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OML
OLOML
OML - Old Mutual Plc - Index to the MCEV statements for the year ended 31
December 2011
OLD MUTUAL plc
Issuer code: OLOML
JSE Share code: OML
NSX share code: OLM
ISIN: GB0007389926
Old Mutual plc
09 March 2012
Index to the MCEV statements
For the year ended 31 December 2011
Adjusted Group MCEV by line of Business
Group Market Consistent Embedded Value statement of earnings
Commentary on key changes in the MCEV 2011 primary statements compared to
2010
Adjusted Operating Group MCEV Earnings per share
Notes to the Market Consistent Embedded Value basis supplementary
information
A: MCEV policies
B: Segment information
C: Other key performance information
D: Sensitivity tests
E: Disposal of Nordic businesses
ADJUSTED GROUP MCEV BY LINE OF BUSINESS
At 31 December 2011
GBPm
At At
31 December 31 December
2011 2010
Notes
MCEV of the core covered business (Long
Term Savings) B3 5,713 5,913
Adjusted net worth* 2,204 2,228
Value of in-force business 3,509 3,685
MCEV of the non-core covered business
(Bermuda) B3 66 287
Adjusted net worth 187 403
Value of in-force business (121) (116)
MCEV of the discontinued covered
business (Nordic and US Life) B3 1,433 1,315
Adjusted net worth 285 720
Value of in-force business 1,148 595
Adjusted net worth of asset management
and other businesses 1,955 1,939
Emerging Markets 499 289
Retail Europe 14 14
Wealth Management 165 171
US Asset Management 1,270 1,461
Nordic** 7 4
Value of the banking business 3,286 3,603
Nedbank (market value) 2,935 3,275
Emerging Markets (adjusted net worth) 29 -
Nordic (adjusted net worth) 322 328
Value of the general insurance business
Mutual & Federal (adjusted net worth) 294 409
Net other business*** 175 42
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration**** 270 266
Adjustment for value of own shares in
ESOP schemes***** 117 85
Market value of perpetual preferred
securities A2(r) (465) (449)
Market value of perpetual preferred
callable securities A2(r) (605) (598)
Market value of subordinated debt A2(r) (1,445) (1,782)
Adjusted Group MCEV 10,794 11,030
Adjusted Group MCEV per share (pence) 194.1 202.2
Number of shares in issue at the end of the
financial period less treasury shares - millions****** 5,562 5,456
* Adjusted net worth is after the elimination of inter-company loans.
** Includes the adjusted net worth of Nordic holding companies that are
classified as non-covered business, net of the holding companies` investment in
Group subsidiaries.
*** Includes any other business that is not included within the main lines of
business, largely Old Mutual parent company IFRS equity net of Group
adjustments, consolidation adjustments in respect of intercompany transactions
and debt, and Bermuda asset management.
**** The effect of the acquisition of the minority interest in Mutual & Federal
during 2010 has been included in this adjustment for the first time during 2011
***** Includes adjustment for value of excess own shares in employee share
scheme trusts. The movement in value between 31 December 2010 and 31 December
2011 is the net effect of the increase in the Old Mutual plc share price, the
reduction in excess own shares following employee share grants in March 2011 and
the reduction in overall shares held due to exercises of rights to take delivery
of, or net settle, share grants during the financial period. The effect of the
acquisition of the minority interest in Mutual & Federal during 2010 has been
included in this adjustment for the first time during 2011.
****** The 239 million treasury shares were cancelled on 13 January 2012.
GROUP MARKET CONSISTENT EMBEDDED VALUE STATEMENT OF
EARNINGS
For the year ended 31 December 2011
GBPm
Year ended Year ended
31 December 31 December
Notes 2011 2010
Long Term Savings
Covered business B2 714 640
Asset management and other business 123 124
Banking 15 -
Nedbank 852 764
Banking 755 601
Mutual & Federal
General insurance 89 103
US Asset Management
Asset management 67 72
Other operating segments
Finance costs* (155) (183)
Corporate costs ** (43) (46)
Other shareholders` (expenses) / income (18) 4
Adjusted operating Group MCEV earnings
before tax from core operations 1,547 1,315
* This includes interest payable from Old Mutual plc to non-core operations of
GBP27 million for the year ended 31 December 2011 (2010: GBP55 million).
** Central costs of GBP14 million are allocated to the covered business and
provisioned in the VIF (2010: GBP14 million) hence corporate costs under MCEV of
GBP43 million differ from the IFRS amount of GBP57 million (2010: GBP60 million)
COMMENTARY ON KEY CHANGES IN THE MCEV 2011 PRIMARY
STATEMENTS COMPARED TO 2010
Bermuda reduction in MCEV
The closing MCEV balance reduced considerably as a result of unfavourable market
impacts on the Variable Annuity Guaranteed Minimum Accumulation Benefit (GMAB)
reserves.
Treatment of Nordic
On 15 December 2011, the Company announced that it had entered into an agreement
to sell the assets and liabilities of its Nordic business unit to Skandia Liv
for the sum of SEK 22.5 billion (GBP2.1 billion). This transaction is still
subject to shareholder approval. The Nordic business unit has been classified as
discontinued for IFRS reporting purposes, but continues to be included with full
disclosure in the covered business for MCEV reporting purposes.
Net other business
The material components include the increased dividends paid to Group from
business units and Group proceeds from the disposal of US Life, a reduced book
value of debt component (due to repayment of debt) and intercompany loan
movements.
Inclusion of other African businesses
The life businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe do not
calculate an embedded value, however they are included in the MCEV of the
covered business (within Emerging Markets) at their IFRS NAV at 31 December
2011. The impact of these results on the Emerging Markets MCEV is noted in B4:
Analysis of covered business MCEV earnings. The asset management and Zimbabwean
banking businesses are included within the Group MCEV at the IFRS NAV. The
inclusion of the new African businesses increased the Adjusted Group MCEV by
GBP203 million at 31 December 2011.
US Asset Management
Consistent with the Consolidated Financial Statements Note A1, comparative
information in respect of the operating earnings and the value at period end has
been revised in accordance with changes to presentation made in the current
year. This has resulted in corresponding equal and opposite revisions to the
`Other shareholder expenses` and `Net other business`. The closing value has
reduced significantly compared to prior year due to the goodwill write down of
GBP264 million. See Note A2 (1) to the Consolidated Financial Statements.
ADJUSTED OPERATING GROUP MCEV EARNINGS PER SHARE
For the year ended 31 December 2011
Core Non-core
continuing continuing
Year ended 31 December 2011 Notes operations operations
Adjusted operating Group MCEV earnings
before tax 1,547 48
Covered business B2 714 48
Other business 833 -
Tax on adjusted operating Group MCEV
earnings (364) (1)
Covered business B2 (162) (1)
Other business (202) -
Adjusted operating Group MCEV earnings
after tax 1,183 47
Non-controlling interests
Ordinary shares (255) -
Preferred securities (62) -
Adjusted operating MCEV earnings after tax
attributable to equity holders 866 47
Adjusted operating Group MCEV earnings per share* 15.9 0.9
Adjusted weighted average number of shares - millions
GBPm
Discontinued
Year ended 31 December 2011 operations Total
Adjusted operating Group MCEV earnings before tax 173 1,768
Covered business 156 918
Other business 17 850
Tax on adjusted operating Group MCEV earnings (31) (396)
Covered business (28) (191)
Other business (3) (205)
Adjusted operating Group MCEV earnings after tax 142 1,372
Non-controlling interests
Ordinary shares - (255)
Preferred securities - (62)
Adjusted operating MCEV earnings after tax attributable
to equity holders 142 1,055
Adjusted operating Group MCEV earnings per share* 2.6 19.4
Adjusted weighted average number of shares - millions 5,435
Core Non-core
continuing continuing
Year ended 31 December 2010 Notes operations operations
Adjusted operating Group MCEV earnings
before tax 1,315 (28)
Covered business B2 640 (28)
Other business 675 -
Tax on adjusted operating Group MCEV
earnings (288) 4
Covered business B2 (118) 4
Other business (170) -
Adjusted operating Group MCEV earnings
after tax 1,027 (24)
Non-controlling interests
Ordinary shares (217) -
Preferred securities (62) -
Adjusted operating MCEV earnings after tax
attributable to equity holders 748 (24)
Adjusted operating Group MCEV earnings per share* 13.9 (0.4)
Adjusted weighted average number of shares - millions
GBPm
Discontinued
Year ended 31 December 2010 operations Total
Adjusted operating Group MCEV earnings before tax 132 1,419
Covered business 113 725
Other business 19 694
Tax on adjusted operating Group MCEV earnings (26) (310)
Covered business (21) (135)
Other business (5) (175)
Adjusted operating Group MCEV earnings after tax 106 1,109
Non-controlling interests
Ordinary shares - (217)
Preferred securities - (62)
Adjusted operating MCEV earnings after tax attributable
to equity holders 106 830
Adjusted operating Group MCEV earnings per share* 2.0 15.5
Adjusted weighted average number of shares - millions 5,359
* 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.
GROUP MARKET CONSISTENT EMBEDDED VALUE STATEMENT OF EARNINGS
For the year ended 31 December 2011
GBPm
Year ended Year ended
31 December 31 December
2011 2010
Notes
Adjusted operating Group MCEV earnings
before tax from core operations 1,547 1,315
Adjusted operating Group MCEV earnings
before tax from Bermuda non-core
operations B2 48 (28)
Adjusted operating Group MCEV earnings
before tax from continuing operations* 1,595 1,287
Adjusting items from continuing
operations C3 (437) 395
Total Group MCEV earnings before tax
from continuing operations 1,158 1,682
Income tax attributable to shareholders (168) (387)
Total Group MCEV earnings after tax from
continuing operations 990 1,295
Total Group MCEV earnings after tax from
discontinued operations**
Nordic (15) 165
US Life A4 - 227
Total Group MCEV earnings after tax for
the financial period 975 1,687
Total Group MCEV earnings for the
financial period attributable to:
Equity holders of the parent 674 1,429
Non-controlling interests
Ordinary shares 239 196
Preferred securities 62 62
Total Group MCEV earnings after tax for
the financial period 975 1,687
Basic total Group MCEV earnings per
ordinary share (pence) 13.1 28.2
Weighted average number of shares - millions 5,136 5,064
* For long-term business and general insurance businesses, adjusted operating
Group MCEV earnings are based on long-term and short-term investment returns
respectively, include investment returns on life fund investments in Group
equity and debt instruments, and are 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 exclude goodwill impairment, the impact of acquisition
accounting, option revaluations related to long-term incentive schemes, the
impact of closure of unclaimed shares trusts, profit/(loss) on
acquisition/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 instruments.
** For Nordic, these are composed of earnings before tax of GBP173 million
(2010: GBP84 million), adjusting items of GBP(161) million (2010: GBP104
million) and tax of GBP(27) million (2010: GBP(23) million). For US Life, these
are composed of earnings before tax of GBP48 million, adjusting items of GBP180
million and tax of GBP(1) million for the year ended 31 December 2010. Further
detail relating to adjusting items can be found in section C3.
Reconciliation of movements in Group and Adjusted Group MCEV (after tax)
Year ended 31 December 2011 GBPm
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Notes
Opening Group MCEV 7,515 2,386 9,901
Adjusted operating MCEV
earnings B4 727 328 1,055
Non-operating MCEV earnings (331) (50) (381)
Total Group MCEV earnings 396 278 674
Other movements in IFRS net
equity C4 (699) (148) (847)
Closing Group MCEV 7,212 2,516 9,728
Adjustments to bring Group
investments to market value B1 - 1,066 1,066
Adjusted Group MCEV 7,212 3,582 10,794
Year ended 31 December 2010 GBPm
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Opening Group MCEV 6,027 1,602 7,629
Adjusted operating MCEV earnings 590 240 830
Non-operating MCEV earnings 786 (187) 599
Total Group MCEV earnings 1,376 53 1,429
Other movements in IFRS net equity 112 731 843
Closing Group MCEV 7,515 2,386 9,901
Adjustments to bring Group investments
to market value - 1,129 1,129
Adjusted Group MCEV 7,515 3,515 11,030
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
A: MCEV policies
A1: Basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in the
supplementary statements on pages 82 to 123 as `MCEV`) adopts the Market
Consistent Embedded Value Principles (Copyright Copyright Stichting CFO Forum
Foundation 2008) issued in June 2008 and updated in October 2009 by the CFO
Forum (`the Principles`) as the basis for the methodology used in preparing the
supplementary information.
The CFO Forum announced changes to the MCEV Principles in October 2009 to
reflect inter alia the inclusion of a liquidity premium. These changes affirm
that the risk free reference rate to be applied under MCEV should include both
the swap yield curve appropriate to the currency of the cash flows and a
liquidity premium where appropriate. The CFO Forum is undertaking further work
to develop more detailed application guidance.
The Principles have been fully complied with for all businesses as at 31
December 2011. The detailed methodology and assumptions made in presenting this
supplementary information are set out in notes A2 and A3. Any reference made to
US Life relates only to methodology applied at 31 December 2010.
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. Non-covered business is valued at the IFRS
net asset value detailed in the primary financial statements adjusted to
eliminate inter-company loans.
- The adjusted Group MCEV, a measure used by management 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
subsidiary, marking the value of deferred consideration due in respect of Black
Economic Empowerment arrangements in South Africa (`the BEE schemes`) to market,
as well as including the market value of excess own shares held in ESOP schemes.
A2: Methodology
(a) Introduction
MCEV represents the present value of shareholders` interests in the earnings
distributable from assets allocated to the in-force covered business after
sufficient allowance for the aggregate risks in the covered business and is
measured in a way that is consistent with the value that would normally be
placed on the cash flows generated by these assets and liabilities in a deep and
liquid market. MCEV is therefore a risk-adjusted measure to the extent that
financial risk is reflected through the use of market consistent techniques in
the valuation of both assets and distributable earnings and a transparent
explicit allowance is made for non-financial risks.
The MCEV consists of the sum of the following components:
- Adjusted net worth, which excludes acquired intangibles and goodwill,
consisting of:
- - free surplus allocated to the covered business; and
- - required capital to support the covered business.
- Value of in-force covered business (VIF)
The adjusted net worth of the covered business is the market value of
shareholders` assets held in respect of the covered business after allowance for
the liabilities of the in-force covered business which are dictated by local
regulatory reserving requirements.
MCEV is calculated net of non-controlling shareholder interests and excludes the
value of future new business.
(b) Coverage
Covered business includes, where material, any contracts that are regarded by
local insurance supervisors as long-term life assurance business, and other
business, where material, directly related to such long-term life assurance
business where the profits are included in the IFRS long-term business profits
in the primary financial statements. For the life businesses in Kenya, Malawi,
Nigeria, Swaziland, and Zimbabwe, and where the covered business is not
material, the treatment within this supplementary information is the same as in
the primary financial statements (i.e. expected future profits for this
business is not capitalised for MCEV reporting purposes).
The covered business does not include any business written in Skandia Liv.
Skandia Liv is a mutual life insurance company within the Group. All assets and
liabilities are wholly attributable to the policyholders of the mutual company.
Some types of business are legally written by a life company, but under IFRS are
classified as asset management because `long-term business` only serves as a
wrapper. This business continues to be excluded from covered business, for
example:
- New institutional investment platform pensions business written in the United
Kingdom as it is more appropriately classified as unit trust business; and
- Individual unit trusts and some group market-linked business written by the
asset management companies in South Africa through the life company as profits
from this business arise in the asset management and asset administration
companies.
The treatment within this supplementary information of all business other than
the covered business is the same as in the primary financial statements, except
for USAM where the value includes the allowance for the loan note from plc. The
adjusted Group MCEV includes the impact of marking all debt to market value, the
market value of the Group`s listed banking subsidiary, marking the value of
deferred consideration due in respect of Black Economic Empowerment arrangements
in South Africa (`the BEE schemes`) to market, as well as including the market
value of excess own shares held in ESOP schemes.
(c) Free surplus
Free surplus is the market value of any assets allocated to, but not required to
support, the in-force covered business. It is determined as the market value of
any excess assets attributed to the covered business but not backing the
regulatory liabilities, less the required capital to support the covered
business.
(d) Required capital
Required capital is the market value of assets that is attributed to support the
covered business, over and above that required to back statutory liabilities for
covered business, whose distribution to shareholders is restricted. The
following capital measures are considered in determining the required capital
held for covered business so that it reflects the level of capital considered by
the directors to be appropriate to manage the business:
- Economic capital;
- Regulatory capital (i.e. the level of solvency capital which the local
regulators require);
- Capital required by rating agencies in order to maintain the desired credit
rating; and
- Any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon Old Mutual`s own
internal assessment of risks inherent in the underlying business. It measures
capital requirements on a basis, consistent with a 99.93% confidence level over
a one-year time horizon.
For Emerging Markets, Retail Europe and Wealth Management capital determined
with reference to internal management objectives is the most onerous and is the
capital measure used, whilst for Nordic the regulatory capital requirement is
the most onerous. For US Life, the required capital was based on the amount that
management deemed necessary to maintain the desired credit rating for the
Company, whilst for Bermuda the required capital is set with reference to
internal management objectives, i.e. the adjusted net worth.
The required capital in respect of OMLAC(SA)`s covered business is partially
covered by the market value of the Group`s investments in banking and general
insurance in South Africa. On consolidation these investments are shown
separately.
The table below shows the level of required capital expressed as a percentage of
the minimum local regulatory capital requirements
At 31 December 2011
Required Regulatory Ratio
Notes capital (a) capital (b) (a/b)
Emerging Markets* B3 1,368 1,012 1.4
Retail Europe** B3 52 77 0.7
Wealth Management B3 262 164 1.6
Bermuda*** B3 187 77 2.4
Nordic B3 127 127 1.0
US Life B3 n/a n/a n/a
Total 1,996 1,457 1.4
GBPm
At 31 December 2010
Required Regulatory Ratio
capital (a) capital (b) (a/b)
Emerging Markets* 1,498 1,153 1.3
Retail Europe** 62 85 0.7
Wealth Management 278 162 1.7
Bermuda*** 403 - n/a
Nordic 135 135 1.0
US Life 468 196 2.4
Total 2,844 1,731 1.6
* The required capital and regulatory capital relating to the life businesses in
Kenya, Malawi, Nigeria, Swaziland and Zimbabwe is included in the 31 December
2011 results for Emerging Markets.
** Local regulators within many of the Retail Europe countries allow intangible
assets to be included as admissible regulatory capital. In such cases the
required capital reported for MCEV is net of these items, although each of the
countries continues to be sufficiently capitalised on the local solvency basis.
Skandia Leben in Germany is permitted under local regulations to include the
unallocated policyholder profit sharing liability as admissible capital.
*** During December 2011, the BMA insurance (Prudential Standards) (Class E
Solvency Requirements) Rules 2011 were formally signed into Bermudan law. The
regulations allow for a three-year transition period for the new capital
requirement (50% for financial year 2011, 75% for financial year 2012, 100% for
financial year 2013). The required capital calculated on this statutory basis is
approximately $120 million at 31 December 2011. We continue to calculate the
required capital as the adjusted net worth held in the business as this exceeds
the transitional capital. Capital for this business is managed at Group level on
an economic capital basis. The Bermudan regulator allows intangible assets to be
included as admissible regulatory capital. The movement in required capital is
discussed further in Note B4: Analysis of covered business MCEV earnings (after
tax) for Bermuda.
(e) Value of in-force covered business
Under the MCEV methodology, VIF consists of the following components:
- Present value of future profits (PVFP) from in-force covered business; less
- Time value of financial options and guarantees; less
- Frictional costs of required capital; less
- Cost of residual non-hedgeable risks (CNHR).
Projected liabilities and cash flows are calculated net of outward risk
reinsurance with allowance for default risk of reinsurance counterparties where
material.
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
A: MCEV policies continued
A2: Methodology continued
(f) Present value of future profits
The PVFP is calculated as the discounted value of future distributable earnings
(taking account of local statutory reserving requirements) that are expected to
emerge from the in-force covered business, including the value of contractual
renewal of in-force business, on a best estimate basis where assumed earned
rates of return and discount rates are equal to the risk free reference rates.
It therefore represents a deterministic certainty equivalent valuation of future
distributable earnings. The certainty equivalent valuation approach is described
in more detail in note A3. Any limitations on distribution of such earnings due
to statutory or internal capital requirements are taken into account separately
in the calculation of frictional costs of required capital.
PVFP captures the intrinsic and time value of financial options and guarantees
on in-force covered business which are included in the local statutory reserves
according to local requirements, but excludes any additional allowance for the
time value of financial options and guarantees.
(g) Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of
investment returns (i.e. asymmetric impact) on future shareholder cash flows of
policyholder financial options and guarantees within the in-force covered
business.
The time value of financial options and guarantees describes that part of the
value of financial options and guarantees that arises from the variability of
future investment returns on assets to the extent that it is not already
included in the statutory reserves. The calculations are based on market
consistent stochastic modelling techniques where the actual assets held at the
valuation date are used as the starting point for the valuation of such
financial options and guarantees. Projected cash flows are valued using economic
assumptions such that they are valued in line with the price of similar cash
flows that are traded in the capital markets. The time value represents the
difference between the average value of shareholder cash flows under many
generated economic scenarios and the deterministic shareholder value under the
best estimate assumptions for the equivalent business. Closed form solutions are
also applied in Europe provided the nature of any guarantees is not complex.
The time value of financial options and guarantees also includes allowance for
potential burn-through costs on participating business, i.e. the extent to which
shareholders are unable to recover a loan made to participating funds to meet
either regulatory or internal capital management requirements or the extent to
which reserves are inadequate to cover severely adverse experience.
In the generated economic scenarios allowance is made, where appropriate, for
the effect of dynamic management and/or policyholder actions in different
circumstances:
- Management has some discretion in managing exposure to financial options and
guarantees, particularly within participating business. Such dynamic management
actions are reflected in the valuation of financial options and guarantees
provided that such discretion is consistent with established and justifiable
practice taking into account policyholders` reasonable expectations (e.g. with
due consideration of the Principles and Practices of Financial Management, or
PPFM, for South African business), subject to any contractual guarantees and
regulatory or legal constraints and has been passed through an appropriate
approval process by the local Executive team and, where applicable, the Board.
Assumptions that depend on the market performance (such as crediting rates or
bonus rates) are set relative to the risk free reference rates (subject to
contractual guarantees) and assuming that all market participants are subjected
to the same market conditions.
- Where credible evidence exists that persistency rates are linked to economic
scenarios, allowance is made for dynamic policyholder behaviour in response to
changes in economic conditions.
- Modelled dynamic management and policyholders` actions include the following:
- - changes in future bonus and crediting rates subject to contractual
guarantees, including removing all or part of previously declared non- vested
balances where circumstances warrant such action;
- - dynamic persistency rates for the US Life and Bermuda businesses, and
dynamic guaranteed annuity option take-up rates for the South African business
driven by changes in economic conditions and management actions; and
- - changes in surrender values.
In determining the time value of financial options and guarantees at least 1,000
simulations are run to ensure that a reasonable degree of convergence of results
has been obtained. Where deemed appropriate, the number of simulations is
increased to reduce sampling error.
Europe
Whilst certain products within the European businesses provide financial options
and guarantees, these are immaterial due to the predominantly unit-linked nature
of the business.
Emerging Markets
The financial options and guarantees mainly relate to maturity guarantees and
guaranteed annuity options.
As required by the applicable Actuarial Society of South Africa guidance note,
the time value of the financial options and guarantees included in the statutory
reserves in the Emerging Markets businesses as at 31 December 2011 has been
valued using a risk-neutral market consistent asset model, and is referred to as
the `Investment Guarantee Reserve` (IGR). This reserve includes a discretionary
margin as defined by local guidelines to allow for the sensitivity of the
reserve to market movements, including interest rates, equity levels and the
volatility implicit in the pricing of derivative instruments in these markets.
This discretionary margin is valued in the VIF.
US Life
The financial options and guarantees mainly related to minimum crediting (bonus)
rates.
Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum
accumulation benefits on Variable Annuity contracts.
(h) Frictional costs of required capital
From the shareholders` viewpoint there is a cost due to restrictions on the
distribution of required capital that is locked in the Company. Where material,
an allowance has been made for the frictional costs in respect of the taxation
on investment return (income and capital gains) and investment costs on the
assets backing the required capital for covered business. The allowance for
taxation is based on the taxation rates applicable to investment earnings on
assets backing the required capital, although such tax rates are reduced, where
applicable, to allow for interest paid on debt which is used partly to finance
the required capital.
The run-off pattern of the required capital is projected on an approximate basis
over the lifetime of the underlying risks in line with drivers of the capital
requirement. The same drivers are used to split the total required capital
between existing business and new business.
The allowance for frictional costs is independent of the allowance for the cost
of residual non-hedgeable risks as described below.
(i) Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the
time value of financial options and guarantees by using techniques that are
similar to the type of approaches used by capital markets. In addition the
modelling of some non-hedgeable non-financial risks is incorporated as part of
the calculation of the PVFP (e.g. to the extent that expected operational losses
are incorporated in the maintenance expense assumptions) or the time value of
financial options and guarantees (e.g. dynamic policyholder behaviour such as
the interaction of the investment scenario and the persistency rates). Residual
non-financial risks include, for example, liability risks such as mortality,
longevity and morbidity risks; business risks such as persistency, expense and
reinsurance credit risks; and operational risk. All such risks for which no or
insufficient allowance is made in the PVFP or time value of financial options
and guarantees, together with some allowance for hedge risk and credit spread
risk in the US Life and Bermudan businesses, are considered within the allowance
for the CNHR.
An allowance is made in the CNHR to reflect uncertainty in the best estimate of
shareholder cash flows as a result of both symmetric and asymmetric non-
hedgeable risks since these risks cannot be hedged in deep and liquid capital
markets and are managed, inter alia, by holding risk capital. Considering the
Group as a whole, most residual non-hedgeable risks have a symmetric impact on
shareholder value with the exception of operational risk.
The CNHR is calculated using a cost of capital approach, i.e. it is determined
as the present value of capital charges for all future non-hedgeable risk
capital requirements until the liabilities have run off. The capital charge in
each year is the product of the projected expected non-hedgeable risk capital
held after allowance for some diversification benefits and the cost of capital
charge. The cost of capital charge therefore represents the return above the
risk free reference rates that the market is deemed to demand for providing this
capital.
The residual non-hedgeable risk capital measure is determined using an internal
economic capital model based on appropriate shock scenarios consistent with a
99.5% confidence level over a one-year time horizon. The internal economic
capital model makes allowance for certain management actions, such as reductions
in bonus and crediting rates, where deemed appropriate.
The following allowance is made for diversification benefits in determining the
residual non-hedgeable risk capital at a business unit level:
- Diversification benefits within the non-hedgeable risks of the covered
business are allowed for.
- No allowance is made for diversification benefits between hedgeable and non-
hedgeable risks of the covered business.
- No allowance is made for diversification benefits between covered and non-
covered business.
The table below shows the amounts of diversified economic capital held in
respect of residual non-hedgeable risks.
Capital held in respect of non-hedgeable risks GBPm
At At
31 December 31 December
2011 2010
Emerging Markets 808 751
Retail Europe 147 115
Wealth Management 684 622
Bermuda 335 274
Nordic 290 362
US Life n/a 678
Total 2,264 2,802
During 2011 the methodology to calculate non-hedgeable risk capital was enhanced
and standardised across all insurance business units in order to align with
emerging Solvency II requirements. This enhancement has generally led to an
increase in the non-hedgeable risk capital in all business units, except for
Nordic where it fell due to a significant reduction in the level of operational
risk capital as a result of the rebate tax ruling in June 2011 (i.e. tax on
rebates is no longer a risk component for operational risk).
A weighted average cost of capital rate of 2.0% has been applied to residual
symmetric and asymmetric non-hedgeable capital at a business unit level over the
life of the contracts. This translates into an equivalent cost of capital rate
of approximately 2.6% being applied to the Group diversified capital required in
respect of such non-hedgeable risks.
(j) Participating business
For participating business in Emerging Markets, US Life and Bermuda, the method
of valuation makes assumptions about future bonus or crediting rates and the
determination of profit allocation between policyholders and shareholders. These
assumptions are made on a basis consistent with other projection assumptions,
especially the projected future risk free investment returns, established
Company practice (with due consideration of the PPFM for South African
business), past external communication, any payout smoothing strategy, local
market practice, regulatory/contractual restrictions and bonus participation
rules.
Where current benefit levels are higher than can be supported by the existing
fund assets together with projected investment returns, a downward `glide path`
is projected in benefit levels so that the policyholder fund would be exhausted
on payment of the last benefit.
(k) Spread-based products
A market consistent valuation of spread-based products (such as Deferred
Annuities in Bermuda, where investment returns are earned at one rate and
policyholders` accounts are credited at a different rate with the difference
referred to as `spread`) is dependent on the extent that management discretion
can target a shareholder profit margin and the decision rules that management
would follow in respect of crediting or bonus rates in any particular stochastic
scenario.
Where guaranteed terms are offered at outset of a contract that dictate the
payments to policyholders throughout the term of the contract, these payments
are valued using the certainty equivalent valuation technique. These products,
for example immediate annuities in payment, may therefore show a loss at point
of sale under MCEV as investment margins are not anticipated while currently
pricing practice does anticipate these margins. If returns in excess of the risk
free reference rates actually emerge in the future, these will be recognised in
the MCEV earnings as they arise.
For business where the crediting (bonus) rate is set in advance, crediting rates
are set by considering management`s target shareholder margins throughout the
contract lifetime (subject to any guarantees). For other business, projected
crediting rates are set equal to the risk free reference rates less the
anticipated margin to cover profit and expenses (subject to any policyholder
guarantees eroding the shareholder margins). However, during the period
following the valuation date the existing crediting rate is applied until the
next point at which it can be varied. Given the guarantees included within such
products (including consideration of a 0% floor for crediting rates), stochastic
modelling is used to value such contracts.
(l) Valuation of assets and treatment of unrealised losses
The market values of assets, where quoted in deep and liquid markets, are based
on the bid price on the reporting date. Unquoted assets are valued according to
IFRS and marked to model.
No smoothing of market values or unrealised gains/losses is applied.
(m) Asset mix
The time value of financial options and guarantees and PVFP (where relevant) are
calculated with reference to assets that are projected using the actual asset
allocation of the policyholder funds at the reporting date. However, if the
current asset mix is materially different to the long-term strategic asset
allocation as a result of market movements, projected assets are assumed to
revert to the long-term strategic asset allocation in the short- to medium-term
as appropriate.
(n) Defined benefit pension scheme
Where a defined benefit pension scheme within the covered business is in surplus
or deficit on the liability basis that is used to determine future employer
contributions, the employer pension fund expense assumptions incorporated within
the VIF allow appropriately for the expected release of surplus or funding of
the deficit.
(o) Consolidation adjustments
The MCEV result split by business unit takes account of both sides of any loans
arrangements between Group companies, with the Group effect included in net
other business.
(p) Look through principle
PVFP and value of new business cash flow projections look through and include
the profits/losses of owned service companies, e.g. distribution and
administration, related to the management of the covered business. Any profit
margins that are included in investment management fees payable by the life
assurance companies to the asset management subsidiaries have not been included
in the value of in-force business or the value of new business on the grounds of
materiality and because a significant proportion of these profits arise from
performance-based fees.
(q) Taxation
In valuing shareholders` cash flows, allowance is made in the cash flow
projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying
current local corporate tax legislation and practice together with known future
changes and taking credit for any deferred tax assets.
The value of deferred tax assets is partly recognised in the MCEV. Typically
those tax assets are expected to be utilised in future by being offset against
expected tax liabilities that are generated on expected profits emerging from
in-
force business. MCEV may therefore understate the true economic value of such
deferred tax assets because it does not allow for future new business sales
which could affect the utilisation of such assets.
There was previously uncertainty around both the basis and effective date for
possible taxation of fee income earned from fund managers by Swedish insurance
companies and the expenses that can be relieved against such income. On 10 June
2011 the Supreme Administrative Court in Sweden delivered the final verdict
stating that fund rebates are not taxable for corporate income tax purposes. We
will therefore continue to treat fee income from our Swedish unit-linked
business as being exempt from corporation tax within our MCEV.
The Emergency Budget of 22 June 2010 announced a reduction in the UK corporation
tax rate by 1% per year for four years from the financial year beginning April
2011, ultimately bringing the corporation tax rate down to 24%. The Budget of 23
March 2011 announced an additional 1% reduction to be enacted during 2011,
bringing the ultimate tax rate down to 23%. The 31 December 2011 MCEV results
therefore reflect the 1% reduction to 26% enacted during 2011, as well as the
further 1% reduction to 25% which is effective from April 2012 as this has been
substantially enacted.
The effect of the first reduction to 27% was included within the 31 December
2010 MCEV results (GBP4 million). A further GBP8 million is allowed for at 31
December 2011 as an assumption change relating to the tax rate reduction from
27% to 25%. The impact of the remaining future reductions from 25% down to 23%
is estimated to be an MCEV profit of GBP8 million and this will be reflected
once these future annual reductions are enacted.
A new dividend withholding tax system (replacing the current Secondary Tax on
Companies (STC) system) will be introduced in South Africa effective from 1
April 2012. This is reflected in the results at 31 December 2011, i.e. no
allowance will be made in future for the impact of the new dividend withholding
tax in the MCEV, except for an allowance for withholding tax on the remittance
of dividends to Old Mutual plc, as the actual level of taxation will depend on
the legal nature of each shareholder. The Emerging Markets MCEV has increased by
approximately R1,221 million (GBP105 million) while the value of new business
for the year ending 31 December 2011 has increased by approximately R104 million
(GBP9 million). This has led to the average effective tax rate reducing from 33%
to 28%.
(r) Value of debt
Senior and subordinated debt securities are marked to market value (for IFRS
reporting, debt is valued at either book value or fair value). The table below
shows the comparison of debt on an IFRS and MCEV basis.
Notes to the At 31 December
Consolidated 2011
Debt securities Financial Statements Book value MCEV
GBP350 million perpetual preferred callable
securities E1 350 263
EUR500 million perpetual preferred callable
securities E1 338 342
US$750 million cumulative preference securities E1 458 465
R3.0 billion repayable 27 October 2015 (8.9%) E1 (e) 239 249
EUR2 million fixed rate note repayable December
2013 H2 (a) 2 2
US$16.5 million secured senior debt repayable August
2014 (5.23%) E1 (b) 11 11
EUR200 million (2010: 750 million) (4.5% to January
2012 and 6 month EURIBOR plus 0.96% thereafter)* E1 (e) 166 166
GBP500 million repayable 3 June 2021 (8.0%)** - new E1 (e) 471 471
R100 million floating rate note repayable February
2011 (3 month ZAR-JIBAR-SAFEX plus 4.5%) - repaid E1 (b) - -
GBP300 million repayable 21 October 2016 (5.0%)** -
repaid E1 (e) - -
GBP500 million euro bond repayable October 2016
(7.125%)*** E1 (e) 504 546
US$50 million floating rate note repayable
September 2011
(3 month LIBOR plus 0.35%) - repaid E1 (a) - -
Value of debt 2,539 2,515
At 31 December 2010 GBPm
Debt securities Book value MCEV
GBP350 million perpetual preferred callable
securities 350 270
EUR500 million perpetual preferred callable
securities 338 328
US$750 million cumulative preference securities 458 449
R3.0 billion repayable 27 October 2015 (8.9%) 293 293
EUR2 million fixed rate note repayable December 2013 2 2
US$16.5 million secured senior debt repayable
August 2014 (5.23%) - -
EUR200 million (2010: 750 million) (4.5% to January 2012
and 6 month EURIBOR plus 0.96% thereafter)* 609 609
GBP500 million repayable 3 June 2021 (8.0%)** -
new - -
R100 million floating rate note repayable
February 2011
(3 month ZAR-JIBAR-SAFEX plus 4.5%) - repaid 10 10
GBP300 million repayable 21 October 2016
(5.0%)** - repaid 297 297
GBP500 million euro bond repayable October 2016
(7.125%)*** 503 539
US$50 million floating rate note repayable
September 2011 32 32
(3 month LIBOR plus 0.35%) - repaid
Value of debt 2,892 2,829
* The principal and coupon on the bond were swapped into Sterling and US
Dollars.
** The coupon on the bond was swapped into Krona.
*** This differs from the value in the Borrowed Funds note E1 (e) by the accrued
interest at the end of the year, which is included within the book value of the
debt in determining the MCEV market value uplift to maintain consistency and
comparability with the market value.
Where either the principal or the coupon of the debt security has been swapped
into an alternate currency, the mark to market value of these derivative
instruments of GBP86 million (2010: GBP20 million) has not been included in the
value of debt above, however it is included in the Net other business value of
GBP175 million (Adjusted Group MCEV presented per business line). Further
information relating to the debt securities can be found in Note E1 in the Notes
to the Consolidated Financial Statements.
(s) New business and renewals
The market consistent value of new business (VNB) measures the value of the
future profits expected to emerge from all new business sold, and in some cases
from premium increases to existing contracts, during the reporting period after
allowance for the time value of financial options and guarantees, frictional
costs and the cost of residual non-hedgeable risks associated with writing the
new business.
VNB includes contractual renewal of premiums and recurring single premiums,
where the level of premium is pre-defined and is reasonably predictable, and
changes to existing contracts where these are not variations allowed for in the
PVFP. Non-contractual increments are treated similarly where the volume of such
increments is reasonably predictable or likely (e.g. where premiums are expected
to increase in line with salary or price inflation).
Any variations in premiums on renewal of in-force business from that previously
anticipated including deviations in non-contractual increases, deviations in
recurrent single premiums and re-pricing of premiums for in-force business are
treated as experience variances or economic variances on in-force business and
not as new business.
VNB is calculated as follows:
- Economic assumptions at the start of the reporting period are used, except for
OMLAC(SA)`s Non-Profit Annuities and Fixed Bond products and US Life products
where point of sale assumptions are used (where applicable using economic
assumptions at the middle of the reporting period as a proxy).
- Demographic and operating assumptions at the end of the reporting period are
used.
- At point of sale and rolled forward to the end of the reporting period.
- Generally using a standalone approach unless a marginal approach would better
reflect the additional value to shareholders created through the activity of
writing new business.
- Expense allowances include all acquisition expenses, including any acquisition
expense overruns.
- Net of tax, reinsurance and non-controlling interests.
- No attribution of any investment and operating variances to VNB.
New business margins are disclosed as:
- The ratio of VNB to the present value of new business premiums (PVNBP); and
- The ratio of VNB to annual premium equivalent (APE), where APE is calculated
as annualised recurring premiums plus 10% of single premiums.
PVNBP is calculated at point of sale using premiums before reinsurance and
applying a valuation approach that is consistent with the calculation of VNB.
(t) Analysis of MCEV earnings
An analysis of MCEV earnings provides a reconciliation of the MCEV for covered
business at the beginning of the reporting period and the MCEV for covered
business at the end of the reporting period on a net of taxation basis.
Operating MCEV earnings are generated by the value of new business sold during
the reporting period, the expected existing business contribution, operating
experience variances, operating assumption changes and other operating
variances:
- The value of new business includes the impact of new business strain on free
surplus that arises, amongst other things, from the impact of initial expenses
and additional required capital that is held in respect of such new business.
- The expected existing business contribution is determined by projecting both
actual assets and actual liabilities (including assets backing the free surplus
and required capital) from the start of the reporting period to the end of the
reporting period using expected real-world earned rates of return. The expected
existing business contribution is presented in two components:
- - Expected earnings on free surplus and required capital and the expected
change in VIF assuming that the assets earn the beginning of period risk free
reference rates as well as the deterministic release of the time value of
options and guarantees, frictional costs and CNHR; and
- - Additional expected earnings on free surplus and required capital and the
additional expected change in VIF as a result of real-world expected earned
rates of return on assets in excess of beginning of period risk free reference
rates.
- Transfers from VIF and required capital to free surplus includes the release
of required capital and modelled profits from VIF into free surplus in respect
of business that was in-force at the beginning of the reporting period, although
the movement does not contribute to a change in the MCEV.
- Operating experience variances reflect the impact of deviations of the actual
operational experience during the reporting period from the expected operational
experience. It is analysed before operating assumption changes, i.e. such
variances are assessed against opening operating assumptions, and reflects the
total impact of in-force and new business variances.
- Operating assumption changes incorporate the impact of changes to operating
assumptions from those assumed at the beginning of the reporting period to those
assumed at the end of the reporting period. As VNB is calculated using operating
assumptions at the end of the reporting period, this impact only relates to the
value of in-force business at the end of the reporting period that was also in-
force at the beginning of the reporting period.
- Other operating variances include model improvements, changes in methodology
and the impact of certain management actions, such as a change in the asset
allocation backing required capital.
- Total MCEV earnings also include economic variances and other non-operating
variances:
- Economic variances incorporate the impact of changes in economic assumptions
from the beginning of the reporting period to the end of the reporting period
(for example, different opening and closing interest rates and equity
volatility, increases in equity market values during the period) as well as the
impact on earnings resulting from actual returns on assets being different to
the expected returns on those assets as reflected in the expected existing
business contribution. It therefore also includes the impact of economic
variances in the reporting period on projected future earnings.
- Other non-operating variances include the impact of changes in mandatory local
regulations and legislative changes in taxation.
An analysis of MCEV earnings requires non-operating closing adjustments in
respect of exchange rate movements and capital transfers such as those in
respect of payment of dividends and acquiring/divesting businesses.
Return on MCEV for covered business is calculated as the operating MCEV earnings
after tax divided by opening MCEV in local currency, except for Wealth
Management, Long Term Savings and total covered business where the calculations
are performed in sterling.
The anticipated expected existing business contribution for the 12 months
following the year ended 31 December 2011 (at the reference rate as well as in
excess of the reference rate) is provided to assist users of the MCEV
supplementary information in forecasting operating MCEV earnings. Note that the
exchange rates that are used for such disclosure are the same rates that are
used to translate current year earnings for comparability purposes, i.e. average
exchange rates. Therefore the ultimate expected existing business contribution
for the financial year ending 31 December 2012 may differ from these results.
(u) Analysis of Group MCEV earnings
Presentation of Group MCEV consists of the covered business under the MCEV
methodology and the non-covered business valued as the unadjusted IFRS net asset
value, with the exception of USAM. A mark to market adjustment is therefore not
performed for external borrowings and other items not on a mark to market basis
under IFRS relating to non-covered business.
A3: Assumptions
Non-economic assumptions
The appropriate non-economic projection assumptions for future experience (e.g.
mortality, persistency and expenses) are determined using best estimate
assumptions of each component of future cash flows, are specific to the entity
concerned and have regard to past, current and expected future experience where
sufficient evidence exists (e.g. longevity improvements and AIDS-related claims)
as derived from both entity-specific and industry data where deemed appropriate.
Material assumptions are actively reviewed by means of detailed experience
investigations and updated, as deemed appropriate, at least annually.
These assumptions are based on the covered business being part of a going
concern, although favourable changes in maintenance expenses such as
productivity improvements are generally not included beyond what has been
achieved by the end of the reporting period.
The management expenses attributable to life assurance business have been
analysed between expenses relating to the acquisition of new business,
maintenance of in-force business (including investment management expenses) and
development projects.
- All expected maintenance expense overruns affecting the covered business are
allowed for in the calculations.
- The MCEV makes provision for future development costs and one-off expenses
(such as those incurred on the integration of businesses following an
acquisition, restructuring costs and costs related to Solvency II
implementation) that relate to covered business to the extent that such project
costs are known with sufficient certainty, based on three year business plans.
- Unallocated Group holding company expenses have been included to the extent
that they are allocated to the covered business. The table below shows the
proportion of future expenses attributable to the long-term business. The
allocation of these expenses aligns to the proportion that the management
expenses incurred by the covered businesses to the total management expenses
incurred in the Group.
Group holding Company expenses attributable to
long-term business %
At At
31 December 31 December
2011 2010
Emerging Markets 17 17
Retail Europe 3 3
Wealth Management 5 6
Nordic 3 4
US Life - 2
Total 28 32
In line with legislation in Germany, a specified proportion of miscellaneous
profits is shared with policyholders. 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. Skandia Leben in Germany
therefore sets the best estimate assumptions for the amount to be shared with
policyholders in future years after making an allowance for the acquisition
expenses in relation to the new business expected to be written over the next
three years. However note that, as previously mentioned, MCEV excludes the value
of future new business.
Economic assumptions
An active basis is applied to set pre-tax investment and economic assumptions to
reflect the economic conditions prevailing on the reporting date. Economic
assumptions are set consistently, for example future bonus or crediting rates
are set at levels consistent with the investment return assumptions.
Under a market consistent valuation, economic assumptions are determined such
that projected cash flows are valued in line with the prices of similar cash
flows that are traded on the capital markets. Thus, risk free cash flows are
discounted at a risk free reference rate and equity cash flows at an equity
rate. In practice for the PVFP, where cash flows do not depend on or vary
linearly with market movements, a certainty equivalent method is used which
assumes that actual assets held earn, before tax and investment management
expenses, risk free reference rates (including any liquidity adjustment) and all
the cash flows are discounted using risk free reference rates (including any
liquidity adjustment) which are gross of tax and investment management expenses.
The deterministic certainty equivalent method is purely a valuation technique
and over time the expectation is still that risk premiums will be earned on
assets such as equities and corporate bonds.
(a) Risk free reference rates and inflation
The risk free reference rates, reinvestment rates and discount rates are
determined with reference to the swap yield curve appropriate to the currency of
the cash flows. For Europe the swap yield curve is obtained from Bloomberg. For
Bermuda the swap yield curve is sourced from a third party market consistent
asset model that is used to generate the economic scenarios that are required to
value the time value of financial options and guarantees. For Emerging Markets
the swap yield curve is sourced internally (using market data provided by the
Bond Exchange of South Africa) and it is validated to the Bloomberg swap yield
curve.
At 31 December 2011, no adjustments are made to swap yields to allow for
liquidity premiums or credit risk premiums, apart from a liquidity premium
adjustment to OMLAC(SA)`s Immediate Annuity business and Fixed Bond business. A
liquidity premium adjustment is applied to OMLAC(SA)`s Fixed Bond business as
OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in
excess of the risk free rate and the duration of the asset portfolio and the
liability duration are a good match (meaning the asset portfolio is held to
maturity). Cash flows on this product are also predictable and the company has
adequate liquidity to withstand a substantial increase in lapses at all
durations without having to sell bonds which further strengthens the case for
applying a liquidity premium.
It is the directors` view that a proportion of non-government bond spreads at 31
December 2011 is attributable to a liquidity premium rather than only to credit
and default allowances and that returns in excess of swap rates can be achieved,
rather than entire spreads being lost to worsening default experience. For
OMLAC(SA)`s Immediate Annuity business the currency, credit quality and duration
of the actual bond portfolios were considered and adjusted risk free reference
rates were derived at 31 December 2011 by adding 50bps of liquidity premium for
this business (31 December 2010: 45bps) to the swap rates used for setting
investment return and discounting assumptions. For OMLAC(SA)`s Fixed Bond
products 50 bps of liquidity premium was added to the swap rates. These
adjustments reflect the liquidity premium component in non-government bond
spreads over swap rates that is expected to be earned on the portfolios. In
deriving the liquidity premia at 31 December 2011, we have reviewed emerging
Solvency II matching premium guidance and a comparison of the yields of similar
durations on South African government bonds and bonds issues by state-owned
enterprises. At those durations where swap yields are not available, e.g. due to
lack of a sufficiently liquid or deep swap market, the swap curve is extended
using appropriate interpolation or extrapolation techniques.
The risk free reference spot yields (excluding any applicable liquidity
adjustments) and expense inflation rates at various terms for each of the
significant regions are provided in the table below. The risk free reference
spot yield curve has been derived from mid swap rates at the reporting date.
Risk free reference spot yields (excluding any applicable liquidity adjustments)
%
GBP EUR USD* ZAR SEK
At 31 December 2011
1 year 1.4 1.4 0.7 5.7 2.1
5 years 1.6 1.7 1.2 7.1 2.3
10 years 2.4 2.4 2.1 8.1 2.5
20 years 3.0 2.7 2.6 8.1 2.1
At 31 December 2010
1 year 0.9 1.3 0.4 5.6 2.3
5 years 2.7 2.5 2.2 7.4 3.3
10 years 3.6 3.3 3.5 8.2 3.7
20 years 4.0 3.7 4.3 8.1 4.0
* For prior reporting periods, the risk free spot yields disclosed for USD were
on a semi-annual par basis. The assumptions at 31 December 2011, as well as the
comparative for the prior period are now shown as annualised spot yields,
consistent with other regions.
Expense inflation %
GBP EUR USD ZAR SEK
At 31 December 2011
1 year 3.0 2.5 3.0 6.1 1.3
5 years 3.4 2.5 3.0 7.0 2.2
10 years 3.8 2.5 3.0 7.7 2.5
20 years 4.3 2.5 3.0 7.5 2.6
At 31 December 2010
1 year 3.0 2.5 3.0 5.0 2.2
5 years 4.3 2.5 3.0 6.4 3.0
10 years 5.3 2.5 3.0 7.2 3.2
20 years 5.1 2.5 3.0 7.0 3.3
(b) Volatilities and correlations
Where cash flows contain financial options and guarantees that do not move
linearly with market movements, asset cash flows are projected and all cash
flows are discounted using risk-neutral stochastic models. These models project
the assets and liabilities using a distribution of asset returns where all asset
types, on average, earn the same risk free reference rates.
Apart from the risk free reference yields specified above, other key economic
assumptions for the calibration of economic scenarios include the implied
volatilities for each asset class and correlations of investment returns between
different asset classes. For Bermuda, implied volatilities and correlations are
determined for each global equity and bond index modelled.
The volatility assumptions for the calibration of economic scenarios that are
used in the stochastic models are, where possible, based on those implied from
appropriate derivative prices (such as equity options or swaptions in respect of
guarantees that are dependent on changes in equity markets and interest rates
respectively) as observed on the valuation date. However, historic implied and
historic observed volatilities of the underlying instruments and expert opinion
are considered where there are concerns over the depth or liquidity of the
market. Where strict adherence to the above is not possible, for example where
markets only exist at short durations such as the swaption market in South
Africa, interpolation or extrapolation techniques, and where appropriate,
historical data are used to derive volatility assumptions for the full term
structure of the liabilities. Correlation assumptions between asset classes that
are used in stochastic models are based on an assessment of historic
relationships. Where historic data is used in setting volatility or correlation
assumptions, a suitable time period is considered for analysing historic data
including consideration of the appropriateness of historical data where economic
conditions were materially different to current conditions.
The at-the-money annualised asset volatility assumptions of the asset classes
incorporated in the stochastic models are detailed below.
ZAR volatilities*
Option term 1 year swap 5 year swap 10 year swap
At 31 December 2011
1 year 30.6 25.0 23.1
5 years 21.9 21.5 22.4
10 years 22.9 23.8 24.0
20 years 25.8 25.7 25.1
At 31 December 2010
1 year 18.7 16.9 15.8
5 years 16.4 15.5 14.9
10 years 15.6 15.0 14.5
20 years 13.8 13.3 12.8
ZAR volatilities* %
Equity
(total return
Option term 20 year swap index)
At 31 December 2011
1 year 23.3 27.6
5 years 23.0 26.7
10 years 23.5 26.6
20 years 23.7 29.3
At 31 December 2010
1 year 15.1 23.4
5 years 14.4 25.5
10 years 13.9 27.0
20 years 11.9 27.8
* Due to limited liquidity in the ZAR swaption market, the market consistent
asset model has been calibrated by extrapolating swaption and equity implied
volatility data beyond a term of one year and 5 years respectively for
assumptions at 31 December 2011 (2 year and 3 years respectively for assumptions
at 31 December 2010).
** Property index implied volatilities have been removed from the table above as
they are no longer material to the Emerging Markets stochastic models.
USD volatilities %
Option term 1 year swap 5 year swap 10 year swap 20 year swap
At 31 December 2011
1 year 71.8 49.1 45.1 41.8
5 years 42.1 36.8 34.6 33.8
10 years 32.7 31.2 31.1 29.9
20 years 29.8 29.3 27.9 27.5
At 31 December 2010
1 year 37.8 34.3 31.2 27.7
5 years 26.2 24.7 23.0 20.9
10 years 20.0 18.8 17.7 16.1
20 years 16.8 15.7 14.7 13.1
International equity volatilities (applicable to Bermuda)*
Option term SPX RTY EWZ TPX HSCEI
At 31 December 2011
1 year 25.0 n/a 35.9 26.7 31.5
5 years 27.8 n/a 34.8 28.0 32.3
10 years 27.8 n/a 34.8 28.0 32.3
At 31 December 2010
1 year 21.5 28.1 n/a 26.7 27.8
5 years 23.6 32.6 n/a 28.3 32.3
10 years 23.6 32.6 n/a 28.3 32.3
%
Option term TWY KOSP12 NIFTY SX5E UKX
At 31 December 2011
1 year 26.1 25.1 25.6 27.2 23.9
5 years 25.0 24.6 25.2 25.3 25.0
10 years 25.0 24.6 25.2 25.3 25.0
At 31 December 2010
1 year 21.5 21.4 22.0 24.3 21.5
5 years 25.5 24.0 26.6 25.2 24.2
10 years 25.5 24.0 26.6 25.2 24.2
International equity volatilities (applicable to Bermuda)*
Option term EEM USAgg EUAgg APAgg %
At 31 December 2011
1 year 33.9 5.5 13.0 12.3
5 years 33.0 5.5 13.0 12.3
10 years 33.0 5.5 13.0 12.3
At 31 December 2010
1 year 27.4 5.5 13.0 12.6
5 years 27.7 5.5 13.0 12.6
10 years 27.7 5.5 13.0 12.6
* Long-term option implied volatility has been calibrated assuming a flat
volatility term structure beyond 5 years due to limited data availability for
some indices. The assumptions at 31 December 2011, as well as the comparative
for the prior period are shown as the annualised volatilities applicable over
the entire option term specified, consistent with the disclosure of volatilities
for other regions. These volatilities, as represented by their Bloomberg codes,
refer to the price indices. Due to ongoing enhancements in the fund mapping
process, the indices referenced may vary from period to period. In the first
half of 2011, a decision was made to remove the Russell 2000 Index (RTY) and add
the MSCI Brazil Index (EWZ) which provides exposure to Latin America.
(c) Exchange rates
All MCEV figures are calculated in local currency and translated to GBP using
the appropriate exchange rates as detailed in Note C2 of the consolidated
financial statements.
(d) Expected asset returns in excess of the risk free reference rates
The expected asset returns in excess of the risk free reference rates have no
bearing on the calculated MCEV other than the calculation of the expected
existing business contribution in the analysis of MCEV earnings. Real-world
economic assumptions are determined with reference to one-year forward risk free
reference rates applicable to the currency of the liabilities at the start of
the reporting period. All other economic assumptions, for example future bonus
or crediting rates, are set at levels consistent with the real-world investment
return assumptions.
Equity and property risk premiums incorporate both historical relationships and
the directors` view of future projected returns in each region over the analysis
period. Pre-tax real-world economic assumptions are determined as follows:
- The equity risk premium is 3.5% for Africa and 3% for Europe.
- The cash return equals the one year risk free reference rate for all regions.
- The corporate bond return is based on actual corporate bond spreads on the
reporting date less an allowance for defaults.
- The property risk premium is 1.5% in Africa and 2% in Europe.
(e) Tax
The weighted average effective tax rates that apply to the cash flow projections
at 31 December 2011 are set out below:
Weighted average effective tax rates
%
At At
31 December 31 December
2011 2010
OMLAC(SA)* 28 33
Namibia - -
Retail Europe 25 27
Wealth Management 8 11
Bermuda - -
Nordic 4 4
* The reduction in weighted average effective tax rate for OMLAC(SA) from 31
December 2010 to 31 December 2011 is as a result of the new dividend withholding
tax effective from 1 April 2012 as detailed in Note A2 (q).
A4: Discontinued business
Disposal of US Life
On 6 August 2010, the Company announced that it had entered into an agreement to
sell the assets and liabilities of its US Life insurance business to Harbinger
Capital Partners for the sum of GBP215 million ($350 million) subject to
regulatory approval. The sale was completed, following regulatory approval, on 7
April 2011. This transaction has resulted in an uplift of GBP451 million to the
adjusted Group MCEV, as analysed below.
Adjusted Group MCEV uplift from disposal of US
Life GBPm
Covered Other
business business Total
Headline purchase price - 215 215
Advisor fees and costs - (17) (17)
US Life sale proceeds - 198 198
Retention of OM Re - 71 71
Total proceeds from US Life disposal - 269 269
Removal of US Life MCEV* 182 - 182
Adjusted Group MCEV uplift 182 269 451
* The MCEV results for US Life include allowance for Old Mutual Reassurance
(Ireland) Limited (OM Re)
The total earnings over the period are equal to the MCEV uplift, however we have
not attributed these earnings to specific line items in the analysis of MCEV
earnings.
B: Segment information
B1: Components of Group MCEV and Adjusted Group MCEV
GBPm
At At
31 December 31 December
Notes 2011 2010
Adjusted net worth attributable to
ordinary equity holders of the parent 5,193 5,737
Equity 8,488 8,951
Adjustment to IFRS net asset value C5 (2,607) (2,526)
Adjustment to remove perpetual preferred
callable securities (688) (688)
Value of in-force business 4,535 4,164
Present value of future profits 5,248 5,256
Additional time value of financial
options and guarantees (136) (433)
Frictional costs (243) (276)
Cost of residual non-hedgeable risks (334) (383)
Group MCEV 9,728 9,901
Adjustments to bring Group investments
to market value
Adjustment to bring listed subsidiary
(Nedbank) to market value 655 715
Adjustment for value of own shares in
ESOP schemes* 117 85
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration** 270 266
Adjustment to bring external debt to
market value 24 63
Adjusted Group MCEV 10,794 11,030
Group MCEV value per share (pence) 174.9 181.5
Adjusted Group MCEV per share (pence) 194.1 202.2
Number of shares in issue at the end of
the financial period less treasury
shares - millions 5,562 5,456
Return on Group MCEV (ROEV) per annum
from core operations 8.8% 9.8%
Return on Group MCEV (ROEV) per annum
from continuing non-core operations 0.5% (0.3)%
Return on Group MCEV (ROEV) per annum
from discontinued operations 1.4% 1.4%
Return on Group MCEV (ROEV***) per annum 10.7% 10.9%
* Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2010 and 31 December 2011 is
the net effect of the increase in the Old Mutual plc share price, the reduction
in excess own shares following employee share grants in March 2011 and the
reduction in overall shares held due to exercises of rights to take delivery of,
or net settle, share grants during the financial period.
The effect of the acquisition of the minority interest in Mutual & Federal
during 2010 has been included in this adjustment for the first time during 2011.
** The effect of the acquisition of the minority interest in Mutual & Federal
during 2010 has been included in this adjustment for the first time during 2011.
*** The ROEV is calculated as the adjusted operating Group MCEV earnings after
tax and non-controlling interests of GBP1,055 million (2010: GBP830 million)
divided by the opening Group MCEV.
B2: Adjusted operating MCEV earnings for the covered business
Total GBPm
covered Long Term Emerging Retail
Year ended 31 December 2011 business Savings Markets Europe
Adjusted operating Group MCEV
earnings before tax 918 714 468 24
Tax on adjusted operating Group
MCEV earnings (191) (162) (119) (5)
Adjusted operating Group MCEV
earnings after tax 727 552 349 19
GBPm
Wealth
Year ended 31 December 2011 Management Bermuda Nordic US Life
Adjusted operating Group MCEV
earnings before tax 222 48 156 -
Tax on adjusted operating Group
MCEV earnings (38) (1) (28) -
Adjusted operating Group MCEV
earnings after tax 184 47 128 -
Total GBPm
covered Long Term Emerging Retail
Year ended 31 business Savings Markets Europe
December 2010
Adjusted operating
Group MCEV
earnings before tax 725 640 443 68
Tax on adjusted
operating Group
MCEV earnings (135) (118) (99) (2)
Adjusted operating
Group MCEV
earnings after tax 590 522 344 66
GBPm
Year ended 31 Wealth
December 2010 Management Bermuda Nordic US Life
Adjusted operating
Group MCEV
earnings before tax 129 (28) 65 48
Tax on adjusted
operating Group
MCEV earnings (17) 4 (20) (1)
Adjusted operating
Group MCEV
earnings after tax 112 (24) 45 47
B3: Components of MCEV of the covered business
Total
covered Long Term Emerging Retail
Year ended 31 December 2011 business Savings Markets* Europe
Adjusted net worth 2,676 2,204 1,768 104
Free surplus 680 522 400 52
Required capital 1,996 1,682 1,368 52
Value of in-force 4,536 3,509 1,399 484
Present value of future
profits 5,248 4,001 1,740 547
Additional time value of
financial
options and guarantees (136) (14) - (12)
Frictional costs (243) (236) (218) (8)
Cost of residual
non-hedgeable risks (333) (242) (123) (43)
MCEV 7,212 5,713 3,167 588
Wealth GBPm
Year ended 31 December 2011 Management Bermuda Nordic US Life
Adjusted net worth 332 187 285 -
Free surplus 70 - 158 -
Required capital 262 187 127 -
Value of in-force 1,626 (121) 1,148 -
Present value of future
profits 1,714 36 1,211 -
Additional time value of
financial
options and guarantees (2) (122) - -
Frictional costs (10) (2) (5) -
Cost of residual (76) (33) (58) -
non-hedgeable risks
MCEV 1,958 66 1,433 -
Total GBPm
covered Long Term Emerging Retail
Year ended 31 December 2010 business Savings Markets* Europe
Adjusted net worth 3,351 2,228 1,804 103
Free surplus 507 390 306 41
Required capital 2,844 1,838 1,498 62
Value of in-force 4,164 3,685 1,509 520
Present value of future
profits 5,256 4,160 1,849 573
Additional time value of
financial
options and guarantees (433) (12) - (10)
Frictional costs (276) (261) (240) (11)
Cost of residual (383) (202) (100) (32)
non-hedgeable risks
MCEV 7,515 5,913 3,313 623
Wealth GBPm
Year ended 31 December 2010 Management Bermuda Nordic US Life
Adjusted net worth 321 403 186 534
Free surplus 43 - 51 66
Required capital 278 403 135 468
Value of in-force 1,656 (116) 1,318 (723)
Present value of future
profits 1,738 145 1,397 (446)
Additional time value of
financial
options and guarantees (2) (235) - (186)
Frictional costs (10) (2) (6) (7)
Cost of residual (70) (24) (73) (84)
non-hedgeable risks
MCEV 1,977 287 1,504 (189)
* The required capital in respect of Emerging Markets 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.
B4: Analysis of covered business MCEV earnings
Year ended 31 December 2011 GBPm
Total covered business
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 507 2,844 3,351 4,164 7,515
New business value (444) 187 (257) 490 233
Expected existing
business contribution
(reference rate) 17 65 82 179 261
Expected existing
business contribution
(in excess of
reference rate) 7 34 41 87 128
Transfers from VIF
and required capital
to free surplus 943 (236) 707 (707) -
Experience variances 10 30 40 111 151
Assumption changes 23 4 27 1 28
Other operating
variance 188 (205) (17) (57) (74)
Operating MCEV
earnings 744 (121) 623 104 727
Economic variances (221) (22) (243) (214) (457)
Other non-operating
variance 32 1 33 93 126
Total MCEV earnings 555 (142) 413 (17) 396
Closing adjustments (382) (706) (1,088) 389 (699)
Capital and dividend
flows (243) 55 (188) - (188)
Foreign exchange
variance (75) (312) (387) (306) (693)
MCEV of acquired/sold
business (64) (449) (513) 695 182
Closing MCEV 680 1,996 2,676 4,536 7,212
Return on MCEV
(RoEV)% per annum 9.7%
GBPm
Year ended 31 December 2010
Total covered business
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 416 2,399 2,815 3,212 6,027
New business value (485) 226 (259) 431 172
Expected existing
business contribution
(reference rate) 9 89 98 192 290
Expected existing
business contribution
(in excess of
reference rate) 7 27 34 174 208
Transfers from VIF
and required capital
to free surplus 899 (276) 623 (623) -
Experience variances (1) 6 5 71 76
Assumption changes (2) 2 - (98) (98)
Other operating
variance (125) 74 (51) (7) (58)
Operating MCEV
earnings 302 148 450 140 590
Economic variances 224 23 247 521 768
Other non-operating
variance (7) 25 18 - 18
Total MCEV earnings 519 196 715 661 1,376
Closing adjustments (428) 249 (179) 291 112
Capital and dividend
flows (468) - (468) - (468)
Foreign exchange
variance 40 249 289 291 580
MCEV of acquired/sold
business - - - - -
Closing MCEV 507 2,844 3,351 4,164 7,515
Return on MCEV
(RoEV)% per annum 9.8%
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.
GBPm
Year ended 31 December 2011
Adjusted Value of MCEV
net worth in-force
Experience variances 40 111 151
Persistency 20 84 104
Risk 43 4 47
Expenses (44) 13 (31)
Other 21 10 31
Assumption changes 27 1 28
Persistency 21 40 61
Risk - 8 8
Expenses (7) (99) (106)
Other 13 52 65
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances 5 71 76
Persistency 7 57 64
Risk 22 (2) 20
Expenses (37) 5 (32)
Other 13 11 24
Assumption changes - (98) (98)
Persistency (22) (53) (75)
Risk 19 12 31
Expenses (2) (44) (46)
Other 5 (13) (8)
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 23 71 94 201 295
Expected existing
business contribution
(in excess of
reference rate) 4 36 40 75 115
B4: Analysis of covered business MCEV earnings (after tax)
The Long Term Savings segment consists of Emerging Markets, Retail Europe and
Wealth Management.
Year ended 31 December 2011 GBPm
Long Term Savings (LTS)
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 390 1,838 2,228 3,685 5,913
New business value (390) 179 (211) 388 177
Expected existing
business contribution
(reference rate) 14 60 74 137 211
Expected existing
business contribution
(in excess of
reference rate) 7 10 17 40 57
Transfers from VIF
and required capital
to free surplus 748 (179) 569 (569) -
Experience variances (5) 32 27 103 130
Assumption changes 9 4 13 27 40
Other operating
variance 33 (28) 5 (68) (63)
Operating MCEV
earnings 416 78 494 58 552
Economic variances 23 (6) 17 (24) (7)
Other non-operating
variance (7) - (7) 96 89
Total MCEV earnings 432 72 504 130 634
Closing adjustments (300) (228) (528) (306) (834)
Capital and dividend
flows (232) 55 (177) - (177)
Foreign exchange
variance (68) (283) (351) (306) (657)
Closing MCEV 522 1,682 2,204 3,509 5,713
Return on MCEV
(RoEV)% per annum 9.3%
GBPm
Year ended 31 December 2010
Long Term Savings (LTS)
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 289 1,470 1,759 3,079 4,838
New business value (370) 154 (216) 375 159
Expected existing
business
contribution
(reference rate) 8 76 84 154 238
Expected existing
business
contribution
(in excess of
reference rate) 7 (3) 4 33 37
Transfers from VIF
and required capital
to free surplus 699 (184) 515 (515) -
Experience variances (46) 33 (13) 44 31
Assumption changes 23 2 25 30 55
Other operating
variance (49) 33 (16) 18 2
Operating MCEV
earnings 272 111 383 139 522
Economic variances 104 29 133 256 389
Other non-operating
variance (24) 25 1 - 1
Total MCEV earnings 352 165 517 395 912
Closing adjustments (251) 203 (48) 211 163
Capital and dividend
flows (283) - (283) - (283)
Foreign exchange
variance 32 203 235 211 446
Closing MCEV 390 1,838 2,228 3,685 5,913
Return on MCEV
(RoEV)% per annum 10.8%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in sterling.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances 27 103 130
Persistency 9 70 79
Risk 43 3 46
Expenses (37) 13 (24)
Other 12 17 29
Assumption changes 13 27 40
Persistency 7 40 47
Risk - 8 8
Expenses (3) (77) (80)
Other 9 56 65
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances (13) 44 31
Persistency 20 26 46
Risk 17 8 25
Expenses (56) 5 (51)
Other 6 5 11
Assumption changes 25 30 55
Persistency - 3 3
Risk 17 14 31
Expenses (2) (2) (4)
Other 10 15 25
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 20 67 87 166 253
Expected existing
business contribution
(in excess of
reference rate) 4 12 16 45 61
B4: Analysis of covered business MCEV earnings (after tax) continued
Year ended 31 December 2011 GBPm
Emerging Markets*
Free Required Adjusted Value of
surplus Capital net worth in-force MCEV
Opening MCEV 306 1,498 1,804 1,509 3,313
New business value (189) 155 (34) 133 99
Expected existing
business contribution
(reference rate) 11 58 69 105 174
Expected existing
business contribution
(in excess of
reference rate) 2 10 12 18 30
Transfers from VIF
and required capital
to free surplus 359 (150) 209 (209) -
Experience variances 28 24 52 50 102
Assumption changes 1 4 5 1 6
Other operating
variance (7) (11) (18) (44) (62)
Operating MCEV
earnings 205 90 295 54 349
Economic variances 1 8 9 23 32
Other non-operating
variance (7) - (7) 100 93
Total MCEV earnings 199 98 297 177 474
Closing adjustments (105) (228) (333) (287) (620)
Capital and dividend
flows (39) 51 12 - 12
Foreign exchange
variance (66) (279) (345) (287) (632)
Closing MCEV 400 1,368 1,768 1,399 3,167
Return on MCEV
(RoEV)% per annum 11.9%
GBPm
Year ended 31 December 2010
Emerging Markets*
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 80 1,225 1,305 1,158 2,463
New business value (159) 134 (25) 111 86
Expected existing
business contribution
(reference rate) 6 73 79 124 203
Expected existing
business contribution
(in excess of
reference rate) - (3) (3) 16 13
Transfers from VIF
and required capital
to free surplus 356 (166) 190 (190) -
Experience variances 11 14 25 10 35
Assumption changes 19 - 19 18 37
Other operating
variance (6) (2) (8) (22) (30)
Operating MCEV
earnings 227 50 277 67 344
Economic variances 57 21 78 84 162
Other non-operating
variance 4 - 4 1 5
Total MCEV earnings 288 71 359 152 511
Closing adjustments (62) 202 140 199 339
Capital and dividend
flows (93) - (93) - (93)
Foreign exchange
variance 31 202 233 199 432
Closing MCEV 306 1,498 1,804 1,509 3,313
Return on MCEV
(RoEV)% per annum 13.2%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in rand.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances 52 50 102
Persistency 25 31 56
Risk 39 (1) 38
Expenses (17) 8 (9)
Other 5 12 17
Assumption changes 5 1 6
Persistency 7 48 55
Risk - - -
Expenses (2) (47) (49)
Other - - -
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances 25 10 35
Persistency 29 5 34
Risk 11 7 18
Expenses (15) 4 (11)
Other - (6) (6)
Assumption changes 19 18 37
Persistency - 2 2
Risk 17 (1) 16
Expenses 2 15 17
Other - 2 2
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 18 63 81 122 203
Expected existing
business contribution
(in excess of
reference rate) 3 12 15 21 36
* The MCEV for Emerging Markets is presented after the adjustment for market
value of life fund investments in Group equity and debt instruments.
Emerging Markets
Overview
New business: The new business value increased (compared to 2010) largely driven
by very strong Mass Foundation Cluster sales volumes and an improvement in
margins resulting from changes to economic and operating assumptions.
Operating earnings: The operating profits on the in-force book were driven by
strong positive mortality and persistency experience variances.
Non-operating earnings and closing adjustments: The most material impact was
caused by the rand depreciating against sterling, leading to a large negative
foreign exchange variance. The changes to tax legislation in South Africa (in
particular, the move to a withholding tax regime for dividends) account for most
of the large one off positive non-operating variance.
New Business
The increase in the value of new business was largely driven by the increased
sales of higher margin Mass Foundation Cluster business. Margins in general were
impacted positively by operating assumption changes (mainly relating to
persistency) and a more favourable economic basis. However, there were also
offsetting negative impacts on margins resulting from a less profitable mix of
business (more market-linked business sold relative to with-profit business).
There was a small net negative impact on the value of new business from tax
legislation changes. This was a combination of the negative effect of tax
legislation changes affecting the Fixed Bond product and the positive effect of
moving to a dividend withholding tax regime (increase to VNB of GBP9 million).
Expected existing business contribution
The unwind of returns on the in-force business over 2011 was slightly lower than
2010. The lower unwind was the combined effect of the negative impact due to
lower 1-year risk-free rates, offset by positive impacts due to a higher assumed
real world expected return on cash and a higher opening MCEV balance on which
the unwind is based.
Experience variances
Both mortality and persistency experience were very strong in 2011 and included
a number of one-off items, leading to a significantly improved positive
experience variance compared to 2010. The mortality variance was the result of
exceptionally good experience in Retail Affluent, continued good experience in
Mass Foundation Cluster and improved Corporate Segment experience. The
persistency profits were improved by continued business efforts to improve
retention. It should be noted that the experience variance includes ANW earnings
of GBP14 million relating to the life business in Kenya, Malawi, Nigeria,
Swaziland, and Zimbabwe as profits not modelled.
Operating assumption changes
The small overall assumption change impact was the result of a number of
different offsetting effects, particularly an improvement in the persistency
basis (to reflect the good experience in recent years) and negative impacts from
expense assumption changes, mainly the increased provision for project costs.
Although mortality experience was very positive in 2011, no mortality assumption
changes were made as the experience appeared unusually positive compared to
recent years and was further boosted by one-off items which contributed
significantly to the profit. The assumptions will be considered again in 2012
following a review of the experience.
Other operating variances
The negative other operating variance was the result of an increase in the CNHR
resulting from implementation of a new economic capital model (alignment with
Solvency II requirements) to determine non-hedgeable risk capital and the effect
of other miscellaneous modelling changes.
Economic variances
Investment returns over 2011 were lower than 2010. The JSE SWIX index increased
slightly by 1% over 2011 (compared with 18% over 2010). The year-end economic
basis (mainly the swap curve) boosted MCEV. In aggregate, this had the impact of
leading to a small positive economic variance.
Other non-operating variances
A new dividend withholding tax system (replacing the current Secondary Tax on
Companies ("STC") system) will be introduced in South Africa effective from 1
April 2012. The current STC tax allowance was removed from the embedded value
models, resulting in an increase in VIF. This was offset by an allowance for
dividend withholding tax on remittance of dividends to Old Mutual plc. The
overall effect is a material increase in the net of tax VIF of GBP105 million.
Capital and dividend flows
This includes a large one-off positive effect of GBP69m for the inclusion of the
opening ANW for the life businesses in Kenya, Malawi, Nigeria, Swaziland, and
Zimbabwe which are included in Emerging Markets for the first time in 2011, with
any foreign exchange movement on this balance allocated as a foreign exchange
variance. This is largely offset by dividends paid.
Foreign exchange effects
The large negative effect was caused by the 18% depreciation in the rand against
sterling applied to the MCEV closing balance. The majority of Emerging Market`s
MCEV earnings are rand denominated, and the volatility of the rand against
sterling is largely unhedged. Hence, all the line items shown in the analysis of
covered business MCEV earnings are also implicitly impacted by movements in the
rand against sterling.
Year ended 31 December 2011 GBPm
Retail Europe
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 41 62 103 520 623
New business value (73) 1 (72) 80 8
Expected existing
business contribution
(reference rate) 1 - 1 8 9
Expected existing
business contribution
(in excess of
reference rate) - - - 5 5
Transfers from VIF
and required capital
to free surplus 93 1 94 (94) -
Experience variances 3 - 3 (3) -
Assumption changes - - - 2 2
Other operating
variance 6 (6) - (5) (5)
Operating MCEV
earnings 30 (4) 26 (7) 19
Economic variances 2 (4) (2) (13) (15)
Other non-operating
variance - - - - -
Total MCEV earnings 32 (8) 24 (20) 4
Closing adjustments (21) (2) (23) (16) (39)
Capital and dividend
flows (19) - (19) - (19)
Foreign exchange
variance (2) (2) (4) (16) (20)
Closing MCEV 52 52 104 484 588
Return on MCEV
(RoEV)% per annum 3.0%
GBPm
Year ended 31 December 2010
Retail Europe
Free Required Adjusted Value of
surplus capital net worth In-force MCEV
Opening MCEV 46 32 78 453 531
New business value (69) 1 (68) 75 7
Expected existing
business contribution
(reference rate) 1 - 1 8 9
Expected existing
business contribution
(in excess of
reference rate) - - - 3 3
Transfers from VIF
and required capital
to free surplus 97 2 99 (99) -
Experience variances 5 (1) 4 1 5
Assumption changes - - - 11 11
Other operating
variance (9) - (9) 40 31
Operating MCEV
earnings 25 2 27 39 66
Economic variances 1 2 3 19 22
Other non-operating
variance (26) 25 (1) (5) (6)
Total MCEV earnings - 29 29 53 82
Closing adjustments (5) 1 (4) 14 10
Capital and dividend
flows (6) - (6) - (6)
Foreign exchange
variance 1 1 2 14 16
Closing MCEV 41 62 103 520 623
Return on MCEV
(RoEV)% per annum 12.8%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in euro.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances 3 (3) -
Persistency (2) 3 1
Risk 3 2 5
Expenses (3) - (3)
Other 5 (8) (3)
Assumption changes - 2 2
Persistency - (2) (2)
Risk - - -
Expenses - 5 5
Other - (1) (1)
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances 4 1 5
Persistency (2) 3 1
Risk 3 - 3
Expenses (3) - (3)
Other 6 (2) 4
Assumption changes - 11 11
Persistency - 9 9
Risk - - -
Expenses - (4) (4)
Other - 6 6
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) - 1 1 11 12
Expected existing
business contribution
(in excess of
reference rate) 1 - 1 3 4
Retail Europe
Overview
Operating earnings: The operating profits on the in-force book were mainly
driven by new business contribution and the expected unwind of the MCEV.
Non-operating earnings and closing adjustments: The most material impacts are as
a result of the negative economic variances, largely due to reduced fund
returns, and the foreign exchange variance as a result of the depreciation of
the euro against sterling.
New Business
The value of new business has increased due to higher sales volumes in Poland
and Switzerland. Margins have also increased as a result of positive volume
effects, driven by a decrease in acquisition expense over-runs in Switzerland,
and favourable economic assumption changes.
Expected existing business contribution
The expected existing business contribution is in line with 2010.
Experience variances
The most significant experience variance is in respect of mortality risk. This
is partially offset by adverse expense variances due to higher overhead
expenses.
Operating assumption changes
The most significant operating assumption change relates to the lowering of
expense assumptions as a result of refinements to the allocation of Retail
Europe overhead expenses to individual insurance entities.
Other operating variances
The negative other operating variance mainly relates to a change in methodology
used to calculate CNHR to align with Solvency II requirements.
Economic variances
There was a large negative investment return variance on the VIF mainly due to
the effect of negative market developments and poor fund returns over 2011. This
was partially offset by a positive impact due to the reduction in swap rates
across all Retail Europe currencies.
Capital and dividend flows
The main capital flow relates to a significant dividend paid from the covered
business to Old Mutual plc.
Foreign exchange effects
The foreign exchange variance is mainly due to unfavourable exchange rate
movements on translation as a result of the euro depreciating against sterling.
B4: Analysis of covered business MCEV earnings (after tax) continued
GBPm
Year ended 31 December 2011
Wealth Management
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 43 278 321 1,656 1,977
New business value (128) 23 (105) 175 70
Expected existing
business contribution
(reference rate) 2 2 4 24 28
Expected existing
business contribution
(in excess of
reference rate) 5 0 5 17 22
Transfers from VIF
and required capital
to free surplus 296 (30) 266 (266) -
Experience variances (36) 8 (28) 56 28
Assumption changes 8 - 8 24 32
Other operating
variance 34 (11) 23 (19) 4
Operating MCEV
earnings 181 (8) 173 11 184
Economic variances 20 (10) 10 (34) (24)
Other non-operating
variance - - - (4) (4)
Total MCEV earnings 201 (18) 183 (27) 156
Closing adjustments (174) 2 (172) (3) (175)
Capital and dividend
flows (174) 4 (170) - (170)
Foreign exchange
variance - (2) (2) (3) (5)
Closing MCEV 70 262 332 1,626 1,958
Return on MCEV
(RoEV)% per annum 9.3%
GBPm
Year ended 31 December 2010
Wealth Management
Free Required Adjusted Value of
surplus capital net worth In-force MCEV
Opening MCEV 163 213 376 1,468 1,844
New business value (142) 19 (123) 189 66
Expected existing
business contribution
(reference rate) 1 3 4 22 26
Expected existing
business contribution
(in excess of
reference rate) 7 - 7 14 21
Transfers from VIF
and required capital
to free surplus 246 (20) 226 (226) -
Experience variances (62) 20 (42) 33 (9)
Assumption changes 4 2 6 1 7
Other operating
variance (34) 35 1 - 1
Operating MCEV
earnings 20 59 79 33 112
Economic variances 46 6 52 153 205
Other non-operating
variance (2) - (2) 4 2
Total MCEV earnings 64 65 129 190 319
Closing adjustments (184) - (184) (2) (186)
Capital and dividend
flows (184) - (184) - (184)
Foreign exchange
variance - - - (2) (2)
Closing MCEV 43 278 321 1,656 1,977
Return on MCEV
(RoEV)% per annum 6.1%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in sterling.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances (28) 56 28
Persistency (14) 36 22
Risk 1 2 3
Expenses (17) 5 (12)
Other 2 13 15
Assumption changes 8 24 32
Persistency - (6) (6)
Risk - 8 8
Expenses (1) (35) (36)
Other 9 57 66
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances (42) 33 (9)
Persistency (7) 18 11
Risk 3 1 4
Expenses (38) 1 (37)
Other - 13 13
Assumption changes 6 1 7
Persistency - (8) (8)
Risk - 15 15
Expenses (4) (13) (17)
Other 10 7 17
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 2 3 5 33 38
Expected existing
business contribution
(in excess of
reference rate) - - - 21 21
Wealth Management
Overview
New business: The new business value increased (compared to 2010); largely
driven by a change in business mix and assumption changes. Sales volumes were
below 2010 levels for all Wealth Management businesses, except for the UK
Platform which saw 2% year on year growth.
Operating earnings: The operating profits on the in-force book were driven by
the expected unwind of the MCEV, favourable rebate assumption changes, and
strong positive rebate, persistency and mortality experience variances.
Non-operating earnings and closing adjustments: The most material impact below
the line was the capital returned to group during the year and foreign exchange
variances due to funds held in non-sterling denominations.
New Business
The increase in the value of new business was largely due to the lower internal
acquisition costs following a cost reduction programme, together with the higher
rebate and improved persistency assumptions. Margins in general were impacted
positively by external factors, in particular the more favourable economic
basis. However, there were also offsetting negative impacts on margins resulting
from lower volumes.
Expected existing business contribution
The expected existing business contribution (in excess of reference rate) is not
significant on the required capital portion of the business as shareholder
assets backing capital requirements are typically invested in highly secure
government paper and other short-term instruments.
Experience variances
Rebate, persistency and mortality experience was strong in 2011 leading to a
positive experience variance compared to 2010. The persistency variance was as a
result of assumptions made for the anticipated impacts of the Retail
Distribution Review (RDR)* that have yet to emerge on Legacy business in the UK.
The adverse expense experience was due to one-off variances relating to software
development. Maintenance expenses have come under pressure due to lower than
assumed sales on UK platform and a changing mix of business.
Operating assumption changes
Assumptions changes were generally favourable with the release of margins on
rebates following strong recent experience and more clarity from the FSA
regarding the future treatment of rebates. Positive mortality experience led to
favourable assumption changes, offset by the adverse expense and persistency
assumption changes.
Other operating variances
The other operating variance was the result of some large offsetting items.
Modelling changes include the impact of a move to a 50th percentile best
estimate basis** offset by an associated move to more granular persistency
modelling techniques giving an overall impact of GBP(13) million. Other
operating variances also include the results of modelling improvements for the
Platform business following a migration of valuation models (GBP14 million); an
increase in the CNHR resulting from implementation of the 50th percentile best
estimate basis; and the effect of other miscellaneous modelling changes.
Economic variances
Investment returns over 2011 were lower than 2010 due to reduced fund growth as
a result of the fall in equity markets. The tax position of the Legacy business
resulted in large deemed disposal losses. These were partially offset by a
reduction in the effective tax rate in the UK businesses and in International`s
Finnish operation and a positive contribution from lower swap rates in 2011.
Other non-operating variances
Other non-operating variances include the benefit of reductions in headline UK
corporation tax. The Emergency Budget of 22 June 2010 announced that the UK`s
mainstream corporation tax rate would be reduced from its current level of 28%
down to 24% in annual 1% steps. The first reduction to 27% was included within
the full-year 2010 results. In the 23 March 2011 Budget speech an additional 1%
reduction, to come into effect during 2011, was announced. The further reduction
to 25% (effective from April 2012) has also been allowed for and the impact of
the 2% reduction to 25% is GBP8 million.
Capital and dividend flows
The capital and dividend flows mainly represent dividends, repayments of loans
and capital injections.
Foreign exchange effects
The negative effect was caused by the depreciation of the euro and Swiss franc
against sterling.
* Retail Distribution Review (RDR): The RDR is an FSA consumer protection
initiative which aims to drive structural change in the retail investments
industry to give consumers confidence that the advice they are given, and
products they are sold, are best suited to their needs. Whilst the regulations
will not be in force until 1st January 2013 the market is already starting to
change. The exact impact of the RDR is still uncertain and assumption changes
include an allowance for expected worsening persistency experience in 2012 and
2013 because of the RDR impacts.
** Modelling changes to allow for 50th percentile best estimate basis:
Traditionally the Group MCEV methodology has allowed assumptions to incorporate
a margin over the 50th percentile (best estimate) where this could be justified
on the grounds of modelling uncertainty of the best estimate. In preparation for
full Solvency II implementation, a revised group-wide MCEV approach is being
phased in. The approach requires the release of margins when calculating MCEV on
a true best estimate basis.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011 continued
B: Segment information continued
B4: Analysis of covered business MCEV earnings (after tax) continued
GBPm
Year ended 31 December 2011
Bermuda
Free Required Adjusted Value of
surplus Capital net worth in-force MCEV
Opening MCEV - 403 403 (116) 287
New business value - - - - -
Expected existing
business contribution
(reference rate) - 2 2 6 8
Expected existing
business contribution
(in excess of
reference rate) - 24 24 14 38
Transfers from VIF
and required capital
to free surplus 66 (57) 9 (9) -
Experience variances 16 (1) 15 9 24
Assumption changes 14 - 14 (22) (8)
Other operating
variance 155 (177) (22) 7 (15)
Operating MCEV
earnings 251 (209) 42 5 47
Economic variances (251) - (251) (10) (261)
Other non-operating
variance - - - - -
Total MCEV earnings - (209) (209) (5) (214)
Closing adjustments - (7) (7) - (7)
Capital and dividend
flows - - - - -
Foreign exchange
variance - (7) (7) - (7)
Closing MCEV - 187 187 (121) 66
Return on MCEV
(RoEV)% per annum 17.0%
GBPm
Year ended 31 December 2010
Bermuda
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV - 363 363 (165) 198
New business value - - - - -
Expected existing
business contribution
(reference rate) - 3 3 9 12
Expected existing
business contribution
(in excess of
reference rate) - 30 30 35 65
Transfers from VIF
and required
capital
to free surplus 16 (45) (29) 29 -
Experience
variances (18) 1 (17) (2) (19)
Assumption changes (19) - (19) (16) (35)
Other operating
variance (32) 37 5 (52) (47)
Operating MCEV
earnings (53) 26 (27) 3 (24)
Economic variances 53 - 53 52 105
Other non-operating
variance - - - - -
Total MCEV earnings - 26 26 55 81
Closing adjustments - 14 14 (6) 8
Capital and
dividend flows - - - - -
Foreign exchange
variance - 14 14 (6) 8
Closing MCEV - 403 403 (116) 287
Return on MCEV
(RoEV)% per annum (11.4)%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in dollars.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances 15 9 24
Persistency 14 8 22
Risk - - -
Expenses 3 - 3
Other (2) 1 (1)
Assumption changes 14 (22) (8)
Persistency 14 6 20
Risk - - -
Expenses (4) (22) (26)
Other 4 (6) (2)
GBPm
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances (17) (2) (19)
Persistency (15) (1) (16)
Risk - - -
Expenses (8) - (8)
Other 6 (1) 5
Assumption changes (19) (16) (35)
Persistency (16) 9 (7)
Risk 2 (1) 1
Expenses - (26) (26)
Other (5) 2 (3)
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing business
contribution (reference rate) - 1 1 7 8
Expected existing business
contribution
(in excess of reference rate) - 24 24 5 29
Bermuda
Overview
Operating earnings: Profits from Variable Annuity surrender experience and
persistency assumption changes increased operating earnings in 2011, partially
offset by losses from the strengthening of expense assumptions and modelling
changes to the CNHR and Fixed Annuity reserves.
Non-operating earnings and closing adjustments: The closing MCEV balance reduced
considerably because of unfavourable market impacts on the Variable Annuity
Guaranteed Minimum Accumulation Benefit (GMAB) performance.
Expected existing business contribution
The expected contribution in excess of the risk-free rate has reduced in 2011,
with the VIF component reflecting lower credit spread income as a result of the
run off of the fixed income portfolio and lower earned credit spreads, and the
ANW component reflecting lower interest earned on Old Mutual plc loan notes.
Experience variances
Positive persistency variances in 2011 are mainly due to the surrender of
Variable Annuity contracts over the period. This includes the impact of special
surrender fee waiver offers given to Universal Guarantee Option (UGO) clients
outside of Hong Kong during the year, which significantly increased the number
of surrenders taking place in 2011. Expense variances in 2011 include a one-off
profit impact of GBP5m due to the release of a legal expense provision.
Operating assumption changes
Partial withdrawal and surrender assumptions were refined according to the
results of the most recent experience investigation, with the main impacts being
an increase in surrender rates of out-the-money UGO Variable Annuity contracts,
and an increase in partial withdrawal rates on all products apart from Variable
Annuities sold outside of Hong Kong. Expense assumptions were strengthened to
take account of an updated forecast of business expenditure over the next 3
years and higher anticipated per-policy expenses over the run-off of the in-
force book.
Other operating variances
Losses due to other operating experience variances consist mainly of CNHR
modelling changes, where the capital model used has been updated to reflect Old
Mutual`s Solvency II Internal Model framework, as well as the strengthening of
Fixed Annuity reserves to allow for market-value adjustments to withdrawal
payments that compensate policyholders in a low interest rate environment. The
movement between free surplus and required capital is mostly due to the current
policy of calculating required capital as the ANW held in the business. ANW, and
therefore required capital, have reduced significantly over the period, largely
due to the impact of adverse financial markets on Variable Annuity (GMAB)
reserves. Capital requirements for Bermuda are managed at Group on an economic
capital basis.
Economic variances
Below-the-line economic variance losses consist largely of increases in Variable
Annuity (GMAB) reserves due to adverse equity market and exchange rate movements
(net of gains from the partial hedging strategy), as well as significantly lower
interest rates.
Foreign exchange effects
The negative effect was caused by the depreciation in the US dollar against
sterling applied to the MCEV earnings and closing balance.
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
B: Segment information continued
B4: Analysis of covered business MCEV earnings (after tax) continued
GBPm
Year ended 31 December 2011
Nordic
Free Required Adjusted
surplus capital net worth
Opening MCEV 51 135 186
New business value (54) 8 (46)
Expected existing business contribution
(reference rate) 3 3 6
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus 129 - 129
Experience variances (1) (1) (2)
Assumption changes - - -
Other operating variance - - -
Operating MCEV earnings 77 10 87
Economic variances 7 (16) (9)
Other non-operating variance 39 1 40
Total MCEV earnings 123 (5) 118
Closing adjustments (16) (3) (19)
Capital and dividend flows (11) - (11)
Foreign exchange variance (5) (3) (8)
Closing MCEV 158 127 285
Value of
in-force MCEV
Opening MCEV 1,318 1,504
New business value 102 56
Expected existing business contribution
(reference rate) 36 42
Expected existing business contribution
(in excess of reference rate) 33 33
Transfers from VIF and required capital
to free surplus (129) -
Experience variances (1) (3)
Assumption changes (4) (4)
Other operating variance 4 4
Operating MCEV earnings 41 128
Economic variances (180) (189)
Other non-operating variance (3) 37
Total MCEV earnings (142) (24)
Closing adjustments (28) (47)
Capital and dividend flows - (11)
Foreign exchange variance (28) (36)
Closing MCEV 1,148 1,433
Return on MCEV (RoEV)% per annum 8.5%
Year ended 31 December 2010
Nordic
Free Required Adjusted
surplus capital net worth
Opening MCEV 91 104 195
New business value (49) 6 (43)
Expected existing business contribution
(reference rate) - 1 1
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus 103 - 103
Experience variances 30 (5) 25
Assumption changes - - -
Other operating variance (44) 4 (40)
Operating MCEV earnings 40 6 46
Economic variances (4) 12 8
Other non-operating variance 17 - 17
Total MCEV earnings 53 18 71
Closing adjustments (93) 13 (80)
Capital and dividend flows (100) - (100)
Foreign exchange variance 7 13 20
Closing MCEV 51 135 186
Value of
in-force MCEV
Opening MCEV 1,114 1,309
New business value 84 41
Expected existing business contribution
(reference rate) 14 15
Expected existing business contribution
(in excess of reference rate) 26 26
Transfers from VIF and required capital
to free surplus (103) -
Experience variances (1) 24
Assumption changes (55) (55)
Other operating variance 34 (6)
Operating MCEV earnings (1) 45
Economic variances 86 94
Other non-operating variance - 17
Total MCEV earnings 85 156
Closing adjustments 119 39
Capital and dividend flows - (100)
Foreign exchange variance 119 139
Closing MCEV 1,318 1,504
Return on MCEV (RoEV)% per annum 3.3%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in krona.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances (2) (1) (3)
Persistency (3) 6 3
Risk - 1 1
Expenses (10) - (10)
Other 11 (8) 3
Assumption changes - (4) (4)
Persistency - (6) (6)
Risk - - -
Expenses - - -
Other - 2 2
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances 25 (1) 24
Persistency (2) (6) (8)
Risk 5 - 5
Expenses 2 - 2
Other 20 5 25
Assumption changes - (55) (55)
Persistency - (7) (7)
Risk - - -
Expenses - (18) (18)
Other - (30) (30)
GBPm
Year ended 31 December 2012
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 3 3 6 28 34
Expected existing business
contribution
(in excess of reference rate) - - - 25 25
Nordic
Overview
On 15 December 2011, the Company announced that it had entered into an agreement
to sell the Nordic business unit to Skandia Liv for the sum of SEK 22.5 billion
(GBP2.1 billion). This transaction is still subject to shareholder approval. The
Nordic business was therefore owned by the Company over the entire reporting
period.
New business: The new business value increased (compared to 2010) largely driven
by the strong sales growth in Skandia Link Denmark.
Operating earnings: The operating profits on the in-force book were driven by
the expected unwind of the MCEV. The overall impact of experience variances and
assumption changes was small.
Non-operating earnings and closing adjustments: The most material impact was due
to the negative economic variance, largely driven by a fall in the equity
markets during 2011.
New Business
The key reason for the increase in volume and margin is the strong sales growth
in Skandia Link Denmark, which tends to attract higher margins. Sales in Sweden
were relatively flat in 2011 compared to 2010. The strong sales in Denmark are a
result of the using a tied agent network as well as the effect of the new
commission legislation (which resulted in a surge of new business before the law
was effected).
Expected existing business contribution
The unwind of returns on the in-force business over 2011 was higher than 2010.
The higher unwind was due to higher assumed real world expected returns and a
higher opening MCEV balance on which the unwind is based.
Experience variances
The experience variances are primarily driven by a major restructuring programme
implemented in 2011. This was offset by positive rebate experience arising from
a higher level of rebate income than expected.
Operating assumption changes
The impact of assumption changes has reduced significantly compared to 2010 and
largely reflect a strengthening of the persistency assumptions (premium
reductions, transfers and surrenders). The strengthening of persistency
assumptions reflects higher anticipated future transfers within a few specific
segments rather than recent experience (which has been positive).
Other operating variances
The positive other operating variance was the result of a decrease in the CNHR
resulting from implementation of a new economic capital model (to align with
Solvency II requirements). This was partially offset by the impact of a change
in the methodology used to determine expense inflation assumptions.
Economic variances
The negative economic variance has been driven by a fall in the equity markets
during the second half of 2011 (the Swedish OMX index decreased by 17% over 2011
compared with an increase of 18% over 2010), with the downward shift in the swap
curve producing a further negative impact.
Other non-operating variances
The other non-operating variance relates primarily to the net effect of a
capital contribution from Skandia Liv. During the year, Skandia Liv made a group
contribution of GBP154 million to the Skandia Group. Unrelieved tax losses have
been used to offset the entire tax charge on this transaction. Simultaneously,
the Skandia Group made a capital injection of GBP110 million back to Skandia
Liv, corresponding to the group contribution net of tax relief.
Capital and dividend flows
The capital and dividend flows mainly represent dividends, repayment of loans
and capital injections.
Foreign exchange effects
The negative effect was caused by the 2% depreciation in the krona against
sterling applied to the MCEV closing balance.
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
B: Segment information continued
B4: Analysis of covered business MCEV earnings (after tax) continued
GBPm
Year ended 31 December 2011
US Life
Free Required Adjusted
surplus capital net worth
Opening MCEV 66 468 534
New business value - - -
Expected existing business contribution
(reference rate) - - -
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus - - -
Experience variances - - -
Assumption changes - - -
Other operating variance - - -
Operating MCEV earnings - - -
Economic variances - - -
Other non-operating variance - - -
Total MCEV earnings - - -
Closing adjustments (66) (468) (534)
Capital and dividend flows - - -
Foreign exchange variance (2) (19) (21)
MCEV of acquired/sold business (64) (449) (513)
Closing MCEV - - -
Value of
in-force MCEV
Opening MCEV (723) (189)
New business value - -
Expected existing business contribution
(reference rate) - -
Expected existing business contribution
(in excess of reference rate) - -
Transfers from VIF and required capital
to free surplus - -
Experience variances - -
Assumption changes - -
Other operating variance - -
Operating MCEV earnings - -
Economic variances - -
Other non-operating variance - -
Total MCEV earnings - -
Closing adjustments 723 189
Capital and dividend flows - -
Foreign exchange variance 28 7
MCEV of acquired/sold business 695 182
Closing MCEV - -
Return on MCEV (RoEV)% per annum -
Year ended 31 December 2010
US Life
Free Required Adjusted
surplus capital net worth
Opening MCEV 36 462 498
New business value (66) 66 -
Expected existing business contribution
(reference rate) 1 9 10
Expected existing business contribution
(in excess of reference rate) - - -
Transfers from VIF and required capital
to free surplus 81 (47) 34
Experience variances 33 (23) 10
Assumption changes (6) - (6)
Other operating variance - - -
Operating MCEV earnings 43 5 48
Economic variances 71 (18) 53
Other non-operating variance - - -
Total MCEV earnings 114 (13) 101
Closing adjustments (84) 19 (65)
Capital and dividend flows (85) - (85)
Foreign exchange variance 1 19 20
MCEV of acquired/sold business - - -
Closing MCEV 66 468 534
Value of
in-force MCEV
Opening MCEV (816) (318)
New business value (28) (28)
Expected existing business contribution
(reference rate) 15 25
Expected existing business contribution
(in excess of reference rate) 80 80
Transfers from VIF and required capital
to free surplus (34) -
Experience variances 30 40
Assumption changes (57) (63)
Other operating variance (7) (7)
Operating MCEV earnings (1) 47
Economic variances 127 180
Other non-operating variance - -
Total MCEV earnings 126 227
Closing adjustments (33) (98)
Capital and dividend flows - (85)
Foreign exchange variance (33) (13)
MCEV of acquired/sold business - -
Closing MCEV (723) (189)
Return on MCEV (RoEV)% per annum 14.1%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by
opening MCEV in dollars.
GBPm
Year ended 31 December 2011
Adjusted Value of
net worth in-force MCEV
Experience variances - - -
Persistency - - -
Risk - - -
Expenses - - -
Other - - -
Assumption changes - - -
Persistency - - -
Risk - - -
Expenses - - -
Other - - -
Year ended 31 December 2010
Adjusted Value of
net worth in-force MCEV
Experience variances 10 30 40
Persistency 4 38 42
Risk - (10) (10)
Expenses 25 - 25
Other (19) 2 (17)
Assumption changes (6) (57) (63)
Persistency (6) (58) (64)
Risk - (1) (1)
Expenses - 2 2
Other - - -
US Life
For the year ended 31 December 2011, Old Mutual Reassurance (Ireland) Limited
(OMRe), which provides reinsurance to the United States Life Companies, is
included within the Old Mutual plc results. For all comparative periods, the
results for US Life include allowance for OMRe.
The sale of the US Life insurance business to Harbinger Capital Partners was
completed, following regulatory approval, on 7 April 2011. This transaction has
resulted in an uplift of GBP451 million to the adjusted Group MCEV, based on the
31 December 2010 value for US Life. Further details relating to the MCEV impact
of this transaction are noted in A4.
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
C: Other key performance information
C1: Value of new business (after tax)
The tables below set out the regional 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% of single premiums.
Bermuda is excluded from the tables below as it is closed to new business.
GBPm
Year ended 31 December 2011
Annualised PVNBP
recurring Single capitalisation
premiums premiums PVNBP factors*
Long Term Savings 569 6,211 9,113 5.1
Emerging Markets 363 1,441 3,295 5.1
Retail Europe 67 56 549 7.4
Wealth Management 139 4,714 5,269 4.0
Nordic 153 753 1,347 3.9
US Life** - - - -
Total covered business 722 6,964 10,460 4.8
PVNBP APE
APE VNB margin margin
Long Term Savings 1,189 177 1.9% 15%
Emerging Markets 506 99 3.0% 20%
Retail Europe 72 8 1.5% 11%
Wealth Management 611 70 1.3% 11%
Nordic 229 56 4.2% 25%
US Life** - - - -
Total covered business 1,418 233 2.2% 16%
GBPm
Year ended 31 December 2010
Annualised PVNBP
recurring Single capitalisation
premiums premiums PVNBP factors*
Long Term Savings 554 7,359 10,162 5.1
Emerging Markets 325 1,611 3,269 5.1
Retail Europe 63 63 513 7.2
Wealth Management 166 5,685 6,380 4.2
Nordic 144 573 1,104 3.7
US Life** 10 824 889 6.6
Total covered business 708 8,756 12,155 4.8
PVNBP APE
APE VNB margin margin
Long Term Savings 1,290 159 1.6% 13%
Emerging Markets 487 86 2.6% 18%
Retail Europe 69 7 1.4% 11%
Wealth Management 734 66 1.0% 9%
Nordic 201 41 3.7% 21%
US Life** 92 (28) (3.2)% (31)%
Total covered business 1,583 172 1.4% 11%
* The PVNBP capitalisation factors are calculated as follows: (PVNBP -
single premiums)/annualised recurring premiums.
** The US Life VNB is negative when calculated on an MCEV basis, due to the
reliance on spread in the pricing basis, and the low risk free swap
curve.
The value of new individual unit trust linked retirement annuities and pension
fund asset management business written by the Emerging Markets long-term
business of GBP884 million (2010: GBP723 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
Wealth Management of GBP704 million (2010: GBP304 million) is excluded as this
is more appropriately classified as unit trust business.
New business single premiums of GBP31 million, annualised recurring premiums of
GBP14 million and APE of GBP17 million in respect of the life business in Kenya,
Malawi, Nigeria, Swaziland, and Zimbabwe have been excluded from the above
tables, as no value of new business and PVNBP calculations have been performed
for these businesses.
C2: Drivers of new business value for covered business (PVNBP margin)*
%
Total
covered Long Term Emerging Retail
Year ended 31 December 2011 business Savings Markets Europe
Margin at the end of
comparative period** 1.8 1.6 2.6 1.4
Change in volume 0.2 0.1 0.3 0.5
Change in country and
product mix (0.2) (0.2) (0.6) (0.3)
Change in operating assumptions 0.2 0.2 0.4 (0.4)
Change in economic assumptions 0.2 0.2 0.4 0.3
Change in tax/regulation - - (0.1) -
Exchange rate movements - - - -
Margin at the end of the period 2.2 1.9 3.0 1.5
Wealth
Year ended 31 December 2011 Management Nordic US Life
Margin at the end of
comparative period** 1.0 3.7 -
Change in volume (0.1) 0.1 -
Change in country and product mix - 0.4 -
Change in operating assumptions 0.2 (0.1) -
Change in economic assumptions 0.1 0.1 -
Change in tax/regulation 0.1 - -
Exchange rate movements - - -
Margin at the end of the period 1.3 4.2 -
%
Total
covered Long Term Emerging Retail
Year ended 31 December 2010 business Savings Markets Europe
Margin at the end of
comparative period 1.6 1.3 2.3 (1.0)
Change in volume (0.1) - 0.1 1.6
Change in country and
product mix 0.1 0.2 0.4 (0.2)
Change in operating assumptions 0.1 0.2 (0.1) 0.9
Change in economic assumptions (0.4) (0.1) (0.1) 0.1
Change in tax/regulation - - - -
Exchange rate movements 0.1 - - -
Margin at the end of the period 1.4 1.6 2.6 1.4
Wealth
Year ended 31 December 2010 Management Nordic US Life
Margin at the end of
comparative period 1.0 3.8 2.2
Change in volume (0.1) (0.1) (0.1)
Change in country and product mix (0.1) 0.6 (0.9)
Change in operating assumptions 0.2 (0.4) (0.6)
Change in economic assumptions - (0.2) (3.8)
Change in tax/regulation - - -
Exchange rate movements - - -
Margin at the end of the period 1.0 3.7 (3.2)
* The PVNBP margin changes are calculated in the business unit reporting
currency.
** The PVNBP margin at the end of the comparative period has been restated
to exclude the US Life margin impact.
The value of new business has increased for all business units during 2011
relative to 2010, with the PVNBP margin also displaying positive trends across
all business units.
For Emerging Markets the increase in new business margin is largely influenced
by external factors, in particular the change from STC to dividend withholding
tax in South Africa and the more favourable economic basis, as well as
favourable operating assumption changes. Strong sales growth in Mass Foundation
Cluster, which has higher margins than other segments, also contributed
positively. These effects were partly offset by the adverse effect of tax
legislation changes reducing the profitability of the Fixed Bond product and a
less favourable product mix, particularly in the Corporate Segment.
The new business margin in Retail Europe increased slightly over the period,
mainly due to positive volume effects, driven by a decrease in acquisition
expense over-runs in Switzerland, and favourable economic assumption changes.
For Wealth Management, the increase in margin is predominately due to reduced
acquisition expenses and favourable assumption changes (both operating and
economic).
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
C: Other key performance information continued
C3: Adjustments applied in determining total Group MCEV earnings before tax
GBPm
Year ended 31 December 2011
Non-
Covered 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 - (283) (283)
Economic variances (554) (28) (582)
Other non-operating variances 22 - 22
Acquired/divested business* - 182 182
Dividends declared to holders of perpetual
preferred callable securities - 44 44
Adjusting items relating to US Asset
Management equity plans and non-controlling
interests - (3) (3)
Fair value gains on Group debt instruments - 22 22
Adjusting items (532) (66) (598)
Adjusting items from continuing operations (378) (59) (437)
Adjusting items from discontinued operations (154) (7) (161)
Total MCEV adjusting items (532) (66) (598)
Year ended 31 December 2010
Non-
Covered covered
business 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 - (20) (20)
Economic variances 864 (7) 857
Other non-operating variances 17 - 17
Acquired/divested business* - (22) (22)
Dividends declared to holders of
perpetual preferred callable securities - 44 44
Adjusting items relating to US Asset
Management equity plans and non-controlling
interests - 6 6
Fair value gains on Group debt
instruments - (203) (203)
Adjusting items 881 (202) 679
Adjusting items from continuing
operations 591 (196) 395
Adjusting items from discontinued
operations 290 (6) 284
Total MCEV adjusting items 881 (202) 679
* This relates to the non-covered businesses in Kenya, Malawi, Nigeria,
Swaziland, and Zimbabwe that have been included for the first time during 2011.
C4: Other movements in IFRS net equity impacting Group MCEV
GBPm
Year ended 31 December 2011
Non-
Covered covered Total
business business Group
MCEV IFRS MCEV
Fair value gains/(losses) - 24 24
Net investment hedge - 28 28
Currency translation differences/exchange
differences on translating foreign operations (693) (498) (1,191)
Aggregate tax effects of items taken
directly to or transferred from equity - 11 11
Other movements* 182 128 310
Net income recognised directly into equity (511) (307) (818)
Capital and dividend flows for the year** (257) (8) (265)
Inclusion of other African life businesses** 69 - 69
Net purchase of treasury shares - (17) (17)
Shares issued in lieu of cash dividends - 124 124
Other shares issued - 10 10
Acquisition of non-controlling interest in
Mutual & Federal - - -
Change in share based payment reserve - 50 50
Other movements in net equity (699) (148) (847)
Year ended 31 December 2010
Non-
Covered covered
business business Total Group
MCEV IFRS MCEV
Fair value gains/(losses) - 8 8
Net investment hedge - (86) (86)
Currency translation
differences/exchange differences on
translating foreign operations 580 448 1,028
Aggregate tax effects of items taken
directly to or transferred from equity - 14 14
Other movements* - (24) (24)
Net income recognised directly into
equity 580 360 940
Capital and dividend flows for the year** (468) 322 (146)
Inclusion of other African life
businesses** - - -
Net purchase of treasury shares - (28) (28)
Shares issued in lieu of cash dividends - 162 162
Other shares issued - 4 4
Acquisition of non-controlling interest
in Mutual & Federal - (93) (93)
Change in share based payment reserve - 4 4
Other movements in net equity 112 731 843
* This relates to the reversal of the US Life MCEV on the covered business.
** Dividends are allowed for on a cash basis, consistent with IFRS. The effect
of the capital transfer relating to the inclusion of the other African life
businesses is separated out from the other capital and dividend flows for the
period as this is not eliminated on group consolidation. The GBP69 million is
included in the Capital and dividend flows of GBP(188) million included in Note
B4: Analysis of covered business MCEV earnings for Emerging Markets. Any foreign
exchange movement on this opening balance is allocated as a foreign exchange
variance.
C5: 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.
GBPm
Total
covered Long Term Emerging Retail
At 31 December 2011 business Savings Markets Europe
IFRS net asset value* 5,214 3,744 1,230 600
Adjustment to include long-term
business on a statutory solvency
basis (1,905) (1,108) 182 (305)
Inclusion of Group equity and
debt instruments held in life
funds** 365 365 365 -
Goodwill (998) (797) (9) (191)
Adjusted net worth attributable
to ordinary equity holders of
the parent 2,676 2,204 1,768 104
Wealth
At 31 December 2011 Management Bermuda Nordic US Life
IFRS net asset value* 1,914 201 1,269 -
Adjustment to include long-term
business on a statutory solvency
basis (985) (14) (783) -
Inclusion of Group equity and
debt instruments held in life
funds** - - - -
Goodwill (597) - (201) -
Adjusted net worth attributable
to ordinary equity holders of
the parent 332 187 285 -
GBPm
Total
covered Long Term Emerging Retail
At 31 December 2010 business Savings Markets Europe
IFRS net asset value* 5,794 3,845 1,216 632
Adjustment to include long-term
business on a statutory solvency
basis (1,822) (1,202) 207 (331)
Inclusion of Group equity and
debt instruments held in life
funds** 389 389 389 -
Goodwill (1,010) (804) (8) (198)
Adjusted net worth attributable
to ordinary equity holders of
the parent 3,351 2,228 1,804 103
Wealth
At 31 December 2010 Management Bermuda Nordic US Life
IFRS net asset value* 1,997 432 1,243 274
Adjustment to include long-term
business on a statutory solvency
basis (1,078) (29) (851) 260
Inclusion of Group equity and
debt instruments held in life
funds** - - - -
Goodwill (598) - (206) -
Adjusted net worth attributable
to ordinary equity holders of
the parent 321 403 186 534
* IFRS net asset value is after elimination of inter-company loans.
** A further GBP(69)m (2010: GBP(83) million) relates to the non-covered
business.
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 shareholder funds. In South Africa, these values exclude
items that are eliminated or shown separately on consolidation (such as Nedbank
and inter-company loans). For some European countries the value reflected in the
adjustment to include long-term business on a statutory solvency basis includes
the value of the deferred acquisition cost asset, which is part of the equity.
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
with the exception of the Bermuda business where DAC is an admissible asset
under local statutory basis.
* 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.
For Bermuda business, VIF reflects the impact of amortizing DAC allowed under
the ANW.
* For the US Life business, the reversal of the IFRS impairment for discontinued
operations which is included in the IFRS net asset value, as this is not
recognised on a statutory solvency basis.
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
D1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business at
31 December 2011 and the value of new business for the year ended 31 December
2011 to the following:
* Economic assumptions 1% increase: Increasing all pre-tax investment and
economic assumptions by 1%, with credited rates and discount rates changing
commensurately
* Economic assumptions 1% decrease: Decreasing all pre-tax investment and
economic assumptions by 1%, with credited rates and discount rates changing
commensurately
* Equity/property market value 10% increase: Equity and property market value
increasing by 10%, with all pre-tax investment and economic assumptions
unchanged
* Equity/property market value 10% decrease: Equity and property market value
decreasing by 10%, with all pre-tax investment and economic assumptions
unchanged
* 10bps increase of liquidity spreads: Recognising the present value of an
additional 10bps of liquidity spreads assumed on corporate bonds over the
lifetime of the liabilities, with credited rates and discount rates changing
commensurately
* 50bps contraction on corporate bond spreads
* 25% increase in equity/property implied volatilities: 25% multiplicative
increase in equity and property implied volatilities
* 25% increase in swaption implied volatilities: 25% multiplicative increase in
swaption implied volatilities
* 10% decrease in discontinuance rates: Voluntary discontinuance rates
decreasing by 10%
* 10% decrease in maintenance expense: Maintenance expense levels decreasing by
10%, with no corresponding decrease in policy charges
* 5% decrease in mortality/morbidity rates: Mortality and morbidity assumptions
for assurances decreasing by 5%, with no corresponding decrease in policy
charges
* 5% decrease in mortality assumption: Mortality assumption for annuities
decreasing by 5%, with no corresponding increase in policy charges
* VNB 10% increase in acquisition expenses: For value of new business,
acquisition expenses other than commission and commission related expenses
increasing by 10%, with no corresponding increase in policy charges
* VNB on closing economic assumptions: Value of new business calculated on
economic assumptions at the end of reporting period
* Minimum capital requirement: Required capital equal to the minimum statutory
requirement
* NHR capital diversification: Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between hedgeable and non- hedgeable risks
for covered business
* 99.93% confidence level NHR capital: Economic capital for residual non-
hedgeable risks calculated assuming a 99.93% confidence level which is targeted
by an internal economic capital model
For each sensitivity illustrated all other assumptions have been left unchanged
except where they are directly affected by the revised conditions. Sensitivity
scenarios therefore include consistent changes in cash flows directly affected
by the changed assumption(s), for example future bonus participation in changed
economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder
distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modelling of
dynamic reserves is extremely complex and the effect on value is second- order.
Therefore, in performing the sensitivities, reserving bases have been kept
constant for non-linked business (including non-linked reserves for linked
business) whilst only varying future experience assumptions with similar
considerations applying to required capital. However the sensitivities for South
Africa in respect of an increase/decrease of all pre-tax investment and economic
assumptions, an increase/decrease in equity and property market values and
increases in equity, property and swaption implied volatilities allow for the
change in the time value of financial options and guarantees that form part of
the IGR.
The sensitivities for an increase/decrease in all pre-tax investment and
economic assumptions (with credited rates and discount rates changing
commensurately) are calculated in line with a parallel shift in risk free
reference spot rates rather than risk free reference forward rates. However, the
1% reduction is limited so that it does not lead to negative risk free reference
rates.
The equity and property sensitivities make allowance for rebalancing of asset
portfolios.
VNB sensitivities assume that the scenario arises immediately after point of
sale of the contract. Therefore no allowance is made for the ability to re-
price any contracts in the sensitivity scenarios, apart from the mortality
sensitivities for the South African business where allowance is made for changes
in the pricing basis for products with reviewable premiums.
Sensitivity tests: MCEV
GBPm
Total
covered Long Term Emerging Retail
At 31 December 2011 business Savings Markets Europe
Central assumptions 7,212 5,713 3,167 588
Effect on MCEV of:
Economic assumption 1% increase 7,103 5,579 3,109 566
Economic assumption 1% decrease 7,315 5,836 3,209 603
Equity/property market value
10% increase 7,585 5,948 3,285 597
Equity/property market value
10% decrease 6,869 5,509 3,054 579
10bps increase of liquidity
spreads 7,221 5,722 3,176 588
50bps contraction on corporate
bond spreads 7,232 5,728 3,182 588
25% increase in equity/property
implied volatilities 7,124 5,691 3,146 588
25% increase in swaption
implied volatilities 7,198 5,701 3,157 586
10% decrease in discontinuance
rates 7,405 5,884 3,224 605
10% decrease in maintenance
expense 7,471 5,919 3,305 609
5% decrease in
mortality/morbidity rates 7,333 5,833 3,270 592
5% decrease in mortality
assumption 7,190 5,693 3,147 588
Minimum capital requirement 7,267 5,766 3,217 589
NHR capital diversification 7,282 5,759 3,192 598
99.93% confidence level NHR
capital: 7,155 5,660 3,140 581
Wealth
At 31 December 2011 Management Bermuda Nordic
Central assumptions 1,958 66 1,433
Effect on MCEV of:
Economic assumption 1% increase 1,904 117 1,407
Economic assumption 1% decrease 2,024 18 1,461
Equity/property market value 10% increase 2,066 118 1,519
Equity/property market value 10% decrease 1,876 14 1,346
10bps increase of liquidity spreads 1,958 66 1,433
50bps contraction on corporate bond spreads 1,958 71 1,433
25% increase in equity/property implied
volatilities 1,957 - 1,433
25% increase in swaption implied volatilities 1,958 64 1,433
10% decrease in discontinuance rates 2,055 48 1,473
10% decrease in maintenance expense 2,005 77 1,475
5% decrease in mortality/morbidity rates 1,971 66 1,434
5% decrease in mortality assumption 1,958 66 1,431
Minimum capital requirement 1,960 68 1,433
NHR capital diversification 1,969 70 1,453
99.93% confidence level NHR capital: 1,939 62 1,433
Sensitivity tests: Value of in-force business
GBPm
Total
covered Long Term Emerging Retail
At 31 December 2011 business Savings Markets Europe
Central assumptions 4,536 3,509 1,399 484
Effect on value of in-force
business of:
Economic assumption 1% increase 4,384 3,392 1,338 464
Economic assumption 1% decrease 4,673 3,611 1,443 498
Equity/property market value
10% increase 4,790 3,674 1,475 493
Equity/property market value
10% decrease 4,283 3,346 1,327 475
10bps increase of liquidity
spreads 4,545 3,519 1,409 484
50bps contraction on corporate
bond spreads 4,540 3,509 1,399 484
25% increase in equity/property
implied volatilities 4,513 3,488 1,379 484
25% increase in swaption
implied volatilities 4,521 3,497 1,388 483
10% decrease in discontinuance
rates 4,749 3,680 1,455 501
10% decrease in maintenance
expense 4,795 3,715 1,537 505
5% decrease in
mortality/morbidity rates 4,657 3,629 1,502 488
5% decrease in mortality
assumption 4,514 3,490 1,380 484
Minimum capital requirement 4,590 3,562 1,449 485
NHR capital diversification 4,606 3,555 1,424 494
99.93% confidence level NHR
capital: 4,478 3,456 1,372 477
Wealth
At 31 December 2011 Management Bermuda Nordic
Central assumptions 1,626 (121) 1,148
Effect on value of in-force business of:
Economic assumption 1% increase 1,590 (129) 1,121
Economic assumption 1% decrease 1,670 (114) 1,176
Equity/property market value 10% increase 1,706 (118) 1,234
Equity/property market value 10% decrease 1,544 (124) 1,061
10bps increase of liquidity spreads 1,626 (121) 1,147
50bps contraction on corporate bond spreads 1,626 (116) 1,147
25% increase in equity/property implied
volatilities 1,625 (122) 1,147
25% increase in swaption implied volatilities 1,626 (123) 1,147
10% decrease in discontinuance rates 1,724 (119) 1,188
10% decrease in maintenance expense 1,673 (110) 1,190
5% decrease in mortality/morbidity rates 1,639 (121) 1,149
5% decrease in mortality assumption 1,626 (121) 1,145
Minimum capital requirement 1,628 (119) 1,147
NHR capital diversification 1,637 (117) 1,168
99.93% confidence level NHR capital: 1,607 (125) 1,147
NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION
For the year ended 31 December 2011
D1: Sensitivity tests continued
Sensitivity tests: Value of new business
GBPm
Total
covered Long Term Emerging
At 31 December 2011 business Savings Markets
Central assumptions 233 177 99
Effect value of new business of:
Economic assumption 1% increase 215 160 92
Economic assumption 1% decrease 250 192 105
Equity/property market value 10% increase 244 183 99
Equity/property market value 10% decrease 223 172 99
10bps increase of liquidity spreads 234 178 100
50bps contraction on corporate bond spreads 233 177 99
25% increase in equity/property implied
volatilities 232 176 99
25% increase in swaption implied
volatilities 233 177 99
10% decrease in discontinuance rates 280 214 125
10% decrease in maintenance expense 255 196 111
5% decrease in mortality/morbidity rates 247 191 114
5% decrease in mortality assumption 233 177 99
VNB 10% increase in acquisition expenses 214 159 88
VNB on closing economic assumptions 251 195 107
Minimum capital requirement 238 182 104
NHR capital diversification 239 181 101
99.93% confidence level NHR capital: 227 171 97
Retail Wealth
At 31 December 2011 Europe Management Nordic
Central assumptions 8 70 56
Effect value of new business of:
Economic assumption 1% increase 5 63 55
Economic assumption 1% decrease 10 77 58
Equity/property market value 10% increase 8 76 61
Equity/property market value 10% decrease 8 65 51
10bps increase of liquidity spreads 8 70 56
50bps contraction on corporate bond spreads 8 70 56
25% increase in equity/property implied
volatilities 8 69 56
25% increase in swaption implied volatilities 8 70 56
10% decrease in discontinuance rates 9 80 66
10% decrease in maintenance expense 10 75 59
5% decrease in mortality/morbidity rates 7 70 56
5% decrease in mortality assumption 8 70 56
VNB 10% increase in acquisition expenses 6 65 55
VNB on closing economic assumptions 9 79 56
Minimum capital requirement 8 70 56
NHR capital diversification 9 71 58
99.93% confidence level NHR capital: 8 66 56
Sensitivity tests: Total covered business at 31 December 2010
GBPm
Value of Value of
in-force new
At 31 December 2010 MCEV business business
Central assumptions 7,515 4,164 172
Effect on Total covered business of:
Economic assumption 1% increase 7,259 3,847 180
Economic assumption 1% decrease 7,761 4,468 156
Equity/property market value 10% increase 7,567 4,216 176
Equity/property market value 10% decrease 7,886 4,441 180
10bps increase of liquidity spreads 7,147 3,895 165
50bps contraction on corporate bond spreads 7,815 4,444 172
25% increase in equity/property implied
volatilities 7,396 4,138 172
25% increase in swaption implied volatilities 7,423 4,072 147
10% decrease in discontinuance rates 7,747 4,415 211
10% decrease in maintenance expense 7,777 4,426 192
5% decrease in mortality/morbidity rates 7,654 4,304 185
5% decrease in mortality assumption 7,464 4,114 171
VNB 10% increase in acquisition expenses n/a n/a 154
VNB on closing economic assumptions n/a n/a 189
Minimum capital requirement 7,578 4,227 176
NHR capital diversification 7,565 4,215 175
99.93% confidence level NHR capital: 7,437 4,087 166
E1: Disposal of Nordic businesses
On 15 December 2011, the Company announced that it had entered into an agreement
to sell the assets and liabilities of its Nordic business unit to Skandia Liv
for the sum of SEK 22.5 billion (GBP2.1 billion). This transaction is still
subject to shareholder approval. As a result, the MCEV earnings of the Nordic
business have been included as discontinued within the MCEV results, including
restating the prior year. Nordic life business does however continue to
contribute to the covered business MCEV at 31 December 2011.
The tables below indicate the estimated impact to the Adjusted Group MCEV at 31
December 2011 as a result of the disposal of the Nordic businesses.
GBPm
Estimated Adjusted Group MCEV uplift from
proposed disposal of Nordic
Covered Other
business business Total
Headline purchase price - 2,100 2,100
Advisor fees and costs - (20) (20)
Nordic sale proceeds - 2,080 2,080
Removal of Nordic MCEV* (1,433) (329) (1,762)
Adjusted Group MCEV uplift (1,433) 1,751 318
Adjusted Group MCEV uplift per share
(pence)** (25.8) 31.5 5.7
* This includes the covered and non-covered business
** This excludes the impact of the share consolidation
On 3 February 2012 the Company announced that it intends to:
* return approximately GBP1 billion of net proceeds from the Disposal to
Ordinary Shareholders by means of a Special Dividend (equivalent to 18 pence per
Ordinary Share); and
* carry out a share consolidation on a 7 for 8 consolidation basis (designed to
keep the share price broadly unchanged).
Estimated Adjusted Group MCEV post disposal
of Nordic GBPm
Covered Other
business business Total
Adjusted Group MCEV per share
at 31 December 2011 129.7 64.4 194.1
Net sales proceeds* (25.8) 31.5 5.7
Special dividend - (18.0) (18.0)
Share consolidation 14.8 11.2 26.0
Adjusted Group MCEV per share at
31 December 2011 post disposal of Nordic 118.7 89.1 207.8
* Net of the removal of the Nordic MCEV
Date: 09/03/2012 09:02:01 Produced by the JSE SENS Department.
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