premiums upfront can be
partially offset to the extent that crediting (bonus) rates are not fixed for
the full term of the contract and that management can adjust future crediting
rates relative to modelled investment returns - generally aiming to target a
margin to cover profit and expenses. However future investment returns based on
risk free reference rates are much lower than expected real-world returns,
which means that any underlying guarantees in the policies (including any
crediting rates that have been declared prospectively until the next reset
date) are more likely to take effect in risk-neutral market consistent
stochastic scenarios. There may thus be a shortfall of projected profits
relative to profits that are expected to emerge on a real world pricing basis,
which we refer to as `spread compression`.
Additionally some of the deferred annuities still have crediting rates locked
in for several years (e.g. Multi-Year Guaranteed Annuities).
- Market volatility assumptions that are used to calculate the time value of
financial options and guarantees under MCEV are higher than the long-term
expected volatilities assumed under EEV. This has increased the time value of
financial options and guarantees under MCEV.
Discounting of projected MCEV losses
- Under MCEV reporting the discount rate is set in relation to risk free
reference rates which are lower than the risk discount rates used under EEV
reporting. In the instance where low risk free projected investment returns
under MCEV lead to lower investment income, but overall still reflect
profitable products, the discounting effect of using a lower rate tends to
offset the removal of the risk premium in investment returns. However in
instances where low risk free projected investment returns under MCEV lead to a
projected loss on the business, the resulting losses are also discounted at a
lower rate, which has the effect of increasing the present value of the
projected future losses.
- As a consequence, MCEV results at a time of very low risk free reference
rates of return need to be carefully
considered:
An increase in risk free yields can rapidly turn a market consistent VIF that is
negative into a positive VIF if the risk free reference rate starts at a level
below guaranteed crediting (bonus) rates and increases to one which leads to a
surplus in investment income relative to crediting rates.
In the event that an increase in risk free reference rates does not fully cover
the required guaranteed crediting rate, the resulting loss will still be
smaller than the starting point, and the effect of discounting this at a higher
rate could be that the VIF loss reduces substantially.
There is hence a severely `non-linear` outcome when risk free reference rates
are close to guaranteed crediting rates, with small changes in risk free rates
(up or down) leading to large changes in VIF.
Considering the above, the more pronounced impact of the move from EEV to MCEV
reporting at 31 December 2007 of -7.5 per cent compared to the impact at 31
December 2006 of -4.2 per cent results mainly from the following changes in
economic conditions:
A widening of corporate bond spreads and reductions in market values of such
assets - marking all assets to market value means that unrealised capital
losses are no longer expected to remain largely unrealised even if portfolio
cash flow matching means that those assets are held to maturity. Or
practically, it is assumed that at 31 December 2007 a larger portion of
corporate bond assets will default before maturity than assumed at 31 December
2006.
Reductions in risk free reference rates and as a consequence all guarantees
being in the money to a greater extent.
An increase in implied market volatilities which are used to assess the time
value of financial options and guarantees, relative to the real-world approach
of using historic volatilities that was previously adopted under EEV.
In conclusion, compared to EEV reporting, MCEV reporting merely changes the
timing of recognition of profits and not the ultimate profitability that will
emerge on covered business. Over time it is therefore expected that risk
premiums in excess of risk free reference rates will be realised and will
contribute to MCEV earnings.
16 Comparison of components of Embedded Value on EEV and MCEV bases
The tables below provide a comparison of the components of Embedded Value of
the covered business as at 31 December 2007 and 31 December 2006 between the
previously published EEV basis and the MCEV basis. The change in MCEV to a
bottom-up evaluation of the risks inherent in the business requires a change in
the presentation of the components underlying the MCEV.
In-force covered business
Total UK Nordic ELAM
Previously published EEV 6,861 1,451 1,084 580
Adjusted net worth 2,423 276 122 50
Free surplus 516 89 47 (12)
Required capital 1,907 187 75 62
Value of in-force business 4,438 1,175 962 530
Present value of future profits 4,864 1,225 989 561
Additional time value of financial
options and guarantees (49) - - (1)
Cost of required capital (377) (50) (27) (30)
MCEV 6,349 1,531 1,114 572
Adjusted net worth 2,421 276 122 50
Free surplus* 515 89 47 (11)
Required capital 1,906 187 75 61
Value of in-force business 3,928 1,255 992 522
Present value of future profits 4,584 1,305 1,059 574
Additional time value of financial
options and guarantees (199) - - (1)
Frictional costs (193) (10) (10) (10)
Cost of residual non-hedgeable risks (264) (40) (57) (41)
GBPm
In-force covered business At
31 December
2007
OMSA* Rest of United
Africa States
Previously published EEV 2,549 128 1,069
Adjusted net worth 1,394 76 505
Free surplus 268 43 81
Required capital 1,126 33 424
Value of in-force business 1,155 52 564
Present value of future profits 1,330 56 703
Additional time value of financial
options and guarantees - - (48)
Cost of required capital (175) (4) (91)
MCEV 2,546 124 462
Adjusted net worth 1,392 76 505
Free surplus* 266 43 81
Required capital 1,126 33 424
Value of in-force business 1,154 48 (43)
Present value of future profits 1,344 55 246
Additional time value of financial
options and guarantees - - (198)
Frictional costs (122) (2) (38)
Cost of residual non-hedgeable risks (68) (5) (53)
* For the South African business, the value of the asset related to the
deferred CGT liability recognised in the adjusted net worth was recalculated on
a market consistent basis.
In-force covered business
Total UK* Nordic* ELAM*
Previously published EEV 6,413 1,255 846 600
Adjusted net worth 2,104 235 (108) 115
Free surplus 202 73 (154) 59
Required capital 1,902 162 46 56
Value of in-force business 4,309 1,020 954 485
Present value of future profits 4,782 1,089 1,004 538
Additional time value of financial
options and guarantees (51) - - (4)
Cost of required capital (421) (69) (50) (49)
MCEV 6,145 1,325 863 585
Adjusted net worth 2,102 235 (108) 115
Free surplus** 199 73 (154) 59
Required capital 1,903 162 46 56
Value of in-force business 4,043 1,090 971 470
Present value of future profits 4,644 1,139 1,033 531
Additional time value of financial
options and guarantees (165) - - (5)
Frictional costs (186) (14) (8) (9)
Cost of residual non-hedgeable risks (250) (35) (54) (47)
In-force covered business GBPm
At
31 December
2006
OMSA** Rest of United
Africa States
Previously published EEV 2,433 135 1,144
Adjusted net worth 1,326 82 454
Free surplus 115 45 64
Required capital 1,212 37 390
Value of in-force business 1,107 53 690
Present value of future profits 1,286 57 806
Additional time value of financial
options and guarantees - - (47)
Cost of required capital (179) (4) (69)
MCEV 2,413 134 825
Adjusted net worth 1,324 82 454
Free surplus** 112 45 64
Required capital 1,212 37 390
Value of in-force business 1,089 52 371
Present value of future profits 1,333 60 548
Additional time value of financial
options and guarantees (45) (1) (114)
Frictional costs (129) (2) (24)
Cost of residual non-hedgeable risks (70) (5) (39)
* Gross of minority interests.
** For the South African business, the value of the asset related to the
deferred CGT liability recognised in the adjusted net worth was recalculated on
a market consistent basis.
17 Restatement of value of new business (after tax) of covered business
The table below reconciles the value of new business and new business margins
for the year ended 31 December 2007 from the previously published EEV basis to
the MCEV basis. The same steps have been applied in the reconciliations as for
the total in-force covered business as set out in note 16.
Value of new business
Total UK Nordic ELAM
Previously published VNB under EEV
basis 266 76 19 38
Release of cost of required capital
in published EEV basis 32 2 2 3
Economic assumption changes (9) 10 7 2
Allowance for frictional costs (20) 0 (1) (2)
Allowance for cost of residual
non-hedgeable risks (39) (7) (4) (3)
Total impact (36) 5 4 1
VNB on MCEV basis 230 81 23 38
Percentage impact -13.6% 6.6% 21.1% 2.7%
EEV PVNBP 13,878 6,297 643 1,465
EEV APE 1,760 740 147 190
EEV PVNBP margin 1.9% 1.2% 2.9% 2.5%
EEV APE margin 15% 10% 13% 20%
MCEV PVNBP 14,046 6,311 690 1,494
MCEV APE 1,748 740 147 190
MCEV PVNBP margin 1.7% 1.3% 3.3% 2.6%
MCEV APE margin 13% 11% 16% 20%
GBPm
Year ended
31 December
Value of new business 2007
OMSA* Rest of Africa United States
Previously published VNB under
EEV basis 53 8 72
Release of cost of required
capital in published EEV basis 11 0 14
Economic assumption changes - - (28)
Allowance for frictional costs (8) 0 (9)
Allowance for cost of residual
non-hedgeable risks (6) (1) (18)
Total impact (4) (1) (41)
VNB on MCEV basis 50 7 31
Percentage impact -6.7% -10.4% -56.9%
EEV PVNBP 2,224 99 3,150
EEV APE 333 15 335
EEV PVNBP margin 2.4% 7.9% 2.3%
EEV APE margin 16% 51% 21%
MCEV PVNBP 2,268 98 3,185
MCEV APE 321 15 335
MCEV PVNBP margin 2.2% 7.1% 1.0%
MCEV APE margin 15% 47% 9%
* Note that OMSA healthcare administration business was included in the EEV
basis, but is excluded on an MCEV basis.
The impact on VNB of the covered business written in 2007 due to moving from an
EEV to MCEV basis is a decrease of 13.6 per cent from GBP266 million to GBP230
million. Most of the reduction is attributable to the United States business
where VNB decreased by 56.9 per cent from GBP72 million to GBP31 million.
The EEV risk discount rate for each geography was calibrated for total in-force
business and hence the EEV methodology did not make allowance for different
levels of risk for different portfolios of asset and liability risks. The MCEV
methodology makes a more granular allowance for the differences in the risk
profile of different product lines and different generations of policies. The
relative impacts on VNB of each of the steps outlined above therefore differ
from the impacts on VIF as outlined in note 16 because the risk profiles of new
business are different to the risk profiles of in-force business.
Also note that in calculating PVNBP, the projected premiums are discounted with
risk free reference rates under MCEV rather the higher risk discount rate which
is applicable in each geography under the previous EEV methodology. PVNBP under
MCEV reporting is therefore greater than under EEV reporting with a
corresponding decrease in PVNBP margins (assuming all other things including
VNB being equal).
18 Restatement of Return on Embedded Value of covered business
Return on Embedded Value (RoEV) for covered business is calculated as the
operating earnings after tax divided by opening Embedded Value in local
currency. The table below provides summaries of the drivers in the change of
RoEV for the year ended 2007 from the previously published EEV basis to the
MCEV basis. For this purpose the impact on RoEV of the recalibration of risk
margins under EEV has been treated as an assumption change.
No results are shown for the `Rest of Africa` from a materiality perspective.
In-force covered business
UK Nordic ELAM
Previously published RoEV% on an EEV basis 17.2% 4.6% 6.1%
MCEV RoEV% 15.5% 7.6% 1.5%
Difference -1.7% 3.1% -4.6%
Drivers of change for the covered business:
New business value 0.0% 0.4% 0.4%
Expected existing business contribution 0.5% -0.9% -0.3%
Experience variances 0.5% 1.2% 0.3%
Assumption changes -2.7% 2.4% -5.2%
Other operating variances* 0.0% 0.0% 0.2%
Year ended
31 December
In-force covered business 2007
United
OMSA States
Previously published RoEV% on an EEV basis 11.2% 3.8%
MCEV RoEV% 11.7% 4.1%
Difference 0.5% 0.3%
Drivers of change for the covered business:
New business value -0.2% -2.5%
Expected existing business contribution 1.2% 0.6%
Experience variances -0.6% -1.5%
Assumption changes -0.3% -5.2%
Other operating variances* 0.4% 8.9%
* Changes and improvement to models and methodology are reflected as other
operating variances under MCEV rather than being included as part of assumption
changes as treated under EEV.
The impact on VNB as a result of moving from an EEV to MCEV basis has been
outlined in note 18. Other key drivers of the change in RoEV for each geography
are discussed below.
UK and ELAM
As mentioned earlier in note 13, contrary to previous EEV treatment, the impact
of changes in taxation under MCEV is excluded from operating earnings. Such
reallocation of tax changes to non-operating variances is the major reason for
the significantly reduced contribution of assumption changes.
Nordic
The contribution from assumptions changes is impacted positively by treating
the negative impact of the recalibration of risk margins under EEV as an
assumption change. In addition the impact from the introduction of
annuitisation of the corporate business is higher under MCEV than under EEV
since the MCEV effects are discounted at risk free reference rates rather than
the higher risk discount rate under EEV.
South Africa
The major reasons for the change in RoEV from an EEV to MCEV basis is the
significantly higher expected existing business contribution.
As mentioned earlier in note 4, the expected existing business contribution
under MCEV is now derived with reference to the one-year forward risk free
reference rate at the start of the reporting period as opposed to the 10-year
government bond yield curve. The downwards sloping swap yield curve in South
Africa therefore leads to a higher expected existing business contribution
under MCEV.
United States
The positive impact of model improvements and changes in methodology on an MCEV
basis has been re-classified from assumption changes to other operating
variances.
Going forward, rates of return on Embedded Value for the US should be higher
than under EEV as the opening MCEV is starting from a much lower base value
compared to EEV and, other things being equal, higher actual operating earnings
will emerge than projected under MCEV at the valuation date as corporate bond
credit spreads are realised and margins (such as the cost of residual
non-hedgeable risks) are released.
Shareholder information
Listings and shares in issue
The Company`s shares are listed on the London, Malawi, Namibian and Zimbabwe
Stock Exchanges and on the JSE Limited (JSE). The primary listing is on the
London Stock Exchange and the other listings are all secondary listings. The
Company`s secondary listing on the Stockholm Stock Exchange ended on 7
September 2007, but the Company`s shares may still be traded on the Xternal
list of the Nordic Exchange in Stockholm. The ISIN number of the Company`s
shares is GB0007389926.
At 31 December 2008, the Company had 5,516,141,360 ordinary shares of 10p each
in issue (31 December 2007: 5,510,272,537).
239,434,888 shares were held by the Company in treasury, at 31 December 2008
(31 December 2007: 97,074,907)
Websites
Further information on the Company can be found on the following websites:
www.oldmutual.com
www.oldmutual.co.za
4 March 2009
Sponsor
Merrill Lynch South Africa (Pty) Limited
Date: 04/03/2009 09:24:18 Produced by the JSE SENS Department.
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