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OLOML
OML - Old Mutual plc - Old Mutual plc Interim Results for the six months ended
30 June 2009
OLD MUTUAL plc
Issuer code: OLOML
JSE Share code: OML
NSX share code: OLM
ISIN: GB0007389926
Old Mutual plc Interim Results for the six months ended 30 June 2009
GBPm
Financial Summary H1 2009 H1 2008
Adjusted operating profit before tax (IFRS basis)* GBP538m GBP773m
Adjusted operating earnings per share (IFRS basis)** 5.4p 7.7p
Adjusted operating Group MCEV earnings before tax GBP755m GBP902m
Adjusted operating Group MCEV earnings per share 8.9p 10.1p
Adjusted Group MCEV per share 143.8p 140.3p
Profit before tax (IFRS) GBP160m GBP853m
Basic earnings per share (IFRS) (1.8p) 11.2p
Financial Highlights - A creditable performance in difficult markets
* Positive Group net client cash flows of GBP0.2 billion despite lower sales
* OMSA long-term business adjusted operating profit of R1.82 billion (2008:
R1.84 billion) demonstrates the strength of a diverse product offering
* Nordic Life sales up 22% to GBP134 million (2008: GBP110 million) due to
improved product range and stronger distribution
* UK net client inflows of GBP0.4 billion driven by growth in platform sales
* US Asset Management net client inflows of USD0.6 billion demonstrates
strength of boutique model
* Group pro-forma FGD surplus at 30 June of GBP1 billion (31 December 2008:
GBP0.7 billion).
Operational and Strategic Highlights - Good progress in delivering on
priorities
* Closed Hong Kong office, sold Australian businesses, withdrew from ABN-Amro
TEDA Chinese asset management acquisition
* Withdrawal from markets where scale not achievable: Portugal, Hungary, Czech
Republic
* Major restructuring of US Life and OMCAP, creating greater focus and lower
cost base
* New Group operating model to strengthen central governance
* Long-Term Savings structure introduced to leverage competitive advantages
and capabilities.
New Chairman Appointed
* As announced separately today, on Chris Collins` retirement at the end of
the year, Patrick O`Sullivan will join the Group as Chairman, bringing strong
financial services and corporate restructuring experience to the Board.
Julian Roberts, Group Chief Executive, commented:
"We have delivered a creditable performance despite continued volatility in
equity markets, and have taken a number of decisive actions in line with the
strategic priorities we set out in March.
"Our capital position was reinforced during the second quarter and our Group
pro-forma FGD position is now above GBP1 billion. We have substantially
derisked our US businesses and our new operating model represents a
fundamental shift to stronger governance from the centre.
"For the past 12 months, our primary focus has been on fixing our problems and
protecting ourselves against the downside. With the actions to do that largely
complete, we can start to look past the immediate market challenges and begin
to position ourselves for the upside which will come as markets recover."
Enquiries
Investor Relations
Patrick Bowes UK +44 (0)20 7002 7440
Deward Serfontein SA +27 (0)82 810 5672
Media
Matthew Gregorowski UK/SA +44 (0)20 7002 7133
+44 (0)7748 183 834
Don Hunter (Finsbury) UK +44 (0)20 7251 3801
Notes
Unless otherwise stated, wherever the terms asterisked in the Financial
Highlights are used, whether in the Financial Highlights, the Group 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 non-
controlling 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, 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 non-controlling 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 9:00am (BST),
10:00am (CET and 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 1016 30
US (toll-free) +1 877 491 0064
Sweden (toll-free) 0200 8876 51
South Africa (toll-free) 0800 9914 68
International +44 20 7162 0025
Playback (available for 14 days from 5 August), using pass-code 840789:
UK (toll-free) 0800 358 1860
US (toll-free) +1 888 365 0240
Sweden (toll-free) +46 (0) 46 8 5052 0333
International +44 20 7031 4064
Copies of these Interim 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 Interim Results
can be found on the website. This contains key financial data for 2009 and
2008.
Group Chief Executive`s Review
Overview
The Group delivered a creditable performance in light of the tough market
conditions during the period. Although equity and credit markets have now come
off their lows, their average for the period was around two-thirds of their
average level in the first half of 2008, and they have continued to be highly
volatile. This has affected customer confidence in savings and investments,
the bedrock of our business.
In this environment, our focus has been to manage effectively those areas
within our control, namely improving our capital position and operational
efficiency across our businesses, and we have made good progress in delivering
on the strategic priorities we set out in March. Our capital position
strengthened during the second quarter, with our Group pro-forma FGD surplus
at 30 June standing at GBP1 billion, and this has further improved to GBP1.1
billion at 31 July. This is sufficient to cover the overall risks that the
Group faces, and our individual business units also remain well capitalised.
Within our newly-formed Long-Term Savings ("LTS") division, we delivered good
performances in the markets where we have dominant market positions, namely
South Africa and Sweden, and across Europe we delivered strong net client cash
flows. We also achieved positive client cash flows in US Asset Management, and
have taken significant cost out of our US businesses, with US Life delivering
a small profit for the period.
We have made some fundamental changes to our operating model which will
strengthen our central governance processes and the Group Executive Committee
is now complete. Today we have also separately announced the appointment of
Patrick O`Sullivan as Chairman, who will succeed Chris Collins at the end of
the year. Patrick`s extensive industry and restructuring experience will be a
major benefit as we look to reshape the Group over time. As previously
announced, Mike Arnold will join the Board as a non-executive director on 1
September 2009.
Dividends
As outlined in our preliminary results in March, the Board will not be
declaring an ordinary dividend for the six months ended 30 June 2009. The
Board will consider the position in respect of a final ordinary dividend for
2009 at the appropriate time in light of the then prevailing market and
economic conditions and based on the Group`s capital, cash flow and earnings
with a view to maintaining cover of at least two times.
LTS - South Africa
South Africa delivered a strong performance given the rapid deterioration in
economic conditions compared to the corresponding period last year. Sales were
robust due to our brand strength and extensive Life and Unit Trust product
offering. Long-term business adjusted operating profit was flat at R1.8
billion with lower equity markets significantly affecting asset management
performance fees. Market conditions and recession-related job losses have
resulted in lower levels of both single and regular premium business, while we
have benefited from increased demand for risk protection products. Net client
cash flows were only marginally down excluding the PIC withdrawal announced in
March and in our South African asset management business (OMIGSA) we are
seeing evidence that clients are recognising the benefits of our boutique
model. Old Mutual Life Assurance Company (SA) saw a further strengthening in
its capital to a surplus of 3.9 times the required statutory level, the
highest in the South African life insurance industry.
Since the period end, we have announced the appointment of Kuseni Dlamini as
Chief Executive of Old Mutual South Africa. We are confident that under his
leadership our southern African businesses will continue to thrive. However,
the economy has been impacted by the global slowdown and is in a recession.
Accordingly, our South African businesses have a cautious outlook for the
remainder of this year.
LTS - Europe
Across Europe we delivered good positive client cash flows despite lower
overall sales. Nordic produced an especially strong performance, with client
inflows of GBP0.5 billion for the period, 12% of opening funds under
management on an annualised basis. Nordic also produced a strong sales
performance, with Life sales up 22% on an APE basis to GBP134 million, driven
largely by its enhanced product range and strengthened broker relationships in
Sweden, which have remained resilient to the deteriorating global economic
environment. Assets under management across Europe held up well in tough
market conditions, which at GBP53 billion is slightly above the position at 31
December 2008. All our Skandia businesses remain well capitalised.
Client inflows in Skandia UK were GBP0.4 billion, as we continued to
strengthen our position in the rapidly evolving platform market. As market
leader, we have taken advantage of our scale by undergoing a major repricing
exercise. While this is having an anticipated negative impact on margins in
the short term, over the longer term we expect margins to improve in line with
volume growth although this will take longer under current market conditions.
We also expect to consolidate our market-leading position further as IFAs use
fewer, larger platform providers and move in line with the requirements of the
Retail Distribution Review.
LTS - US Life
The transformation of US Life is now largely complete, including streamlining
its product range and simplifying distribution to top-tier producing agents.
We are now running the business from a significantly reduced cost base and are
targeting sales for the full year of USD700 million - USD800 million, a third
of the level in the prior year to conserve capital. While impairments on
investments in the second quarter increased, overall impairment levels for the
half-year were significantly lower than for the second half of 2008, and there
were no defaults on the corporate bond portfolio.
Bermuda
Having closed Bermuda to new business in March, we continued to improve the
hedge effectiveness of the book which was 95.5% for the half-year, a further
improvement on the first quarter position. The business reported a small
profit for the half-year and remains well capitalised. We do not currently
anticipate that it will require any further capital. Furthermore, we have soft-
closed funds that had low hedge effectiveness and strengthened governance,
providing greater oversight from the centre. We continue to look at options to
derisk this business further.
US Asset Management
Our US Asset Management business achieved positive net client inflows of
USD0.6 billion during the period, a major achievement given the outflows
experienced across the industry generally, which reflects the strength of our
multi-boutique model. Funds under management increased by 3% from the year-end
position to USD247 billion due to net positive market returns during the
second quarter. We have closed Clay Finlay, which resulted in a reduction in
FUM of USD1.5 billion, following a significant fall in its assets under
management attributed largely to the downturn in global equity markets. Since
30 June we have strengthened the client offering at Dwight Asset Management by
acquiring the cash management team of Neuberger Berman. We have already taken
considerable cost out of the business, and are restructuring Old Mutual
Capital ("OMCAP"), our retail mutual fund business, halving its retail mutual
fund range and cost base while introducing a new, more targeted distribution
strategy.
Nedbank and Mutual & Federal
In what have been challenging market conditions for South African banks,
Nedbank has remained solidly profitable although the reduced endowment from
lower interest rates, slower asset growth and increasing impairments resulted
in reduced earnings levels compared to the first half of last year. Nedbank
has continued its focus on strengthening its capital and asset base and the
South African banking system in general remains relatively stable. Nedbank`s
Tier 1 capital adequacy ratio increased from 9.6% in December 2008 to 10.0%
and the total capital adequacy ratio increased from 12.4% to 13.2%.
The first half performance of Mutual & Federal was adversely affected by a
number of large claims and a weaker underwriting performance, although this
improved during the second quarter. Its international solvency ratio improved
to 46% at 30 June 2009 from 41% at the year-end.
Strategy Update
As outlined in our preliminary results in March, following a full review of
our businesses, we identified five key priority areas aimed at creating a
stronger, leaner, more focused Group. We have already made good progress in
delivering on these priorities, while also focusing on improving operational
efficiencies across our businesses.
Maintain and strengthen our capital position
As already noted, we have continued to strengthen our regulatory capital
position. We also have cash and committed facilities of GBP0.8 billion
available at the holding company level, and our individual businesses remain
well capitalised. Further strengthening of capital and liquidity remains a key
area of focus.
Streamline the portfolio over time
As we have said consistently, reaching our optimal business structure will
take time, especially while markets do not allow for corporate activity which
is value enhancing for shareholders. Nevertheless, we have already taken a
number of decisive actions during the period and continue to evaluate further
opportunities.
We closed our Asia Pacific regional office in Hong Kong, exited Portugal, sold
our Australian businesses and withdrew from acquiring Fortis Bank`s interest
in AATEDA, a Chinese asset management joint venture. We have significantly
reduced the product range and cost base in our US Life business and closed
Bermuda to new business. We have also closed our US Asset Management boutique,
Clay Finlay, and are in the process of streamlining OMCAP.
We remain committed to exiting markets where we do not have scale and where
there is limited potential for gaining scale within a reasonable time. We have
therefore also decided to withdraw from Hungary and the Czech Republic.
Leverage scale in our long-term savings businesses
The most significant structural change was to bring Skandia, OMSA, US Life and
Asia Pacific together into a new LTS division under Paul Hanratty. This was
premised on leveraging the competitive advantages and capabilities that we
have in these businesses, principally through extracting cost efficiencies and
more effective deployment of our technology.
A new LTS structure is being implemented, based around geographic or customer-
related market segments. This will see our emerging market businesses, namely
Africa, Latin America, India and China being grouped together and our European
businesses, outside Scandinavia, being aligned according to their principal
customer profiles, namely Retail and Wealth Management.
Our open-architecture platform model, which is specifically aimed at the
Wealth
Management market where affluent clients are served by independent
distributors, gives us a strong competitive advantage. Skandia UK, ELAM`s
Wealth Management business, Skandia International, Skandia Investment Group
and our Institutional Sales business will all sit within the Wealth Management
unit. The retail market has significant growth potential and we will look to
reduce back-office administration costs in order to improve efficiency and
increase profitability as markets recover. As a consequence of these changes,
we are closing our ELAM regional office.
We are in the process of identifying specific cost savings and developing a
long-term growth strategy for LTS, and will report on these at the year-end
results in March 2010.
Drive value creation within, and between, our South African businesses
Nedbank`s priority during the first half has been on capital management rather
than growth in light of the rapid deterioration in the operating environment.
Nedbank has announced major management changes and we have also recently
appointed a new Chief Executive at OMSA. With the new management teams in
place, and given the good progress made in Nedbank in strengthening its
capital base, there will be a renewed focus on implementing closer working
practices between our South African businesses during the second half.
Nedbank has also acquired Old Mutual`s stake in the Nedlife, Fairbairn Private
Bank and BoE Private Client joint ventures. This is another example of how we
are working to simplify our organisation. Nedbank is also in negotiations with
Imperial Holdings Limited to acquire the remaining 49.9% shareholding in
Imperial Bank.
Strengthen governance, risk management and operational efficiency
Our new operating model is a fundamental shift away from the historic
decentralised approach. Capital allocation and required returns, as well as
risk policies, are now controlled from Group Head Office and we have
implemented a new management and board structure to ensure comprehensive
oversight from the centre. Our revised risk processes are being fully
integrated into the business-planning process, including new risk strategies
for each of our businesses. We are also refreshing the non-executive teams of
our subsidiary Boards, which will strengthen both our governance and our
technical skills base.
Outlook
For the past 12 months, our primary focus has been on addressing our problems
and protecting ourselves against the downside. With the actions to do that
largely complete, we can start to look past the immediate market challenges
and begin to position ourselves for the upside which will come as markets
recover.
Julian Roberts
Group Chief Executive
5 August 2009
Group Finance Director`s Review
GROUP RESULTS
Overview of H1 2009 results
H1 2009 performance has proved to be resilient given the continuation of
generally weak market and operating conditions seen during the second half of
last year. H1 2008 was clearly a cyclical peak in market and operating
conditions for both our long-term savings and protection business and our
banking activities. Adjusted Operating Profit earnings per share were 5.4
pence for H1 2009 compared to 7.7 pence for the comparable period of 2008 and
4.5 pence for H2 2008.
IFRS AOP for H1 2009 of GBP538 million was GBP235 million lower than that H1
2008. This was due to reduced new business sales, lower earnings on group
capital, increased levels of credit impairment in the banking businesses, and
lower asset management profits in SA and the US. Sales trends for the second
quarter were worse than those of the first although we did begin to see the
first tentative signs of stabilisation in the equity-related products of OMSA
and some European operations at the end of the second quarter. Overall the
Group delivered results in line with our plans that were drawn up in
anticipation of current market conditions.
Adjusted operating Group MCEV earnings per share for the half-year of 8.9
pence were 1.2 pence (12%) lower than the 2008 half-year results, restated on
to the new MCEV basis. The investment returns earned on the US bond portfolio
made a significant contribution to earnings, which was partially off-set by
lower earnings in both the asset management and banking businesses.
Adjusted Group MCEV per share for H1 2009 increased to 143.8 pence from 117.6
pence at the year-end. The increase in the MCEV per share over the year-end
was driven by the substantial reduction over the period in corporate credit
spreads in US Life, economic variances (including the impact of the increase
in global interest rates medium to long term, which reduced the time value of
financial options and guarantees) and an amendment arising from an allocation
of assets between covered and non-covered businesses at December 2008. This
was partially off-set by a lower result in Europe driven by lower expected
returns as swap rates reduced significantly over 2008, adverse persistency
experience and a low new business contribution.
The Chancellor`s Budget announcements on 22 April confirmed that dividends
received by UK companies from overseas trading subsidiaries would become
exempt from UK corporation tax with effect from 1 July 2009 to ensure
compliance with EU Freedom of Establishment principles. As at 30 June 2009,
Skandia International`s MCEV was net of a tax deduction of GBP166 million.
Under IFRS accounting rules, a change in tax legislation can only be reflected
in the financial statements once the new legislation is "substantively
enacted". The Finance Bill 2009 became substantively enacted on 21 July 2009
so the gain will be recognised in H2 2009.
The ROEV of 14.8% has increased significantly driven by the lower opening
embedded value as at 31 December 2008, and the recovery in US corporate bond
spreads.
Management Discussion and Analysis of Results for H1 2009
The principal businesses of the group are the LTS division, Nedbank, Mutual &
Federal and US Asset Management. Old Mutual owns 55% of Nedbank and 74% of
Mutual & Federal. At 30 June 2009, the market capitalisation of Nedbank was
GBP3.8 billion and of Mutual & Federal was GBP370 million. The results for
Nedbank, Mutual & Federal and US Asset Management are discussed separately in
the Business Review which follows this Report. Key performance statistics for
the LTS business are as follows:
GBPm H1 2009 H1 2008
Life assurance sales (APE) 634 755
Value of new business* 70 87
Adjusted operating profit (IFRS basis) (pre-tax) 317 420
Operating MCEV earnings (post-tax) 409 461
* H1 restated on MCEV basis.
Sales across the LTS division declined, largely as a result of the fall in the
UK single premium market, off-set by a growth in Nordic sales. There was a
small decline in recurring premiums across Europe. The managed reduction in
the US
Life product range also contributed to the decline in LTS sales. The APE
margin of 11% for the half-year has held up well relative to the comparative
period
(H1 2008: 12%) despite the fall in sales, and the PVNBP margin has also
remained steady at 1.5%.
The fall in the new business margins in LTS is mainly attributable to the
lower margins in Europe. Within Europe, there has been a marked fall in the
margins for the UK business as a result of the move to the new platform. ELAM
and
Nordic margins were also weaker, whereas International remained flat as
compared to H1 2008.
On an IFRS AOP basis, the LTS decline is predominantly in Europe and the US.
The fall in US earnings is in line with scaling back of the business. The
lower
European earnings are due to lower sales and reduced funds under management.
Lower operating MCEV earnings are driven by the large decline in European
earnings and to a lesser extent in South Africa, off-set by a significant
increase in the US on the back of increased expected returns.
Further discussion on the drivers for the movements within Europe, OMSA and US
Life is given in the Business Review.
Reconciliation of IFRS and AOP profits
In accordance with our AOP policy, a charge for acquisition accounting
(GBP118 million) and short-term fluctuations in investment return
(GBP235 million) represented the key deductions from the adjusted operating
profit (pre-tax) to arrive at a profit before tax on an IFRS basis of GBP160
million.
Underlying sources of profitability
The development of the Group`s IFRS operating earnings for H1 2009 versus
H1 2008 was caused by flat South African insurance results, lower asset
management and Skandia earnings, predominantly based on fee income, and weaker
spread income from banking and US Life earnings.
The underlying quality of the underwriting result improved in H1 2009 compared
to H2 2008. Earnings from the existing book dominated earnings from new
business as there were only small experience variances and small changes in
assumptions.
The South African rand strengthened in recent months against sterling and the
US dollar weakened against sterling. This had the effect of improving rand-
denominated earnings whilst reducing the sterling equivalent of the US Life
and Bermuda profits, and the sterling value of dollar-denominated debt.
Key actuarial and MCEV developments in H1 2009
The company now reports its supplementary embedded value information under
Market Consistent Embedded Value Principles. Old Mutual`s methodology adopts
the 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 at
30 June 2009 for all businesses with the exception of the use of adjusted risk
free reference rates to take account of the liquidity component of corporate
bond spreads that is evident in the market as at that date for US Life
business and Old Mutual South Africa`s (OMSA) Retail Affluent Immediate
Annuity business.
At 31 December 2008 we adjusted the risk-free reference rates in respect of
the
US Life business to allow for a liquidity premium of 300 bps, after reviewing
relevant literature, including independent data published by Barrie & Hibbert.
In June 2009, we have followed the same process to determine the adjustment of
175 bps to the risk-free reference rates for the US Life business. This
reduction in the allowance for liquidity premiums partially off-set the
positive impact on MCEV in H1 2009 resulting from the uplift in the market
value of corporate bonds as corporate bond spreads contracted. These economic
changes, together with other economic assumption changes and investment
variances, resulted in total "economic variances" for US Life of GBP493
million.
We also introduced an adjustment to the OMSA Retail Affluent Immediate Annuity
business in order to recognise a liquidity premium of 50 bps. This adjustment
was determined with reference to the spread between bonds issued by state-
owned enterprises such as ESKOM, and South African government bonds, and is
used as a proxy to the spread that would apply in respect of non-credit
default risk of South African corporate bonds. The introduction of this
liquidity premium adjustment, together with other economic assumptions changes
and investment variances, resulted in total "economic variances" for OMSA of
GBP(66) million.
The Cost of Non-Hedgeable Risks ("CNHR") is derived by projecting the Economic
Capital held in respect of these non-hedgeable risks into the future, and
calculating the present value after applying a cost of 2% to this capital, at
a business unit level, without allowing for group diversification benefits.
The
Economic Capital projected is based on the figure determined for the prior six-
month period; thus the December 2008 CNHR is based on the June 2008 Economic
Capital, which was calculated with reference to EEV. The June 2009 CNHR is
based on the December 2008 Economic Capital, which was based on MCEV for the
first time. This has led to a step change in the calculation for all business
units. The impact of this step change varies across business units, being
smallest in OMSA, and largest in the Skandia business units. This accounted
for the bulk of the "other operating variances" for Europe of GBP(35) million.
Positive mortality variances were experienced in the period, particularly in
respect of OMSA and US Life SPIA contracts. The SPIA MCEV mortality basis was
weakened marginally in order to align fully with the IFRS mortality basis.
The calculation of the Time Value of Financial Options and Guarantees ("TVOG")
in respect of US Life and Bermuda was refined in the period, leading to an
increase in VIF at 30 June 2009.
Restatement of June 2008 Embedded Value results for the move to MCEV
As a consequence of the move to the MCEV basis of reporting as at 31 December
2008, we have published the June 2009 results on the MCEV basis, and have
included a restatement of the June 2008 comparatives from the published EEV
results to the new MCEV basis. The adjusted Group MCEV per share at 30 June
2008 was 140.3 pence, a reduction of 2.9 pence from the published EEV of 143.2
pence. As disclosed in the December 2008 restatement, the difference was
primarily due to the non-capitalisation of credit risk spreads in the US Life
business. The impact was broadly neutral for the South African and European
businesses. The restatement incorporated an addition of 125 bps to the risk-
free reference rates, using the same methodology to determine the US Life
adjusted risk-free reference rates as at 31 December 2008 and 30 June 2009,
and is fully described in the accompanying disclosures.
Lapses and Surrenders
We continue to monitor and manage actively the lapse and surrender behaviour
of clients and specific agents. Trends in the US were more volatile in the
fixed annuity book, similar to industry-wide trends, and terminations have
been above assumption levels for several months. A moderation during the
second quarter brought about by an active lapse and surrender management
programme had the effect of reducing fixed annuity termination rates close to
assumption levels.
We consider that the unusual market conditions have validated our decision to
hold a higher than usual cash weighting in the US Life Investment portfolio.
We currently hold around USD1.2 billion of cash in the portfolio, which we
estimate will fund a doubling of our lapse assumption for two years without
recourse to sales of the assets held in the portfolio. This gives considerable
flexibility when considering actions to mitigate against having to realise
losses on corporate bonds. Termination experience in variable annuity and life
products was below assumed levels.
OMSA saw some indications of deteriorating persistency in certain regular
premium Mass Retail products given the economic conditions in H1 2009. Lapse
and surrender management programmes in OMSA are well established.
The experience in the UK reflected anxiety around equity-based investments,
although this stabilised in the second quarter. Elsewhere in LTS, trends were
generally in line with assumptions.
Overall the financial circumstances of our customer base remain the key driver
of lapse and surrender behaviour. For example, with rising unemployment in a
number of markets we would expect to see temporary deterioration in
persistency, which should revert back to long-run assumptions as economic
conditions improve.
Capital, liquidity and leverage
Capital
The Group`s capital surplus at 30 June 2009 was GBP1.0 billion. The increase
since 31 December was due to the statutory earnings in the period, rand
strength and a Nedbank Tier 2 capital raising off-set by modest rises in
statutory bank capital requirements in South Africa. There was a positive
GBP30 million movement in FGD arising from management actions including the
disposal of Australia, closure of Bermuda to new business and a change in the
investment mix of OMSA shareholder funds held to back the Capital Adequacy
Requirement. The GBP41 million break fee paid to exit the AATEDA acquisition
reduced our FGD surplus but, had the acquisition proceeded, it would have
reduced the surplus by a greater amount. We estimate the capital surplus at
31 July was about GBP1.1 billion.
In line with the Board`s announcement in March, no interim ordinary dividend
is proposed for 2009. The Board will consider the position in respect of a
final ordinary 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.
Our subsidiary businesses continue to have strong local statutory capital
cover.
Business unit Ratio
OMLAC(SA) 3.9x
Mutual & Federal 141%
US Life 281%
Nordic 10.8x
UK 3.0x
Nedbank* Core Tier 1:8.6%
Tier 1:10.0%
Total: 13.2%
* This includes unappropriated profits.
Liquidity
As a Group we concentrate on maintaining effective dialogue and strong
commercial relationships with our banks. So far this year we have successfully
extended two existing bank facilities of GBP250 million and have put in place
an additional three-year bank facility of USD200 million. We have ongoing
discussions with several other banks within our relationship group and
anticipate further improvements on our funding during the second half.
As of today the plc has available cash and commitments to facilities of over
GBP800 million.
In addition to the cash and available resources referred to above at the
holding company level, each of the individual businesses also maintains
liquidity to support their normal trading operations.
Leverage
H1 H1
GBPm
2009 2008
Opening net debt (2 263) (2 420)
Inflows from businesses 350 597
Outflows to businesses + expenses (449) (157)
Debt and equity movements:
Ordinary Dividends paid - (227)
Share repurchase - (174)
Equity issuance - 4
Other non-cash movements (13) (49)
Closing net debt (2 375) (2 426)
Net decrease/(increase) in debt (112) (6)
Our reported net debt at 30 June 2009 was 5% up on the year-end position at
GBP2.4 billion, but GBP51 million lower than at H1 2008. During the half-year,
the business units contributed GBP350 million of inflows which were off-set by
GBP449 million of operational expenses and organic investment including the
USD225 million of capital injected into US Life in the first quarter. During
the period cash of GBP41 million was used to exit the AATEDA transaction and
GBP47 million was paid in respect of a market timing litigation which was part
of the exposure originating from the sale of American Skandia. We expect that
the final settlement of the various American Skandia matters will be covered
within our existing provisions.
We remain committed to supporting the US Life capital ratio to around 300%.
Although the unrealised loss position has improved, statutory capital is
driven primarily by impairments. To maintain this ratio, it is likely that we
will make a cash injection into the business in early 2010 as we did at the
beginning of this year. This could be in the order of USD200 million to USD300
million depending upon a wide range of factors including our statutory
earnings in the second half, market movements, ratings migration and the
implementation of possible changes to both US GAAP and NAIC accounting rules
which are currently under consideration.
We made no ordinary dividend payments in the period and no new debt or equity
was issued. The non-cash movements are largely the negative impact of currency
and marking to market certain of our debt liabilities under IFRS. In the
second half of the year, we anticipate seasonally higher net operational cash
flows, particularly as a result of financing US Life in H1.
Net cash flows from clients
The Group enjoyed positive net client cash flow in H1 2009 with strong inflows
in the US asset management businesses and Europe.
Funds under management were down for the year but have been volatile given the
substantial market movements in the period. The US and South African equity
portfolios showed the greatest volatility. The movement had knock-on impacts
on both management fees and performance fees.
US Life and US bond portfolio performance
The cash characteristics of the US Life business are very different than that
of the equivalent period of last year. We are not making significant new bond
purchases and new premiums have reduced significantly on the prior year due to
decision to restrict new business. We are incurring significantly lower new
business commissions and have successfully cut office costs. Regular claims
continue to be paid out and total lapses and surrenders are lower than the
prior year.
On the US Life USD15.4 billion portfolio, the unrealised loss was USD1.6
billion as of 30 June 2009, and has continued to improve to USD1.4 billion as
at
31 July 2009. This compares to USD2.8 billion at 31 March 2009 and USD2.3
billion at 31 December 2008. The unrealised loss on the Bermuda fixed income
portfolio as at H1 2009 was USD0.1 billion. All of the above are stated net of
the impact of reclassification of certain securities permitted by the
amendment of IAS 39, the unrealised loss of which amounted to USD283 million
at 30 June 2009 and USDS387 million at 31 December 2008 (30 June 2008: nil).
The portfolio continues to have approximately 5% in asset-backed and mortgage-
backed securities, with approximately 5% in preferred stock and hybrid
instruments. Of the portfolio, 49% is rated "A" and above, 41% is rated "BBB"
or below and 10% is not rated. The ten largest holdings account for USD802
million (4.7%) of the portfolio (31 December 2008: USD1.1 billion and 6.1%)
with an average holding of USD80 million (2008: USD107 million).
There have been no defaults in the portfolio in the half-year and we have
noted a number of recapitalisations mainly of financial companies which have
benefited the valuation of the bonds we hold. The running yield of the
portfolio is 5.83%.
Long-term investment return
The reduction in the South African LTIR return is driven by a reduction in the
rate from 16.6% in 2008 to 13.3% in 2009 in line with our accounting policy.
Additionally this year we have changed the reporting segments of the LTIR to
better reflect those assets supporting OMLAC(SA)`s Capital Adequacy
Requirement (CAR) and the excess shareholder assets. The reallocation of the
return is shown in the table below:
June 2008 June
June 2009 as previously 2008
GBPm as currently reported reported restated
OMSA LTIR 61 120 67
Plc 46 - 53
Total 107 120 120
Within the US Life business, the LTIR methodology has been refined to reflect
an expected return for the year off-set by a default impairment provision and
an investment management expense allowance. Both the investment return rate
and default impairment charge are to be applied to an asset base calculated on
a 12-month rolling average amortised cost value for the investment portfolio.
Bermuda
In Bermuda the costs of the hedging programme are now to be spread over the
life of the programme. This more closely matches the approximately USD2.5
million current monthly cost of protection to shareholders with the period of
protection purchased.
Bermuda is now in run-off with hedge effectiveness of over 95% for the six
months to 30 June 2009, up from 77.8% for the year to 31 December 2008.
Residual risk relates to volatility and produced a profit of USD96 million for
the period. Economic hedge effectiveness was achieved through use of
derivative instruments. On an economic basis, Bermuda made a profit of USD112
million. This translates to an IFRS AOP profit of USD5 million following the
removal of short-term market movements and the inclusion of our long-term
expectation of hedge expenses.
Surrender behaviour will determine the speed at which the Bermudan book of
business runs-off over time, and the extent and timing of any capital and cash
release.
Corporate disposals and acquisitions and related party transactions
As set out in the strategy in March 2009, the Group continues to simplify its
structure and reduce its spread of business to focus on areas of key
competence and competitive strength, and drive operational improvements.
OMSA sold to Nedbank its share in the Nedbank JVs in exchange for a
consideration of 10.2 million Nedbank shares. This transaction will allow
clarity of the management of these businesses and increase the non-interest
income of Nedbank.
Nedbank is in negotiations with Imperial Holdings Limited to acquire the
remaining 49.9% shareholding in the Imperial Bank joint venture.
As we reviewed our strategy and reach in China, we withdrew from the AATEDA
acquisition in China at a cost of GBP41 million.
During the period we completed the disposal of our Australian businesses at a
loss of GBP4 million.
We also commenced SYmmETRY integration process and we expect it to have a
positive impact on the high net worth strategy at OMSA in the near term. We
completed the ACSIS transaction on 31 July 2009.
Tax and non-controlling interests
Taxation at 28% of AOP for the first half was comparable to H1 2008. The
effects of decreased South African secondary tax on companies (STC) costs and
a higher proportion of low taxed income was off-set by increased deferred tax
assets not recognised and non-deductible costs. We anticipate a broadly
similar effective tax rate for the full year.
Non-controlling interests were GBP42 million lower than last year reflecting
lower Nedbank and Mutual & Federal earnings in this half compared to H1 2008.
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.
Continued volatility in world economic conditions creates uncertainty in
equity markets, currency fluctuations, credit spreads, corporate bond defaults
and rating agency actions both on investments owned by the Group and the Group
underlying entities. Unemployment conditions continue to deteriorate and could
adversely affect termination experience in respect of the life insurance
business that could result in realising losses on illiquid assets,
particularly in the case of US Life.
Economic uncertainty has contributed to reduced consumer confidence, which we
have experienced as a consequence of changing product preferences to lower
risk investment products and affecting termination experience in respect of
existing and new business. These may have an impact on earnings and present
both risks and opportunities for the Group.
The Group is continually monitoring these uncertainties and taking appropriate
actions wherever feasible. The Group continues to meet Group and individual
entity capital requirements and day to day liquidity needs.
The implementation of the new operating model will present challenges and
change risk across the Group. The Group continues to strengthen and embed its
risk management framework, with increasing importance being placed upon its
Risk Appetite framework, for example, in the business planning processes.
The Board of Directors has the expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the
interim financial statements contained in this announcement.
Philip Broadley
Group Finance Director
5 August 2009
Business Review
LONG-TERM SAVINGS: Old Mutual South Africa (OMSA) and Rest of Africa
Profits resilient as sales are under pressure in tough economic conditions
H1 H1 %
Highlights (Rm) 2009 2008 change
Long-term business adjusted operating profit 1 822 1 842 (1%)
347 565 (39%)
Asset management adjusted operating profit
Long-term investment return (LTIR) 833 1 007 (17%)
Adjusted operating profit (IFRS basis)
(pre-tax) 3 002 3 414 (12%)
Return on allocated capital (OMSA only) 26.2% 28.3%
Operating MCEV earnings (covered business)
(post-tax)* 1 511 2 654 (43%)
Return on embedded value (covered business)
(post-tax)* 9.8% 14.6%
Life assurance sales (APE)** 2 191 2 459 (11%)
Unit trust/mutual fund sales*** 11 893 10 503 13%
Value of new business* 326 342 (5%)
APE margin* 15% 14%
PVNBP* 16 660 17 893 (7%)
PVNBP margin* 2.0% 1.9%
Net client cash flows (NCCF) (bn) (20.4) (3.6) (467%)
H1 FY %
Highlights (Rbn) 2009 2008 change
SA client funds under management 435 472 (8%)
* H1 2008 restated on MCEV basis
** Life sales now exclude healthcare business
*** OMSA Unit trust/mutual fund sales include Marriott Income Specialists
Summary review of business unit results
Introduction
The SA economy entered a recession after contracting by an annualised rate of
6.4% in the first quarter. The slowdown in the economic growth has led to
cumulative reductions of 4.5% in short-term interest rates since December
2008.
The South African economy is expected to shrink by about 2% this year.
The rand has managed to recover some of the ground lost in Q3 and Q4 of 2008
closing at R7.75 against the dollar and R12.74 against the pound at the end of
Q2 mainly as a result of a narrowing trade deficit.
Although investment markets remain highly volatile, in line with international
markets, local equity markets have rebounded strongly from the lows hit in
February, with performance for the half-year period to 30 June up 3%.
Net client cash flow
As announced in March 2009, OMIGSA experienced a large outflow from PIC as a
result of the PIC performing a full review and redistribution of their equity
portfolio, significantly increasing their number of managers. As a result of
the PIC withdrawal, net client cash outflows were significantly greater than
the prior period. In addition to the PIC outflow, there was a termination of a
large Corporate segment client in Q1 this year, and the poor economic
environment has led to higher numbers of members withdrawing from pension
funds. In the Retail space, NCCF was ahead of prior year as a result of
increase in inflows mainly in Unit Trusts, as well as lower asset values
leading to lower maturity benefits.
In OMIGSA our client cash flows have benefited from good non-life sales.
Life assurance sales
Lower equity markets have reduced the attractiveness of the equity-based
products to the retail investor and this has particularly affected the single
premium market. Lower asset values combined with increased volatility have
made customers exercise greater caution before moving assets. This has been
particularly evident in the Corporate segment where the conversion to a
completed sale has taken longer. The assets that moved were predominantly
invested in money market or cash-type funds, which tend to have very low
margins. This has led to the overall lower life sales but higher money market
Unit Trust sales as shown by the 11% (2% excluding Nedlife) decline in Life
APE and the 13% increase in Unit Trust sales. OMSA has benefited from the wide
diversity of product offerings leading to a modest overall increase in sales
over 2008 when looking at both Life and Unit Trust sales together. Within the
life sales, risk products were down by 30% (11% excluding Nedlife), with the
Retail Mass segment sales increasing by 37% on the back of larger sales force
and risk sales in the Retail Affluent segment fell by 41% (up by 8% excluding
Nedlife).
Sales of recurring premium savings products declined 12% relative to prior
year with a 20% decline in the Retail Affluent market as customers were
reluctant to commit to long-term savings products in light of the higher risk
of job losses, lower disposable incomes as well as financial advisors
adjusting to the new commission structures brought about by a change in the
regulatory environment. In the Retail Mass segment recurring premium savings
sales reduced by 9% mainly because of the increase in policy cancellations
particularly where premiums are paid by debit order. Single premium savings
products offering equity exposure also suffered. Our key non-equity offerings
in the Retail Affluent segment, Investment Frontiers Fixed Bonds and
annuities, were not as competitive as last year leading to a decline in
overall sales compared to 2008. Annuity rates were improved at the end of
April. We have launched a new bonus series for the Absolute Growth Portfolios
to enhance the attractiveness of the product to Corporate customers.
Unit trust/mutual fund sales
There were signs of a slowdown in money market fund sales late in Q2 as short-
term interest rates fell. We expect to see increased interest in exposure to
other asset classes should this trend continue, supported by the modest
recovery of equity markets in Q2. We are positioned to compete strongly,
especially following the recent improvement in OMIGSA`s relative equity
investment performance in Q2.
Adjusted IFRS operating profit
In Q1 we reduced the rate of increase in cover on certain risk products in the
Retail Mass segment to achieve better alignment between the cost of the
benefit and the corresponding premium increase on the policies. The impact of
this on the existing book has been a reduction in policy reserves leading to a
significant contribution to life operating profit for the half-year. Life
profits also benefited from an increase in long bond yields during the half-
year period leading to an increase in the interest assumption used to value
life products from 7.5% at the beginning of the year to 9%. These positive
factors were more than off-set by:
* impact of lower equity levels on asset-based fees and investment variances;
* mortality and disability profits on Permanent Health Insurance and Group
Life
Assurance products;
* worse persistency experience as result of the impact of the tough economic
environment on our customers; and
* a small charge for share based payments this year compared to a large credit
in the prior year.
Asset management operating profit was down 39% as a result of lower asset
values due to lower investment markets, lower performance fees especially
among funds with CPI (domestic South African inflation) based benchmarks and
higher expenses. Expenses were higher, in part, because of a charge for share-
based payments costs this year as the Group share price increased compared to
a credit in 2008 when the share price reduced over the half-year.
The LTIR was 17% lower after a 330 bps decrease in the rate applied,
reflecting lower investment returns on shareholder funds achieved in 2008 and
the expectation of lower returns in 2009 combined with lower average
investible asset balances.
Value of new business
The VNB was 5% lower than 2008 level (16% higher excluding Nedlife) despite
the decline in new business volumes because of an increase in the new business
margin. The margin increased because of a change in product mix (higher
proportion of protection product sales) and reduced rate of future cover
increases on certain protection products in Retail Mass.
Operating MCEV earnings
The operating Market Consistent Embedded Value (MCEV) earnings declined by 43%
from the 2008 level, mainly due to lower expected existing business
contribution resulting from a combination of a lower opening MCEV balance and
a lower one-year swap rate at the start of 2009 compared to the start of 2008
(the expected existing business contribution under MCEV is derived with
reference to the one-year forward swap rate applicable to the currency of the
liabilities at the start of the reporting period) and the impact of worse
termination experience particularly in the Retail segments as a result of the
tough economic environment.
In December 2008 we reached agreement to sell our healthcare business to
Lethimvula and on 1 June 2009 we sold our share of the Nedgroup Life and BOE
Private Client joint ventures to Nedbank. As a result we now exclude OM
Healthcare from our life sales and embedded value (2008 sales and MCEV numbers
have therefore been restated to exclude this). Profits for OM Healthcare and
Nedbank joint ventures are included for the first five months to 1 June 2009.
Funds under management
Funds under management of R435 billion were down 8% on 31 December 2008
largely as a result of negative net client cash flow. After the period-end, we
completed the acquisition of 100% of ACSIS which will enable OMSA to gain
access to a niche of private and retirement fund clients.
Our alternative asset class boutiques, OMIGPI and Alternative Investments,
have shown resilience in performance in the volatile market. At an overall
level our relative fund performance has improved over the short and medium
term when measured against the benchmark funds and also improved over medium
to long term when measured against peer funds as shown in a table below:
OMIGSA performance
June 2009
Proportion of funds
outperforming 1 year 3 years 5 years
Benchmarks 42% 47% 48%
Peer median 53% 55% 56%
December 2008
Proportion of funds
outperforming 1 year 3 years 5 years
Benchmarks 38% 36% 55%
Peer median 57% 40% 54%
Capital position
Highlights (Rbn) June 2009 Dec 2008 % change
Admissible Capital 41.7 42.6 (2%)
Statutory Capital Adequacy Requirement
(SCAR) 10.8 11.2 (4%)
Statutory Capital Cover 3.9x 3.8x
Old Mutual South Africa`s life company capital position remains strong in
spite of turbulent markets. The statutory capital cover has increased
marginally to 3.9 times since December 2008.
At 30 June 2009, the statutory capital requirement reduced to R10.8 billion
from 31 December 2008`s figure of R11.2 billion as a result of a decision to
hold more cash and reduce our exposure to equities.
Detailed Review of Business Unit Segments
H1 H1 %
Retail Affluent (Rm) 2009 2008 change
Life sales (APE)
Savings 536 690 (22%)
Protection 287 483 (41%)
Annuity 100 114 (12%)
Total 923 1 287 (28%)
Single (APE) 367 470 (22%)
Recurring 556 817 (32%)
Unit trust flows 9 115 8 266 10%
Value of new business* 26 126 (79%)
APE margin* 2.8% 9.8%
Net client cash flow (NCCF) (Rbn) 1.9 (1.7) 212%
* H1 2008 restated on MCEV basis
Total Retail Affluent Life APE is 28% lower than 2008 as a result of the
challenging economic environment impacting negatively on consumer disposable
income and volatile markets leaving many customers unwilling to make long-term
savings commitments.
Life single premium sales are down 22% on 2008. Investment Frontiers is the
main contributor to this drop, especially the Fixed Bond and market-linked
funds. Annuity sales are down 12% from last year, because of less competitive
annuity rates this year.
Recurring premium savings sales are 20% lower than 2008, with clients
reluctant to commit to long-term savings products in the current economic
environment.
Recurring premium risk sales excluding Nedlife from 2008 sales are up 9% from
last year. Greenlight sales have been boosted by the launch of the new Severe
Illness Benefit in June and we expect this to continue.
Unit Trust sales are 10% up on 2008 driven by strong money market flows in the
volatile investment markets with Old Mutual Money Market offering very
competitive rates.
NCCF is positive, compared with negative flows in H1 2008. This is largely as
a result of outflows, in particular surrenders and maturities, being lower
than expected due to lower market levels for much of the year and a focus on
business retention.
VNB is 79% (61% excluding Nedlife) lower than 2008 due to lower sales volumes
while margin is lower because of a lower proportion of profitable life single
premium products as well as higher new business strain on the back of lower
sales.
H1 H1
2009 2008 % change
Retail Mass (Rm)
Life sales (APE)
Savings 288 316 (9%)
Protection 335 245 37%
Total 623 561 11%
Value of new business* 160 95 68%
APE margin* 26% 17%
Net client cash flows (NCCF) (Rbn) 1.2 0.9 33%
* H1 2008 restated on MCEV basis
Sales are up 11% over the equivalent period in 2008, as a result of the larger
sales force. This is achieved in spite of continued challenges on retention at
early policy durations, especially relating to savings business.
The VNB and APE margin have increased from last year due to a favourable shift
in product mix towards more profitable risk products and improved
profitability of savings products.
Net client cash flow remains strong as a result of growth in life sales.
H1 H1 %
2009 2008 change
Corporate Segment (Rm)
Life sales (APE)
Savings 224 198 13%
Annuity 59 75 (21%)
Protection* 87 68 28%
Total 370 341 9%
Single (APE) 230 233 (1%)
Recurring * 140 108 30%
Value of new business** 52 56 (7%)
APE margin* 14% 16%
Net client cash flow (NCCF) (Rbn) (4.4) (2.7) (63%)
* Excluding Healthcare sales
** H1 2008 restated on MCEV basis
Total Corporate life sales (APE) are 9% higher than in 2008, driven by higher
recurring premium sales. Risk business has had a better start to the year than
in 2008 with a large scheme secured in January 2009. Single premium sales are
at a similar level to 2008 despite the turbulence in investment markets.
Despite total sales being 9% higher than in 2008, VNB is 7% lower. This is
mainly due to a lower proportion of high margin annuity business in this
year`s sales compared to the corresponding period last year. A significant
proportion of the savings flows have been into very low margin cash products
compared to smoothed bonus products last year with the anticipation that this
cash will move into the smoothed bonus products later this year. We have a
strong sales pipeline, a new bonus series has been launched for the Absolute
Growth Portfolios and we expect flows into that product to improve as the year
progresses.
Net client cash flows are lower than in H1 of 2008. The termination of a large
client (R1.47 billion) took place in February this year. Apart from this,
other terminations have been at significantly lower levels than 2008. The
worsening economic conditions are leading to higher rates of member
withdrawal, impacting net client cash flow negatively.
Old Mutual Investment Group South Africa (OMIGSA)
H1 H1 %
Rm 2009 2008 change
Life sales (APE) 137 142 (4%)
Unit trust/mutual fund sales 1 404 1 374 2%
Value of new business* 18 18 0%
APE margin* 13% 13%
Net client cash flows (NCCF) (Rbn) (18.8) (0.5)
H1 FY %
Sources of FUM (Rbn) 2009 2008 change
Life 288 296 (3%)
Unit trusts 47 45 4%
Third party 77 110 (30%)
Total OMIGSA managed assets 412 451 (9%)
Managed by external fund managers 28 29 (3%)
Total OMSA FUM 440 480 (8%)
Less: managed by group companies for OMSA (34) (37) 8%
Total OMSA client funds managed in SA 406 443 (8%)
* H1 restated on MCEV basis
Net client cash flows (excluding the PIC) slightly improved from 2008, a
result of good non-life sales and lower outflows given sensitivities to
markets and a good response to the conservative positioning of Marriott Income
Specialists boutique.
As announced at our prelims presentation in March 2009, OMIGSA experienced a
large outflow from PIC as a result of the PIC performing a full review and
redistribution of their equity portfolio, significantly increasing their
number of managers. While we lost significant assets, we were pleased to be
awarded a portion of the reconfigured portfolio, evidence of their confidence
in our capabilities.
As our boutique structure has bedded down, there has been increased stability
in our teams. We have set strong foundations in place over the past two years
and are slowly seeing improving levels of acceptance and confidence in
individual boutique investment philosophies and processes. The merger of the
OMIGSA Fixed Income and Futuregrowth teams has proceeded smoothly, with the
new combined team operating a single cohesive investment process.
The South Africa equity market (JSE All Share Index) has risen slightly off
February lows, with a year to date performance of 3%. The past six months has
been extremely volatile, with market sentiment oscillating between pessimism
and flight to "safe haven" sectors of gold and cash (particularly in January
and February), and improved sentiment leading to rising markets from March
onwards, particularly in sectors which had been heavily sold off between
October and February. Compelling valuations in late 2008 in the non-gold
Resources area, as well as some industrials, meant that a number of OMIGSA
Boutiques were overweight in these areas early in the year. This significantly
affected performance in January and February, but we saw a strong turnaround
from March onwards.
Futuregrowth (now merged with the OMIGSA Fixed Income boutique) continues to
deliver good performance across its fund range. SYmmETRY performance has also
improved with its Balanced and Defensive CIS funds well positioned relative to
peer group. Our alternative asset class boutiques, OMIGPI and Alternative
Investments, have shown resilience in performance in this time of market
volatility, helping to diversify investor returns. Shorter-term performance in
the majority of our equity boutiques has improved substantially from the end
of February 2009 onwards.
Rest of Africa
Despite similar challenging markets in Namibia, particularly in the retail
sector, sales were ahead of prior year mainly due to strong performance from
institutional business. Recurring premium sales continued to show an improving
trend to the end of June 2009, with Retail Mass and the Broker Distribution
channels delivering a solid sales performance.
The total life sales (on APE basis) were up 6%. Life single premium sales were
38% lower as a result of the tough economic environment. This was off-set by a
32% improvement in the recurring premiums sales, driven mainly by strong sales
in the Retail Mass segment as a result of the growth in the sales force.
Unit trust sales continued to improve significantly, with total sales for the
six months to 30 June 2009 ending up 59% on the comparative period last year.
This is mainly due to strong Money Market sales as investors consider money
market as a safer option given the volatile equity markets.
LONG-TERM SAVINGS: Europe (UK, International, Nordic, Europe and
Latin America (ELAM))
Market share grows and steady NCCF
H1 H1 %
Highlights (GBPm) 2009 2008 change
Adjusted operating profit (IFRS basis)
(pre-tax) 76 148 (49%)
Return on equity 3.0% 4.6%
Return on equity (excluding goodwill) 10.0% 14.9%
Operating MCEV earnings (covered business)
(post-tax)* 40 291 (86%)
Return on embedded value (covered
business)* 3.0% 15.7%
Life assurance sales (APE) 436 529 (18%)
Unit trust/mutual fund sales 1 855 1 942 (4%)
Value of new business* 39 70 (44%)
APE margin* 9% 13%
PVNBP* 3 111 3 962 (21%)
PVNBP margin* 1.3% 1.8%
Net client cash flows (GBPbn) 1.6 1.8 (11%)
Highlights (GBPbn) H1 2009 FY 2008 % change
Funds under management 53.1 52.8 1%
* H1 2008 restated on MCEV basis.
Introduction
The weak economic conditions and lower financial markets have had a
significant impact on the European businesses in 2009. There have been much
lower sales volumes and customers have favoured more conservative asset mixes.
This has put new business margins under pressure and also reduced the margins
on existing assets under management. The lower interest rate environment and
deteriorating credit experience have resulted in lower interest rates on
shareholders funds and lower banking margins. Nevertheless, the Skandia
businesses are well positioned for a recovery in markets and volumes, and
market shares have generally increased. Operating MCEV earnings have reduced
significantly reflecting a reduction in one-year interest rates, lower VNB, an
increase in capital held to support non-hedgeable risks and adverse
persistency experience.
The last 12 months has seen high volatility in stock market levels and foreign
exchange rates.
In the UK, the FTSE100 closed at 4 249 at 30 June 2009 (30 June 2008: 5 626).
Although this was only a small decline from the opening position of 4 434, it
masks a low of 3 512 in March.
The Swedish stock market rose by 19.8% in the six months to 30 June 2009,
however it is still 12.2% lower than its position at 30 June 2008. The Swedish
kronor weakened against sterling moving from 11.45 at 31 December 2008 to
12.70 at 30 June 2009.
The Euro weakened against sterling in the period from 1.04 at 31 December 2008
to 1.17 at 30 June 2009. European equity markets had varied experience in the
first half with some increasing from year-end positions and others remaining
broadly flat compared to the year-end, however they were all still lower than
at 30 June 2008. The Italian index (MIBTel) moved up 26% from the year-end
position, but remains 16% down on its position at 30 June 2008; the German Dax
was broadly flat compared to the year-end, but was 36% lower than at 30 June
2008, and the French CAC 40 was 2% lower than at 31 December 2008, but is 29%
lower than at 30 June 2008.
Positive net client cash flows despite low investor confidence
The European business delivered positive net client cash flows for the period
with net inflows of GBP1.6 billion, representing 6% of opening funds under
management on an annualised basis. Nordic`s net client cash flow for the
period was excellent at GBP0.5 billion (30 June 2008: GBP0.3 billion),
representing 12% of opening funds under management on an annualised basis. The
positive performance was largely driven by a combination of strong sales and
lower outflows from maturities and surrenders. In ELAM, net client cash flows
for the period were also strong at GBP0.6 million, representing 12% of opening
funds under management on an annualised basis. The positive performance
included very good sales production in Italy and Latin America as well as
ongoing retention programs which have contributed to the positive outcome. The
UK business delivered net inflows of GBP0.4 billion in the first half of 2009.
This cash flow was driven by the growth in platform sales (although this was
below the planned level) as Skandia UK continues to benefit from net inflows
from a number of key competitors in the market. Margins on the platform are
lower than on traditional business. Operational leverage is expected to be
generated as volumes increase.
Despite excellent net client cash flows, poor investment returns in most
European markets resulted in only a GBP0.3 billion increase in funds under
management since the beginning of the year. Nordic reported an increase in
funds under management to GBP8.4 billion at 30 June 2009, up 6% (16% on a
local currency basis) from the level at 31 December 2008. The growth was
driven by strong net client cash flow and the increase in the Swedish stock
market in the first half of 2009. UK also reported an increase in funds under
management since the end of 2008 at GBP23 billion, whereas the International
business reported lower funds under management at GBP12 billion reflecting
surrenders in the second quarter. In the second half of 2008 there was a
switch into cash-based investments but this is showing signs of reversing in
the second quarter of 2009 as some confidence returns to the market.
Strong sales performance in Nordic but investment volatility affected other
European businesses
Life sales APE declined in line with the market by 18% to GBP436 million in
2009. Nordic`s excellent growth in sales continued during the period despite
the financial turmoil. Life sales APE were up 22% on the comparative period,
mainly due to strong sales in Sweden. The very strong trend in new sales
experienced in 2008 continued in 2009 and so far there are no signs of any
negative effects from the volatile markets or worsening economic conditions on
sales volumes in Sweden. The broker sales channel accounted for the majority
of the increase during H1 2009 as a result of strengthened relationships
supported by the investment portfolio product Depa and faster introduction of
new funds to the market.
In the UK, life sales APE declined in line with the market. Skandia UK took a
strategic decision in late 2008 to grow scale in the platform market by
removing the initial charges on its platform product. Within the single
premium personal pension market, Skandia UK improved its position as market
leader in platform business in the first quarter of 2009. The market changes
as a result of the Retail Distribution Review will create costly and
significant implementation challenges for all firms in the UK retail sector,
requiring all firms to examine the validity of their existing business model.
However, Skandia UK`s platform model is already clearly aligned to the FSA`s
desire for greater choice and transparency and hence we are confident that it
will benefit from the change in the UK distribution landscape.
International life sales APE are down 34% on the same period last year as a
result of the challenging market conditions in the majority of its markets.
Customer nervousness and increased appetite for regular premium products have
affected production, nevertheless the International business continues to
benefit from its geographic diversity, full open-architecture proposition and
strong distribution relationships to meet the needs of its high-net-worth
customer base and remains the leading player in single premium products to its
target markets. We continued to develop products and the e-business customer
proposition during the first half of 2009.
In aggregate, ELAM life sales APE were down for the period, with different
trends evident in the various countries. Life markets in Europe continue to be
oriented towards traditional life, with unit-linked lines showing significant
year-on-year decreases. In the predominantly regular premium markets, the
negative impacts were felt more strongly as regular savers face increased
uncertainty over disposable incomes and constrained savings potential, while
guarantee products remain attractive to clients given fears about market risk.
In the Mass Retail markets, notably Germany and Poland, the traditional ramp-
up around year-end did not materialise last year, affecting pipeline sales in
2009. Single premium business, however, has recovered well from levels seen in
the second half of 2008. In the predominantly single premium Affluent business
there has been strong production in Italy, as a result of compelling product
offerings and good distribution relationships.
Good unit trust performance in difficult markets
Unit trust sales were down 4% on the comparative period at GBP1 855 million.
Nordic`s mutual fund sales were down by 6% on the comparative period, whereas
ELAM increased by 14% (mainly due to currency movements). Nordic benefited
during the first six months of 2009 from a material inflow of customer fund
holdings from other banks as a result of a marketing campaign launched in
February. The Latin American business in particular did well in the first half
of the year, with higher volumes as a result of equity market growth. UK
mutual fund sales fell by 19% in the first half of 2009.
Adjusted operating profit (IFRS basis) impacted by market conditions
Adjusted operating profit (IFRS basis) was down 49% to GBP76 million for the
period. All businesses experienced a fall in profits with the UK result down
by
32% to GBP46 million, Nordic decreased by 44% to GBP22 million, International
fell by 53% to GBP11 million and ELAM was down by 116% to GBP(3) million over
the comparative period.
The UK result was impacted by reduced fees from lower funds under management,
reduced investment income from lower interest rates and, as expected, the
removal of the initial margin on the platform business. These adverse effects
have been partially off-set by policyholder tax releases. The beneficial
impact of policyholder tax will be diluted as the financial markets improve.
The Nordic result was also affected by lower asset-based revenues due to lower
funds under management at the beginning of the year, lower profits from
healthcare, a lower interest margin and increased credit losses in
SkandiaBanken. Whilst credit losses have increased on 2008 levels, the credit
loss ratio remains very low at 0.16% in H1 2009, compared to 0.07% in H1 2008.
International`s result was mainly affected by lower new business levels,
currency losses and other costs.
The ELAM businesses reported a loss of GBP3 million (2008: profit of
GBP17 million) largely as a result of lower markets and increased policyholder
participation costs in Germany of GBP8 million.
All of the European businesses have been managing their expense bases tightly
throughout the period. We have decided to restructure the various European
businesses. ELAM is being split so that the businesses in France, Italy and
Spain (Affluent) are managed with the UK and International businesses so that
they can benefit from the scale of these similar Wealth Management businesses.
The Retail business is being kept separate, while the Latin American
businesses will now report into and leverage off the South African businesses.
This will allow us to close the ELAM regional office and reduce ongoing
running costs, although there are restructuring costs in 2009.
Value of new business affected by lower volumes
VNB fell by 44% to GBP39 million. Although there were strong results in Nordic
from excellent sales production, these were off-set by the effect of lower
volumes across the rest of the European business which have relatively fixed
cost bases in the short term. The life new business APE margin ended the
period at 9%, down from 13% in the comparative period.
The value of Nordic`s new business increased due to higher life new sales in
both Sweden and Denmark whilst strong cost control has been maintained.
However, the life new business APE margin of 15% declined from 17% at
30 June 2008 as the strengthened retention assumptions in 2008 fed through to
the 2009 results, and due to adverse business mix, as a higher proportion of
sales are in lower margin products.
In the UK, the value of new business fell by 69% to GBP5 million due to lower
volumes and the removal of the initial margin on the platform business to
capture market share. Some fall in the margin was expected as part of the
strategy to promote the new platform business, and the new operating model is
designed to grow operating profitability through increased scale. However the
extent of market level declines has meant that margins have reduced more than
anticipated in our repricing decision taken in 2008.
International has maintained its new business margin at 17% in the first six
months, demonstrating the resilience of the franchise. The high margin is
driven by a positive business mix impact more than off-setting lower volumes
and benefits from the quality of the high-net-worth client base, strong
distribution relationships, tight cost control and the breadth of the customer
proposition.
Decrease in operating MCEV earnings (covered business) (post-tax)
The operating MCEV earnings, on covered business after tax, decreased by 86%
to GBP40 million. Each of the European businesses saw a decline in profits in
the period, largely from a combination of worsening economic conditions
affecting sales volumes, and lower interest rates in 2008 leading to lower
expected return. In addition, there has been adverse persistency experience
and an increase in the cost of non-hedgeable risks.
In the UK, there was a fall in operating MCEV earnings to GBP13 million from
GBP135 million in the comparative period. The 2008 result benefited from
positive assumption changes, mainly due to increased recognition of retained
rebates from fund managers. The value of new business has also fallen by GBP9
million as a result of lower volumes and the migration of business to the
platform model. Persistency experience worsened and the capital held for non-
hedgeable risks increased in the period.
International`s MCEV operating earnings reduced to GBP2 million in 2009, a
fall of GBP51 million, as a result of adverse persistency experience,
particularly in the Middle East, lower new business profits (down GBP9
million) from lower volumes, and an increase in the cost of non-hedgeable
risks.
The MCEV operating earnings for Nordic fell by 50% to GBP42 million compared
with the first half of 2008 as a result of lower interest rates, an increase
in the cost of non-hedgeable risks, and the effect of a positive assumption
change in 2008 for the introduction of currency spreads. Improved persistency
experience and higher profits from new business have partially off-set these
amounts.
ELAM reported an MCEV operating loss of GBP17 million for the period, compared
with a profit of GBP20 million in the comparative period. The shortfall to
last year arises from a combination of factors including lower new business
profits
(GBP14 million), lower interest rates, adverse experience variances (including
policyholder participation in Germany), and an increase in the cost of non-
hedgeable risks.
Continued growth in banking business
SkandiaBanken`s liquidity position is strong, largely because the bank`s
assets are funded by deposits. The capital ratio as at 30 June 2009 was 13.7%
(on a
Basel II, pillar one basis). SkandiaBanken`s retail lending portfolio has been
built on sound lending practices with 95% of mortgages having strong
creditworthiness (the average loan-to-value in the portfolio at the end of the
period was approximately 40%) while the remaining 5% of the lending portfolio
relates to car and personal loans. The quality of the lending portfolio is
evidenced by the credit loss ratio which has remained at a low level of 0.16%
with a deterioration in Norway being largely off-set by an improvement in
Sweden. Whilst mortgage and savings volumes have increased on the comparative
period, the profitability of the bank has been affected by the worsening
economic conditions which have caused the net interest margin to fall to 1.4%
at 30 June 2009 compared with 1.5% at 30 June 2008.
Capital levels remain strong
The European businesses are well capitalised and the current levels of
statutory capital are within or above the target ranges set by management.
Continued investment innovation at Skandia
During 2009, the European businesses continued to invest in improving product
propositions and customer service standards to create value for customers and
distributors. The work was rewarded by a number of industry awards during the
first half of the year.
LONG-TERM SAVINGS: US Life
Business transformation and derisking of the business is continuing
H1 H1
Highlights (USDm) 2009 2008 % change
Adjusted operating profit (IFRS basis)
(pre-tax) 44 104 (58%)
Return on equity 27.4% 7.2%
Operating MCEV earnings (covered business)
(post-tax)* 388 (10) 3978%
Life assurance sales (APE) 57 124 (54%)
Value of new business* 11 (10) 210%
APE margin* 19% (8%)
PVNBP* 521 1,076 (52%)
PVNBP margin* 2.1% (0.9%)
Net client cash flows (USDbn)** (0.9) (0.4) (125%)
H1 FY %
Highlights (USDbn) 2009 2008 change
Funds under management** 15.8 15.2*** 4%
* H1 2008 restated on MCEV basis
** Stated on a start manager basis as USAM manages funds on behalf of US
Life
*** Restated to include the assets reclassified under IAS 39.
Introduction
The US economy contracted by between 1% and 2% during Q2, compared to 6.1% in
Q1, with the improvement driven by government programmes to boost liquidity.
Unemployment and foreclosure rates continue to increase, and unemployment
figures of 9 - 10% are expected in 2009, which would be the highest rate in 26
years. In response to the increasing unemployment rate the Federal Reserve has
pledged to maintain the key interest rate at 0 - 0.25% for "an extended
period".
Economists predict that interest rates will stay at record lows through the
rest of 2009.
The dollar rate strengthened marginally against sterling during Q1 (closing at
USD1.43) but weakened during Q2 to close at USD1.65 against sterling.
Equity market volatility remained high. A rally in the latter part of Q2
resulted in the S&P 500 level increasing by 1.8% year to date, although its
30 June 2009 position is 28% lower than at 30 June 2008.
Initial business transformation actions substantially complete
As outlined at the year-end, the key focus for the management of the US Life
business has been to transform and scale back the business. The product
profile has been streamlined, eliminating unprofitable product lines. A
consequence is that overall volumes are inevitably reduced compared to 2008,
although with lower new business strain, the business as a whole is now less
capital-intensive than in previous periods. The major transformational
actions, covering the reduced product range, the restructuring of distribution
with a focus on top-tier producing agents, lower staff numbers and a full
review of the company`s outsourcing model, are complete.
The streamlining of the product range was accompanied by a reduction in
current year sales targets from 2008 levels. Year-to-date sales are ahead of
plan in dollar terms, but within the capital budget allocated to new business.
Given a continuation of this capital-efficient sales mix, we now anticipate
full year 2009 sales in the USD700 million to USD800 million range. In current
market conditions annuity products are of greater appeal to clients than
indexed life products and provide less capital strain. Our distribution
partners have the capacity to sell these products and have supported the
change in the product range. A new agreement with a major outsourcer, expected
to deliver savings of
USD5 million per year, provides added downward pressure on ongoing costs as
well as favourably boosting overall service levels. The run-rate of expenses
has reduced by nearly 50% from the prior year expense levels.
Sales managed down
As discussed previously, the result of the streamlining of the product range
and the focus on top-tier producing agents has been to manage sales downwards.
Fixed indexed annuity sales, a key product line, reduced approximately 61% to
USD276 million in line with plan and our capital utilisation plan. This line
contributed 66% of total APE for the first six months of 2009. Fixed deferred
annuity sales reduced by approximately 47%. This product line continues to
address the needs of customers who seek fixed interest guarantees during times
of market volatility and economic instability. Immediate annuity sales (which
do not include any life-contingent products), which remain an important
offering since they contribute to capital in the year of sale, declined by
31%.
Total sales on an APE basis in respect of life products were down 54% over the
comparative period, with Universal Life APE down approximately 45% to
USD15 million and term sales reduced to minimal levels off the back of very
low activity levels in the mortgage market.
Adjusted operating profit (IFRS basis) results
Adjusted operating profit (IFRS basis) was USD44 million for the first half of
2009 compared to USD104 million for the first half of 2008. This reflects
retrospective DAC unlocking of USD36 million resulting from higher surrender
activity and a reduction in the interest margin earned; of the USD50 million
fall in investment income, USD28 million is driven by the change in the long-
term earned rate, and USD22 million is driven by lower net investment income
due to a decrease in average assets under management as a result of higher
surrenders. These negative impacts were off-set by the positive impact of
commuting 17 large case Single Premium Immediate Annuity (SPIA) contracts,
positive experience variances and small hedging gains.
Value of new business
VNB increased by USD21 million over the comparative period, with the margin
ending the period at 19%. The increase in margin was mainly due to higher swap
rates and the focus on selling more profitable business. To that end, the
traditional business has been shrunk given the unsatisfactory pricing
available on an MCEV basis, and management actions to improve margins on fixed
index annuities have increased VIF.
MCEV results
Operating MCEV earnings were USD398 million higher than the comparative
period.
This was mainly due to increased expected returns, which accounted for
USD199 million of earnings in this reporting period compared to USD26 million
in the comparative period. Under MCEV methodology investment spreads in excess
of the adjusted risk free reference rate are not recognised upfront but are
left to emerge as they are earned. Where earned rates exceed the contractual
minimum guarantees plus our target profit spread, the additional return earned
is shared between policyholders and shareholders. Where the earned rate is
below this threshold we no longer achieve our spread and therefore if returns
increase we aim to regain that spread before crediting a greater proportion to
policyholders. At the end of 2008 projected returns under MCEV were below
guarantees for many products, largely as a result of the widening of corporate
bond spreads in the second half of the year which increased mark-to-market
losses on the portfolio. At the end of 2007 the comparative returns were much
higher. Thus most of the additional expected spread flows directly to profit
in the first half of 2009, whereas in the first half of 2008 much of it would
have been passed on to policyholders through increased crediting rates.
In addition, there was a positive impact of USD116 million arising from an
amendment to the calculation of the Time Value of Options and Guarantees
("TVOG") in relation to a particular block of in-force policies. We further
benefited from positive experience variances. During the period we commuted a
block of our SPIA contracts to the owners through their third party advisers
at a similar value to the reserve established for this block after the recent
reserve strengthening, giving in fact a positive variance. Although the
experience from the total SPIA annuity block can be expected to be volatile,
since it is a small book with some large individual contracts, we are
confident that the reserve adjustments made in previous periods are adequate
to cover the future expected outcomes in respect of this business and the
transaction described above supports this view.
The large movements below the line demonstrate the sensitivity of the US Life
MCEV to changes in the economic environment, as market consistent methodology
means that results move in line with the movements in the market in general.
Since assets are marked to market the high unrealised losses in the bond
portfolio depressed the MCEV at 31 December 2008; the USD0.7 billion decrease
in unrealised losses over the period was the main driver of a positive USD737
million below the line variance.
Credit update
Although the fixed income portfolio continued to be affected by poor economic
and financial market conditions, the fair value of the portfolio increased
USDS0.7 billion from year-end. The impact of the IAS 39 reclassification was
USD283 million as at 30 June 2009, compared to USD387 million at
31 December 2008 (30 June 2008: nil), and is excluded from the disclosures
that follow. The yield on the book value of the fixed income portfolio has not
changed significantly in H1 as no major asset purchases or sales have occurred
since year-end. The company retains 8% of its holdings in cash and short-term
investments (totalling USD1.2 billion). However the net unrealised loss
position on the fixed income security portfolio improved to USD1.6 billion at
30 June 2009 (USD2.3 billion at 31 December 2008), reflecting a broad recovery
in financial markets in general, and narrowing corporate credit spreads in
particular. As at 31 July 2009, the unrealised loss position further improved
to USD1.4 million. Continued government support of the residential mortgage
market, and new considerations of increasing such support to the commercial
mortgage market, have also led to narrowing spreads across structured
securities, which have also been accretive to the portfolio`s unrealised loss
position.
Approximately USD1.7 billion of the fixed income portfolio is classified as
loans and receivables, which are carried at amortised cost. As a result,
USD0.3 billion of unrealised losses on a mark-to-market basis are not
reflected in the balance sheet in accordance with IAS 39.
During the period there were no defaults in the corporate bond portfolio and
USD199 million of IFRS impairment losses were recognised on 54 securities,
which were partially off-set by USD40 million of net investment trading gains.
Regulatory impairment losses were USD163 million. As of 30 June 2009 compared
to
31 December 2008, approximately USD689 million of securities previously rated
investment grade are now rated non-investment grade and approximately
USD96 million of securities rated non-investment grade have been downgraded
further. Impairment losses included USD129 million related to structured
securities, with the losses being due to adverse changes in expected future
cash flows. The impairment losses were primarily in residential mortgage-
backed securities (USD52 million), commercial mortgage-backed securities
(USD66 million), preferred stocks and hybrid securities (USD26 million), and
three corporate holdings in the financial services sector (USD51 million).
The fixed income portfolio has exposure to approximately USD0.7 billion of
preferred stock/hybrid instruments amounting to 5% of the portfolio at 30 June
2009 versus USD1.1 billion (6% of the portfolio) at 30 June 2008, with the
bulk of this exposure concentrated in the financial sector. During the first
quarter, these holdings came under pressure as concerns about financial
institutions continued to mount. In the second quarter, however, these
securities have recovered sharply, as results from the Federal Reserve`s
"stress test" of banks were released and banks and other financial
institutions sought to raise capital to bolster their balance sheets. In
general, finance-related names were the largest contributors to the
improvement in the net unrealised loss position for the fixed income portfolio
during the second quarter.
The fair value of the US fixed income investment portfolio at 30 June 2009,
after recognition of the impairments, totalled USD14.4 billion (31 December
2008: USD14.0 billion).
Rigorous impairment process
We continue to conduct a rigorous impairment review process and we shall
continue to record impairments where we see any actual credit deterioration
from the time the bonds first went on our watch list. Impairments of USD199
million were recorded in H1 2009 compared to USD136 million in H1 2008 and
USD575 million in H2 2008. Statutory impairments were USD163 million compared
to USD101 million in H1 2008 and USD294 million in H2 2008. Total impairments
since 2007 amount to USD910 million in IFRS terms of which USD558 million has
impacted statutory earnings and capital ratios.
Potential capital strain from migration of the portfolio has been extensively
modelled and we had planned for an increase in statutory charges for migration
of 43% for H1 which was consistent with actual. 16% is forecasted for the
remainder of 2009, compared to 18% in FY 2008. Migration risk is closely
monitored and requires a case-by-case analysis rather than a broad sector-
based approach. Migration mainly took place within the corporate bond and
structured security portfolio.
Increase in funds under management driven by recovery of investment valuations
Funds under management ended the period at USD15.8 billion, up 4% from the
opening position primarily due to the USD0.7 billion (5%) increase in the
market value of the investment portfolio and investment income for the period.
This was partially off-set by negative net client cash flows at 12% of opening
funds under management on an annualised basis. Net client cash flows were
inevitably reduced compared to the prior year due to the decision to reduce
new business volumes (total gross sales for the six months to 30 June 2009
were USD419 million compared to USD946 million for the same period in 2008, a
reduction of 56%), in addition to an increase in surrender activity. During Q2
2009, a conservation programme was introduced to focus on the reduction of
termination activity. The programme, initially focused on conserving fixed
annuity assets, encompasses focused surrender activity monitoring,
policyholder outreach, and agent communication and monitoring. This has
already delivered benefits and surrenders have begun to trend downward in May,
June and July. The running four-week average annuity account value surrendered
per week was approximately USD34 million just prior to commencement of the
programme and reduced to approximately USD18 million as of the end of Q2.
Liquidity and asset/liability management a key focus
The US portfolio and business operations produced net cash flows of USD260
million in the half-year. Cash income from the portfolio in the form of
interest and maturities amounted to USD509 million. Maturities were lower than
last year, in line with expectation given the profile of the bonds and the
planned duration matching against the policy maturities. Net transfers of
USD225 million were made to the business from plc. As this business is managed
to a reduction in sales level of approximately two-thirds of the 2008 levels,
we can expect that the natural cash cycle of maturities will rise as policies
mature, are surrendered or lapse, and investment income and expenses contract.
The net cash position then rises and the prospect of surplus capital emerges.
The maturity profile follows the historic growth in sales of the business
meaning that asset/liability management is taken into account, as well as the
impact of impairments on the portfolio. We are relatively well matched with an
average asset duration of 5.6 years for assets and average liability duration
of 5.1 years for liabilities.
We have continued to maintain strict investment control over the portfolio. We
are managing to minimise capital but we have been prepared, on occasion, to
selectively trade out of positions at gains and losses in the period. Our new
Chief Investment Officer has sought to manage the process of reinvesting net
premiums into cash to ensure ample liquidity, but we are likely to be
selectively investing in credit a portion of our surplus cash during 2009 to
improve yield.
Capital
OM Financial Life Insurance Company regulatory capital increased during the
half-year driven by strong statutory operating earnings partially off-set by
investment impairments.
OM Financial Life`s regulatory capital requirements increased (at the targeted
300% level) primarily due to ratings downgrades in its fixed income investment
portfolio.
The increase in capital and offsetting increase in required capital reduced
the risk-based capital ratios from 305% at 31 December 2008 to 281% at 30 June
2009, which is within the targeted range for the interim period.
LONG-TERM SAVINGS: Asia Pacific
Continued focus on existing businesses in India and China
We continue to generate business through our joint ventures in China
(Skandia:BSAM) and in India (Kotak Mahindra Life Insurance). Gross written
premiums of GBP118 million in India were 21% lower than the comparative
period, whilst gross written premiums of GBP23 million in China were 22%
higher than the comparative period. We continue to maintain and grow our
presence in Hong Kong through our Royal Skandia (Skandia International)
operation.
BANKING: NEDBANK GROUP (NEDBANK)
Resilient performance balance sheet strengthened and strong capital ratios in
a challenging environment
The full text of Nedbank`s results for the six months ended 30 June 2009,
released on 5 August 2009, can be accessed on Nedbank`s website
http://www.nedbankgroup.co.za
Rm
H1 H1
Highlights 2009 2008 % change
Adjusted operating profit (IFRS basis)
(pre-tax)** 2 890 5 086 (43%)
Headline earnings* 1 988 2 943 (32%)
Net interest income* 8 185 7 960 3%
Non-interest revenue* 5 377 4 954 9%
Net interest margin* 3.44% 3.83%
Credit loss ratio* 1.5% 0.96%
Cost to income ratio* 52.5% 51.5%
ROE* 11.1% 18.7%
ROE* (excluding goodwill) 12.6% 21.3%
* As reported by Nedbank in their report to shareholders as at 30 June 2009
** Prior year AOP included an amount of R726 million in respect of the sale of
Visa shares.
The first half of 2009 has been a challenging period for the South African
economy. It has been a harsh environment for clients and this has negatively
impacted bank earnings. In this environment, Nedbank has focused on the
strength of its balance sheet. Capital ratios continued strengthening,
liquidity was sound throughout the period and Nedbank increased its net asset
value.
Nedbank remained solidly profitable, but the reduced endowment income and
margin on current and savings accounts from lower interest rates, together
with slower asset growth and increasing impairments, have resulted in reduced
earnings levels compared with the period to June 2008. There are, however,
signs that the first half of 2009 may have seen the worst of the retail credit
cycle.
Throughout this difficult period Nedbank has continued to advance loans to its
clients while ensuring affordability criteria are met. Nedbank has shown
modest market share growth in most core retail and commercial advances
categories.
Nedbank continues to seek ways of assisting distressed clients, promoting
responsible lending and encouraging savings. Of the large South African banks,
Nedbank offers amongst the lowest bank fees for low and middle income earners.
Banking environment
In the first quarter of 2009 the South African economy contracted at its
fastest rate since the third quarter of 1984. The deterioration in the South
African banking environment, as indicated in Nedbank`s first quarter trading
update in May 2009, has been more severe than was anticipated at the time of
the release of the 2008 financial results in February 2009. The risk remains
high that the recovery in economic growth may be slow and protracted, and that
retrenchments will increase and house prices will continue to decline into the
second half of the year.
While lower interest rates are positive for consumers - as reflected in the
slower rate at which retail impairments are increasing - this has a negative
impact on bank earnings in the short term due to reduced endowment income and
margin on current and savings accounts. Wholesale banking, which has been
resilient, even at the peak of the interest rate cycle, is starting to show
increased signs of increased credit stress being experienced by some clients.
Review of results
As highlighted in the 2008 annual results announcement, management has focused
on maintaining a strong and appropriately liquid statement of financial
position (balance sheet) during these difficult market conditions. It is
therefore pleasing to report that Nedbank increased net asset value (NAV) by
7.4% to 8 762 cents per share. Nedbank`s Tier 1 capital adequacy ratio
increased from 9.6% in December 2008 to 10.0% and the total capital adequacy
ratio increased from 12.4% to 13.2%. Nedbank`s ratio of risk-weighted assets
to total assets ratio is 62.8%, above the top end of the peer group,
indicating the conservative approach adopted in applying Basel II. The inter-
bank funding market has functioned normally and liquidity remains sound.
Headline earnings decreased by 32.4% from R2 943 million for the period to
June 2008 to R1 988 million for the six months to June 2009. Diluted headline
earnings per share decreased by 34.1% from 719 cents to 474 cents. Basic
earnings decreased by 28.7% from R3 597 million to R2 564 million for the
current period. Diluted earnings per share decreased by 30.5% from 879 cents
to 611 cents.
Overall Nedbank`s results were negatively impacted by lower interest rates and
the effects of the economic recession. This has resulted in margin compression
from the negative endowment effect and margin compression on current and
savings accounts and a reduction in transaction volumes. In addition,
impairments have increased from December 2008, although some improvement has
been noted since March 2009.
Solid client flows, a healthy retail deposit franchise, improved asset margins
on new business, strong levels of capital and good cost discipline have
created a solid base from which to grow.
Nedbank achieved a return on average ordinary shareholders` equity (ROE)
excluding goodwill of 12.6% and an ROE of 11.1% for the period.
Financial performance
Net interest income (NII)
NII grew 2.8% to R8 185 million (June 2008: R7 960 million) as a result of a
14.8% increase in average interest-earning banking assets off-set by
compression in Nedbank`s margin.
The net interest margin for the period was 3.44%, down from 3.83% for the
period to June 2008 and the 3.66% for the year ended December 2008.
Margin compression was largely due to the reduced endowment income impact on
capital and margin on non-rate sensitive deposits resulting from the faster
than expected reduction in interest rates. In addition, margin was impacted by
other liability margin compression reflecting the higher cost of term funding;
the increased duration in the wholesale deposit book and the cost of holding
additional liquidity buffers; the cost of funding increased non performing
loans and properties in possession; debits relating to accounting for historic
structured-finance transactions with related credits offset in taxation; and
interest earning assets repricing more quickly than interest bearing
liabilities.
Impairments charge on loans and advances
The credit loss ratio reflects the very tough economic conditions and
increased to 1.57% for June 2009 compared with 0.96% for the same period in
2008 and 1.36% for the second half of 2008. It is encouraging that this ratio
showed a slight improvement from the 1.67% reflected in Nedbank`s first
quarter trading update.
Given the recessionary environment, South African businesses are experiencing
increased levels of stress which has resulted in higher levels of impairments
in the wholesale advances books but still within the through the cycle range
for this sector.
Defaulted advances increased by 94.8% (annualised) to R25 437 million from
R17 301 million reported in December 2008 and total impairment provisions
increased by 32.9% (annualised) to R9 142 million for the same period.
Approximately R1 billion of the defaulted advances are technical in nature and
the direct result of applying a reduced instalment to historic arrears
balances as interest rates fall. Note that, in this context, default means
that customers are not fully up to date with repayments but a high percentage
of the advances are still recoverable.
Management has maintained a strong focus on managing risk and improving asset
quality, particularly in retail home loans. Good progress has been made and
average loan-to-value (LTV) ratios for new home loans at grant stage have been
reduced to 79.9%. This trend is evident in lower LTV ratios at grant stage and
in an improved distribution of the book when measured by balance outstanding
to original valuation. Client rates have also increased during the past six
months, with a significant reduction in the average concession granted on new
business. Similar steps have been taken in other secured loan products with
Nedbank Retail. However, because of the lower volumes of new business being
written, this will take some time to impact the margin on the overall book,
which has also been negatively affected by an increase in the cost of funds.
Non-interest revenue (NIR)
Nedbank`s focus on growing non-interest revenue streams is starting to show
results. NIR increased 8.5% to R5 377 million (June 2008: R4 954 million).
Commission and fee income grew by 8.7%, mainly from increases in transactional
banking fees and insurance product pricing in Retail and strong cash handling
volumes, increased electronic banking volumes and credit related
excess/commitment fees in Business Banking. The migration of Corporate Banking
clients onto the NetBank electronic banking system will commence later in the
year and is expected to contribute to the acquisition of transactional banking
corporate clients.
Trading income was up by 14.2% from R813 million at June 2008 to R928 million,
driven primarily by favourable trading opportunities in treasury and the
global markets businesses.
NIR from the private equity portfolios declined in line with markets by
R80 million compared to June 2008, in line with markets.
NIR includes an amount of R85 million (June 2008: R21 million) from the credit-
related fair value adjustment of the bank`s own sub-debt. This is low quality
earnings and has not been attributed to capital.
Expenses
Nedbank`s expenses increased by 7.1% to R7 121 million (June 2008:
R6 651 million) and are in line with expectations. Expenses remain tightly
controlled with staff expenses having increased by 7.1%, resulting from the
1.5% growth in staff numbers compared with June 2008, marketing and public
relations costs decreased by 3.4%; information technology costs grew by 7.4%,
largely attributable to ongoing investment in systems development for client
businesses and risk-related projects; fees and insurance increased by 18.4% as
a result of increased fraud levels; and Nedbank`s black economic empowerment
(BEE) transaction expenses decreased from R108 million to R66 million mainly
through movements in the share price.
In line with expectations, as NII growth slowed predominantly from lower
endowment income and margin on current and savings accounts, Nedbank`s
efficiency ratio deteriorated marginally from 51.5% to 52.5%.
Associate income
Associate income decreased from R84 million in June 2008 to R55 million
largely as a result of lower earnings in the Nedbank Retail Bancassurance and
Wealth joint ventures and the fact that these were consolidated for the last
month of the current period.
Taxation
The taxation charge (excluding taxation on non-trading and capital items)
decreased by 36.7% from R1 014 million in June 2008 to R642 million primarily
as a result of lower profits in the period.
Capital
Nedbank and its subsidiaries are well capitalised with all capital adequacy
ratios well above minimum regulatory levels, and Nedbank`s ratios are now at
the top end or slightly above Nedbank`s internal target ranges which were
increased in December 2008 in response to the deteriorating environment.
Nedbank has been proactive in managing the efficiency of its capital
structure, and in the first quarter of 2009 successfully placed a 13 year (non-
call 8 year) USD100 million listed lower Tier 2 subordinated unsecured
floating rate note with an international investor. Nedbank`s core Tier 1
capital adequacy ratio (calculated on Tier 1 capital excluding perpetual
preference share capital and hybrid debt capital instruments) increased to
8.6% from 8.2% in December 2008 and the Tier 1 capital adequacy ratio
increased to 10.0% from 9.6%. The total capital adequacy increased to 13.2%
from 12.4% in December 2008 and is now above Nedbank`s increased total capital
adequacy target range of 11.5% to 13.0%.
In accordance with its prudent capital management strategy, Nedbank increased
its levels of surplus capital, and currently holds a surplus of R10.6 billion
relative to its calculated economic capital requirements, calibrated to an A-
debt rating (including a 10% buffer), and a surplus of R10.7 billion relative
to its regulatory capital adequacy requirements.
Following the conservative approach when implementing Basel II in 2008,
Nedbank has adopted a prudent risk-weighted asset optimisation programme.
Since December 2008, this programme has resulted in a decrease in risk-
weighted assets, held for credit risk, and the risk-weighted assets to total
assets ratio is 62.8%. This is still above the top end of the peer group,
highlighting further optimisation opportunities. Nedbank`s leverage ratio
(total assets to ordinary shareholders` equity) at 14.8 times remains
conservative by both international and local standards, and has declined from
16.2 times (December 2008), evidencing focus on balance sheet strength in the
current economic climate.
To strengthen capital further Nedbank intends, subject to regulatory approval
and market conditions, issuing non-redeemable, non-cumulative preference
shares amounting to approximately R500 million during August 2009.
Funding and liquidity
Nedbank maintains a conservative funding structure, in line with the domestic
market and its liquidity remains sound. There is no Tier 2 refinancing
required in the capital markets for 2009. Nedbank remains appropriately liquid
with a loan-to-deposit ratio of 93.8%.
Given Nedbank`s domestic focus, international funding represents a small
portion of Nedbank`s funding base at around 1.5% and the increased cost of
international funding as a result of the reduction in international liquidity
has had a minimal effect on the Nedbank.
Total assets
Total assets decreased marginally by 3.5% (annualised) to R557 billion
(December 2008: R567 billion) as a result of decreasing overnight loans and
foreign correspondents, as well as the maturing of R6 billion of additional
liquid assets that were accumulated prior to the 2008 year-end and repayment
of the associated repo funding. Growth in average interest-earning banking
assets slowed to 14.8% (June 2008 growth: 22.9%).
Advances and deposits
Advances are 1.1% (annualised) lower than at December 2008, reducing from
R434 billion to R432 billion at June 2009 with the reduction being mainly
attributable to lower levels of trading assets flowing from a more cautious
approach to risk appetite. Overall, growth has slowed down as result of
subdued demand as well as Nedbank`s focus on more selective advances growth
and improving margins.
Nedbank reduced its exposure to foreign correspondents, overnight loans and
trading advances. Excluding these categories core banking advances grew by
4.2% (annualised) from December 2008. Home loans grew by 6.2% (annualised) and
vehicle and asset finance loans by a more muted 1.9% (annualised) with market
share increasing in both of these categories.
Nedbank grew its market share of deposits, but deposits declined by 2.8%
(annualised) from R467 billion at the year-end to R460 billion at June 2009
driven mostly by a reduction in repurchase trading activity referred to above.
Retail deposit growth was broadly flat in a highly competitive market that has
started to experience declining demand for savings and investment products
given lower interest rates.
Nedbank is focused on maintaining and building its strong deposit franchise.
Optimising its funding mix and funding profile by growing the Retail and
Business Banking portion of the deposit base remains key, as is the
competitive pricing of term deposits.
Update on acquisitions
In May 2009, Nedbank announced the acquisition of NedLife, BoE Private Clients
and Fairbairn Private Bank from OMSA. These acquisitions were approved by
shareholders and have been consolidated by Nedbank with effect from 1 June
2009.
On 29 May 2009, Nedbank advised that it was in negotiations with Imperial
Holdings Limited to acquire the remaining 49.9% shareholding in Imperial Bank.
The negotiations are progressing well and Nedbank hopes to announce the
details shortly.
Outlook
Initially the domestic economy was resilient during the early stages of the
international financial crisis but has increasingly succumbed to the effects
of the global recession. Consequently we believe the recovery will be more
protracted than previously anticipated, with gross domestic product (GDP)
growth currently forecast by Nedbank to decrease by 2.0% during 2009 with a
modest expansion of 1.7% forecast in 2010.
Volumes of new business in retail remain constrained by low levels of consumer
confidence and consumer concerns around falling asset prices and increasing
unemployment. Lower local demand, international trade activity and commodity
prices together with the strong rand have increased the pressure on businesses
and led to declining corporate demand and confidence.
In addition to the 400 basis point cut in interest rates this year to date, a
further 100 basis point cut is currently anticipated for the remainder of
2009.
The effect of reduced endowment and lower margin on current and savings
accounts will have on banking interest margins will increase during the second
half, while a reversal in the impairment trend is currently only anticipated
to begin to positively impact bank earnings growth in the next 12 to 18
months.
Prospects
Nedbank remains cautious in its outlook for the remainder of 2009 and
performance is currently expected to reflect the following: advances growth in
the mid-single digits; margin compression, on the 2008 margin, of around 30 to
35 basis points; the credit loss ratio is currently forecast to improve
marginally from the 1.57% for the period to June 2009; NIR growth for the year
in upper single digits; expense growth for the year in early double digits,
partially driven by the full consolidation of the joint ventures purchased
from
Old Mutual which will, when combined with the endowment pressure in NII, lead
to a deterioration in the cost to income ratio from the 52.5% for the period;
and a focus on improving capital adequacy ratios and optimising funding and
liquidity.
Nedbank has revised its outlook for the full 2009 year and continues to be
cautious about prospects for the rest of the year. Forecast risk remains high
in this environment.
Nedbank remains disciplined and firmly focused on the basics of good banking,
ensuring that the fundamentals of the Nedbank group remain solid. Nedbank is
well capitalised, with conservative funding, good liquidity, a focus on risk
management and strong cost management.
GENERAL INSURANCE: MUTUAL & FEDERAL
Challenging trading conditions
Mutual & Federal`s results for the six months ended 30 June 2009, released on
29 July 2009, can be accessed on Mutual & Federal`s website
http://www.mf.co.za
H1 H1 %
Highlights (Rm) 2009 2008 change
Underwriting result (96) (23) (317%)
Long-term investment return (LTIR) 388 450 (14%)
Adjusted operating profit (IFRS basis)
(pre-tax) 292 427 (32%)
Gross premiums* 4 358 4 689 (7%)
Earned premiums* 3 550 3 914 (9%)
Claims ratio* 73.1% 71.4% -
Combined ratio* 102.7% 100.6% -
Solvency ratio* 46% 43% -
Return on capital* (3-year average) 17.1% 25.5% -
* As reported by Mutual & Federal in their report to shareholders as at
30 June 2009
Profits impacted by adverse insurance environment
Adjusted operating profit for the six months declined following a significant
deterioration in the underwriting result despite the cancellation of certain
unprofitable blocks of business in 2008. These blocks of business were
cancelled as there were no reasonable expectations of them returning to
profitability. The deterioration in profit in 2009 is a result of a number of
large commercial and industrial claims in the first quarter. There were also
substantial personal lines claims following the widespread rains, whilst the
difficult economic environment resulted in significant underwriting losses for
Credit Guarantee. The overall situation did however improve subsequently and
acceptable levels of underwriting profits were achieved in the second quarter.
The AOP was furthermore impacted by a reduction in the long-term rate of
return from 16.6% to 13.3%. This change in rate decreased operating income by
R98 million in 2009 and the profit attributable to equity shareholders
accordingly declined by 6.8%.
Gross premium income declined by 7.1%, largely due to a 39% reduction in
personal scheme premiums following the cancellation of unprofitable business.
Risk finance premiums declined by 41% due to a reduction in reinsurance
received from the furniture retail sector as a consequence of lower consumer
spending.
Investment income declined during the period mainly as a result of a reduction
in equity gains. Whilst dividend income reduced in line with lower equity
holdings, interest income increased as a result of higher levels of cash
holdings during the period, not withstanding the reduction in interest rates.
Improvement in solvency
As a result of the surplus for the period, the net asset value per share
improved by 5% to R11.44 at 30 June 2009 compared to R10.92 at 31 December
2008. The international solvency margin (being the ratio of net assets to net
premiums on the international basis) correspondingly increased to 46% at 30
June 2009 and remains in the target range of 45% to 50% adopted by Mutual &
Federal. In light of the need to build solvency levels and conserve capital,
an interim dividend has not been declared.
Other
Despite difficult trading conditions in the first half, the company has
started to benefit from the reorganisation to a regionalised business model
which is expected to deliver improved service levels to clients and
intermediaries.
US ASSET MANAGEMENT
Solid results given continued difficult market conditions
H1 H1 %
Highlights (USDm) 2009 2008 change
Adjusted operating profit (IFRS basis) (pre-tax) 46 139 (67%)
Return on capital 2.1% 8.5%
Operating margin 15% 26%
Unit trust/mutual fund sales 660 1 179 (44%)
Net client cash flows (USDbn) 0.6 1.9 (68%)
H1 FY %
Highlights (USDbn) 2009 2008 change
Funds under management 247.1 240.3 3%
Market volatility
Investment market dislocation both in bonds and equities resulted in large
numbers of withdrawals and reallocation. The business reacted with robust and
early cost action and a tough assessment of the portfolio`s performance.
Investment performance solid through a continued difficult investing
environment
In the context of this market, aggregate long-term investment performance from
our member firms remained strong. At 30 June 2009, 55% of assets had
outperformed their benchmarks over the trailing three-year period and 56% of
assets were ranked above the median of their peer group over the trailing
three-year period. As of the trailing five-year period, 77% of assets
outperformed their respective benchmarks and 63% of assets were ranked above
the median of their peer group. These numbers represent both an improvement
from the first quarter, and demonstrate that our affiliates continue to
deliver strong investment returns for our clients.
Positive net cash flows and resilient multi-asset model
Net client cash inflows for the period were USD0.6 billion, compared to USD1.9
billion for the last half-year. Given the level of net outflows experienced
across the industry over this challenging period, achieving positive net flows
was encouraging, and reflects the longevity of the asset base given the
specific investment styles available to clients through the boutique model.
The net positive result was driven in particular by strong flows at Heitman,
Barrow Hanley and Rogge.
Funds under management ended the period at USD247.1 billion, a 3% increase
from
31 December 2008. USD7.6 billion (3%) of the increase was due to positive
market returns, with the market recovery in the second quarter more than
erasing the declines experienced in the first quarter. The decline in unit
trust sales also reflected weak market conditions. We made the decision to
close one of our affiliates, Clay Finlay, which resulted in a USD1.5 billion
reduction in funds under management during the period.
Adjusted operating profit (IFRS basis) down 67%
Adjusted operating profit for the period was down 67% over the comparative
period. This was a result of a 29% decrease in average funds under management
(41% decrease in equity assets and 14% decrease in fixed income and other
assets) compared to H1 2008, which drove down management fee revenue, as well
as a reduction in performance fees and transaction fees to 4% of total
revenue, down from 6% in H1 2008. Also contributing to the decline were lower
seed capital investment returns and the absence of revenue from securities
lending, which was suspended in the second half of 2008. The interim 2009
result was also negatively impacted by approximately USD6 million of costs
associated with the closure of Clay Finlay. The operating margin, which is
calculated inclusive of non-controlling interest expense, declined as revenues
fell, off-set in part however by expense savings. The RoC performance
reflected similar factors. Expenses are down 32% relative to the comparative
period, reflecting significant action taken by management to control costs in
the current economic climate as well as lower variable compensation. At
current market levels we expect increased revenues, operating margins, and
profit in the second half of 2009 relative to the first half.
Positioning the business for growth
Cash management team added at Dwight
A lift-out of Neuberger Berman`s cash management team to Dwight Asset
Management has been completed, and will be effective from 1 July. Cash
management complements Dwight`s current capabilities as a stable value
manager, and provides the business with an opportunity to offer a complete
investment solution to current and prospective clients. We anticipate
subsequent positive development of new clients and client cash flow as the
team becomes established.
Equity plans
Five additional equity plans have been implemented during 2009, bringing the
total number of affiliates with equity to fourteen. We anticipate completing
the roll-out of equity plans across the business within the next twelve
months. Aligning the interests of affiliate management and shareholders as
regards revenue and cost management is considered a vital component of our
long-term strategy, and key to talent retention and for positioning the
business for sustainable long-term growth.
Evolution in retail strategy
Building on the long-term success of our institutional asset management
business, we plan to streamline our mutual fund offerings, pending board and
shareholder approval. The resulting fund line-up is expected to include
primarily single-manager, single-strategy funds, which offer style purity,
economies of scale, and leverage the firm`s strengths as an institutional
asset manager. In addition we will adopt a more focused, investment-oriented
distribution model. To meet the needs of intermediary partners who
increasingly demand in-depth mutual fund research and information, Old Mutual
has aligned its distribution structure to offer a higher degree of technical
investment expertise.
As a result of offering fewer products and introducing a new distribution
strategy, OMCAP will eliminate certain administrative and sales positions over
the next eight months and leverage specific core competencies of the broader
USAM organisation. In 2009, cost savings from these actions are expected to be
off-set by one-time restructuring costs. The expected run-rate cost savings
are USD10-15 million per annum starting in 2010.
BERMUDA
Continuing actions to de-risk the business
H1 H1 %
Highlights (USDm) 2009 2008 change
Adjusted operating profit (IFRS basis) (pre-tax) 5 (92) 105%
Life assurance sales (APE) 2 222 (99%)
Value of new business* - (5) 100%
APE margin 0% (2%)
PVNBP* 23 2 225 (99%)
PVNBP margin 0% (0.2%)
USDbn
H1 FY %
Highlights (USDbn) 2009 2008 change
Funds under management** 5.5 5.8 (5%)
* H1 2008 restated on MCEV basis
** Stated on a start manager basis as USAM manages funds on behalf of Bermuda
Improved hedge effectiveness
Following the completion of a strategic review of the business in March 2009
with subsequent closure of Old Mutual (Bermuda) Ltd (OMB) to new business on
18 March 2009, we have continued our action programme to further derisk the
business whilst focusing on significantly reducing the business expense base.
We have also strengthened our governance and risk management practices.
The results of the derisking programme continue to be successful. Hedge
effectiveness for the six months ended 30 June 2009 further improved to 95.5%
(from 91.6% for the three months ended 31 December 2008) in respect of hedged
components of risk. We have not hedged volatility in the period and benefited
from gains as a result of this position. The soft-close strategy, which
prevents policyholders from transferring money into funds that are illiquid
and/or volatile, was effected on 30 April 2009, and fund mappings have been
updated to reflect fund returns and new indices.
IFRS AOP of USD5 million is USD97 million higher than the prior period
primarily due to a lower hedge losses and expenses.
OMB remains firmly committed to all existing policy obligations and remains
well capitalised, with statutory capital of USD476 million as at 30 June 2009.
No further capital injection is anticipated.
Credit update
The improvement in corporate spreads and the relatively short duration of the
OMB portfolio has resulted in a net improvement in the unrealised loss
position of the portfolio. The net unrealised loss position was USD0.1 billion
at 30 June 2009 compared to USD0.3 billion at 31 December 2008. Impairment
charges of USD21 million have been recorded for the six months ended 30 June
2009. There were no defaults in the period.
Actions for the remainder of the year will be focused on further derisking the
OMB fixed income portfolio through selective sales, whilst reinvesting
proceeds into assets that will be accretive to investment returns and the
aggregate portfolio risk profile.
Index to the financial Information
Statement of directors` responsibilities in respect of the half-yearly
financial statements
Independent review report by KPMG Audit Plc to Old Mutual plc
Consolidated income statement
Consolidated statement of comprehensive income
Reconciliation of adjusted operating profit to profit after tax
Consolidated statement of financial position
Condensed consolidated statement of cash flows
Consolidated statement of changes in equity
Notes to the consolidated financial statements
1 Accounting policies
2 Foreign currencies
3 Segment information
4 Operating profit adjusting items
5 Income tax expense/(credit)
6 (Losses)/earnings and (loss)/earnings per share
7 Goodwill
8 Borrowed funds
9 Dividends
10 Contingent liabilities
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
1 Basis of preparation
2 Methodology
3 Assumptions
4 (i) Adjusted Group Market Consistent Embedded Value presented per
business line
5 Adjustments applied in determining total Group MCEV earnings before
tax
6 Other movements in net equity impacting Group MCEV
7 Reconciliation of MCEV adjusted net worth to IFRS net asset value for
the covered business
8 Value of new business (after tax)
9 Product analysis of new covered business premiums
10 Drivers of new business value*
11 Sensitivity tests
12 Key changes in MCEV methodology and assumptions
13 Restatement of adjusted Group Embedded Value per share
14 Restatement of adjusted Group MCEV operating earnings per share
15 Restatement of Embedded Value of covered business
16 Comparison of components of Embedded Value on EEV and MCEV bases
17 Restatement of value of new business (after tax) of covered business
18 Restatement of Return on Embedded Value of covered business
Statement of directors` responsibilities in respect of the half-yearly
financial statements
For the six months ended 30 June 2009
We confirm that to the best of our knowledge:
* the consolidated financial information has been prepared in accordance with
the recognition and measurement principles of International Financial
Reporting
Standards adopted by the EU and in accordance with the requirements of IAS 34
"Interim Financial Reporting"
* the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six
months of the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of
the current financial year and that have materially affected the
financial position or performance of the entity during that period;
and any changes in the related party transactions described in the
last annual report that could do so.
Julian Roberts Philip Broadley
Group Chief Executive Group Finance Director
5 August 2009 5 August 2009
Independent review report by KPMG Audit Plc to Old Mutual plc
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended
30 June 2009 which comprises the Consolidated income statement, the
Consolidated statement of comprehensive income, the Consolidated statement of
financial position, the Condensed consolidated statement of cash flows, the
Consolidated statement of changes in equity and the related explanatory notes.
We have also reviewed the reconciliation of adjusted operating profit to
profit after tax which has been prepared on the basis as set out later in this
announcement.
We have also been engaged by the company to review the Old Mutual Market
Consistent Embedded Value ("Old Mutual MCEV") basis supplementary information
for the six months ended 30 June 2009 as set out later in this announcement
("the supplementary information") including the conversion of its comparative
supplementary information for six months ended 30 June 2008, previously
prepared on the European Embedded Value ("EEV") basis, to an Old Mutual MCEV
basis.
We have read the other information contained in the half-yearly financial
report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set of
financial statements or the supplementary information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK`s Financial Services Authority
("the UK FSA") and also to provide a review conclusion to the company on the
supplementary information. Our review of the condensed set of financial
statements has been undertaken so that we might state to the company those
matters we are required to state to it in this report and for no other
purpose.
Our review of the supplementary information has been undertaken so that we
might state to the company those matters we have been engaged to state in this
report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have reached.
Directors` responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FSA. The
directors have accepted responsibility for preparing the supplementary
information contained in the half-yearly financial report in accordance with
the basis of preparation as set out later in this announcement.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the EU. The condensed set of
financial statements included in this half-yearly financial report has been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU.
The supplementary information has been prepared in accordance with the basis
of preparation as set out later in this announcement, using the methodology
and assumptions set out in notes 2 and 3 to the supplementary information. The
supplementary information should be read in conjunction with the group`s
condensed financial statements which are set out later in this announcement.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements and the supplementary information in the half-
yearly financial report based on our review.
Scope of review
We conducted our reviews in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
and supplementary information consists of making enquiries, primarily of
persons responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially less in
scope than an audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2009 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR
of the UK FSA.
Based on our review, nothing has come to our attention that causes us to
believe that the Old Mutual MCEV basis supplementary information for the six
months ended 30 June 2009 is not prepared, in all material respects, in
accordance with the basis of preparation as set out later in this
announcement, using the methodology and assumptions set out in notes 2 and 3
to the supplementary information.
Alastair W S Barbour
for and on behalf of KPMG Audit Plc
Chartered Accountants
8 Salisbury Square
London EC4Y 8BB
5 August 2009
Consolidated income statement
For the six months ended 30 June 2009
GBPm
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2009 2008 2008
Notes Restated*
Revenue
Gross earned premiums 3(iii) 1,817 2,861 5,156
Outward reinsurance (180) (164) (335)
Net earned premiums 1,637 2,697 4,821
Investment return
(non-banking) 1,553 (4,074) (11,578)
Banking interest and
similar income 2,112 1,894 4,059
Banking trading,
investment and similar
income 73 70 162
Fee and commission
income, and income from
service activities 1,119 1,189 2,313
Other income 61 190 270
Total revenues 6,555 1,966 47
Expenses
Claims and benefits
(including change in
insurance contract
provisions) (1,377) (2,023) (3,610)
Reinsurance recoveries 176 149 262
Net claims and benefits
incurred (1,201) (1,874) (3,348)
Change in investment
contract liabilities (1,142) 3,842 10,051
Losses on loans and
advances (253) (126) (319)
Finance costs (19) (9) 392
Banking interest payable
and similar expenses (1,437) (1,302) (2,853)
Fee and commission
expenses, and other
acquisition costs (406) (389) (937)
Other operating and
administrative expenses (1,446) (1,349) (2,834)
Goodwill impairment 4(ii) - - (74)
Change in third party
interest in consolidated
funds (282) 210 779
Amortisation of PVIF and
other acquired
intangibles 4(ii) (164) (176) (361)
Total expenses (6,350) (1,173) 496
Share of associated
undertakings` loss after
tax - (2) (1)
(Loss)/profit on disposal
of subsidiaries,
associated undertakings
and
strategic investments 4(iii) (45) 62 53
Profit before tax 160 853 595
Income tax
(expense)/credit 5(i) (133) (168) 88
Profit after tax for the
financial period 27 685 683
(Loss)/profit for the
financial period
attributable to:
Equity holders of the
parent (70) 549 441
Non-controlling interests
Ordinary shares 63 110 188
Preferred securities 34 26 54
Profit after tax for the
financial period 27 685 683
(Loss)/earnings per share
Basic (loss)/earnings per
ordinary share (pence) 6(i) (1.8) 11.2 8.6
Diluted (loss)/earnings
per ordinary share
(pence) 6(i) (1.7) 10.5 8.1
Weighted average number
of shares - millions 4,757 4,771 4,755
* Interim 2008 results have been restated to include Mutual & Federal as a
continuing operation.
Consolidated statement of comprehensive income
For the six months ended 30 June 2009
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Profit after tax for the
financial period 27 685 683
Other comprehensive income
Fair value gains/(losses):
Property revaluation 2 6 16
Net investment hedge 2 5 281
Available-for-sale
investments:
Fair value gains/(losses) 453 (528) (1,635)
Recycled to the income
statement 117 85 414
Shadow accounting (63) 227 26
Currency translation
differences/exchange
differences on translating
foreign operations (248) (269) 429
Other movements 47 (14) 68
Income tax relating to
components of other
comprehensive income (149) 67 366
Total comprehensive income 188 264 648
Equity holders of the parent 1 245 305
Non-controlling interests
Ordinary shares 151 (7) 299
Preferred securities 36 26 44
Total comprehensive income 188 264 648
Reconciliation of adjusted operating profit to profit after tax
For the six months ended 30 June 2009
GBPm
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2009 2008 2008
Notes Restated*
Long Term Savings 3(ii) 317 420 452
Nedbank 3(ii) 211 337 575
M&F 3(ii) 20 28 76
USAM 3(ii) 30 70 97
Bermuda 3(ii) 4 (47) (137)
582 808 1,063
Finance costs (47) (71) (140)
Long term investment
return on excess assets 46 53 108
Other shareholders`
expenses (43) (17) (32)
Adjusted operating profit
before tax 538 773 999
Adjusting items 4(i) (403) 146 (168)
Profit for the financial
period before tax
(excluding policyholder
tax) 135 919 831
Income tax attributable to
policyholder returns 3(ii) 25 (66) (236)
Profit for the financial
period before tax 160 853 595
Total income tax
(expense)/credit 5(i) (133) (168) 88
Profit after tax for the
financial period 27 685 683
* Interim 2008 results have been restated to include Mutual & Federal as a
continuing operation
Adjusted operating profit after tax attributable to ordinary equity holders
GBPm
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2009 2008 2008
Notes Restated*
Adjusted operating profit
before tax 538 773 999
Tax on adjusted operating
profit 5(iii) (149) (220) (86)
Adjusted operating profit
after tax 389 553 913
Non-controlling interest
- ordinary shares (72) (122) (218)
Non-controlling interest
- preferred securities (34) (26) (54)
Adjusted operating profit
after tax attributable to
ordinary equity holders 283 405 641
Adjusted weighted average
number of shares
(millions) 6(i) 5,232 5,245 5,230
Adjusted operating
earnings per share
(pence) 6(ii) 5.4 7.7 12.2
* Interim 2008 results have been restated to include Mutual & Federal as a
continuing operation
Basis of preparation
The reconciliation of adjusted operating profit to profit after tax 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.
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 non-controlling 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.
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 non-controlling 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.
Consolidated statement of financial position
At 30 June 2009
GBPm
At At At
30 June 30 June 31 December
Notes 2009 2008 2008*
Assets
Goodwill and other intangible assets 5,397 5,453 5,882
Mandatory reserve deposits with central
banks 856 610 734
Property, plant and equipment 763 549 682
Investment property 1,578 1,265 1,478
Deferred tax assets 1,434 764 1,590
Investments in associated undertakings
and joint ventures 115 69 111
Deferred acquisition costs 2,933 2,728 3,199
Reinsurers` share of long-term business
policyholder liabilities 1,162 1,411 1,148
Reinsurers` share of general insurance
liabilities 130 - 115
Deposits held with reinsurers 137 185 164
Loans and advances 37,835 29,890 35,745
Investments and securities 84,493 83,789 83,522
Current tax receivable 149 47 118
Client indebtedness for acceptances 146 201 220
Other assets 3,229 3,244 3,137
Derivative financial instruments -
assets 2,486 3,149 3,228
Cash and cash equivalents 2,672 3,129 2,862
Non-current assets held-for-sale - 571 7
Total assets 145,515 137,054 143,942
Liabilities
Long-term business policyholder
liabilities 80,801 78,954 81,269
General insurance liabilities 403 - 344
Third party interests in consolidated
funds 2,610 2,674 2,591
Borrowed funds 8 2,515 2,236 2,295
Provisions 409 429 477
Deferred revenue 604 521 598
Deferred tax liabilities 1,466 1,389 1,452
Current tax payable 195 206 219
Other liabilities 3,947 5,622 3,733
Liabilities under acceptances 146 201 220
Amounts owed to bank depositors 40,590 32,033 38,171
Derivative financial instruments -
liabilities 2,109 3,062 2,990
Non-current liabilities held-for-sale - 373 6
Total liabilities 135,795 127,700 134,365
Net assets 9,720 9,354 9,577
Shareholders` equity
Equity attributable to equity holders
of the parent 7,731 7,802 7,737
Non-controlling interests
Ordinary shares 1,293 849 1,147
Preferred securities 696 703 693
Total non-controlling interests 1,989 1,552 1,840
Total equity 9,720 9,354 9,577
* The 31 December 2008 financial position has been restated by an amount
of
GBP1,405 million for both derivative financial instruments assets and
liabilities on a consistent basis to 30 June 2009. There was no impact
on
the consolidated net assets at 31 December 2008 as a result of the
restatement.
Condensed consolidated statement of cash flows
For the six months ended 30 June 2009
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Cash flows from operating
activities
Profit before tax 160 853 595
Non-cash movements in
profit before tax 1,851 1,083 14,656
Changes in working capital (2,275) 811 (13,249)
Taxation paid (160) (262) (458)
Net cash (outflow)/inflow
from operating activities (424) 2,485 1,544
Cash flows from investing
activities
Net disposal/(acquisitions)
of financial investments 477 (2,388) (1,170)
Net acquisition of
investment properties (22) (19) (7)
Net acquisition of
property, plant and
equipment (98) (64) (110)
Net acquisition of
intangible assets (12) (2) (18)
Acquisition of interests in
subsidiaries (2) (65) (93)
Disposal of interests in
subsidiaries, associated
undertakings and
strategic investments 16 1,133 1,138
Net cash inflow/(outflow)
from investing activities 359 (1,405) (260)
Cash flows from financing
activities
Dividends paid to:
Equity holders of the
Company - (227) (352)
Equity non-controlling
interests and preferred
security interests (103) (109) (208)
Interest paid (excluding
banking interest paid) (120) (61) (87)
Proceeds from issue of
ordinary shares (including
by subsidiaries to non-
controlling interests) 46 (226) 31
Net sale of treasury shares 4 - 5
Shares repurchased in
buyback programme - - (175)
Issue of subordinated and
other debt 290 76 374
Other debt repaid (33) (13) (225)
Net cash inflow/(outflow)
from financing activities 84 (560) (637)
Net increase in cash and
cash equivalents 19 520 647
Effects of exchange rate
changes on cash and cash
equivalents (175) (235) 399
Cash and cash equivalents
at beginning of the year 4,642 3,596 3,596
Cash and cash equivalents
at end of the period 4,486 3,881 4,642
Consisting of:
Cash and cash equivalents 2,672 3,129 2,862
Mandatory reserve deposits
with central banks 856 610 734
Short term cash balances
held in policyholder funds 1,744 1,084 2,043
Cash and cash equivalents
subject to consolidation of
funds (785) (942) (997)
Total 4,486 3,881 4,642
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 statement of cash flows in
line with market practice in South Africa.
Consolidated statement of changes in equity
For the six months ended 30 June 2009
Millions
Number of Attributable to
shares issued equity holders
Six months ended 30 June 2009 and fully paid of the parent
Notes
Equity holders` funds at
beginning of the period 5,516 7,737
(Loss)/profit after tax for
the financial period - (70)
Other comprehensive income - -
Fair value gains:
Property revaluation - 2
Net investment hedge - 2
Available-for-sale investments:
Fair value gains - 453
Recycled to the income
statement - 117
Shadow accounting - (63)
Currency translation
differences/exchange
differences on
translating foreign operations - (327)
Other movements - 36
Income tax relating to
components of other
comprehensive income - (149)
Total comprehensive income - 1
Dividends for the period 9 - (22)
Net sale of treasury shares - 5
Change in participation in
subsidiaries - (4)
Fair value of equity settled
share options - 14
Transactions with shareholders - (7)
Equity holders` funds at end
of the period 5,516 7,731
Total non- GBPm
controlling Total
Six months ended 30 June 2009 interest equity
Equity holders` funds at beginning of the period 1,840 9,577
(Loss)/profit after tax for the financial period 97 27
Other comprehensive income - -
Fair value gains:
Property revaluation - 2
Net investment hedge - 2
Available-for-sale investments:
Fair value gains - 453
Recycled to the income statement - 117
Shadow accounting - (63)
Currency translation differences/exchange
differences on
translating foreign operations 79 (248)
Other movements 11 47
Income tax relating to components of other
comprehensive income - (149)
Total comprehensive income 187 188
Dividends for the period (81) (103)
Net sale of treasury shares (1) 4
Change in participation in subsidiaries 42 38
Fair value of equity settled share options 2 16
Transactions with shareholders (38) (45)
Equity holders` funds at end of the period 1,989 9,720
GBPm
Share Share Other
Six months ended 30 June 2009 Notes capital premium reserves
Attributable to equity holders
of the parent at beginning of
the period 552 766 2,130
(Loss)/profit for the financial
period attributable to equity
holders of the parent - - -
Other comprehensive income
Fair value gains:
Property revaluation - - 2
Net investment hedge - - -
Available-for-sale investments:
Fair value gains - - 453
Recycled to income statement on
realisation - - 117
Shadow accounting - - (63)
Currency translation
differences/exchange differences
on
translating foreign operations - - -
Other movements - 3 (6)
Income tax relating to
components of other
comprehensive
income - - (150)
Total comprehensive income - 3 353
Dividends for the period 9 - - -
Net sale of treasury shares - - -
Change in participation in
subsidiaries - - (4)
Fair value of equity settled
share options - - 14
Transactions with shareholders - - 10
Attributable to equity holders
of the parent at end of the
period 552 769 2,493
Perpetual
preferred
Translation Retained callable
Six months ended 30 June
2009 reserve earnings securities Total
Attributable to equity
holders of the parent at
beginning of
the period 386 3,215 688 7,737
(Loss)/profit for the
financial period
attributable to equity
holders of the parent - (86) 16 (70)
Other comprehensive income
Fair value gains:
Property revaluation - - - 2
Net investment hedge 2 - - 2
Available-for-sale
investments:
Fair value gains - - - 453
Recycled to income
statement on realisation - - - 117
Shadow accounting - - - (63)
Currency translation
differences/exchange
differences on
translating foreign
operations (327) - - (327)
Other movements 2 37 - 36
Income tax relating to
components of other
comprehensive
income - (5) 6 (149)
Total comprehensive income (323) (54) 22 1
Dividends for the period - - (22) (22)
Net sale of treasury
shares - 5 - 5
Change in participation
in subsidiaries - - - (4)
Fair value of equity
settled share options - - - 14
Transactions with
shareholders - 5 (22) (7)
Attributable to equity
holders of the parent at
end of the
period 63 3,166 688 7,731
GBPm
At
30 June
Other reserves 2009
Merger reserve 2,716
Available-for-sale reserve (482)
Property revaluation reserve 83
Share-based payments reserve 179
Other reserves (3)
Attributable to equity holders of the parent at end of the period 2,493
Retained earnings were reduced by GBP342 million at 30 June 2009 (GBP550
million at 30 June 2008, 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 continued
For the six months ended 30 June 2009
Millions
Number of Attributable to
shares issued equity holders
Six months ended 30 June 2008 and fully paid of the parent
Notes
Equity holders` funds at
beginning of the period 5,510 7,961
Profit after tax for the
financial period - 549
Other comprehensive income
Fair value gains:
Property revaluation - 6
Net investment hedge - 5
Available-for-sale investments:
Fair value losses - (528)
Recycled to the income
statement - 85
Shadow accounting - 227
Currency translation
differences/exchange
differences on translating
foreign operations - (150)
Other movements - (16)
Income tax relating to
components of other
comprehensive income - 67
Total comprehensive income - 245
Dividends for the period 9 - (249)
Net sale of treasury shares - (5)
Shares repurchased in the
buyback programme - (174)
Issue of ordinary share
capital by the Company - 4
Change in participation in
subsidiaries - -
Exercise of share options 4 3
Fair value of equity settled
share options - 17
Transactions with shareholders 4 (404)
Equity holders` funds at end
of the period 5,514 7,802
GBPm
Total non-
controlling Total
Six months ended 30 June 2008 interest equity
Equity holders` funds at beginning of the period 1,636 9,597
Profit after tax for the financial period 136 685
Other comprehensive income
Fair value gains:
Property revaluation - 6
Net investment hedge - 5
Available-for-sale investments:
Fair value losses - (528)
Recycled to the income statement - 85
Shadow accounting - 227
Currency translation differences/exchange
differences on translating
foreign operations (119) (269)
Other movements 2 (14)
Income tax relating to components of other
comprehensive income - 67
Total comprehensive income 19 264
Dividends for the period (87) (336)
Net sale of treasury shares - (5)
Shares repurchased in the buyback programme - (174)
Issue of ordinary share capital by the Company - 4
Change in participation in subsidiaries (16) (16)
Exercise of share options - 3
Fair value of equity settled share options - 17
Transactions with shareholders (103) (507)
Equity holders` funds at end of the period 1,552 9,354
Share Share Other
Six months ended 30 June 2008 Notes capital premium reserves
Attributable to equity holders
of the parent at beginning of
the period 551 757 2,908
Profit for the financial period
attributable to equity holders
of
the parent - - -
Other comprehensive income
Fair value gains/(losses):
Property revaluation - - 6
Net investment hedge - - -
Available-for-sale investments:
Fair value gains/(losses) - - (528)
Recycled to income statement - - 85
Shadow accounting - - 227
Currency translation
differences/exchange differences
on
translating foreign operations - - -
Other movements - 2 (9)
Income tax relating to
components of other
comprehensive
income - - 61
Total comprehensive income - 2 (158)
Dividends for the period 9 - - -
Net purchase of treasury shares - - -
Shares repurchased in the
buyback programme - - -
Issue of ordinary share capital
by the Company - 4 -
Exercise of share options - 3 -
Fair value of equity settled
share options - - 17
Transactions with shareholders - 7 17
Attributable to equity holders
of the parent at end of the
period 551 766 2,767
GBPm
Perpetual
preferred
Translation Retained callable
Six months ended 30 June
2008 reserve earnings securities Total
Attributable to equity
holders of the parent at
beginning of
the period (304) 3,361 688 7,961
Profit for the financial
period attributable to
equity holders of
the parent - 533 16 549
Other comprehensive income
Fair value gains/(losses):
Property revaluation - - - 6
Net investment hedge 5 - - 5
Available-for-sale
investments:
Fair value gains/(losses) - - - (528)
Recycled to income
statement - - - 85
Shadow accounting - - - 227
Currency translation
differences/exchange
differences on
translating foreign
operations (150) - - (150)
Other movements - (9) - (16)
Income tax relating to
components of other
comprehensive
income - - 6 67
Total comprehensive income (145) 524 22 245
Dividends for the period - (227) (22) (249)
Net purchase of treasury
shares - (5) - (5)
Shares repurchased in the
buyback programme - (174) - (174)
Issue of ordinary share
capital by the Company - - - 4
Exercise of share options - - - 3
Fair value of equity
settled share options - - - 17
Transactions with
shareholders - (406) (22) (404)
Attributable to equity
holders of the parent at
end of the
period (449) 3,479 688 7,802
GBPm
At
30 June
Other reserves 2008
Merger reserve 2,716
Available-for-sale reserve (180)
Property revaluation reserve 75
Share-based payments reserve 156
Other reserves -
Attributable to equity holders of the parent at end of the period 2,767
Consolidated statement of changes in equity continued
For the six months ended 30 June 2009
Millions
Number of Attributable to
shares issued equity holders
Year ended 31 December 2008 and fully paid of the parent
Notes
Equity holders` funds at
beginning of the year 5,510 7,961
Profit after tax for the
financial period - 441
Other comprehensive income
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)
Income tax relating to
components of other
comprehensive income - 366
Total comprehensive income - 305
Dividends for the year 9 - (395)
Net sale of treasury shares - 5
Shares repurchased in the
buyback 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
Transactions with shareholders 6 (529)
Equity holders` funds at end
of the year 5,516 7,737
Total non- GBPm
controlling Total
Year ended 31 December 2008 interest equity
Equity holders` funds at beginning of the year 1,636 9,597
Profit after tax for the financial period 242 683
Other comprehensive income
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
Income tax relating to components of other
comprehensive income - 366
Total comprehensive income 343 648
Dividends for the year (165) (560)
Net sale of treasury shares - 5
Shares repurchased in the buyback 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
Transactions with shareholders (139) (668)
Equity holders` funds at end of the year 1,840 9,577
Share Share Other
Year ended 31 December 2008 Notes capital premium reserves
Attributable to equity holders
of the parent at beginning of
the year 551 757 2,908
Profit for the financial year
attributable to equity holders
of
the parent - - -
Other comprehensive income
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
Income tax relating to
components of other
comprehensive
income - - 367
Total comprehensive income - - (804)
Dividends for the year 9 - - -
Net sale of treasury shares - - -
Shares repurchased in the
buyback programme - - -
Issue of ordinary share capital
by the Company - 5 -
Exercise of share options 1 4 -
Fair value of equity settled
share options - - 26
Transactions with shareholders 1 9 26
Attributable to equity holders
of the parent at end of the year 552 766 2,130
Perpetual
preferred
Translation Retained callable GBPm
Year ended 31 December
2008 reserve earnings securities Total
Attributable to equity
holders of the parent
at beginning of
the year (304) 3,361 688 7,961
Profit for the
financial year
attributable to equity
holders of
the parent - 410 31 441
Other comprehensive
income
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)
Income tax relating to
components of other
comprehensive
income (13) - 12 366
Total comprehensive
income 690 376 43 305
Dividends for the year - (352) (43) (395)
Net sale of treasury
shares - 5 - 5
Shares repurchased in
the buyback 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
Transactions with
shareholders - (522) (43) (529)
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
period 2,130
Notes to the consolidated financial statements
For the six months ended 30 June 2009
1 Accounting policies
Basis of preparation
The consolidated financial information contained herein has been prepared in
accordance with the recognition and measurement principles of International
Financial Reporting Standards adopted by the EU and in accordance with the
requirements of IAS 34 `Interim Financial Reporting`.
The Group`s results for the six months ended 30 June 2009 and the position at
that date have been prepared using accounting policies consistent with those
applied in the preparation of the Group`s 2008 Annual Report and Accounts,
except for the revised IAS 1 set out below.
The consolidated financial information has been prepared on the going concern
basis which the directors believe appropriate having taken into consideration
the matters discussed in the Group Finance Director`s Review in the section
headed Risk and Uncertainties.
The comparative figures for the financial year ended 31 December 2008 are not
the company`s statutory accounts for that financial year. Those accounts have
been reported on by the company`s auditors and delivered to the registrar of
companies. The report of the auditors was (i) unqualified, (ii) did not
include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report, and (iii) did not contain a
statement
under section 237(2) or (3) of the Companies Act 1985.
Implementation of revised IAS 1 `Presentation of Financial Statements`
The financial information set out herein incorporates changes introduced as a
result of the publication of a revised version of IAS 1 `Presentation of
Financial Statements`, effective for accounting periods commencing on or after
1 January 2009. The principal change is the inclusion of a new statement, a
consolidated statement of comprehensive income, separately from the
consolidated statement of changes in equity. Comparative information has been
restated accordingly. There were no impacts on the Group`s results or net
assets as a result of the introduction of the revised standard.
Segment presentation
There has been a presentational change in the way segmental information is
reflected in the consolidated financial information following a change in the
way that management and the Board of Directors considers information when
making operating decisions and the basis on which resources are allocated and
performance assessed by management and the Board of Directors. The reported
segments are Long-term savings, Nedbank, Mutual & Federal (M&F), US Asset
Management (USAM), Bermuda and Other operating segments.
The long-term savings segment is further analysed by major operating segments,
namely OMSA (including Rest of Africa), Europe, US Life and Asia Pacific.
Results of other business activities and operating segments are disclosed in
the `Other operating segments` category. Other operating segments comprise
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
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.
Reclassifications of comparative segment information have been made to align
to
the Group management reporting structure described above.
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,
were adopted in the Group`s 2008 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 were updated in 2008 to reflect the amendments to
the standard. The Group`s US Life on-shore business applied the amendments to
certain financial assets previously categorised as available-for-sale, which
it
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, with no impact on the comparative interim financial
information shown in this report. 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 foreign operations to Sterling are:
Income Statement of
statement financial position
(average rate) (closing rate)
30 June 2009
Rand 13.7363 12.7351
US Dollars 1.4947 1.6453
Swedish Kronor 12.1787 12.6989
Euro 1.1193 1.1725
30 June 2008
Rand 15.1008 15.5673
US Dollars 1.9746 1.9908
Swedish Kronor 12.1128 12.0009
Euro 1.2903 1.2651
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
3 Segment information
(i) Basis of segmentation
The Group`s results are analysed across the following reportable segments:
* Long-term savings - long-term business, asset management and banking
* Nedbank - banking and asset management
* Mutual & Federal (M&F) - general insurance
* US Asset Management (USAM) - asset management
* Bermuda - long-term business and asset management
* Other operating segments.
For purposes of presentation the long-term savings segment is further analysed
by major operating segments, namely OMSA (including Rest of Africa), Europe,
US
Life and Asia Pacific. Results of other business activities and operating
segments are disclosed in the `other operating segments` category. Other
operating segments comprise Group head office.
The segmental information is consistent with the way that management and the
Board of Directors consider information when making operating decisions and is
the basis on which resources are allocated and performance assessed by
management and the Board of Directors.
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 later in this announcement.
Comparative segment information has been revised in accordance with the
changes
in presentation made in the current financial period.
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(ii) Adjusted operating profit statement - segment information six months
ended
30 June 2009
Long Term Savings
OMSA Europe US Life
Revenue
Gross earned premiums 877 215 421
Outward reinsurance (28) (47) (51)
Net earned premiums 849 168 370
Investment return (non-banking) (98) 1,120 303
Banking interest and similar income - 96 -
Banking trading, investment and similar income - - -
Fee and commission income, and income from
service activities 105 558 -
Other income 12 11 1
Inter-segment revenues 29 18 -
Total revenues 897 1,971 674
Expenses
Claims and benefits (including change in
insurance contract provisions) (219) (218) (589)
Reinsurance recoveries 28 55 54
Net claims and benefits incurred (191) (163) (535)
Change in investment contract liabilities (114) (1,026) -
Losses on loans and advances - (3) -
Finance costs - - -
Banking interest payable and similar expenses - (51) -
Fee and commission expenses, and other
acquisition costs (77) (256) (71)
Other operating and administrative expenses (291) (351) (32)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns (2) (23) -
Inter-segment expenses (4) (22) (7)
Total expenses (679) (1,895) (645)
Share of associated undertakings`
profit/(loss) after tax 1 - -
(Loss)/profit on disposal of subsidiaries,
associated undertakings and
strategic investments - - -
Adjusted operating profit/(loss) before tax
and non-controlling interests 219 76 29
Tax expense (60) (6) (8)
Non-controlling interests (2) - -
Adjusted operating profit/(loss) after tax
and non-controlling interests 157 70 21
Adjusting items net of tax and
non-controlling interests (63) (115) (98)
Profit/(loss) after tax attributable to
equity holders of the parent 94 (45) (77)
Asia
Pacific Total
Revenue
Gross earned premiums - 1,513
Outward reinsurance - (126)
Net earned premiums - 1,387
Investment return (non-banking) - 1,325
Banking interest and similar income - 96
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities 4 667
Other income - 24
Inter-segment revenues - 47
Total revenues 4 3,546
Expenses
Claims and benefits (including change in insurance
contract provisions) - (1,026)
Reinsurance recoveries - 137
Net claims and benefits incurred - (889)
Change in investment contract liabilities - (1,140)
Losses on loans and advances - (3)
Finance costs - -
Banking interest payable and similar expenses - (51)
Fee and commission expenses, and other acquisition costs (1) (405)
Other operating and administrative expenses (11) (685)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns - (25)
Inter-segment expenses - (33)
Total expenses (12) (3,231)
Share of associated undertakings` profit/(loss) after
tax 1 2
(Loss)/profit on disposal of subsidiaries, associated
undertakings and
strategic investments - -
Adjusted operating profit/(loss) before tax and
non-controlling interests (7) 317
Tax expense (4) (78)
Non-controlling interests - (2)
Adjusted operating profit/(loss) after tax and
non-controlling interests (11) 237
Adjusting items net of tax and non-controlling interests (45) (321)
Profit/(loss) after tax attributable to equity holders
of the parent (56) (84)
3 Segment information continued
(ii) Adjusted operating profit statement - segment information six months
ended
30 June 2009 continued
Nedbank M&F USAM
- 297 -
- (54) -
- 243 -
- 26 -
2,016 - -
73 - -
293 9 206
24 - 2
14 18 5
2,420 296 213
- (221) -
- 40 -
- (181) -
- - -
(250) - -
- - -
(1,392) - -
- (53) (8)
(529) (30) (175)
- - -
- - -
- - -
- - -
(40) (12) -
(2,211) (276) (183)
2 - -
- - -
211 20 30
(48) (4) (9)
(84) (4) -
79 12 21
10 (5) 11
89 7 32
Other
operating Consolidation
Bermuda segments adjustments
7 - -
- - -
7 - -
124 43 310
- - -
- - -
- - -
11 - -
- 12 (96)
142 55 214
(130) - -
1 - -
(131) - -
(2) - -
- - -
- (47) -
- - -
4 - (25)
(8) (38) (3)
- - -
- - (282)
- - -
- - -
(1) (10) 96
(138) (95) (214)
- (4) -
- - -
4 (44) -
- (10) -
- (16) -
4 (70) -
(49) 1 -
(45) (69) -
Adjusted
operating GBPm
profit IFRS
Total Adjusting Income
reportable items statement
segments (Note 4)
1,817 - 1,817
(180) - (180)
1,637 - 1,637
1,828 (275) 1,553
2,112 - 2,112
73 - 73
1,175 (56) 1,119
61 - 61
- - -
6,886 (331) 6,555
(1,377) - (1,377)
176 - 176
(1,201) - (1,201)
(1,142) - (1,142)
(253) - (253)
(47) 28 (19)
(1,443) 6 (1,437)
(487) 81 (406)
(1,468) 22 (1,446)
- - -
(282) - (282)
- (164) (164)
(25) 25 -
- - -
(6,348) (2) (6,350)
- - -
- (45) (45)
538 (378) 160
(149) 16 (133)
(106) 9 (97)
283 (353) (70)
(353)
(70)
Notes to the consolidated financial statements
For the six months ended 30 June 2009 continued
3 Segment information continued
(ii) Adjusted operating profit statement - segment information six months
ended
30 June 2008
Long Term Savings
OMSA Europe US Life
Revenue
Gross earned premiums 790 126 582
Outward reinsurance (24) (44) (51)
Net earned premiums 766 82 531
Investment return (non-banking) (193) (3,798) 96
Banking interest and similar income - 129 -
Banking trading, investment and similar income - 2 -
Fee and commission income, and income from
service activities 103 606 -
Other income 55 21 13
Inter-segment revenues 100 130 -
Total revenues 831 (2,828) 640
Expenses
Claims and benefits (including change in
insurance contract
provisions) (289) (68) (567)
Reinsurance recoveries 35 22 54
Net claims and benefits incurred (254) (46) (513)
Change in investment contract liabilities 44 3,795 -
Losses on loans and advances - (1) -
Finance costs - - -
Banking interest payable and similar expenses - (89) -
Fee and commission expenses, and other
acquisition costs (72) (267) (43)
Other operating and administrative expenses (243) (348) (27)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns (4) 70 -
Inter-segment expenses (79) (138) (4)
Total expenses (608) 2,976 (587)
Share of associated undertakings`
profit/(loss) after tax 4 - -
Profit on disposal of subsidiaries,
associated undertakings and
strategic investments - - -
Adjusted operating profit/(loss) before tax
and non-controlling interests 227 148 53
Tax expense (78) (44) (15)
Non-controlling interests (2) (1) -
Adjusted operating profit/(loss) after tax
and non-controlling interests 147 103 38
Adjusting items net of tax and
non-controlling interests 176 (12) (52)
Profit/(loss) after tax attributable to
equity holders of the parent 323 91 (14)
Asia
Pacific Total
Revenue
Gross earned premiums - 1,498
Outward reinsurance - (119)
Net earned premiums - 1,379
Investment return (non-banking) - (3,895)
Banking interest and similar income - 129
Banking trading, investment and similar income - 2
Fee and commission income, and income from service
activities 19 728
Other income - 89
Inter-segment revenues - 230
Total revenues 19 (1,338)
Expenses
Claims and benefits (including change in insurance
contract
provisions) - (924)
Reinsurance recoveries - 111
Net claims and benefits incurred - (813)
Change in investment contract liabilities - 3,839
Losses on loans and advances - (1)
Finance costs - -
Banking interest payable and similar expenses - (89)
Fee and commission expenses, and other acquisition costs (6) (388)
Other operating and administrative expenses (17) (635)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns - 66
Inter-segment expenses (1) (222)
Total expenses (24) 1,757
Share of associated undertakings` profit/(loss) after
tax (3) 1
Profit on disposal of subsidiaries, associated
undertakings and
strategic investments - -
Adjusted operating profit/(loss) before tax and
non-controlling interests (8) 420
Tax expense - (137)
Non-controlling interests - (3)
Adjusted operating profit/(loss) after tax and
non-controlling interests (8) 280
Adjusting items net of tax and non-controlling interests - 112
Profit/(loss) after tax attributable to equity holders
of the parent (8) 392
3 Segment information continued
(ii) Adjusted operating profit statement - segment information six months
ended
30 June 2008 continued
Nedbank M&F USAM
- 301 -
- (45) -
- 256 -
- 28 10
1,765 - -
68 - -
254 8 250
67 - 8
8 5 4
2,162 297 272
- (221) -
- 38 -
- (183) -
- - -
(125) - -
- - -
(1,213) - -
- (58) (5)
(466) (24) (197)
- - -
- - -
- - -
- - -
(24) (4) -
(1,828) (269) (202)
3 - -
- - -
337 28 70
(77) (5) (13)
(130) (7) -
130 16 57
14 (6) (1)
144 10 56
Other
operating Consolidation
segments adjustments
Bermuda
1,062 - -
- - -
1,062 - -
(237) 60 (184)
- - -
- - -
- - 1
10 - 16
- 7 (254)
835 67 (421)
(878) - -
- - -
(878) - -
3 - -
- - -
- (71) -
- - -
4 - (39)
(10) (22) (4)
- - -
- - 210
- - -
- - -
(1) (3) 254
(882) (96) 421
- (6) -
- - -
(47) (35) -
(3) 15 -
- (8) -
(50) (28) -
(50) 75 -
(100) 47 -
Adjusted operating GBPm
profit IFRS
Total reportable Adjusting items Income
segments (Note 4) statement
2,861 - 2,861
(164) - (164)
2,697 - 2,697
(4,218) 144 (4,074)
1,894 - 1,894
70 - 70
1,241 (52) 1,189
190 - 190
- - -
1,874 92 1,966
(2,023) - (2,023)
149 - 149
(1,874) - (1,874)
3,842 - 3,842
(126) - (126)
(71) 62 (9)
(1,302) - (1,302)
(486) 97 (389)
(1,358) 9 (1,349)
- - -
210 - 210
- (176) (176)
66 (66) -
- - -
(1,099) (74) (1,173)
(2) - (2)
- 62 62
773 80 853
(220) 52 (168)
(148) 12 (136)
405 144 549
144
549
3 Segment information continued
(ii) Adjusted operating profit statement - segment information year ended 31
December 2008
Long Term Savings
OMSA Europe US Life
Revenue
Gross earned premiums 1,672 315 1,269
Outward reinsurance (47) (90) (106)
Net earned premiums 1,625 225 1,163
Investment return (non-banking) (427) (9,918) 211
Banking interest and similar income - 266 -
Banking trading, investment and similar
income - 24 -
Fee and commission income, and income from
service activities 189 1,167 -
Other income 97 36 3
Inter-segment revenues 230 237 -
Total revenues 1,714 (7,963) 1,377
Expenses
Claims and benefits (including change in
insurance contract provisions) (700) (209) (1,478)
Reinsurance recoveries 42 40 106
Net claims and benefits incurred (658) (169) (1,372)
Change in investment contract liabilities 200 9,847 -
Losses on loans and advances - (4) -
Finance costs - - -
Banking interest payable and similar
expenses - (183) -
Fee and commission expenses, and other
acquisition costs (156) (530) (158)
Other operating and administrative expenses (497) (692) (68)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns 6 230 -
Inter-segment expenses (183) (270) (9)
Total expenses (1,288) 8,229 (1,607)
Share of associated undertakings`
profit/(loss) after tax 6 - -
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - -
Adjusted operating profit/(loss) before tax
and non-controlling interests 432 266 (230)
Tax expense (135) (81) 76
Non-controlling interests (5) - -
Adjusted operating profit/(loss) after tax
and non-controlling interests 292 185 (154)
Adjusting items net of tax and
non-controlling interests 148 (83) (341)
Profit/(loss) after tax attributable to
equity holders of the parent 440 102 (495)
Asia
Pacific Total
Revenue
Gross earned premiums - 3,256
Outward reinsurance - (243)
Net earned premiums - 3,013
Investment return (non-banking) 1 (10,133)
Banking interest and similar income - 266
Banking trading, investment and similar income - 24
Fee and commission income, and income from service
activities 33 1,389
Other income - 136
Inter-segment revenues - 467
Total revenues 34 (4,838)
Expenses
Claims and benefits (including change in insurance
contract provisions) - (2,387)
Reinsurance recoveries - 188
Net claims and benefits incurred - (2,199)
Change in investment contract liabilities - 10,047
Losses on loans and advances - (4)
Finance costs - -
Banking interest payable and similar expenses - (183)
Fee and commission expenses, and other acquisition
costs (10) (854)
Other operating and administrative expenses (37) (1,294)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns - 236
Inter-segment expenses - (462)
Total expenses (47) 5,287
Share of associated undertakings` profit/(loss) after
tax (3) 3
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - -
Adjusted operating profit/(loss) before tax and
non-controlling interests (16) 452
Tax expense - (140)
Non-controlling interests - (5)
Adjusted operating profit/(loss) after tax and
non-controlling interests (16) 307
Adjusting items net of tax and non-controlling
interests (1) (277)
Profit/(loss) after tax attributable to equity holders
of the parent (17) 30
3 Segment information continued
(ii) Adjusted operating profit statement - segment information year ended 31
December 2008 continued
Nedbank M&F USAM
- 570 -
- (91) -
- 479 -
- 56 (3)
3,793 - -
138 - -
533 16 473
85 - 17
19 26 8
4,568 577 495
- (401) -
- 72 -
- (329) -
- - -
(315) - -
- - -
(2,684) - -
- (101) (10)
(928) (59) (388)
- - -
- - -
- - -
- - -
(71) (12) -
(3,998) (501) (398)
5 - -
- - -
575 76 97
(123) (17) 2
(227) (19) -
225 40 99
29 (49) 1
254 (9) 100
Other
operating Consolidation
segments adjustments
Bermuda
1,330 - -
(1) - -
1,329 - -
(543) 94 (713)
- - -
- - -
- - (1)
19 - 13
- 66 (586)
805 160 (1,287)
(822) - -
2 - -
(820) - -
4 - -
- - -
- (140) -
- - -
(106) - (44)
(16) (38) (34)
- - -
- - 779
- - -
- - -
(4) (37) 586
(942) (215) 1,287
- (9) -
- - -
(137) (64) -
- 192 -
- (21) -
(137) 107 -
(228) 324 -
(365) 431 -
GBPm
Adjusted
operating profit IFRS
Total reportable Adjusting items Income
segments (Note 4) statement
5,156 - 5,156
(335) - (335)
4,821 - 4,821
(11,242) (336) (11,578)
4,059 - 4,059
162 - 162
2,410 (97) 2,313
270 - 270
- - -
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)
(1,115) 178 (937)
(2,757) (77) (2,834)
- (74) (74)
779 - 779
- (361) (361)
236 (236) -
- - -
520 (24) 496
(1) - (1)
- 53 53
999 (404) 595
(86) 174 88
(272) 30 (242)
641 (200) 441
(200)
441
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(iii) Gross earned premiums
Long Term Savings
Six months ended 30 June 2009 OMSA Europe US Life
Long-term business-insurance contracts 582 215 421
Long-term business-investment contracts with
discretionary
participation features 295 - -
General insurance - - -
Gross earned premiums 877 215 421
Long-term business - other investment
contracts recognised as
deposits 1,213 3,064 82
Asia
Six months ended 30 June 2009 Pacific Total
Long-term business-insurance contracts - 1,218
Long-term business-investment contracts with discretionary
participation features - 295
General insurance - -
Gross earned premiums - 1,513
Long-term business - other investment contracts
recognised as
deposits - 4,359
Long Term Savings
Six months ended 30 June 2008 OMSA Europe US Life
Long-term business-insurance contracts 526 126 582
Long-term business-investment contracts with
discretionary
participation features 264 - -
General insurance - - -
Gross earned premiums 790 126 582
Long-term business - other investment contracts
recognised as
deposits 597 3,938 53
Asia
Six months ended 30 June 2008 Pacific Total
Long-term business-insurance contracts - 1,234
Long-term business-investment contracts with discretionary
participation features - 264
General insurance - -
Gross earned premiums - 1,498
Long-term business - other investment contracts
recognised as
deposits - 4,588
Long Term Savings
Year ended 31 December 2008 OMSA Europe US Life
Long-term business-insurance contracts 1,148 315 1,269
Long-term business-investment contracts with
discretionary
participation features 524 - -
General insurance - - -
Gross earned premiums 1,672 315 1,269
Long-term business - other investment
contracts recognised as
deposits 1,391 6,920 115
Asia
Year ended 31 December 2008 Pacific Total
Long-term business-insurance contracts - 2,732
Long-term business-investment contracts with discretionary
participation features - 524
General insurance - -
Gross earned premiums - 3,256
Long-term business - other investment contracts
recognised as
deposits - 8,426
(iv) Impairments on financial assets
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Europe 3 1 5
US Life 133 68 392
Total Long Term Savings 136 69 397
Nedbank 250 125 315
Bermuda 14 7 22
Total 400 201 734
3 Segment information continued
(iii) Gross earned premiums
GBPm
Nedbank M&F USAM Bermuda Total
- - - 7 1,225
- - - - 295
297 297
- 297 - 7 1,817
- - - 8 4,367
GBPm
Nedbank M&F USAM Bermuda Total
- - - 1,062 2,296
- - - - 264
- 301 - - 301
- 301 - 1,062 2,861
- - - 63 4,651
GBPm
Nedbank M&F USAM Bermuda Total
- - - 1,330 4,062
- - - - 524
- 570 - - 570
- 570 - 1,330 5,156
- - - 115 8,541
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(v) Funds under management
Long Term Savings
As at 30 June 2009 OMSA Europe US Life
Long-term business policyholder funds 21,380 39,102 347
Unit trusts and mutual funds 4,044 12,668 -
Third party client funds 6,988 - -
Total client funds under management 32,412 51,770 347
Shareholder funds 1,776 1,289 -
Total funds under management 34,188 53,059 347
Asia
As at 30 June 2009 Pacific Total
Long-term business policyholder funds 257 61,086
Unit trusts and mutual funds - 16,712
Third party client funds - 6,988
Total client funds under management 257 84,786
Shareholder funds - 3,065
Total funds under management 257 87,851
Long Term Savings
As at 30 June 2008 OMSA Europe US Life
Long-term business policyholder funds 18,435 42,665 235
Unit trusts and mutual funds 3,318 13,249 -
Third party client funds 6,221 - -
Total client funds under management 27,974 55,914 235
Shareholder funds 1,721 1,348 -
Total funds under management 29,695 57,262 235
Asia
As at 30 June 2008 Pacific Total
Long-term business policyholder funds 167 61,502
Unit trusts and mutual funds 2,346 18,913
Third party client funds 3,453 9,674
Total client funds under management 5,966 90,089
Shareholder funds - 3,069
Total funds under management 5,966 93,158
Long Term Savings
As at 31 December 2008 OMSA Europe US Life
Long-term business policyholder funds 20,301 38,791 241
Unit trusts and mutual funds 3,613 12,399 -
Third party client funds 8,841 - -
Total client funds under management 32,755 51,190 241
Shareholder funds 1,632 1,614 -
Total funds under management 34,387 52,804 241
Asia
As at 31 December 2008 Pacific Total
Long-term business policyholder funds 193 59,526
Unit trusts and mutual funds 1,859 17,871
Third party client funds 1,484 10,325
Total client funds under management 3,536 87,722
Shareholder funds - 3,246
Total funds under management 3,536 90,968
3 Segment information continued
(v) Funds under management
GBPm
Nedbank M&F USAM Bermuda Total
549 - 12,359 2,327 76,321
2,863 - 3,132 - 22,707
3,361 - 134,529 - 144,878
6,773 - 150,020 2,327 243,906
- 139 163 - 3,367
6,773 139 150,183 2,327 247,273
GBPm
Nedbank M&F USAM Bermuda Total
412 - 11,404 2,298 75,616
2,321 - 4,878 - 26,112
3,096 - 141,613 - 154,383
5,829 - 157,895 2,298 256,111
- 78 176 - 3,323
5,829 78 158,071 2,298 259,434
GBPm
Nedbank M&F USAM Bermuda Total
425 - 13,623 2,401 75,975
2,617 - 3,127 - 23,615
3,375 - 147,956 - 161,656
6,417 - 164,706 2,401 261,246
- 145 177 - 3,568
6,417 145 164,883 2,401 264,814
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(vi) Statement of financial position - segment information at 30 June 2009
Long Term Savings
At 30 June 2009 OMSA Europe US Life
Assets
Goodwill and other intangible assets 35 3,543 101
Mandatory reserve deposits with central banks - - -
Property, plant and equipment 327 38 1
Investment property 1,405 3 -
Deferred tax assets 58 283 918
Investments in associated undertakings and
joint ventures 8 1 -
Deferred acquisition costs 111 1,000 1,554
Reinsurers` share of long-term business
policyholder liabilities 11 682 450
Reinsurers` share of general insurance
liabilities - - -
Deposits held with reinsurers - 99 35
Loans and advances 151 3,739 56
Investments and securities 23,458 40,997 9,376
Current tax receivable 3 101 -
Client indebtedness for acceptances - - -
Other assets 567 461 288
Derivative financial instruments - assets 98 7 68
Cash and cash equivalents 74 932 (17)
Inter-segment assets 1,208 421 57
Total assets 27,514 52,307 12,887
Liabilities
Long-term business policyholder liabilities 24,393 40,254 11,475
General insurance liabilities - - -
Third party interests in consolidated funds - - -
Borrowed funds 255 25 -
Provisions 136 177 -
Deferred revenue 23 573 -
Deferred tax liabilities 165 474 647
Current tax payable 61 55 (9)
Other liabilities 938 673 331
Liabilities under acceptances - - -
Amounts owed to bank depositors - 4,907 -
Derivative financial instruments - liabilities 6 23 16
Inter-segment liabilities 37 369 142
Total liabilities 26,014 47,530 12,602
Net assets 1,500 4,777 285
Equity
Equity attributable to equity holders of the
parent 1,501 4,777 285
Non-controlling interests (1) - -
Non-controlling interests - ordinary shares (1) - -
Non-controlling interests - preference shares - - -
Total equity 1,500 4,777 285
Asia
At 30 June 2009 Pacific Total
Assets
Goodwill and other intangible assets - 3,679
Mandatory reserve deposits with central banks - -
Property, plant and equipment - 366
Investment property - 1,408
Deferred tax assets - 1,259
Investments in associated undertakings and joint ventures (3) 6
Deferred acquisition costs - 2,665
Reinsurers` share of long-term business policyholder
liabilities - 1,143
Reinsurers` share of general insurance liabilities - -
Deposits held with reinsurers - 134
Loans and advances - 3,946
Investments and securities - 73,831
Current tax receivable - 104
Client indebtedness for acceptances - -
Other assets - 1,316
Derivative financial instruments - assets - 173
Cash and cash equivalents - 989
Inter-segment assets - 1,686
Total assets (3) 92,705
Liabilities
Long-term business policyholder liabilities - 76,122
General insurance liabilities - -
Third party interests in consolidated funds - -
Borrowed funds - 280
Provisions - 313
Deferred revenue - 596
Deferred tax liabilities - 1,286
Current tax payable - 107
Other liabilities - 1,942
Liabilities under acceptances - -
Amounts owed to bank depositors - 4,907
Derivative financial instruments - liabilities - 45
Inter-segment liabilities 20 568
Total liabilities 20 86,166
Net assets (23) 6,539
Equity
Equity attributable to equity holders of the parent (23) 6,540
Non-controlling interests - (1)
Non-controlling interests - ordinary shares - (1)
Non-controlling interests - preference shares - -
Total equity (23) 6,539
3 Segment information continued
(vi) Statement of financial position - segment information at 30 June 2009
Nedbank M&F USAM Bermuda
508 31 1,163 3
856 - - -
351 22 21 -
18 - - -
17 8 141 -
76 - 7 -
2 17 34 215
18 - - 1
- 130 - -
- 3 - -
33,886 3 - -
5,194 370 156 2,915
44 1 - -
146 - - -
376 84 124 831
1,401 - - (35)
632 80 125 38
33 45 2 508
43,558 794 1,773 4,476
548 - - 4,131
- 403 - -
- - - -
1,064 - - -
- 18 2 -
- 8 - -
158 1 - -
18 - 7 16
877 97 180 20
146 - - -
35,683 - - -
1,244 - - -
412 - 803 3
40,150 527 992 4,170
3,408 267 781 306
1,941 217 754 306
1,467 50 27 -
1,217 50 27 -
250 - - -
3,408 267 781 306
Consolidation GBPm
Other operating segments adjustments Total reportable segments
13 - 5,397
- - 856
3 - 763
- 152 1,578
9 - 1,434
26 - 115
- - 2,933
- - 1,162
- - 130
- - 137
- - 37,835
76 1,951 84,493
- - 149
- - 146
45 453 3,229
163 784 2,486
23 785 2,672
684 (2,958) -
1,042 1,167 145,515
- - 80,801
- - 403
- 2,610 2,610
1,171 - 2,515
76 - 409
- - 604
21 - 1,466
47 - 195
96 735 3,947
- - 146
- - 40,590
40 780 2,109
1,172 (2,958) -
2,623 1,167 135,795
(1,581) - 9,720
(2,027) - 7,731
446 - 1,989
- - 1,293
446 - 696
(1,581) - 9,720
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(vi) Statement of financial position - segment information at 30 June 2008
Long Term Savings
At 30 June 2008 OMSA Europe US Life
Assets
Goodwill and other intangible assets 22 3,849 193
Mandatory reserve deposits with central banks - - -
Property, plant and equipment 227 42 1
Investment property 1,028 3 -
Deferred tax assets 57 151 459
Investments in associated undertakings and
joint ventures 21 - -
Deferred acquisition costs 89 853 1,546
Reinsurers` share of long-term business
policyholder liabilities 18 730 658
Deposits held with reinsurers - 156 29
Loans and advances 72 3,647 44
Investments and securities 21,000 44,085 8,963
Current tax receivable 3 39 -
Client indebtedness for acceptances - - -
Other assets 392 452 213
Derivative financial instruments - assets 44 19 21
Cash and cash equivalents 122 976 -
Non-current assets held-for-sale 8 - -
Inter-segment assets 2 558 (1)
Total assets 23,105 55,560 12,126
Liabilities
Long-term business policyholder liabilities 21,223 43,814 9,620
Third party interests in consolidated funds - - -
Borrowed funds 209 55 -
Provisions 113 182 -
Deferred revenue 22 488 -
Deferred tax liabilities 228 548 496
Current tax payable 52 59 (1)
Other liabilities 707 817 1,045
Liabilities under acceptances - - -
Amounts owed to bank depositors - 4,442 -
Derivative financial instruments - liabilities 53 9 -
Non-current liabilities held-for-sale 6 - -
Inter-segment liabilities (795) 502 (28)
Total liabilities 21,818 50,916 11,132
Net assets 1,287 4,644 994
Equity
Equity attributable to equity holders of the
parent 1,281 4,639 994
Non-controlling interests 6 5 -
Non-controlling interests - ordinary shares 6 5 -
Non-controlling interests - preference shares - - -
Total equity 1,287 4,644 994
Asia
At 30 June 2008 Pacific Total
Assets
Goodwill and other intangible assets 16 4,080
Mandatory reserve deposits with central banks - -
Property, plant and equipment 4 274
Investment property - 1,031
Deferred tax assets 6 673
Investments in associated undertakings and joint ventures (11) 10
Deferred acquisition costs 9 2,497
Reinsurers` share of long-term business policyholder
liabilities - 1,406
Deposits held with reinsurers - 185
Loans and advances - 3,763
Investments and securities - 74,048
Current tax receivable - 42
Client indebtedness for acceptances - -
Other assets 8 1,065
Derivative financial instruments - assets - 84
Cash and cash equivalents 11 1,109
Non-current assets held-for-sale - 8
Inter-segment assets - 559
Total assets 43 90,834
Liabilities
Long-term business policyholder liabilities - 74,657
Third party interests in consolidated funds - -
Borrowed funds - 264
Provisions 10 305
Deferred revenue 10 520
Deferred tax liabilities - 1,272
Current tax payable - 110
Other liabilities 11 2,580
Liabilities under acceptances - -
Amounts owed to bank depositors - 4,442
Derivative financial instruments - liabilities - 62
Non-current liabilities held-for-sale - 6
Inter-segment liabilities 33 (288)
Total liabilities 64 83,930
Net assets (21) 6,904
Equity
Equity attributable to equity holders of the parent (21) 6,893
Non-controlling interests - 11
Non-controlling interests - ordinary shares - 11
Non-controlling interests - preference shares - -
Total equity (21) 6,904
3 Segment information continued
(vi) Statement of financial position - segment information at 30 June 2008
Nedbank M&F USAM Bermuda
399 - 958 3
610 - - -
252 - 20 -
12 - - -
8 - 95 (12)
56 - - -
2 - 27 202
5 - - -
- - - -
26,127 - - -
4,808 - 176 2,787
2 - - -
201 - - -
897 - 168 823
1,077 - - 1
744 - 178 42
2 561 - -
(1) (1) - -
35,201 560 1,622 3,846
413 - - 3,884
- - - -
783 - - -
11 - 2 -
1 - - -
117 - - -
22 - 1 4
2,121 - 247 46
201 - - -
27,591 - - -
1,106 - - -
- 367 - -
300 (34) 1,441 (17)
32,666 333 1,691 3,917
2,535 227 (69) (71)
1,460 183 (97) (71)
1,075 44 28 -
818 44 28 -
257 - - -
2,535 227 (69) (71)
Consolidation GBPm
Other operating segments adjustments Total reportable segments
13 - 5,453
- - 610
3 - 549
- 222 1,265
- - 764
3 - 69
- - 2,728
- - 1,411
- - 185
- - 29,890
186 1,784 83,789
3 - 47
- - 201
89 202 3,244
123 1,864 3,149
114 942 3,129
- - 571
1,433 (1,990) -
1,967 3,024 137,054
- - 78,954
- 2,674 2,674
1,189 - 2,236
111 - 429
- - 521
- - 1,389
69 - 206
109 519 5,622
- - 201
- - 32,033
73 1,821 3,062
- - 373
588 (1,990) -
2,139 3,024 127,700
(172) - 9,354
(566) - 7,802
394 - 1,552
(52) - 849
446 - 703
(172) - 9,354
Notes to the consolidated financial statements
For the six months ended 30 June 2009
3 Segment information continued
(vi) Statement of financial position - segment information at 31 December 2008
Long Term Savings
At 31 December 2008* OMSA Europe US Life
Assets
Goodwill and other intangible assets 32 3,930 132
Mandatory reserve deposits with central banks - - -
Property, plant and equipment 267 44 1
Investment property 1,281 3 -
Deferred tax assets 65 295 1,036
Investments in associated undertakings and
joint ventures 26 - -
Deferred acquisition costs 105 988 1,896
Reinsurers` share of long-term business
policyholder liabilities 6 625 505
Reinsurers` share of general insurance
liabilities - - -
Deposits held with reinsurers - 121 40
Loans and advances 59 3,987 62
Investments and securities 22,326 40,151 10,284
Current tax receivable 3 88 -
Client indebtedness for acceptances - - -
Other assets 443 441 252
Derivative financial instruments - assets 209 - 36
Cash and cash equivalents 101 757 (18)
Non-current assets held-for-sale 7 - -
Inter-segment assets 1,322 516 46
Total assets 26,252 51,946 14,272
Liabilities
Long-term business policyholder liabilities 23,162 39,559 13,338
General insurance liabilities - - -
Third party interests in consolidated funds - - -
Borrowed funds 237 1 -
Provisions 128 240 -
Deferred revenue 23 559 -
Deferred tax liabilities 172 526 578
Current tax payable 97 51 (15)
Other liabilities 831 879 267
Liabilities under acceptances - - -
Amounts owed to bank depositors - 4,622 -
Derivative financial instruments - liabilities 31 1 -
Non-current liabilities held-for-sale 6 - -
Inter-segment liabilities 31 765 1
Total liabilities 24,718 47,203 14,169
Net assets 1,534 4,743 103
Equity
Equity attributable to equity holders of the
parent 1,526 4,743 103
Non-controlling interests 8 - -
Non-controlling interests - ordinary shares 8 - -
Non-controlling interests - preference shares - - -
Total equity 1,534 4,743 103
Asia
At 31 December 2008* Pacific Total
Assets
Goodwill and other intangible assets 11 4,105
Mandatory reserve deposits with central banks - -
Property, plant and equipment 1 313
Investment property - 1,284
Deferred tax assets 3 1,399
Investments in associated undertakings and joint ventures 7 33
Deferred acquisition costs 8 2,997
Reinsurers` share of long-term business policyholder
liabilities - 1,136
Reinsurers` share of general insurance liabilities - -
Deposits held with reinsurers - 161
Loans and advances - 4,108
Investments and securities - 72,761
Current tax receivable 2 93
Client indebtedness for acceptances - -
Other assets 4 1,140
Derivative financial instruments - assets - 245
Cash and cash equivalents 10 850
Non-current assets held-for-sale - 7
Inter-segment assets - 1,884
Total assets 46 92,516
Liabilities
Long-term business policyholder liabilities - 76,059
General insurance liabilities - -
Third party interests in consolidated funds - -
Borrowed funds - 238
Provisions 4 372
Deferred revenue 8 590
Deferred tax liabilities - 1,276
Current tax payable - 133
Other liabilities 16 1,993
Liabilities under acceptances - -
Amounts owed to bank depositors - 4,622
Derivative financial instruments - liabilities - 32
Non-current liabilities held-for-sale - 6
Inter-segment liabilities 35 832
Total liabilities 63 86,153
Net assets (17) 6,363
Equity
Equity attributable to equity holders of the parent (17) 6,355
Non-controlling interests - 8
Non-controlling interests - ordinary shares - 8
Non-controlling interests - preference shares - -
Total equity (17) 6,363
* The 31 December 2008 financial position has been restated by an amount
of
GBP1,405 million for both derivative financial instruments assets and
liabilities on a consistent basis to 30 June 2009. There was no impact
on
the consolidated net assets at 31 December 2008 as a result of the
restatement.
3 Segment information continued
(vi) Statement of financial position - segment information at 31 December 2008
Nedbank M&F USAM Bermuda
425 29 1,305 5
734 - - -
316 24 26 -
15 - - -
25 8 158 -
75 - - -
2 15 40 145
9 - - 3
- 115 - -
- 3 - -
31,634 2 - -
5,043 322 177 3,676
25 - - -
220 - - -
486 68 139 789
1,627 - - 21
631 56 220 29
- - - -
19 46 99 377
41,286 688 2,164 5,045
426 - - 4,784
- 344 - -
- - - -
960 - - -
1 21 3 -
- 8 - -
162 2 - -
18 2 8 19
747 71 299 9
220 - - -
33,549 - - -
1,731 - - -
- - - -
427 (1) 1,452 3
38,241 447 1,762 4,815
3,045 241 402 230
1,717 193 365 230
1,328 48 37 -
1,081 48 37 -
247 - - -
3,045 241 402 230
Consolidation GBPm
Other operating segments adjustments Total reportable segments
13 - 5,882
- - 734
3 - 682
- 179 1,478
- - 1,590
3 - 111
- - 3,199
- - 1,148
- - 115
- - 164
1 - 35,745
88 1,455 83,522
- - 118
- - 220
96 419 3,137
226 1,109 3,228
79 997 2,862
- - 7
1,632 (4,057) -
2,141 102 143,942
- - 81,269
- - 344
- 2,591 2,591
1,097 - 2,295
80 - 477
- - 598
12 - 1,452
39 - 219
149 465 3,733
- - 220
- - 38,171
124 1,103 2,990
- - 6
1,344 (4,057) -
2,845 102 134,365
(704) - 9,577
(1,123) - 7,737
419 - 1,840
(27) - 1,147
446 - 693
(704) - 9,577
Notes to the consolidated financial statements
For the six months ended 30 June 2009
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.
Long Term Savings
Six months ended 30 June 2009 Notes OMSA Europe
Income/(expense)
Goodwill impairment and impact of acquisition
accounting 4(ii) - (109)
Loss on disposal of subsidiaries, associated
undertakings and
strategic investments 4(iii) (1) -
Short-term fluctuations in investment return 4(iv) (32) (27)
Investment return adjustment for Group equity
and debt
instruments held in life funds 4(v) (40) -
Dividends declared to holders of perpetual
preferred callable
securities 4(vi) - -
US Asset Management equity plans and minority
holders 4(vii) - -
Credit-related fair value gains on Group debt
instruments 4(viii) - -
Total adjusting items (73) (136)
Tax on adjusting items 5(iii) 10 21
Non-controlling interest in adjusting items 6(iii) - -
Total adjusting items after tax and
non-controlling interests (63) (115)
GBPm
Six months ended 30 June 2009 US Life Asia Pacific Total
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (9) - (118)
Loss on disposal of subsidiaries,
associated undertakings and
strategic investments - (45) (46)
Short-term fluctuations in investment
return (93) - (152)
Investment return adjustment for Group
equity and debt
instruments held in life funds - - (40)
Dividends declared to holders of
perpetual preferred callable
securities - - -
US Asset Management equity plans and
minority holders - - -
Credit-related fair value gains on Group
debt instruments - - -
Total adjusting items (102) (45) (356)
Tax on adjusting items 4 - 35
Non-controlling interest in adjusting
items - - -
Total adjusting items after tax and
non-controlling interests (98) (45) (321)
Long Term Savings
Notes OMSA Europe
Six months ended 30 June 2008
Income/(expense)
Goodwill impairment and impact of acquisition
accounting 4(ii) - (114)
(Loss)/profit on disposal of subsidiaries,
associated undertakings
and strategic investments 4(iii) (13) 75
Short-term fluctuations in investment return 4(iv) 40 9
Investment return adjustment for Group equity
and debt
instruments held in life funds 4(v) 150 -
Dividends declared to holders of perpetual
preferred callable
securities 4(vi) - -
US Asset Management equity plans and minority
holders 4(vii) - -
Credit-related fair value gains on Group debt
instruments 4(viii) - -
Total adjusting items 177 (30)
Tax on adjusting items 5(iii) (1) 18
Non-controlling interest in adjusting items 6(iii) - -
Total adjusting items after tax and
non-controlling interests 176 (12)
Asia GBPm
US Life Pacific Total
Six months ended 30 June 2008
Income/(expense)
Goodwill impairment and impact of acquisition
accounting (13) - (127)
(Loss)/profit on disposal of subsidiaries,
associated undertakings
and strategic investments - - 62
Short-term fluctuations in investment return (32) - 17
Investment return adjustment for Group equity
and debt
instruments held in life funds - - 150
Dividends declared to holders of perpetual
preferred callable
securities - - -
US Asset Management equity plans and minority
holders - - -
Credit-related fair value gains on Group debt
instruments - - -
Total adjusting items (45) - 102
Tax on adjusting items (7) - 10
Non-controlling interest in adjusting items - - -
Total adjusting items after tax and
non-controlling interests (52) - 112
4 Operating profit adjusting items
(i) Summary of adjusting items
GBPm
Nedbank M&F USAM Bermuda Other Total
- - - - - (118)
- - 1 - - (45)
- (11) - (49) (23) (235)
- - - - - (40)
- - - - 22 22
- - 1 - - 1
6 - - - 6 12
6 (11) 2 (49) 5 (403)
(2) 3 9 - (4) 41
6 3 - - - 9
10 (5) 11 (49) 1 (353)
GBPm
Nedbank M&F USAM Bermuda Other Total
- - - - - (127)
1 - (1) - - 62
- (10) - (50) 37 (6)
- - - - - 150
- - - - 22 22
- - 5 - - 5
- - - - 40 40
1 (10) 4 (50) 99 146
- - - - (24) (14)
13 4 (5) - - 12
14 (6) (1) (50) 75 144
Notes to the consolidated financial statements
For the six months ended 30 June 2009
4 Operating profit adjusting items continued
(i) Summary of adjusting items continued
Long Term Savings
Notes OMSA Europe
Year ended 31 December 2008
Income/(expense)
Goodwill impairment and impact of acquisition
accounting 4(ii) - (341)
(Loss)/profit on disposal of subsidiaries,
associated undertakings
and strategic investments 4(iii) (11) 72
Short-term fluctuations in investment return 4(iv) (95) 145
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(vii) - -
Credit-related fair value gains on Group debt
instruments - -
Total adjusting items 4(viii) 128 (124)
Tax on adjusting items 5(iii) 20 41
Non-controlling interest in adjusting items 6(iii) - -
Total adjusting items after tax and
non-controlling interests 148 (83)
Asia
US Life Pacific Total
Year ended 31 December 2008
Income/(expense)
Goodwill impairment and impact of acquisition
accounting (96) (1) (438)
(Loss)/profit on disposal of subsidiaries,
associated undertakings
and strategic investments - - 61
Short-term fluctuations in investment return (248) - (198)
Investment return adjustment for Group equity
and debt
instruments held in life funds - - 234
Dividends declared to holders of perpetual
preferred callable
securities - - -
US Asset Management equity plans and minority
holders - - -
Credit-related fair value gains on Group debt
instruments - - -
Total adjusting items (344) (1) (341)
Tax on adjusting items 3 - 64
Non-controlling interest in adjusting items - - -
Total adjusting items after tax and
non-controlling interests (341) (1) (277)
4 Operating profit adjusting items continued
(i) Summary of adjusting items continued
GBPm
Nedbank M&F USAM Bermuda Other Total
- - - - - (438)
1 (10) 1 - - 53
- (72) - (228) (72) (570)
- - - - - 234
- - - - 43 43
- - 7 - - 7
14 - - - 489 503
15 (82) 8 (228) 460 (168)
(4) 14 - - (136) (62)
18 19 (7) - - 30
29 (49) 1 (228) 324 (200)
Notes to the consolidated financial statements
For the six months ended 30 June 2009
4 Operating profit adjusting items continued
(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 statement of financial position 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:
Long Term Savings
Six months ended 30 June 2009
OMSA Europe US Life
Amortisation of acquired PVIF - (117) (9)
Amortisation of acquired deferred costs and
revenue - 23 -
Amortisation of other acquired intangible assets - (38) -
Change in acquisition statement of financial
position provisions - 23 -
Goodwill impairment - - -
- (109) (9)
Six months ended 30 June 2009 GBPm
Asia Pacific Total
Amortisation of acquired PVIF - (126)
Amortisation of acquired deferred costs and revenue - 23
Amortisation of other acquired intangible assets - (38)
Change in acquisition statement of financial
position provisions - 23
Goodwill impairment - -
- (118)
Long Term Savings
Six months ended 30 June 2008
OMSA Europe US Life
Amortisation of acquired PVIF - (126) (13)
Amortisation of acquired deferred costs and
revenue - 45 -
Amortisation of other acquired intangible assets - (37) -
Change in acquisition statement of financial
position provisions - 4 -
Goodwill impairment - - -
- (114) (13)
Asia GBPm
Pacific Total
Amortisation of acquired PVIF - (139)
Amortisation of acquired deferred costs and revenue - 45
Amortisation of other acquired intangible assets - (37)
Change in acquisition statement of financial position
provisions - 4
Goodwill impairment - -
- (127)
Long Term Savings
Year ended 31 December 2008
OMSA Europe US Life
Amortisation of acquired PVIF - (251) (35)
Amortisation of acquired deferred costs and
revenue - 81 -
Amortisation of other acquired intangible assets - (75) -
Change in acquisition statement of financial
position provisions - (84) -
Goodwill impairment - (12) (61)
- (341) (96)
Asia GBPm
Pacific Total
Amortisation of acquired PVIF - (286)
Amortisation of acquired deferred costs and revenue - 81
Amortisation of other acquired intangible assets - (75)
Change in acquisition statement of financial position
provisions - (84)
Goodwill impairment (1) (74)
(1) (438)
Notes to the consolidated financial statements
For the six months ended 30 June 2009
4 Operating profit adjusting items continued
(iii) (Loss)/profit on disposal of subsidiaries, associated undertakings and
strategic investments
On 6 March 2009 the Group disposed of its interest in OM Australia at a loss
of
GBP4 million.
In August 2008, an agreement with ABN AMRO Asset Management Asia and their
parent company, Fortis Bank had been entered into to acquire the 49% stake
that
Fortis holds in AATEDA, a major Chinese asset management joint venture for 165
million. On 27 May 2009 termination of AATEDA transaction with ABN AMRO Asset
Management Asia and Fortis Bank was announced, with an exit fee of GBP41
million which has been accounted for as a loss on disposal.
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 2008, 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 on the disposal of Bond Choice.
(Loss)/profits on the disposal of subsidiaries, associated undertakings and
strategic investments are analysed below:
GBPm
6 months 6 months Year ended
Notes ended 30 June ended 30 June 31 December
2009 2008 2008
OMSA (1) (13) (11)
Europe - 75 72
US Life - - -
Asia Pacific (45) - -
Total Long Term Savings (46) 62 61
Nedbank - 1 1
M&F - - (10)
USAM 1 (1) 1
Other - - -
(Loss)/profit on disposal
of subsidiaries, associated
undertakings and
strategic investments (45) 62 53
(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, default assumptions, costs of investment management 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 South
Africa general insurance business, the return is an average value of
investible
assets supporting shareholders` funds and insurance liabilities, adjusted for
net fund flows. For US and Europe long-term businesses, the return is applied
to average investible assets.
Notes to the consolidated financial statements
For the six months ended 30 June 2009
4 Operating profit adjusting items continued
(iv) Long-term investment return continued
6 months 6 months ended Year ended
ended 30 June 30 June 2008 31 December
Long-term investment rates 2009 Restated 2008
OMSA 13.3% 16.6% 16.6%
Europe 4.3% 4.8% 4.8%
US Life 5.6% 5.9% 5.9%
M&F 13.3% 16.6% 16.6%
(iv) Long-term investment return continued
Analysis of short-term fluctuations in investment return
Long Term Savings
Six months ended 30 June 2009 OMSA Europe US Life Total
Long-term investment return 61 53 303 417
Less: Actual shareholder investment
return 29 26 210 265
Short-term fluctuations in investment
return 32 27 93 152
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - - - -
Total short-term fluctuations in
investment return 32 27 93 152
GBPm
M&F Bermuda Other Total
Six months ended 30 June 2009
Long-term investment return 28 69 46 560
Less: Actual shareholder investment
return 17 74 23 379
Short-term fluctuations in investment
return 11 (5) 23 181
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - 54 - 54
Total short-term fluctuations in
investment return 11 49 23 235
Long Term Savings
Six months ended 30 June 2008 OMSA Europe US Life Total
Long-term investment return 67 5 98 170
Less: Actual shareholder investment
return 107 14 66 187
Short-term fluctuations in investment
return (40) (9) 32 (17)
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - - - -
Total short-term fluctuations in
investment return (40) (9) 32 (17)
GBPm
Bermuda Other Total
Six months ended 30 June 2008 M&F
Long-term investment return 29 74 53 326
Less: Actual shareholder investment
return 19 68 90 364
Short-term fluctuations in investment
return 10 6 (37) (38)
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - 44 - 44
Total short-term fluctuations in
investment return 10 50 (37) 6
Long Term Savings
Year ended 31 December 2008 OMSA Europe US Life Total
Long-term investment return 133 66 213 412
Less: Actual shareholder investment
return 38 211 (35) 214
Short-term fluctuations in investment
return 95 (145) 248 198
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - - - -
Total short-term fluctuations in
investment return 95 (145) 248 198
GBPm
Year ended 31 December 2008 M&F Bermuda Other Total
Long-term investment return 60 541 108 1,121
Less: Actual shareholder investment
return (12) 519 36 757
Short-term fluctuations in investment
return 72 22 72 364
Hedge losses on Bermuda guarantees
treated as
short-term fluctuations - 206 - 206
Total short-term fluctuations in
investment return 72 228 72 570
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 instruments 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. For the six months ended 30 June 2009,
the investment return adjustment increased adjusted operating profit by GBP40
million (six months ended 30 June 2008: decrease of GBP150 million, year ended
31 December 2008: decrease of GBP234 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 GBP22 million for the six months ended 30 June 2009 (six
months
ended 30 June 2008: GBP22 million, year ended 31 December 2008: GBP43
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.
Notes to the consolidated financial statements
For the six months ended 30 June 2009
4 Operating profit adjusting items continued
(vii) US Asset Management equity plans and non-controlling interests
US Asset Management has entered into a number of 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 non-controlling interests. However, this is treated as a
compensation expense in determining adjusted operating profit. The amount
recognised in relation to this for the six months ended 30 June 2009 was less
than GBP1 million (six months ended 30 June 2008: GBP5 million, year ended 31
December 2008: GBP7 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 30 June 2009 these instruments were revalued, the impact of
which
was GBP1 million (six months ended 30 June 2008: less than GBP1 million, year
ended 31 December 2008: nil).
(viii) 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 GBP6 million for the six months ended 30 June
2009 (six months ended 30 June 2008: GBP40 million gain, year ended 31
December
2008: GBP489 million gain) at Group head office and GBP6 million for the six
months ended 30 June 2009 (six months ended 30 June 2008: nil, year ended 31
December 2008: GBP14 million gain) 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 expense/(credit)
(i) Analysis of total income tax expense/(credit)
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Current tax
United Kingdom tax
Corporation tax 65 96 93
Double tax relief (44) (93) (145)
Overseas tax
South Africa 107 132 264
United States 2 (7) 4
Europe 22 39 68
Secondary Tax on Companies
(STC) 5 5 22
Prior year adjustments 6 18 1
Total current tax 163 190 307
Deferred tax
Origination of temporary
differences (73) (44) (548)
Changes in tax rates/bases - (5) (1)
Write down/recognition of
deferred tax assets 44 27 154
Total deferred tax (29) (22) (395)
Total income tax
expense/(credit) 133 168 (88)
(ii) Reconciliation of total income tax expense/(credit)
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Profit before tax 160 853 595
Tax at standard rate of 28%
(2008: 28.5%) 44 243 169
Different tax rate or basis
on overseas operations 9 9 (23)
Untaxed and low taxed income (49) (128) (218)
Disallowable expenses 66 23 8
Net movement on deferred
tax assets not recognised 49 34 123
Effect on deferred tax of
changes in tax rates (2) (5) (5)
STC 6 41 53
Income tax attributable to
policyholder returns 20 (46) (169)
Other (10) (3) (26)
Total income tax
expense/(credit) 133 168 (88)
(iii) Income tax on adjusted operating profit
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Income tax expense/(credit) 133 168 (88)
Tax on adjusting items
Impact of acquisition
accounting 19 20 46
(Loss)/profit on disposal
of subsidiaries, associated
undertakings and strategic
investments - 1 12
Short-term fluctuations in
investment return 23 (18) 35
Income tax attributable to
policyholders returns (25) 66 236
Tax on dividends declared
to holders of perpetual
preferred callable
securities
recognised in equity (6) (6) (12)
Fair value gains on group
debt instruments (3) (11) (143)
IAS 34 effective tax rate
adjustment 8 - -
Income tax on adjusted
operating profit 149 220 86
6 (Losses)/earnings and (loss)/earnings per share
(i) Basic and diluted (loss)/earnings per share
Basic (loss)/earnings per share is calculated by dividing the (loss)/profit
for
the financial period attributable to ordinary equity shareholders by the
weighted average number of ordinary shares in issue during the period
excluding
own shares held in policyholder funds, ESOP trusts, Black Economic Empowerment
trusts and other related undertakings.
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
(Loss)/profit for the
financial period
attributable to equity
holders of the parent (70) 549 441
Dividends declared to
holders of perpetual
preferred callable
securities (16) (16) (31)
(Loss)/profit attributable
to ordinary equity holders (86) 533 410
Total dividends declared to holders of perpetual preferred callable securities
of GBP22 million in 2008 (six months ended 30 June 2008: GBP22 million, year
ended 31 December 2008: GBP43 million) are stated net of tax credits of GBP6
million (six months ended 30 June 2008: GBP6 million, year ended 31 December
2008: GBP12 million).
Millions
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Weighted average number of
ordinary shares in issue 5,277 5,311 5,294
Shares held in charitable
foundations (7) (21) (19)
Shares held in ESOP trusts (38) (45) (45)
Adjusted weighted average
number of ordinary shares 5,232 5,245 5,230
Shares held in life funds (239) (239) (240)
Shares held in Black
Economic Empowerment trusts (236) (235) (235)
Weighted average number of
ordinary shares 4,757 4,771 4,755
Basic (loss)/earnings per
ordinary share (pence) (1.8) 11.2 8.6
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
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Weighted average number of
ordinary shares 4,757 4,771 4,755
Adjustments for share
options held by ESOP trusts 109 51 61
Adjustments for shares held
in Black Economic
Empowerment trusts 236 235 235
5,102 5,057 5,051
Diluted (loss)/earnings per
ordinary share (pence) (1.7) 10.5 8.1
Notes to the consolidated financial statements
For the six months ended 30 June 2009
6 Earnings and earnings per share continued
(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 non-controlling
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 (loss)/profit for the financial period to adjusted
operating profit after tax attributable to ordinary equity holders is as
follows:
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
(Loss)/profit for the
financial period
attributable to equity
holders of the parent (70) 549 441
Adjusting items 403 (146) 168
Tax on adjusting items (41) 14 62
Non-controlling interest on
adjusting items (9) (12) (30)
Adjusted operating profit
after tax attributable to
ordinary equity holders 283 405 641
Adjusted weighted average
number of ordinary shares
(millions) 5,232 5,245 5,230
Adjusted operating earnings
per ordinary share (pence) 5.4 7.7 12.2
(iii) Headline earnings per share
In accordance with the JSE Limited (JSE) listing requirements, the Group is
required to calculate a `headline earnings per share` (HEPS), determined by
reference to the South African Institute of Chartered Accountants` circular
8/2007 `Headline Earnings`. The table below sets out a reconciliation of basic
earnings per ordinary share and HEPS in accordance with that circular.
Disclosure of HEPS is not a requirement of International Financial Reporting
Standards.
6 months
ended
30 June
2009
Gross Net
(Loss)/profit for the financial period attributable to
equity holders of the parent (70) (70)
Dividends declared to holders of perpetual preferred
callable securities (16) (16)
(Loss)/profit attributable to ordinary equity holders (86) (86)
Adjustments:
Impairments of goodwill and intangible assets - -
Loss/(profit) on disposal of subsidiaries, associated
undertakings and
strategic investments 45 45
Realised gains/losses (including impairments) on
available-for-sale
financial assets 117 111
Headline earnings 76 70
Weighted average number of ordinary shares 4,757 4,757
Diluted weighted average number of ordinary shares 5,102 5,102
Headline earnings per share (pence) 1.6 1.5
Diluted headline earnings per share (pence) 1.5 1.4
6 months
ended
30 June
2008
Gross Net
(Loss)/profit for the financial period attributable to
equity holders of the parent 549 549
Dividends declared to holders of perpetual preferred
callable securities (16) (16)
(Loss)/profit attributable to ordinary equity holders 533 533
Adjustments:
Impairments of goodwill and intangible assets - -
Loss/(profit) on disposal of subsidiaries, associated
undertakings and
strategic investments (62) (63)
Realised gains/losses (including impairments) on
available-for-sale
financial assets 85 81
Headline earnings 556 551
Weighted average number of ordinary shares 4,771 4,771
Diluted weighted average number of ordinary shares 5,057 5,057
Headline earnings per share (pence) 11.7 11.5
Diluted headline earnings per share (pence) 11.0 10.9
GBPm
Year
ended
31 December
2008
Gross Net
(Loss)/profit for the financial period attributable
to equity holders of the parent 441 441
Dividends declared to holders of perpetual preferred
callable securities (31) (31)
(Loss)/profit attributable to ordinary equity holders 410 410
Adjustments:
Impairments of goodwill and intangible assets 100 100
Loss/(profit) on disposal of subsidiaries, associated
undertakings and
strategic investments (53) (67)
Realised gains/losses (including impairments) on
available-for-sale
financial assets 414 381
Headline earnings 871 824
Weighted average number of ordinary shares 4,755 4,755
Diluted weighted average number of ordinary shares 5,051 5,051
Headline earnings per share (pence) 18.3 17.3
Diluted headline earnings per share (pence) 17.2 16.3
7 Goodwill
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
US Asset Management 1,134 932 1,271
US Life - 57 -
Nedbank 378 303 308
UK 644 644 644
Nordic 199 223 222
ELAM 511 467 574
Other 54 46 62
Goodwill, net of impairment losses 2,920 2,672 3,081
Goodwill is reviewed annually for impairment for each cash generating unit
(CGU) as part of the process for preparation of the Group`s annual financial
statements and in accordance with the Group`s accounting policy. Recognised
goodwill amounts are compared to the recoverable amounts, which are the higher
of the value in use or net selling price calculations for the CGU in question.
Goodwill is further reviewed at other points in the financial year if there
are
indicators of impairment of the goodwill amount for a particular CGU. No
impairment charges have been made to any of the goodwill balances, for any of
the CGUs, in the interim financial information.
8 Borrowed funds
GBPm
At At At
30 June 30 June 31 December
Notes 2009 2008 2008
Senior debt securities and
term loans 8(i) 732 449 557
Mortgage backed securities 8(ii) 111 91 104
Subordinated debt securities 8(iii) 1,672 1,696 1,634
Borrowed funds 2,515 2,236 2,295
(i) Senior debt securities and term loans
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
Floating rate notes(1) 67 75 85
Fixed rate notes(2) 137 46 152
Revolving credit facility(3) 528 192 294
Term loan and other loans - 23 26
Investment fund borrowings - 113 -
Total senior debt securities and term
loans 732 449 557
Senior debt securities and term loan comprises:
1. Floating rate notes
* GBP6 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 2008
* 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 -
repaid 2009
* 22Euro 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 (six months ended 30 June 2008: GBP11 million, year ended 31
December 2008: GBP11 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 30 June 2009 GBP999 million (six months
ended 30 June 2008: GBP443 million, year ended 31 December 2008: GBP826
million) of this facility was utilised, GBP528 million (six months ended 30
June 2008: GBP192 million, year ended 31 December 2008: GBP294 million) in the
form of drawn debt and GBP471 million (six months ended 30 June 2008: GBP264
million, year ended 31 December 2008: GBP532 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 30 June 2009 this facility was undrawn.
As of 3 July 2009 the maturity date was extended by 364 days to 2 July 2010.
(ii) Mortgage backed securities
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
R291 million notes (class A1) repayable
18 November 2039 (11.467%)(1) 23 19 22
R1.4 billion notes (class A2A)
repayable 18 November 2039
(11.817%)(1) 78 64 73
R98 million notes (class B note)
repayable 18 November 2039 (12.067%)(1) 6 5 5
R76 million notes (class C note)
repayable 18 November 2039 (13.317%)(1) 4 3 4
111 91 104
(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 At
30 June 30 June 31 December
2009 2008 2008
Banking
US$18 million repayable 31 August 2009
(6 month LIBOR less 1.5%)(1) 10 9 12
R1.5 billion repayable 24 April 2016
(7.85%)(2) 116 86 108
R1.8 billion repayable 20 September
2018 (9.84%)(3) 139 107 135
R515 million repayable on 4 December
2008 (13.5%)(4) - repaid - 33 -
R500 million repayable on 30 December
2010 (8.38%)(5) 38 28 36
R650 million repayable 8 February 2017
(9.03%)(6) 51 39 49
R1.7 billion repayable 8 February 2019
(8.9%)(7) 125 98 125
R2.0 billion repayable 6 July 2022 (3
month JIBAR plus 0.47%)(8) 160 132 150
R500 million repayable 15 August 2012
(3 month JIBAR plus 0.45%)(9) 40 33 37
R1.0 billion repayable 17 September
2015 (10.54%)(10) 78 61 77
R500 million repayable 14 December 2017
(3 month JIBAR plus 0.70%)(11) 40 32 37
R120 million repayable 14 December 2017
(10.38%)(12) 9 7 9
R487 million repayable 20 November 2018
(15.05%)(13) 38 30 40
R1,265 million repayable 20 November
2018 (JIBAR plus 4.75%)(14) 101 46 94
R300 million repayable on 4 December
2013 (JIBAR plus 2.5%)(15) 12 - 11
US$100 million repayable on 3 March
2022 (3 month US Dollar LIBOR)(16) 61 - -
1,018 741 920
Other
R3.0 billion repayable 27 October 2020
(8.9%)(17) 235 193 219
GBP300 million repayable 21 January
2016 (5.0%)(18) 147 273 239
R250 million preference shares
repayable 9 June 2011(19) 20 16 18
750 million repayable 18 January 2017
(4.5%)(20) 318 522 303
720 1,004 779
Less: Banking subordinated debt
securities held by other Group
companies (66) (49) (65)
Total subordinated liabilities 1,672 1,696 1,634
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 - repaid.
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 of 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 of 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. Dated Tier 2 Notes issued 3 March 2009 with call date of 3 March 2017.
17. 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.
18. 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.
19. 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.
20. 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.
Notes to the consolidated financial statements
For the six months ended 30 June 2009
9 Dividends
Dividends paid were as follows:
GBPm
6 months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
2007 Final dividend paid -
4.55p per 10p share - 227 227
2008 Interim dividend paid
- 2.45p per 10p share - - 125
Dividends to ordinary
equity holders - 227 352
Dividends declared to
holders of perpetual
preferred callable
securities 22 22 43
Dividend payments for the
year 22 249 395
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 2009, GBP22 million was declared and paid to holders of perpetual
preferred callable securities (March 2008: GBP22 million and November 2008:
GBP21 million).
10 Contingent liabilities
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
Guarantees and assets pledged as
collateral security 2,038 1,315 1,839
Irrevocable letters of credit 110 286 760
Secured lending 412 1,038 383
Other contingent liabilities 36 151 393
Nedbank structured financing
Historically a number of the Group`s South African 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
USD1 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.
Other contingent liabilities
The reduction within other contingent liabilities reflects a reclassification
of utilised facilities to commitments.
Old Mutual Market Consistent Embedded Value basis supplementary
information
For the six months ended 30 June 2009
6 months GBPm
ended 30 Year ended
Statement of earnings
on a Group Market
Consistent Embedded
Value 6 months ended June 31 December
basis Notes 30 June 2009 2008 2008
Long Term Savings
Covered business 488 612 578
Asset management (7) 37 42
Banking 8 14 23
489 663 643
Nedbank
Banking 211 337 575
Mutual and Federal
General insurance 20 28 76
US Asset Management
Asset management 30 70 97
Bermuda
Covered business 85 (113) (254)
Other operating
segments
Finance costs (47) (71) (140)
Other shareholders`
expenses (33) (12) (19)
Adjusted operating
Group MCEV earnings
before tax* 755 902 978
Adjusting items 5 530 (343) (2,037)
Total Group MCEV
earnings for the
financial period
before tax 1,285 559 (1,059)
Income tax
attributable to
shareholders (143) (109) 13
Total Group MCEV
earnings after tax
for the financial
period 1,142 450 (1,046)
Total Group MCEV
earnings for the
financial period
attributable to:
Equity holders of the
parent 1,047 316 (1,284)
Non-controlling
interests
Ordinary shares 61 108 184
Preferred securities 34 26 54
Total Group MCEV
earnings after tax
for the financial
period 1,142 450 (1,046)
Basic total Group
MCEV earnings per
ordinary share
(pence) 21.0 6.3 (25.7)
Weighted average
number of shares -
millions 4,996 5,010 4,995
* 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 non-controlling 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.
GBPm
6 months 6 months Year ended
ended 30 ended 30 31 December
Total Group MCEV earnings
per share June 2009 June 2008 2008
Notes
Adjusted operating Group
MCEV earnings after tax
attributable to ordinary
equity
holders
Adjusted operating Group
MCEV earnings before tax 755 902 978
Tax on adjusted operating
Group MCEV earnings 4(ii) (183) (227) (135)
Adjusted operating Group
MCEV earnings after tax 572 675 843
Non-controlling interests
Ordinary shares (70) (120) (214)
Preferred securities (34) (26) (54)
Adjusted operating Group
MCEV earnings after tax
attributable to ordinary
equity
holders 468 529 575
Adjusted operating Group
MCEV earnings per share*
(pence) 8.9 10.1 11.0
Adjusted weighted average
number of shares -
millions 5,232 5,245 5,230
* 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 non-controlling 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) GBPm
6 months ended 30 June 2009
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Notes
4,183 1,079 5,262
Opening Group MCEV
Adjusted operating MCEV
earnings 466 2 468
Non-operating MCEV earnings 590 (11) 579
Total Group MCEV earnings 1,056 (9) 1,047
Other movements in net
equity 6 117 175 292
Closing Group MCEV 5,356 1,245 6,601
6 months ended 30 June 2008
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
6,349 1,010 7,359
Opening Group MCEV
Adjusted operating MCEV earnings 357 172 529
Non-operating MCEV earnings (327) 114 (213)
Total Group MCEV earnings 30 286 316
Other movements in net equity (641) (226) (867)
Closing Group MCEV 5,738 1,070 6,808
Year ended 31 December 2008
Covered Non-covered GBPm
business business Total Group
MCEV IFRS MCEV
Notes
6,349 1,010 7,359
Opening Group MCEV
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 net
equity 6 (29) (784) (813)
Closing Group MCEV 4,183 1,079 5,262
Old Mutual Market Consistent Embedded Value basis supplementary
information
For the 6 months ended 30 June 2009
GBPm
At At At
30 June 30 June 31 December
Components of Group Market
Consistent Embedded Value
(Group MCEV) Notes 2009 2008 2008
Adjusted net worth
attributable to ordinary
equity holders of the parent 3,860 3,100 3,462
Equity 7,731 7,802 7,737
Adjustment to include
long-term business on a
statutory solvency basis:
Long Term Savings 7 (2,167) (2,987) (2,244)
Bermuda 7 (27) 11 (217)
Adjustment for market value
of life funds` investments in
Group equity and debt
instruments
held in life funds 235 230 173
Adjustment to remove
perpetual preferred callable
securities and accrued
dividends (688) (688) (688)
Adjustment to exclude
acquisition goodwill from the
covered business:
Long Term Savings 7 (1,224) (1,268) (1,299)
Value of in-force business 2,741 3,708 1,800
Present value of future
profits 3,481 4,449 2,580
Additional time value of
financial options and
guarantees (127) (215) (261)
Frictional costs (199) (190) (148)
Cost of residual
non-hedgeable risks (414) (336) (371)
Group MCEV 6,601 6,808 5,262
Group MCEV value per share
(pence) 125.1 129.1 99.7
Return on Group MCEV (RoEV)
per annum 14.8% 14.6% 7.8%
Number of shares in issue at
the end of the period less
treasury shares - millions 5,277 5,275 5,277
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 non-controlling interests of GBP468 million (year ended 31 December 2008:
GBP575 million; six months ended 30 June 2008: GBP533 million) divided by the
opening Group MCEV. The operating assumption changes of GBP26 million (year
ended 31 December 2008: GBP(430) million; six months ended 30 June 2008: GBP20
million) and other operating variances of GBP128 million (year ended 31
December 2008: GBP55 million; six months ended 30 June 2008: GBP(38) million)
are not annualised.
GBPm
At
At At 31
30 30 Decem
June June ber
Components of Adjusted Group Market
Consistent Embedded Value (Group MCEV) Notes 2009 2008 2008
Group MCEV 6,601 6,808 5,262
Pro forma adjustments to bring Group
investments to market value
Adjustment to bring listed subsidiaries
to market value 133 111 68
Nedbank 78 25 41
Mutual and Federal 55 86 27
Adjustment for value of own shares in
ESOP schemes* 57 83 63
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 194 158 169
Adjustment to bring external debt to
market value 604 241 645
Adjusted Group MCEV 4(i) 7,589 7,401 6,207
Adjusted Group MCEV per share (pence) 143.8 140.3 117.6
Number of shares in issue at the end of
the period less treasury shares -
millions 5,277 5,275 5,277
* Includes adjustment for value of excess own shares in employee share
scheme trusts. The movement in value between 31 December 2008 and 30
June
2009 is due to a reduction in excess own shares following employee share
grants in March 2009.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
1 Basis of preparation
The Old Mutual Market Consistent Embedded Value methodology (referred to
herein
and in the supplementary statements later in this announcement as `MCEV`)
adopts Market
Consistent Embedded Value Principles (Copyright Copyright Stichting CFO Forum
Foundation 2008) issued in June 2008 by the CFO Forum (`the Principles`) as
the
basis for the methodology used in preparing the supplementary information. The
directors acknowledge their responsibility for the preparation of this
supplementary information. The Principles have been fully complied with for
all
businesses for the six months ended 30 June 2009 and the position at that
date,
with the exception of the use of adjusted risk free reference rates due to
current market conditions for US Life Onshore business (`US Life`) and Old
Mutual South Africa`s (OMSA) Retail Affluent Immediate annuity business.
From 31 December 2008 the Group has replaced the European Embedded Value
(`EEV`) basis with the MCEV basis for the covered business, with figures for
the 6 months ended 30 June 2008 having been restated accordingly.
The Principles were designed during a period of relatively stable market
conditions and in turbulent markets their application could 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 premiums. In respect of the 30
June
2009 disclosure, Old Mutual has made an adjustment to the risk free reference
rates used in determining the value of the US Life business and OMSA`s Retail
Affluent Immediate annuity business, to take account of the liquidity
component
of corporate bond spreads that is evident in the market as at that date. The
Directors consider this adjustment to be necessary so as to maintain
consistency with current market prices and therefore to ensure a meaningful
basis of reporting the value of the Group`s life and related businesses.
Hence,
Old Mutual plc does not comply with Principle 14 and Guideline 14.4, in
respect
of the 30 June 2009 disclosure for the US Life business and OMSA`s Retail
Affluent Immediate annuity business, which does not allow any adjustments to
be
made to the swap yield curve to allow for liquidity premiums. This approach
will be reviewed for use in future reporting periods once the CFO Forum has
completed its own review on the application of Principle 14. The 30 June 2009
MCEV disclosure in respect of all other business complies fully with the
Principles.
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 the 6 months ended 30 June 2008,
previously prepared on the EEV basis, to an MCEV basis. Any changes in the
methodology and assumptions made in presenting this supplementary information
compared to those disclosed in the annual report and accounts 2008 are set out
in notes 2 and 3. 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 6 months ended 30 June 2008 are provided in notes 12 to 18.
The segmental results for Europe include the Skandia Life companies in the
United Kingdom, Nordic region, Europe and Latin America. The segmental results
for OMSA include Namibia.
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.
2 Methodology
Coverage
Following the sale by OMSA of the remaining stake in Nedlife to Nedbank,
Nedlife is excluded from covered business from 2009 onwards although it is
still included in comparative results for prior periods.
Required capital
The table below shows the level of required capital expressed as a percentage
of the minimum local regulatory capital requirements.
Total OMSA Europe
30 June 2009
Required capital (a) 2,302 1,105 395
Regulatory capital (b) 1,293 850 233
Ratio (a/b) 1.8 1.3 1.7
30 June 2008
Required capital (a) 1,815 1,040 342
Regulatory capital (b) 1,139 765 215
Ratio (a/b) 1.6 1.4 1.6
31 December 2008
Required capital (a) 2,025 1,070 371
Regulatory capital (b) 1,259 819 229
Ratio (a/b) 1.6 1.3 1.6
GBPm
US Life* Bermuda*
30 June 2009
Required capital (a) 523 279
Regulatory capital (b) 210 -
Ratio (a/b) 2.5 n/a
30 June 2008
Required capital (a) 390 43
Regulatory capital (b) 159 -
Ratio (a/b) 2.5 n/a
31 December 2008
Required capital (a) 550 34
Regulatory capital (b) 211 -
Ratio (a/b) 2.6 n/a
* The regulatory capital for US Life and Bermuda at 31 December 2008 has
been restated from GBP245 million to GBP211 million.
Cost of residual non-hedgeable risks
The cost of residual non-hedgeable risks (`CNHR`) is derived by projecting the
economic capital held in respect of these non-hedgeable risks into the future
and calculating the present value after applying a cost of 2% to this capital,
at a business unit level, without allowing for group diversification benefits.
The economic capital projected is based on the figure determined for the prior
6 month period; thus the December 2008 CNHR is based on the June 2008 economic
capital, which was calculated with reference to EEV. The June 2009 CNHR is
based on the December 2008 economic capital, which was based on MCEV for the
first time. This has led to a step change in the calculation for all business
units. The impact of this step change varies across business units, being
smallest in OMSA, and largest in the Skandia business units. To the extent
that this change affected operating earnings, the impact is shown under `other
operating variance`.
The table below shows the amounts of diversified economic capital held in
respect of residual non-hedgeable risks.
GBPm
Total OMSA Europe US Life* Bermuda
30 June 2009 2,569 503 1,007 549 510
30 June 2008 1,938 403 756 434 345
31 December 2008 2,207 457 720 513 517
* The total capital held in respect of non-hedgeable risks for US Life and
Bermuda at 31 December 2008 has been restated from GBP826 million to
GBP1,030 million
In addition to the change in the underlying basis used for assessing Economic
Capital from an EEV to MCEV basis, the increase in capital held in respect of
residual non-hedgeable risks for Europe from GBP720 million at 31 December
2008
to GBP1,007 million at 30 June 2009 is largely caused by an increase in the
economic capital held for persistency risk in light of the turbulent economic
market conditions.
Taxation
The value of in-force business (VIF) in respect of Royal Skandia at 30 June
2009 assumes that all future profits will be taxed in the UK, currently at
28%,
on payment of dividends to Skandia UK. The UK Finance Act 2009, which
introduces an exemption from tax on qualifying dividends, was substantively
enacted on the 8th July 2009. This will permit removal of the allowance for
tax
on dividends which is expected to increase the VIF by approximately GBP166m,
in
the second half of 2009.
New business and renewals
The market consistent value of new business (VNB) is calculated using economic
assumptions at the start of the reporting period, except for OMSA`s Non-Profit
Annuities and Fixed Bond products where point of sale assumptions are used.
3 Assumptions
Non-economic assumptions
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.
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 33 per cent of the Group holding company
expenses, with 15 per cent allocated to Europe, 14 per cent allocated to OMSA,
4 per cent allocated to US Life and Bermuda (31 December 2008: 35 per cent of
the Group holding company expenses, with 17 per cent allocated to Europe, 14
per cent allocated to OMSA, 4 per cent allocated to US Life and Bermuda; 30
June 2008: 36 per cent of the Group holding Company expenses, with 18 per cent
allocated to Europe, 14 per cent allocated to OMSA, 4 per cent allocated to US
Life and Bermuda ). 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.
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. From 31 December 2008 Skandia Leben
in Germany performs modelling by setting 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.
Economic assumptions
Risk free reference rates and inflation
Following a review of a wide range of market data and literature, such as the
Barrie & Hibbert calibration of US corporate bond spreads at 30 June 2009, it
is the directors` view that a significant proportion of corporate bond spreads
is attributable to a liquidity premium rather than credit and 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 US
Life business and OMSA`s Retail Affluent Immediate annuity business we
considered the currency, credit quality and duration of our actual corporate
bond portfolio and derived adjusted risk free reference rates at 30 June 2009
by adding 175bps of liquidity premium to swap rates used for setting
investment
return and discounting assumptions for the US LIfe business (31 December 2008:
300bps; 30 June 2008: 125bps) and adding 50bps of liquidity premium to swap
rates used for setting investment return and discounting assumptions for
OMSA`s
Retail Affluent Immediate annuity business (31 December 2008 and 30 June 2008:
zero allowance). These adjustments reflect the liquidity premium component in
corporate bond spreads over swap rates that we expect to earn on our
portfolio.
We believe that the differences between market yields on our US Life and
OMSA`s
Retail Affluent bond portfolios and the adjusted risk free reference rates
still provide adequate implied margins for defaults. No liquidity adjustment
is
applied for other geographies.
When the liquidity premium adjustment was calibrated and introduced for US
Life
business at 31 December 2008, similar research was not yet concluded for South
Africa to estimate the quantum of the liquidity premiums inherent in South
African corporate bond spreads. In addition, the impact of a liquidity premium
adjustment on US Life business was far more material than for OMSA`s Retail
Affluent Immediate annuity business as the concentration of investments in the
corporate bond market is far greater and the widening of corporate bond
spreads
has been more pronounced in the US compared to other geographies. Hence the
application of any liquidity premium adjustment was initially focussed on the
US and such an adjustment is introduced for OMSA at 30 June 2009 to have
consistency of methodology.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
The risk free reference spot yields (excluding 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.
1 year 5 years 10 years 20 years
Risk free reference spot
yields % % % %
30 June 2009
GBP 2.0 3.7 4.0 2.9
EUR 1.4 2.9 3.7 4.3
USD 0.9 2.9 3.7 4.1
ZAR 7.7 9.0 9.2 7.9
SEK 1.0 2.9 3.9 4.2
30 June 2008
GBP 6.3 6.1 5.7 5.2
EUR 5.3 5.1 5.0 5.1
USD 3.3 4.3 4.7 4.9
ZAR 13.4 12.5 11.6 10.4
SEK 5.5 5.5 5.3 5.1
31 December 2008
GBP 2.0 3.1 3.4 3.5
EUR 2.4 3.3 3.8 3.9
USD 1.3 2.1 2.6 2.8
ZAR 9.3 8.0 7.8 6.7
SEK 1.8 2.9 3.2 3.2
1 year 5 years 10 years 20 years
Expense inflation % % % %
30 June 2009
GBP 0.1 1.9 2.9 4.2
EUR 2.3-3.0 2.3-3.0 2.3-3.0 2.3-3.0
USD 3.0 3.0 3.0 3.0
ZAR 5.9 7.2 7.4 6.2
SEK 1.3 2.5 3.0 2.7
30 June 2008
GBP 4.9 4.7 4.7 5.1
EUR 2.5-3.5 2.5-3.5 2.5-3.5 2.5-3.5
USD 3.0 3.0 3.0 3.0
ZAR 9.3 10.0 9.5 8.6
SEK 3.7 3.5 3.5 3.5
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
Volatilities
The at-the-money annualised asset volatility assumptions of the asset classes
incorporated in the stochastic models are detailed below.
Option term
1 year 5 years 10 years 20 years
ZAR volatilities * % % % %
30 June 2009
1 year swap 18.6 18.5 18.0 16.4
5 year swap 17.3 17.6 17.3 15.7
10 year swap 16.6 17.3 16.7 15.1
20 year swap 16.8 17.3 16.1 14.0
Equity (total return index) 27.4 26.3 26.5 27.4
Property (total return index) 17.3 15.7 14.1 14.5
30 June 2008
1 year swap 15.1 14.2 13.8 13.5
5 year swap 15.1 14.1 13.7 13.3
10 year swap 15.2 14.1 13.5 13.1
20 year swap 15.5 14.1 13.3 12.6
Equity (total return index) 24.9 24.1 24.3 25.9
Property (total return index) 16.8 14.5 13.1 13.9
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
* Due to limited liquidity in the ZAR swaption and equity option market,
the market consistent asset model as at 31 December 2008 has been
calibrated by extrapolating swaption and equity option implied
volatility data beyond terms of 2 years and 3 years respectively.
Option term
1 year 5 years 10 years 20 years
USD volatilities % % % %
30 June 2009
1 year swap 61.3 27.8 20.8 16.1
5 year swap 41.9 26.5 19.6 15.6
10 year swap 37.8 25.0 19.3 15.0
20 year swap 33.0 22.4 16.9 13.7
30 June 2008
1 year swap 36.8 21.7 16.9 13.8
5 year swap 28.7 20.2 16.2 13.5
10 year swap 23.4 18.7 15.2 13.0
20 year swap 19.9 16.7 13.8 11.5
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
* Due to limited liquidity in the USD swap market, the market consistent
asset model as at 31 December 2008 has been calibrated by reference to
volatility data as at 30 September 2008.
Option term
International equity volatilities 1 year 5 years 10 years
(Old Mutual Bermuda)* % % %
30 June 2009
SPX 26 27 22
RTY 33 39 29
TPX 29 27 29
HSCEI 39 34 38
TWY 31 30 29
KOSP12 27 27 28
NIFTY 32 27 30
SX5E 30 26 27
UKX 27 26 25
EEM 35 31 37
USAgg 5 5 5
EUAgg 12 12 12
APAgg 11 11 11
30 June 2008
SPX 26 27 22
RTY 33 39 29
TPX 29 27 29
HSCEI 39 34 38
TWSE 31 30 29
KOSP12 27 27 28
NIFTY 32 27 30
SX5E 30 26 27
UKX 27 26 25
31 December 2008
SPX 38 35 27
RTY 46 45 34
TPX 41 39 31
HSCEI 57 51 43
TWSE 36 34 30
KOSP12 42 43 36
NIFTY 39 33 31
SX5E 38 37 31
UKX 37 36 28
BCAI 4 4 4
* These volatilities refer to price indices. Due to ongoing enhancements
in
the fund mapping process, the indices referenced will vary from period
to
period.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
3 Assumptions continued
Tax
The effective tax rate for Europe was a range of 0 to 32 per cent (31 December
2008: 2 to 31 per cent; 30 June 2008: 3 to 30 per cent).
The effective tax rate for OMSA (excluding Namibia) and Namibia were 31 and 0
per cent respectively (31 December 2008: 33 and 0 per cent respectively; 30
June 2008: 34 and 0 per cent respectively), except for the investment return
on
capital for which the attributed tax was derived from the primary accounts.
For US Life the effective tax rate was 0 per cent (31 December 2008: 0 per
cent; 30 June 2008: 0 per cent).
For Bermuda the effective tax rate was 0 per cent (31 December 2008: 1 per
cent; 30 June 2008: 1 per cent).
4 (i) Adjusted Group Market Consistent Embedded Value presented per business
line
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
MCEV of the covered business 5,356 5,738 4,183
Adjusted net worth* 2,615 2,030 2,383
Value of in-force business** 2,741 3,708 1,800
Adjusted net worth of the asset
management businesses 1,714 1,705 1,577
OMSA 199 233 292
Europe 200 175 98
US Asset Management 1,315 1,297 1,187
Value of the banking business 2,208 1,666 1,976
Europe (adjusted net worth) 259 231 285
Nedbank (market value) 1,949 1,435 1,691
Market value of the general insurance
business
Mutual and Federal 272 268 219
Net other business (including Asia
Pacific) (237) 14 (161)
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 194 158 169
Adjustment for value of own shares in
ESOP schemes*** 57 83 63
Perpetual preferred securities (US$
denominated) (292) (350) (203)
Perpetual preferred callable securities (273) (585) (304)
GBP denominated (125) (275) (174)
Euro denominated (148) (310) (130)
Debt (1,410) (1,296) (1,312)
Rand denominated (213) (163) (213)
USD denominated (248) (482) (537)
GBP denominated (653) (323) (191)
SEK denominated (190) (328) (252)
Euro denominated (106) - (119)
Adjusted Group MCEV 7,589 7,401 6,207
* Adjusted net worth is after the elimination of inter-company loans.
** Net of non-controlling interests.
*** Includes adjustment for value of excess own shares in employee share
scheme trusts. The movement in value between 31 December 2008 and 30
June 2009 is due to a reduction in excess own shares following employee
share grants in March 2009.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (ii) Adjusted operating MCEV earnings for the covered business
GBPm
Six months 6 months Year ended
ended 30 June ended 30 June 31 December
2009 2008 2008
Adjusted operating MCEV
earnings before tax for the
covered
business* 573 499 324
OMSA 151 237 463
Europe 40 381 505
US Life 297 (6) (388)
Bermuda 85 (113) (256)
Tax on adjusted operating
MCEV earnings for the
covered business 107 142 191
OMSA 41 61 116
Europe - 90 117
US Life 38 - (24)
Bermuda 28 (9) (18)
Adjusted operating MCEV
earnings after tax for the
covered business 466 357 133
OMSA 110 176 347
Europe 40 291 388
US Life 259 (6) (364)
Bermuda 57 (104) (238)
Tax on adjusted operating
MCEV earnings comprises
Tax on adjusted operating
MCEV earnings for the
covered business (107) (142) (191)
Tax on adjusted operating
MCEV earnings for other
business (76) (85) 56
Tax on adjusted operating
MCEV earnings (183) (227) (135)
* 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.
4 (iii) Components of Market Consistent Embedded Value of the covered business
GBPm
At At At
30 June 30 June 31 December
2009 2008 2008
MCEV of the covered business 5,356 5,738 4,183
Adjusted net worth 2,615 2,030 2,383
Value of in-force business 2,741 3,708 1,800
OMSA
Adjusted net worth* 1,160 1,201 975
Free surplus 55 161 (95)
Required capital 1,105 1,040 1,070
Value of in-force business 1,050 967 1,088
Present value of future profits 1,298 1,156 1,285
Additional time value of financial
options and guarantees - - -
Frictional costs** (156) (125) (117)
Cost of non-hedgeable risks (92) (64) (80)
Europe
Adjusted net worth 626 492 567
Free surplus 231 150 196
Required capital 395 342 371
Value of in-force business 2,720 2,778 2,862
Present value of future profits 2,939 2,951 3,041
Additional time value of financial
options and guarantees (6) (2) (13)
Frictional costs (35) (31) (28)
Cost of non-hedgeable risks (178) (140) (138)
US Life
Adjusted net worth 550 397 465
Free surplus 27 7 (85)
Required capital 523 390 550
Value of in-force business (846) (41) (1,725)
Present value of future profits (664) 261 (1,448)
Additional time value of financial
options and guarantees (106) (204) (192)
Frictional costs*** (3) (31) (2)
Cost of residual non-hedgeable risks (73) (67) (83)
Bermuda
Adjusted net worth 279 (60) 376
Free surplus - (103) 342
Required capital 279 43 34
Value of in-force business (183) 4 (425)
Present value of future profits (92) 81 (298)
Additional time value of financial
options and guarantees (15) (9) (57)
Frictional costs*** (5) (3) (1)
Cost of residual non-hedgeable risks (71) (65) (69)
* 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 OMSA business there has been a material change in the asset
allocation of assets backing required capital from 31 December 2008 to 30
June 2009. As at 30 June 2009 the asset allocation is 75% cash/25% equity
compared to 60% cash/40% equity at 31 December 2008. This resulted in an
increase in frictional tax costs as interest bearing assets are subjected
to higher tax rates than equities.
*** For US Life and Bermuda, the decrease in frictional costs from 30 June
2008 to 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 30 June 2008 (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.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (iv) Analysis of covered business MCEV earnings (after tax)
6 months ended 30 June 2009
Free Required Adjusted
Total covered business surplus capital net worth
Opening MCEV 358 2,025 2,383
New business value (254) 80 (174)
Expected existing business contribution
(reference rate) 6 55 61
Expected existing business contribution
(in excess of reference rate) 4 2 6
Transfers from VIF and required capital
to free surplus 379 (90) 289
Experience variances (11) 5 (6)
Assumption changes 2 - 2
Other operating variance (217) 240 23
Operating MCEV earnings (91) 292 201
Economic variances (91) 32 (59)
Other non-operating variance 24 (6) 18
Total MCEV earnings (158) 318 160
Closing adjustments 113 (41) 72
Capital and dividend flows 110 - 110
Foreign exchange variance (21) (36) (57)
MCEV of acquired/sold business 24 (5) 19
Closing MCEV 313 2,302 2,615
Return on MCEV (RoEV) % per annum
Value of GBPm
Total covered business in-force MCEV
Opening MCEV 1,800 4,183
New business value 244 70
Expected existing business contribution (reference rate) 58 119
Expected existing business contribution (in excess of
reference rate) 199 205
Transfers from VIF and required capital to free surplus (289) -
Experience variances (76) (82)
Assumption changes 24 26
Other operating variance 105 128
Operating MCEV earnings 265 466
Economic variances 632 573
Other non-operating variance (1) 17
Total MCEV earnings 896 1,056
Closing adjustments 45 117
Capital and dividend flows - 110
Foreign exchange variance 70 13
MCEV of acquired/sold business (25) (6)
Closing MCEV 2,741 5,356
Return on MCEV (RoEV) % per annum 18.6%
Return on MCEV for total covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in Sterling. The operating
assumption changes and other operating variances are not annualised.
6 months ended 30 June 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
515 1,906 2,421 3,928 6,349
(290) 92 (198) 282 84
33 54 87 155 242
2 7 9 44 53
475 (92) 383 (383) -
(56) (8) (64) 60 (4)
(52) - (52) 72 20
(5) 7 2 (40) (38)
107 60 167 190 357
49 (16) 33 (383) (350)
1 3 4 19 23
157 47 204 (174) 30
(457) (138) (595) (46) (641)
(428) - (428) (2) (430)
(29) (138) (167) (44) (211)
- - - - -
215 1,815 2,030 3,708 5,738
11.5%
GBPm
Year ended 31 December 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
515 1,906 2,421 3,928 6,349
(608) 172 (436) 540 104
63 117 180 289 469
4 15 19 81 100
939 (189) 750 (750) -
160 (75) 85 (250) (165)
(55) - (55) (375) (430)
172 (156) 16 39 55
675 (116) 559 (426) 133
(722) 5 (717) (1,485) (2,202)
(111) 43 (68) - (68)
(158) (68) (226) (1,911) (2,137)
1 187 188 (217) (29)
(22) - (22) - (22)
23 187 210 (217) (7)
- - - - -
358 2,025 2,383 1,800 4,183
2.1%
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2009
Free Required Adjusted
OMSA covered business surplus capital net worth
Opening MCEV (95) 1,070 975
New business value (50) 40 (10)
Expected existing business contribution
(reference rate) (3) 39 36
Expected existing business contribution
(in excess of reference rate) - 2 2
Transfers from VIF and required capital
to free surplus 151 (70) 81
Experience variances (1) (15) (16)
Assumption changes 2 - 2
Other operating variance 57 (35) 22
Operating MCEV earnings 156 (39) 117
Economic variances 14 1 15
Other non-operating variance - - -
Total MCEV earnings 170 (38) 132
Closing adjustments (20) 73 53
Capital and dividend flows (50) - (50)
Foreign exchange variance 6 78 84
MCEV of acquired/sold business 24 (5) 19
Closing MCEV 55 1,105 1,160
Return on MCEV (RoEV) % per annum
Value of GBPm
OMSA covered business in-force MCEV
Opening MCEV 1,088 2,063
New business value 34 24
Expected existing business contribution
(reference rate) 61 97
Expected existing business contribution (in
excess of reference rate) 7 9
Transfers from VIF and required capital to free
surplus (81) -
Experience variances (23) (39)
Assumption changes (1) 1
Other operating variance (4) 18
Operating MCEV earnings (7) 110
Economic variances (81) (66)
Other non-operating variance - -
Total MCEV earnings (88) 44
Closing adjustments 50 103
Capital and dividend flows - (50)
Foreign exchange variance 75 159
MCEV of acquired/sold business (25) (6)
Closing MCEV 1,050 2,210
Return on MCEV (RoEV) % per annum 9.8%
* The MCEV for OMSA is presented after the adjustment for market value of
life
funds` investments in Group equity and debt instruments
The segment results of OMSA include both the life companies in South Africa
and
Namibia.
The negative experience variances were caused mainly by adverse persistency
experience, adverse Group assurance claims experience and development project
costs, which were partially offset by favourable Retail mortality and
longevity
experience.
There were no material operating assumption changes.
The other operating variances mainly relate to management actions (including a
reduction of future cover increase on certain risk products in the Retail Mass
segment to achieve better alignment between the cost of providing benefits and
the value of the corresponding premium increase, offset by changing the
shareholder asset allocation from 60% cash/40% equity to 75% cash/25% equity
which resulted in an increase in frictional tax costs as interest bearing
assets are subjected to higher tax rates than equities) and various
methodology
changes and error corrections.
The negative economic variances were caused mainly by economic assumption
changes (mainly an increase in medium to long term swap yields and a decrease
in volatilities) and the investment return on policyholder funds being less
than assumed, partially offset by the investment return earned on shareholder
funds being greater than assumed and the introduction of a liquidity premium
for Retail Affluent annuity business.
The capital and dividend flows mainly consist of dividends paid offset by
inter-company dividends received and the disposal of Nedlife.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV
in Rand. The operating assumption changes and other operating variances are
not
annualised.
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
309 1,159 1,468 1,202 2,670
(44) 32 (12) 34 22
15 50 65 74 139
2 7 9 5 14
147 (66) 81 (81) -
10 - 10 (10) -
3 - 3 - 3
2 - 2 (4) (2)
135 23 158 18 176
103 1 104 (121) (17)
(3) 3 - 19 19
235 27 262 (84) 178
(383) (146) (529) (151) (680)
(348) - (348) - (348)
(35) (146) (181) (151) (332)
- - - - -
161 1,040 1,201 967 2,168
14.6%
Year ended 31 December 2008
Free Required Adjusted Value of GBPm
surplus capital net worth in-force MCEV
309 1,159 1,468 1,202 2,670
(84) 72 (12) 73 61
27 101 128 148 276
4 14 18 13 31
296 (134) 162 (162) -
16 (19) (3) (18) (21)
22 - 22 (19) 3
160 (156) 4 (7) (3)
441 (122) 319 28 347
(154) 51 (103) (139) (242)
- - - 18 18
287 (71) 216 (93) 123
(691) (18) (709) (21) (730)
(647) - (647) - (647)
(44) (18) (62) (21) (83)
- - - - -
(95) 1,070 975 1,088 2,063
14.6%
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2009
Free Required Adjusted
Europe covered business surplus capital net worth
Opening MCEV 196 371 567
New business value (170) 7 (163)
Expected existing business contribution
(reference rate) 7 5 12
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus 209 11 220
Experience variances 7 (5) 2
Assumption changes - - -
Other operating variance 1 - 1
Operating MCEV earnings 54 18 72
Economic variances (34) 31 (3)
Other non-operating variance 24 (6) 18
Total MCEV earnings 44 43 87
Closing adjustments (9) (19) (28)
Capital and dividend flows 8 - 8
Foreign exchange variance (17) (19) (36)
Closing MCEV 231 395 626
Return on MCEV (RoEV) % per annum
Value of GBPm
Europe covered business in-force MCEV
Opening MCEV 2,862 3,429
New business value 202 39
Expected existing business contribution (reference rate) 31 43
Expected existing business contribution (in excess of
reference rate) 21 21
Transfers from VIF and required capital to free surplus (220) -
Experience variances (42) (40)
Assumption changes 12 12
Other operating variance (36) (35)
Operating MCEV earnings (32) 40
Economic variances 52 49
Other non-operating variance (1) 17
Total MCEV earnings 19 106
Closing adjustments (161) (189)
Capital and dividend flows - 8
Foreign exchange variance (161) (197)
Closing MCEV 2,720 3,346
Return on MCEV (RoEV) % per annum 3.0%
The segmental results of Europe include Skandia Life companies in the United
Kingdom, Nordic region, Europe and Latin America.
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 largely caused by adverse persistency
experience.
The operating assumption changes reflect increased recognition of fee income
in
the United Kingdom and in the Nordic region.
The other operating variances mainly reflect the impact of modelling and
methodology changes which have increased the amount of capital allocated to
non-hedgeable risks.
The economic variances are mainly due to the positive effect of market
movements on funds under management in the Nordic region and continental
Europe. This has been partially offset by the adverse exchange rate movements
resulting in poor fund returns for UK business sold internationally.
The other non-operating variance mainly results from a release of reserves
following the legal resolution of various legacy issues in the Nordic region.
The capital and dividend flows mainly represent dividends, repayment of loans
and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV
in Sterling. The operating assumption changes and other operating variances
are
not annualised.
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
125 323 448 2,769 3,217
(189) 9 (180) 250 70
17 (2) 15 76 91
- - - 29 29
254 (2) 252 (252) -
7 15 22 3 25
- - - 77 77
(7) 7 - (1) (1)
82 27 109 182 291
14 (17) (3) (278) (281)
4 - 4 - 4
100 10 110 (96) 14
(75) 9 (66) 105 39
(80) - (80) (2) (82)
5 9 14 107 121
150 342 492 2,778 3,270
15.7%
Year ended 31 December 2008
Free Required Adjusted Value of GBPm
surplus capital net worth in-force MCEV
125 323 448 2,769 3,217
(347) 7 (340) 449 109
34 4 38 131 169
- - - 48 48
515 (14) 501 (501) -
31 2 33 (26) 7
(3) - (3) 69 66
12 - 12 (23) (11)
242 (1) 241 147 388
(39) (46) (85) (299) (384)
(111) 43 (68) (18) (86)
92 (4) 88 (170) (82)
(21) 52 31 263 294
(26) - (26) - (26)
5 52 57 263 320
196 371 567 2,862 3,429
12.1%
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2009
Free Required Adjusted
US Life covered business surplus capital net worth
Opening MCEV (85) 550 465
New business value (34) 33 (1)
Expected existing business contribution
(reference rate) (1) 11 10
Expected existing business contribution
(in excess of reference rate) 4 - 4
Transfers from VIF and required capital
to free surplus 25 (29) (4)
Experience variances 8 25 33
Assumption changes - - -
Other operating variance - - -
Operating MCEV earnings 2 40 42
Economic variances (41) - (41)
Other non-operating variance - - -
Total MCEV earnings (39) 40 1
Closing adjustments 151 (67) 84
Capital and dividend flows 152 - 152
Foreign exchange variance (1) (67) (68)
Closing MCEV 27 523 550
Return on MCEV (RoEV) % per annum
Value of GBPm
US Life covered business in-force MCEV
Opening MCEV (1,725) (1,260)
New business value 8 7
Expected existing business contribution (reference
rate) (31) (21)
Expected existing business contribution (in excess of
reference rate) 150 154
Transfers from VIF and required capital to free surplus 4 -
Experience variances (3) 30
Assumption changes 13 13
Other operating variance 76 76
Operating MCEV earnings 217 259
Economic variances 534 493
Other non-operating variance - -
Total MCEV earnings 751 752
Closing adjustments 128 212
Capital and dividend flows - 152
Foreign exchange variance 128 60
Closing MCEV (846) (296)
Return on MCEV (RoEV) % per annum 34.9%
The segment results of US Life include allowance for Old Mutual Reassurance
(Ireland) Limited (OMRe), which provides reinsurance to the United States Life
Companies.
The operating MCEV earnings were largely as a result of the expected existing
business contribution (in excess reference rate). i.e. by the corporate bond
spread that we expected to earn over and above the adjusted risk-free
reference
rate (inclusive of the liquidity premium adjustment).
The experience variances were largely caused by positive mortality variance
and
expense variance, partially offset by negative persistency experience.
The only operating assumption change was in respect of mortality assumptions
on
the Single Premium Immediate Annuity (SPIA) business, which were lightened
slightly to align with IFRS assumptions.
The other operating variances include an amendment in the calculation of the
time value of financial options and guarantees and changes to the methodology
for calculating the non-hedgeable risk capital.
The economic variances were largely driven by the recovery in equity markets
during the period and the increase in the US swap yield curve.
There were no other non-operating variances.
The capital and dividend flows were due to a capital injection made in
February
of this year.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV
in US Dollar. The operating assumption changes and other operating variances
are not annualised.
6 months ended 30 June 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
60 391 451 (102) 349
(32) 17 (15) 10 (5)
1 6 7 2 9
- - - 4 4
64 (23) 41 (41) -
(57) 1 (56) 42 (14)
- - - - -
- - - - -
(24) 1 (23) 17 (6)
(29) (29) 44 15
- - - - -
(53) 1 (52) 61 9
- (2) (2) (2)
- - - - -
- (2) (2) - (2)
7 390 397 (41) 356
(2.9)%
Year ended 31 December 2008
Free Required Adjusted Value of GBPm
surplus capital net worth in-force MCEV
60 391 451 (102) 349
(136) 83 (53) 41 (12)
1 11 12 2 14
- 1 1 9 10
106 (39) 67 (67) -
115 (41) 74 (233) (159)
(6) - (6) (328) (334)
- - - 117 117
80 15 95 (459) (364)
(267) - (267) (789) (1,056)
- - - - -
(187) 15 (172) (1,248) (1,420)
42 144 186 (375) (189)
55 - 55 - 55
(13) 144 131 (375) (244)
(85) 550 465 (1,725) (1,260)
(97.6)%
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
4 (iv) Analysis of covered business MCEV earnings (after tax) continued
6 months ended 30 June 2009
Bermuda covered business
Free Required Adjusted
surplus capital net worth
Opening MCEV 342 34 376
New business value - - -
Expected existing business contribution
(reference rate) 3 - 3
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus (6) (2) (8)
Experience variances (25) - (25)
Assumption changes - - -
Other operating variance (275) 275 -
Operating MCEV earnings (303) 273 (30)
Economic variances (30) - (30)
Other non-operating variance - - -
Total MCEV earnings (333) 273 (60)
Closing adjustments (9) (28) (37)
Capital and dividend flows - - -
Foreign exchange variance (9) (28) (37)
Closing MCEV - 279 279
Return on MCEV (RoEV) % per annum
Value of GBPm
in-force MCEV
Opening MCEV (425) (49)
New business value - -
Expected existing business contribution (reference rate) (3) -
Expected existing business contribution (in excess of
reference rate) 21 21
Transfers from VIF and required capital to free surplus 8 -
Experience variances (8) (33)
Assumption changes - -
Other operating variance 69 69
Operating MCEV earnings 87 57
Economic variances 127 97
Other non-operating variance - -
Total MCEV earnings 214 154
Closing adjustments 28 (9)
Capital and dividend flows - -
Foreign exchange variance 28 (9)
Closing MCEV (183) 96
Return on MCEV (RoEV) % per annum 92.8%
The segment results of Bermuda include allowance for Old Mutual Reassurance
(Ireland) Limited (OMRe), which provides reinsurance to Old Mutual (Bermuda)
Limited.
The experience variances were largely caused by adverse persistency
experience,
and increase in the cost of non-hedgeable risks and a negative expense
variance, partially offset by a reduction in the time value of financial
options and guarantees.
There were no operating assumption changes.
The other operating variance includes a positive variance due to an amendment
of a DAC write-down made in the previous reporting period, an amendment in the
calculation of the time value of financial options and guarantees and changes
to the methodology for calculation the non- hedgeable risk capital.
The economic variances were largely driven by the recovery in equity markets
during the period and the increase in the US swap yield curve.
There were no other non-operating variances.
There were no capital and dividend flows.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV
in US Dollar. The operating assumption changes and other operating variances
are not annualised.
6 months ended 30 June 2008
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
21 33 54 59 113
(25) 34 9 (12) (3)
- - - 3 3
- - - 6 6
10 (1) 9 (9) -
(16) (24) (40) 25 (15)
(55) - (55) (5) (60)
- - - (35) (35)
(86) 9 (77) (27) (104)
(39) - (39) (28) (67)
- - - - -
(125) 9 (116) (55) (171)
1 1 2 - 2
- - - - -
1 1 2 - 2
(103) 43 (60) 4 (56)
(97.5)%
Year ended 31 December 2008
Free Required Adjusted Value of GBPm
surplus capital net worth in-force MCEV
21 33 54 59 113
(41) 10 (31) (23) (54)
1 1 2 8 10
- - - 11 11
22 (2) 20 (20) -
(2) (17) (19) 27 8
(68) - (68) (97) (165)
- - - (48) (48)
(88) (8) (96) (142) (238)
(262) - (262) (258) (520)
- - - - -
(350) (8) (358) (400) (758)
671 9 680 (84) 596
596 - 596 - 596
75 9 84 (84) -
342 34 376 (425) (49)
(195.3)%
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
5 Adjustments applied in determining total Group MCEV earnings before tax
6 months ended 30 June 2009
Covered Non-covered Total
business business Group
Analysis of adjusting items MCEV IFRS MCEV
Income/(expense)
Goodwill impairment and amortisation of
non-
covered business acquired intangible
assets and
impact of acquisition accounting - (6) (6)
Economic variances 538 (12) 526
Other non-operating variances 16 - 16
Acquired/divested business - (41) (41)
Closure of unclaimed share trust - - -
Dividends declared to holders of
perpetual
preferred callable securities - 22 22
Adjusting items relating to US Asset
Management
equity plans and non controlling holders - 1 1
Fair value gains on Group debt
instruments - 12 12
Adjusting items 554 (24) 530
6 months ended 30 June 2008
GBPm
Covered Non-covered Total
business business Group
Analysis of adjusting items MCEV IFRS MCEV
Income/(expense)
Goodwill impairment and amortisation of
non-
covered business acquired intangible
assets and
impact of acquisition accounting - (5) (5)
Economic variances (492) (6) (498)
Other non-operating variances 31 - 31
Acquired/divested business 62 62
Closure of unclaimed share trust - - -
Dividends declared to holders of
perpetual
preferred callable securities - 22 22
Adjusting items relating to US Asset
Management
equity plans and non controlling holders - 5 5
Fair value gains on Group debt
instruments - 40 40
Adjusting items (461) 118 (343)
Year ended 31 December 2008
Covered business Non-covered business Total Group
Analysis of
adjusting items MCEV 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
non controlling
holders - 7 7
Fair value gains
on Group debt
instruments - 503 503
Adjusting items (2,559) 522 (2,037)
6 Other movements in net equity impacting Group MCEV
6 months ended 30 June 2009
GBPm
Covered Non-covered Total
business business Group
MCEV IFRS MCEV
Fair value gains/(losses) - (2) (2)
Net investment hedge - 2 2
Currency translation differences/exchange
differences on translating foreign
operations 13 22 35
Aggregate tax effects of items taken
directly to
or transferred from equity - 1 1
Correction in transfers to the covered
business* - 316 316
Other movements - (47) (47)
Net income recognised directly into
equity 13 292 305
Dividend for the year 104 (126) (22)
Share buy back - - -
Net issues of ordinary share capital by
the
Company - - -
Exercise of share options - - -
Fair value of equity settled share
options - 9 9
Other movements in net equity 117 175 292
6 months ended 30 June 2008
Covered Non-covered Total
business business Group
MCEV IFRS MCEV
Fair value gains/(losses) - (2) (2)
Net investment hedge - (5) (5)
Currency translation differences/exchange
differences on translating foreign
operations (211) (207) (418)
Aggregate tax effects of items taken
directly to
or transferred from equity - 6 6
Correction in transfers to the covered
business* - - -
Other movements - (49) (49)
Net income recognised directly into
equity (211) (257) (468)
Dividend for the year (430) 181 (249)
Share buy back - (174) (174)
Net issues of ordinary share capital by
the
Company - 4 4
Exercise of share options - 3 3
Fair value of equity settled share
options - 17 17
Other movements in net equity (641) (226) (867)
* Amendment arising from allocation of assets between covered and non-
covered
business at December 2008.
Year ended 31 December 2008
Covered Non-covered Total
business business Group
MCEV 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)
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.
At 30 June 2009
Total OMSA Europe
IFRS net asset value* 5,728 707 4,293
Adjustment to include long-term business on a
statutory solvency basis (2,194) 148 (2,443)
Adjustment for market value of life funds`
investments in Group equity and
debt instruments 305 305 -
Adjustments to exclude acquisition of
goodwill from the covered business (1,224) - (1,224)
MCEV adjusted net worth 2,615 1,160 626
GBPm
US Life Bermuda
IFRS net asset value* 422 306
Adjustment to include long-term business on a statutory
solvency basis 128 (27)
Adjustment for market value of life funds` investments
in Group equity and
debt instruments - -
Adjustments to exclude acquisition of goodwill from the
covered business - -
MCEV adjusted net worth 550 279
At 30 June 2008
Total OMSA Europe
IFRS net asset value* 5,995 785 4,287
Adjustment to include long-term business on a
statutory solvency basis (2,976) 137 (2,584)
Adjustment for market value of life funds`
investments in Group equity and
debt instruments 279 279 -
Adjustments to exclude acquisition of
goodwill from the covered business (1,268) - (1,211)
MCEV adjusted net worth 2,030 1,201 492
GBPm
US Life Bermuda
IFRS net asset value* 994 (71)
Adjustment to include long-term business on a statutory
solvency basis (540) 11
Adjustment for market value of life funds` investments
in Group equity and
debt instruments - -
Adjustments to exclude acquisition of goodwill from the
covered business (57) -
MCEV adjusted net worth 397 (60)
At 31 December 2008
Total OMSA Europe
IFRS net asset value* 5,907 602 4,615
Adjustment to include long-term business on a
statutory solvency basis (2,461) 137 (2,749)
Adjustment for market value of life funds`
investments in Group equity and
debt instruments 236 236 -
Adjustments to exclude acquisition of goodwill
from the covered business (1,299) - (1,299)
MCEV adjusted net worth 2,383 975 567
GBPm
US Life Bermuda
IFRS net asset value* 97 593
Adjustment to include long-term business on a statutory
solvency basis 368 (217)
Adjustment for market value of life funds` investments
in Group equity and
debt instruments - -
Adjustments to exclude acquisition of goodwill from the
covered business - -
MCEV adjusted net worth 465 376
* IFRS net asset value is after elimination of inter-company 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.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
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 OMSA business, Nedlife is now excluded from
covered business. A similar consideration applies to VNB and other new
business
measures such as PVNBP and APE in order to provide a better indication of
future expected `normalised` earnings. However note that in the tables below
Nedlife is still incorporated in the comparative results for the 6 months
ended
2008 and the year ended 31 December 2008.
GBPm
6 months 6 months Year ended
ended 30 ended 30 31 December
June 2009 June 2008 2008
Annualised recurring premiums
OMSA 104 104 223
Europe 233 248 476
US Life 9 18 33
Bermuda - - -
346 370 732
Single premiums
OMSA 558 592 1,299
Europe 2,030 2,808 5,001
US Life 287 449 1,027
Bermuda 15 1,127 1,448
2,890 4,976 8,775
PVNBP
OMSA 1,213 1,185 2,437
Europe 3,111 3,962 7,131
US Life 348 545 1,246
Bermuda 15 1,126 1,448
4,687 6,818 12,262
PVNBP capitalisation factors*
OMSA 6.3 5.7 5.1
Europe 4.6 4.7 4.5
US Life 6.5 5.4 6.7
Bermuda - n/a n/a
APE
OMSA 160 163 353
Europe 436 529 977
US Life 38 63 136
Bermuda 2 113 145
636 868 1,611
VNB
OMSA** 24 22 61
Europe 39 70 109
US Life 7 (5) (12)
Bermuda - (3) (54)
70 84 104
8 Value of new business (after tax) continued
6 months 6 months Year ended
ended 30 ended 30 31 December
June 2009 June 2008 2008
PVNBP margin***
OMSA 2.0% 1.9% 2.5%
Europe 1.3% 1.8% 1.5%
US Life 2.1% (0.9)% (0.9)%
1.5% 1.2% 0.8%
APE margin****
OMSA 15% 14% 17%
Europe 9% 13% 11%
US Life 19% (8)% (8)%
11% 10% 6%
* The PVNBP capitalisation factors are calculated as follows: (PVNBP -
single premiums)/annualised recurring premiums.
** The comparative results excluding Nedlife are GBP17m for the 6 months
ended 2008 and GBP52m the year ended 31 December 2008.
*** The comparative results excluding Nedlife are 1.6% for the 6 months
ended
2008 and 2.3% the year ended 31 December 2008.
**** The comparative results excluding Nedlife are 13% for the 6 months ended
2008 and 16% the year ended 31 December 2008.
The value of new individual unit trust linked retirement annuities and pension
fund asset management business written by the OMSA long-term business, which
amounted to GBP172 million in the 6 months ended 30 June 2009 (year ended 31
December 2008: GBP458 million; 6 months ended 30 June 2008: GBP145 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 GBP83 million for
the 6 months ended 30 June 2009 (year ended 31 December 2008: GBP239 million;
6
months ended 30 June 2008: GBP155 million), is excluded as this is more
appropriately classified as mutual fund business.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
9 Product analysis of new covered business premiums
6 months ended 30 June 2009
OMSA Recurring Single
Total business 104 558
Individual business 92 278
Savings 22 204
Protection 23 -
Annuity - 73
Retail mass market 47 1
Group business 12 280
Savings 5 236
Protection 7 -
Annuity - 44
6 months ended 30 June 2008
OMSA Recurring Single
Total business 104 592
Individual business 96 333
Savings 24 254
Protection 33 2
Annuity - 76
Retail mass market 39 1
Group business 8 259
Savings 3 205
Protection 5 1
Annuity - 53
GBPm
Year ended 31 December 2008
OMSA Recurring Single
Total business 223 1,299
Individual business 209 622
Savings 51 477
Protection 68 -
Annuity - 144
Retail mass market 90 1
Group business 14 677
Savings 6 444
Protection 8 1
Annuity - 232
6 months ended 30 June 2009
Europe Recurring Single
Total business 233 2,030
Unit-linked assurance 231 1,927
Life 2 103
6 months ended 30 June 2008
Europe Recurring Single
Total business 248 2,808
Unit-linked assurance 246 2,807
Life 2 1
GBPm
Year ended31 December 2008
Europe Recurring Single
Total business 476 5,001
Unit-linked assurance 470 4,723
Life 6 278
6 months ended 30 June 2009
US Life Recurring Single
Total business 9 287
Fixed deferred annuity - 27
Fixed indexed annuity - 184
Variable annuity - 1
Life 9 16
Immediate annuity - 59
6 months ended 30 June 2008
US Life Recurring Single
Total business 18 449
Fixed deferred annuity - 38
Fixed indexed annuity - 336
Variable annuity - 2
Life 18 8
Immediate annuity - 65
GBPm
Year ended31 December 2008
US Life Recurring Single
Total business 33 1,027
Fixed deferred annuity - 228
Fixed indexed annuity - 611
Variable annuity - 6
Life 33 43
Immediate annuity - 139
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
10 Drivers of new business value*
Year ended 30 June 2009 Year ended 31 December 2008
PVNBP PVNBP
Margin APE Margin Margin APE Margin
Total covered business** % % % %
Margin at the end of
comparative period 1.2 9.9 1.7 13.5
Change in volume 0.2 (1.0) 0.1 0.2
Change in product mix - (0.8) (0.2) (1.8)
Change in country mix - - - -
Change in operating
assumptions 0.2 1.3 (0.3) (2.7)
Change in economic
assumptions 0.1 1.8 (0.3) (2.6)
Exchange rate movements (0.2) (0.1) (0.2) (0.5)
Margin at the end of the
period 1.5 11.1 0.8 6.1
OMSA***
Margin at the end of
comparative period 1.6 13.5 2.4 16.8
Change in volume 0.2 (0.4) 0.2 1.7
Change in product mix (0.3) (1.3) (0.1) (0.6)
Change in country mix - - - -
Change in operating
assumptions 0.5 3.3 0.1 0.4
Change in economic
assumptions - (0.2) (0.1) (1.0)
Margin at the end of the
period 2.0 14.9 2.5 17.3
Europe***
Margin at the end of
comparative period 1.8 13.3 1.7 13.7
Change in volume (0.5) (5.0) - (1.0)
Change in product mix (0.1) (0.7) - (0.2)
Change in country mix - - - -
Change in operating
assumptions 0.1 0.7 (0.1) (1.0)
Change in economic
assumptions - 0.8 (0.1) (0.3)
Margin at the end of the
period 1.3 9.1 1.5 11.2
US Life***
Margin at the end of
comparative period (0.9) (7.9) (0.5) (4.2)
Change in volume - - - -
Change in product mix 2.0 17.7 (0.4) (3.8)
Change in country mix - - - -
Change in operating
assumptions - - 1.9 17.4
Change in economic
assumptions 1.0 9.3 (1.9) (17.8)
Margin at the end of the
period 2.1 19.1 (0.9) (8.4)
* Prior year MCEV comparatives of drivers of new business value for 30 June
2008 are not available.
** 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, and exclude Nedlife for the comparative six months ending 30 June
2008.
11 Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business
at 30 June 2009 and the value of new business for the 6 months ended 30 June
2009 to changes in key assumptions.
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.
GBPm
30 June 2009
Value of in-force Value of new
Total covered business MCEV business business
Central assumptions 5,356 2,741 70
Effect of:
Increasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 5,116 2,511 73
Decreasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 5,553 2,928 66
GBPm
30 June 2009
Value of in-force Value of new
OMSA business business
MCEV
Central assumptions 2,210 1,050 24
Effect of:
Increasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 2,173 1,012 23
Decreasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 2,241 1,083 23
Recognising the present value
of an additional 50 per cent
of liquidity
spreads assumed on corporate
bonds over the lifetime of the
liabilities
with credited rates and
discount rates changing
commensurately 2,227 1,067 25
GBPm
30 June 2009
Value of in-force Value of new
Europe MCEV business business
Central assumptions 3,346 2,720 39
Effect of:
Increasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 3,255 2,641 38
Decreasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately 3,434 2,797 42
GBPm
30 June 2009
Value of in-force Value of new
US Life
MCEV business business
Central assumptions (296) (846) 7
Effect of:
Increasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately (419) (970) 12
Decreasing all pre-tax
investment and economic
assumptions by 1 per
cent, with credited rates and
discount rates changing
commensurately (208) (759) 1
Recognising the present value
of an additional 50 per cent
of liquidity
spreads assumed on corporate
bonds over the lifetime of the
liabilities
with credited rates and
discount rates changing
commensurately 71 (479) 17
GBPm
30 June 2009
Value of in-force Value of new
Bermuda
MCEV business business
Central assumptions 96 (183) -
Effect of:
Increasing all pre-tax
investment and economic
assumptions by 1 per cent,
with credited rates and
discount rates changing
commensurately 107 (172) -
Decreasing all pre-tax
investment and economic
assumptions by 1 per cent,
with credited rates and
discount rates changing
commensurately 86 (193) -
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
12 Key changes in MCEV methodology and assumptions
A summary of the key changes arising in the move from the EEV to MCEV
reporting framework was set out in the annual report and accounts 2008.
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 30 June 2008 from an EEV to MCEV basis.
At 30 June 2008
Previously published adjusted Group EEV per share 143.2p
Change in Embedded Value of covered business as a
consequence of the move to MCEV (7.8)p
Adjustment to bring long-term business on a statutory
solvency basis (0.1)p
Marking the present value of future BEE scheme deferred
consideration to market 0.4p
Adjustment to bring external debt to market value 4.6p
Total impact (2.9)p
Adjusted Group MCEV per share 140.3p
Percentage impact (2.0)%
The change in the adjusted Group Embedded Value per share from 143.2p on an
EEV basis to 140.3p on an MCEV basis is caused 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 6 months ended 30 June 2008 from an EEV to MCEV basis.
6 months
ended 30
June
2008
Previously published adjusted Group EEV operating earnings per
share 10.8p
Change in operating earnings of covered business as a consequence
of the move to MCEV (0.7)p
Adjusted Group MCEV operating earnings per share 10.1p
Percentage impact (5.9)%
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 10.8p on an EEV basis to 10.2p on an
MCEV basis is caused entirely by the change in the operating earnings of the
covered business which is analysed in more detail in note 18.
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
15 Restatement of Embedded Value of covered business
The tables below reconcile the Embedded Value of the covered business as at 30
June 2008 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 OMSA
Previously published EEV 6,153 2,191
Release of cost of required capital in published EEV 391 174
Economic assumption changes (279) (8)
Allowance for frictional costs (190) (125)
Allowance for cost of residual non-hedgeable risks (337) (64)
Total impact (415) (23)
MCEV 5,738 2,168
Percentage impact (6.7)% (1.0)%
GBPm
At 30 June 2008
United
In-force covered business Europe States*
Previously published EEV 3,171 791
Release of cost of required capital in published
EEV 103 114
Economic assumption changes 168 (439)
Allowance for frictional costs (31) (34)
Allowance for cost of residual non-hedgeable
risks (141) (132)
Total impact 99 (491)
MCEV 3,270 300
Percentage impact 3.2% (62.1)%
* The results for United States include Bermuda.
15 Restatement of Embedded Value of covered business continued
The impact as at 30 June 2008 of moving from an EEV to an MCEV methodology is
a reduction in Embedded Value of the covered business of 6.7 per cent from
GBP6,153 million to GBP5,738 million. Most of the reduction in Embedded Value
is attributable to the United States business which decreased by 62.1 per cent
from GBP791 million to GBP300 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.
The underlying drivers of the impact of moving from an EEV to an MCEV
methodology for each geography are consistent with those disclosed as part of
the restatement of the Embedded Value of covered business as at 31 December
2006 and 31 December 2007 as set out in note 15 of the annual report and
account 2008
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
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 30 June 2008 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.
GBPm
At 30 June 2008
United
In-force covered business Total OMSA Europe States**
Previously published EEV 6,153 2,191 3,171 791
Adjusted net worth 2,036 1,203 493 340
Free surplus 220 163 151 (94)
Required capital 1,816 1,040 342 434
Value of in-force business 4,117 988 2,678 451
Present value of future profits 4,559 1,162 2,784 613
Additional time value of financial
options and guarantees (50) - (2) (48)
Cost of required capital (392) (174) (104) (114)
MCEV 5,738 2,168 3,270 300
Adjusted net worth 2,030 1,201 492 337
Free surplus* 215 161 150 (96)
Required capital 1,815 1,040 342 433
Value of in-force business 3,708 967 2,778 (37)
Present value of future profits 4,449 1,156 2,951 342
Additional time value of financial
options and guarantees (215) - (2) (213)
Frictional costs (190) (125) (31) (34)
Cost of residual non-hedgeable risks(336) (64) (140) (132)
* For the OMSA 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.
** The results for United States include Bermuda.
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 6 months ended 30 June 2008 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 15.
GBPm
6 months ended 30 June 2008
United
Value of new business Total OMSA* Europe States**
Previously published VNB under
EEV basis 112 25 61 26
Release of cost of required
capital in published EEV basis 17 6 4 8
Economic assumption changes (16) (2) 14 (28)
Allowance for frictional costs (10) (4) (1) (5)
Allowance for cost of residual
non-hedgeable risks (19) (3) (8) (8)
Total impact (28) (3) 9 (33)
VNB on MCEV basis 84 22 70 (8)
Percentage impact % (25.1)% (12.5)% 14.8% (130.8)%
EEV PVNBP 6,668 1,150 3,857 1,661
EEV APE 872 168 529 175
EEV PVNBP margin % 1.7% 2.2% 1.6% 1.6%
EEV APE margin % 13% 15% 12% 15%
MCEV PVNBP 6,818 1,185 3,962 1,671
MCEV APE 868 163 529 176
MCEV PVNBP margin % 1.2% 1.9% 1.8% (0.5)%
MCEV APE margin % 10% 14% 13% (5)%
* Note that OMSA healthcare administration business was included in the EEV
basis, but is excluded on an MCEV basis.
** The results for United States include Bermuda.
The impact on VNB of the covered business written in the 6 months ended 30
June
2008 due to moving from an EEV to MCEV basis is a decrease of 25.1 per cent
from GBP112 million to GBP84 million. Most of the reduction is attributable to
the United States business where VNB decreased by 130.8 per cent from GBP26
million to -GBP8 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 15
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).
Notes to the Old Mutual Market Consistent Embedded Value basis
supplementary information
For the 6 months ended 30 June 2009
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, with the operating assumption changes and other operating variances
not being annualised for interim reporting. The table below provides summaries
of the drivers in the change of RoEV for the 6 months ended 30 June 2008 from
the previously published EEV basis to the MCEV basis.
6 months ended 30 June 2008
OMSA Europe United States**
In-force covered business % % %
Previously published RoEV% on an EEV
basis 13.5 14.5 1.3
MCEV RoEV% 14.6 15.7 (25.2)
Difference 1.1 1.2 (23.9)
Drivers of change for the covered
business:
New business value (0.2) 0.4 (9.6)
Expected existing business contribution 2.4 0.4 5.0
Experience variances (0.5) 0.6 (4.4)
Assumption changes (0.5) (0.1) (7.4)
Other operating variances* (0.1) (0.1) (7.5)
* 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 results for United States include Bermuda.
The impact on VNB as a result of moving from an EEV to MCEV basis has been
outlined in note 17. Other key drivers of the change in RoEV for each
geography are discussed below.
OMSA
The major reasons for the change in RoEV from an EEV to MCEV basis is the
significantly higher expected existing business contribution. 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 at 31 December 2007 therefore leads to a
higher expected existing business contribution under MCEV in 2008.
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 reduced contribution of
assumption changes.
Europe
As mentioned above, 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. Differences in these yields at the end of 2007 therefore lead to
differences in the expected existing business contribution under MCEV.
United States
Projected cash flows are significantly different under EEV and MCEV and such
differences are the major contributor to the change in RoEV.
The negative 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 expected to be 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 shares may also be traded on the Xternal list of the Nordic Exchange
in Stockholm. The ISIN number of the Company`s shares is GB0007389926.
At 30 June 2009, the Company had 5,516,141,360 ordinary shares of 10p each in
issue (30 June 2008: 5,514,580,342). 239,434,888 shares were held by the
Company in treasury, at 30 June 2009 (30 June 2008: 239,434,888)
Websites
Further information on the Company can be found on the following websites:
www.oldmutual.com
www.oldmutual.co.za
Sponsor
Merrill Lynch South Africa (Pty) Limited
Date: 05/08/2009 08:00:38 Produced by the JSE SENS Department.
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