| Mon 20 Jun 2005, 8:18 | | Old Mutual - Presentation to investors and analyst |
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Old Mutual - Presentation to investors and analysts on European Embedded Value
OLD MUTUAL PLC
ISIN: GB0007389926
JSE Share code: OML
NSX share code: OLM
Issuer code: OLOML
Presentation to investors and analysts on European Embedded Value
Old Mutual plc (`the Group`) is today briefing analysts and investors on the
key impacts resulting from its adoption of the European Embedded Value (`EEV`)
principles for the enhancement of embedded value reporting and disclosure.
In summary, the overall adjusted embedded value of the Group has increased
marginally as at 31 December 2004. The adjusted net worth increases by GBP141
million, in respect of the non-life businesses, reflecting changes arising from
the adoption of IFRS. The Value of in-force business decreases by
GBP116 million reflecting the application of the EEV principles, in respect of
the life businesses. These changes equate to a net increase of GBP25 million
or 0.5% in the embedded value of the group as at 31 December 2004. The briefing
this afternoon focuses on these changes with particular emphasis on the Group`s
approach to the allowance for risk - a key requirement within the EEV
principles.
The briefing will take the form of a telephone dial-in call starting at 3pm UK
time (4pm SA time, 10am Eastern US time). The slide presentation to be used on
the call will be available to download on the website http://www.oldmutual.com
from 12pm UK time on Monday.
The call details are as follows:
SA: Toll-free 0800 994 090
UK: Toll-free 0800 953 1444
US: Toll-free 1866 220 1452
A copy of the restatement of embedded value supplementary information for the
year ended 31 December 2004, for the six months ended 30 June 2004 and for the
year ended 31 December 2003 is attached.
A recording will be available for 14 days following the analyst dial-in on the
20th. The details are as follows: Encore Replay Access Number: 6992561 #, UK
Dial In Number: 0845 245 5205, Std International Number +44 (0) 1452 55 00 00.
20 June 2005
ENQUIRIES:
Old Mutual plc UK
Investor Relations:
Malcolm Bell + 44 (0) 20 7002 7166
Media Relations:
Miranda Bellord + 44 (0) 20 7002 7133
Old Mutual plc SA
Investor Relations:
Deward Serfontein +27 (0) 21 509 8709
Media Relations:
Nad Pillay +27 (0) 21 504 8026
For further information about Old Mutual plc visit www.oldmutual.com
Old Mutual plc
RESTATEMENT OF EMBEDDED VALUE SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED 31
DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 UNDER THE EUROPEAN EMBEDDED
VALUE PRINCIPLES (`EEV`)
20 JUNE 2005
EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THE
TWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004
INDEX
1. INTRODUCTION ...........................................................
2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED
VALUE BASIS...........................................................
3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE .................
4. COMPONENTS OF GROUP EMBEDDED VALUE ..................................
5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE
ADJUSTED EMBEDDED VALUE ............................................
6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS ................
7. METHODOLOGY..........................................................
8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS ..................
9. VALUE OF NEW BUSINESS (after tax) ..................................
10. PRODUCT ANALYSIS OF NEW COVERED BUSINESS PREMIUMS ..................
11. ASSUMPTIONS ........................................................
12. ALTERNATIVE ASSUMPTIONS .............................................
13. AUDITORS` REPORT.....................................................
EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THE
TWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004
1. INTRODUCTION
The European Embedded Value (EEV) Principles were published in May 2004 by the
CFO Forum, a group representing the Chief Financial Officers of major European
insurers. The EEV Principles provide a framework intended to improve
comparability and transparency in embedded value reporting across Europe. Old
Mutual plc has decided to adopt the EEV Principles in respect of its financial
year ending 31 December 2005 and to re-state financial information for the full
year 2004 and the six months to 30 June 2004. The restatements are dealt with
in this document. The restatements additionally detail sensitivities of the
embedded value of the covered business to several key factors.
The Achieved Profits basis of reporting previously adopted by Old Mutual
already complied with the majority of the EEV Principles. A key requirement of
the EEV Principles, and the major driver of changes, was the inclusion of an
appropriate allowance for the aggregate risk in the covered business (i.e. the
long-term life business in the primary financial statements, which includes the
healthcare business).
Risk is allowed for through the level and cost of required capital, explicit
time-value (stochastic) reserves to cover the cost of financial options and
guarantees and the risk discount rate.
The level of required capital for the covered business reflects the level of
capital considered by the Directors to be appropriate to manage the business
allowing for local or group statutory requirements, capital allocated in terms
of our internal capital management and the level of capital required by rating
agencies in respect of our North American business in order to maintain our
desired credit rating. At 31 December 2004, the levels of required capital were
equivalent to 157% and 282% of the minimum local statutory requirements for
Africa and North America respectively.
Allowance has been made for the cost (intrinsic value) of financial options and
guarantees to policyholders in the local statutory reserves according to local
requirements. In South Africa an investment guarantee reserve on a stochastic
basis is included in the local statutory reserves. A deduction from the value
of the in-force business has been made to allow for the time-value (stochastic)
cost of policyholder financial options and guarantees, to the extent that this
is not already included in the statutory reserves. At 31 December 2004 this
deduction amounted to GBP74m.
Having determined the level and cost of required capital and the shareholders`
cost of financial options and guarantees, the risk discount rate is the lever
to ensure that appropriate allowance is made for all the risks in the business.
Old Mutual, advised by the actuarial consultants Tillinghast, decided to adopt
a bottom-up market consistent approach for setting its risk discount rates.
Under a market consistent valuation, each cash flow is valued on a basis
consistent with the way the market values such cash flows. Thus, risk-free cash
flows are discounted at a risk-free rate and equity cash-flows at an equity
rate. Allowance is made for non-market risks in the best-estimate assumptions
and frictional cost of capital. Separate risk discount rates have been
calculated for each of the geographic life businesses. The risk margins for the
African and North American covered businesses are 2.3% p.a., and 3.2% p.a.
respectively.
The EEV Principles require best-estimate assumptions, consistency between
assumptions and active review. The outcome of a review of the economic
assumptions was to increase the gross of tax equity risk premium in South
Africa from 2% p.a. to 3.5% p.a. to better recognise the level of historical
equity risk premiums and the future growth prospects of the economy there.
Following a review of expense assumptions in our North American business, a
higher allocation has been made to maintenance expenses. The expense
assumptions in respect of our South African business now also include an annual
allowance for one-off project costs. GBP6.6m of our unallocated head-office
expenses have been allocated to the covered business and included in the value
of in-force calculations for South Africa and North America.
To clarify terminology, the embedded value of the covered business is the sum
of the shareholders` net worth in respect of the covered business, and the
value of the in-force covered business. The group embedded value includes the
value of all other business at the book value detailed in the primary financial
statements, on an IFRS basis. The adjusted embedded value, a measure used by
management to assess the shareholders` interest in the value of the group,
includes the group`s listed banking and general insurance subsidiaries at
market value as well as the value of own shares held in policyholders` funds.
A comparison of the adjusted embedded value on an achieved profits basis with
that on an EEV basis and a table detailing the impact of the EEV Principles and
IFRS on the adjusted embedded value are set out below.
The overall impact on adjusted embedded value at 31 December 2004 is a 0.5%
increase from 139.1p to 139.7p. The value of the in-force business, which is
affected by the allowance for risk and inclusion of a proportion of unallocated
head-office expenses, reduces by 7%. The adjusted net worth increases by 4%, as
a result of the impact of the adoption of IFRS on our non-life businesses.
The changes that have principally caused this increase are the change to
dividend recognition and the change in goodwill amortisation in respect of the
asset management businesses.
The adjusted operating profit for 2004 has increased by 3% (2% reduction, in
respect of the covered business), with the return on adjusted embedded value
(ROEV) increasing from 19.4% to 19.9%. The most significant items affecting the
operating profit of the covered business resulted from the effect of the
increase of the equity risk premium on the expected return on capital in South
Africa, and the lower value of new business in North America.
A reconciliation of the value of new business and new business margins showing
the impact of moving from the achieved profits basis to the EEV basis is also
detailed below. The total value of new business has reduced by 15%, with the
new business margin on an APE basis reducing from 23% to 18%. The most
significant factor impacting the value of new business is the allowance for
risk.
1. INTRODUCTION continued
Adjusted embedded value on both the achieved profits and EEV basis
GBPm
At 31 December 2004
Achieved EEV
Profits
Shareholders` adjusted net worth 2,525 2,911
Equity shareholders` funds 3,245 3,264
Statutory solvency adjustments:
North America (716) (577)
United Kingdom (19) (7)
Africa - 216
South Africa discounting CGT adjustment 15 15
Value of in-force business 1,592 1,476
Value of in-force business before items 1,871 1,918
listed below
Cost of capital (279) (368)
Additional cost of financial options and - (74)
guarantees
Minority interest in value of in-force (2) (2)
business
Achieved profits equity shareholders` funds/ 4,115 4,385
EEV Group embedded value
Pro-forma adjustment to bring Group
investments to market value
Achieved profits / EEV equity shareholders` 4,115 4,385
funds
Adjustment to bring listed subsidiaries to 876 631
market value
Adjustment to market value of own shares 368 368
held in policyholders` funds
Adjusted embedded value 5,359 5,384
pence
Adjusted embedded value per share 139.1 139.7
Number of shares (millions) 3,854 3,854
At 30 June 2004
Achieved EEV
Profits
Shareholders` adjusted net worth 2,294 2,573
Equity shareholders` funds 2,741 2,796
Statutory solvency adjustments:
North America (433) (370)
United Kingdom (18) (13)
Africa - 156
South Africa discounting CGT adjustment 4 4
Value of in-force business 1,288 1,231
Value of in-force business before items 1,466 1,482
listed below
Cost of capital (178) (185)
Additional cost of financial options and - (66)
guarantees
Minority interest in value of in-force (2) (2)
business
Achieved profits equity shareholders` funds/ 3,580 3,802
EEV Group embedded value
Pro-forma adjustment to bring Group
investments to market value
Achieved profits / EEV equity shareholders` 3,580 3,802
funds
Adjustment to bring listed subsidiaries to 488 272
market value
Adjustment to market value of own shares 312 312
held in policyholders` funds
Adjusted embedded value 4,380 4,386
pence
Adjusted embedded value per share 113.8 114.0
Number of shares (millions) 3,849 3,849
At 1 January 2004
Achieved EEV
Profits
Shareholders` adjusted net worth 2,178 2,409
Equity shareholders` funds 2,754 2,670
Statutory solvency adjustments:
North America (566) (408)
United Kingdom (17) (9)
Africa - 149
South Africa discounting CGT adjustment 7 7
Value of in-force business 1,276 1,234
Value of in-force business before items 1,450 1,464
listed below
Cost of capital (174) (172)
Additional cost of financial options and - (58)
guarantees
Minority interest in value of in-force (2) (2)
business
Achieved profits equity shareholders` funds/ 3,452 3,641
EEV Group embedded value
Pro-forma adjustment to bring Group
investments to market value
Achieved profits / EEV equity shareholders` 3,452 3,641
funds
Adjustment to bring listed subsidiaries to 288 190
market value
Adjustment to market value of own shares 275 275
held in policyholders` funds
Adjusted embedded value 4,015 4,106
pence
Adjusted embedded value per share 104.6 107.0
Number of shares (millions) 3,837 3,837
1. INTRODUCTION continued
Impact of EEV Principles on the adjusted embedded value
At 31 December 2004
Africa North UK & ROW Total GBPm
America
Value of in-force life
business (achieved profits) * 1,050 512 28 1,590
Impact of changes in the
amount of and cost of required
capital (113) (49) (3) (165)
Additional time-value cost of
financial options and
guarantees (49) (25) (74)
Impact of change in the risk
discount rate and economic
assumptions 138 24 162
Impact of extending the
covered business to include
Healthcare 14 14
Impact of reallocation of head
office and other expenses (35) (18) (53)
Value of in-force covered
business (EEV) 1,005 444 25 1,474
Adjusted net worth (achieved
profits) 2,525
Adjustments in respect of
listed subsidiaries and own
shares ** 1,244
IFRS impact on non-life
businesses 141
Adjusted embedded value (EEV) 5,384
At 30 June 2004
Africa North UK & ROW Total GBPm
America
Value of in-force life
business (achieved profits) * 846 415 28 1,289
Impact of changes in the
amount of and cost of required
capital (53) (43) (3) (99)
Additional time-value cost of
financial options and
guarantees (44) (22) (66)
Impact of change in the risk
discount rate and economic
assumptions 128 21 149
Impact of extending the
covered business to include
Healthcare 9 9
Impact of reallocation of head
office and other expenses (34) (19) (53)
Value of in-force covered
business (EEV) 852 352 25 1,229
Adjusted net worth (achieved
profits) 2,294
Adjustments in respect of
listed subsidiaries and own
shares ** 800
IFRS impact on non-life
businesses 63
Adjusted embedded value (EEV) 4,386
At 1 January 2004
Africa North UK & ROW Total GBPm
America
Value of in-force life
business (achieved profits) * 853 393 28 1,274
Impact of changes in the
amount of and cost of required
capital (66) (34) (3) (103)
Additional time-value cost of
financial options and
guarantees (40) (18) (58)
Impact of change in the risk
discount rate and economic
assumptions 149 18 167
Impact of extending the
covered business to include
Healthcare 6 6
Impact of reallocation of head
office and other expenses (35) (19) (54)
Value of in-force covered
business (EEV) 867 340 25 1,232
Adjusted net worth (achieved
profits) ** 2,178
Adjustments in respect of
listed subsidiaries and own
shares ** 563
IFRS impact on non-life
businesses 133
Adjusted embedded value (EEV) 4,106
* Net of minority interests
** The adjustments in respect of listed subsidiaries and own shares comprise
the Achieved Profits market value uplift in respect of the Group`s listed
Banking and General insurance subsidiaries and the market value of own shares
held in policyholders` funds.
1. INTRODUCTION continued
Impact of EEV Principles on the adjusted operating profit before tax in respect
of the covered business
Year to 31 December 2004
Africa North UK & Total
America ROW GBPm
Adjusted operating profit (achieved 640 104 5 749
profits)
Impact on:
Value of new business (3) (24) - (27)
Experience variances - - - -
Operating assumption changes 16 - 16
Other (1) (3) (1) (5)
Adjusted operating profit (EEV) 652 77 4 733
Six months to 30 June 2004
Africa North UK & Total
America ROW GBPm
Adjusted operating profit (achieved 257 69 0 326
profits)
Impact on:
Value of new business 3 (13) - (10)
Experience variances 18 - - 18
Operating assumption changes - - - -
Other 3 (3) - 0
Adjusted operating profit (EEV) 281 53 0 334
Impact of EEV Principles on the value of new business after tax
Year to 31 December 2004
Africa North UK & Total
America ROW GBPm
Value of new business after tax 66 62 (1) 127
(achieved profits)
Impact of change in the risk discount 3 4 - 7
rate and economic assumptions
Impact of changes in the cost of (7) (15) - (22)
required capital
Additional time-value reserves for (1) (7) - (8)
policyholder options and guarantees
Impact of extending the covered 4 - - 4
business to include Healthcare
Expenses (1) 1 -
Value of new business after tax (EEV) 64 45 (1) 108
New business APE (achieved profits) 258 274 14 546
Add: Healthcare 41 - - 41
New business APE (EEV) 299 274 14 587
Present value of new business 1,910 2,433 127 4,470
premiums (EEV)
New business margins after tax %
APE Margin (achieved profits) 26% 23% (7%) 23%
APE Margin (EEV) 21% 16% (7%) 18%
PVNBP Margin (EEV) 3.4% 1.8% (0.8%) 2.4%
Six months to 30 June 2004
Africa North UK & Total
America ROW GBPm
Value of new business after tax 24 30 (1) 53
(achieved profits)
Impact of change in the risk discount 2 2 - 4
rate and economic assumptions
Impact of changes in the cost of (2) (9) - (11)
required capital
Additional time-value reserves for (3) - (3)
policyholder options and guarantees
Impact of extending the covered 3 - - 3
business to include Healthcare
Expenses (1) 1 -
Value of new business after tax (EEV) 26 21 (1) 46
New business APE (achieved profits) 117 138 6 261
Add: Healthcare 23 - - 23
New business APE (EEV) 140 138 6 284
Present value of new business 863 1,249 55 2,167
premiums (EEV)
New business margins after tax %
APE Margin (achieved profits) 20% 22% (17%) 20%
APE Margin (EEV) 19% 15% (17%) 16%
PVNBP Margin (EEV) 3.0% 1.7% (1.8%) 2.1%
2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS
Year to 31 Six months to
December 2004 30 June 2004
GBPm GBPm
Africa
Covered business 652 281
Asset management 54 22
Banking 241 54
General insurance 101 52
1,048 409
North America
Covered business 77 53
Asset management 87 47
164 100
United Kingdom & Rest of World
Covered business 4 -
Asset management (12) 7
Banking - 11
(8) 18
Other shareholders` net expenses (65) (30)
Adjusted operating profit* 1,139 497
Goodwill amortisation and impairments (33) (33)
(Loss)/profit on disposal of subsidiaries (27) 12
Short term fluctuations in investment
return (including economic
assumption changes)
Covered business 189 (118)
Other 39 (16)
Other covered business changes ** (148) (98)
Income from hedging activities that do not
qualify for hedge accounting 31 5
Investment return adjustment for own shares
held in policyholders` funds (94) (22)
Fines and penalties (49) (49)
Operating profit before tax and minority
interests 1,047 178
Income tax expenses (291) (53)
Profit on ordinary activities after tax 756 125
Minority interests - ordinary shares (74) (24)
- preferred securities (59) (27)
Profit for the financial period
attributable to equity holders 623 74
2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED
VALUE BASIS continued
The adjusted operating profit on an after- tax and minority interests basis is
determined as follows:
Year to 31 Six months to
December 2004 30 June 2004
GBPm GBPm
Adjusted operating profit * 1,139 497
Tax on adjusted operating profit (235) (133)
904 364
Minority interests - ordinary shares (94) (36)
- preferred securities (59) (27)
Adjusted operating profit after tax and
minority interests 751 301
Embedded value earnings attributable to
equity shareholders Year to 31 Six months to
December 2004 30 June 2004
Earnings per share pence
Adjusted operating earnings per share * 20.1 8.1
Basic earnings per share 18.2 2.2
Adjusted weighted average number of shares
- millions 3,738 3,735
Weighted average number of shares - millions 3,422 3,419
Year to 31 Six months to
December 2004 30 June 2004
GBPm GBPm
Adjusted operating profit for the covered
business * 733 334
Africa 652 281
North America 77 53
United Kingdom & Rest of World 4 -
Tax on adjusted operating profit for the
covered business 203 101
Africa 180 85
North America 23 16
United Kingdom & Rest of World - -
Adjusted operating profit after tax for the
covered business * 530 233
Africa 472 196
North America 54 37
United Kingdom & Rest of World 4 -
Reconciliation of tax on adjusted
operating profit
Tax on adjusted operating profit for
the covered business 203 101
Tax on adjusted operating profit for
other business 32 32
Tax on adjusted operating profit 235 133
*For life assurance and general insurance business, EEV adjusted operating
profit is based on the expected investment return and includes investment
returns on own shares held within policyholders` funds. For all businesses,
adjusted operating profit excludes impairments, fines and penalties, income
from hedging activities that do not qualify for hedge accounting, and
(loss)/profit on disposal of subsidiaries. Adjusted operating earnings per
share are similarly based, but are stated after tax and minority interests,
with the calculation of the weighted average number of shares including own
shares held in policyholders` funds.
** Refer to analysis of covered business embedded value results in Section 8.
All segmental analysis within this Summary Consolidated Income Statement has
been prepared on a gross of inter- segment transaction basis.
3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE
Year to 31 Six months to
December 2004 30 June 2004
GBPm GBPm
Group embedded value at the beginning of
the year 3,641 3,641
Profit for the financial period 623 74
Foreign exchange movements 116 171
Dividends paid (166) (106)
Purchase/Sale of treasury shares 25 (5)
Exercise of share options 15 8
Fair Value gains/(losses) 64 40
Fair Value equity settled share options 3 1
Shadow accounting (9) -
Cash flow hedge amortisation (4) (2)
Aggregate tax effect of items taken
directly to or transferred into equity - (6)
Other 77 (14)
Net increase in Group embedded value 744 161
Group embedded value at the end of the
period 4,385 3,802
4. COMPONENTS OF GROUP EMBEDDED VALUE
At 31 December At 30 June
2004 2004
GBPm GBPm
Shareholders` adjusted net worth 2,911 2,573
Equity shareholders` funds 3,264 2,796
Adjustment to include African life
subsidiaries on a statutory 216 156
solvency basis
Adjustment to include North American life
subsidiaries on a (577) (370)
statutory solvency basis
Adjustment to include UK & Rest of World life
subsidiaries on (7) (13)
a statutory solvency basis
Adjustment for discounting CGT 15 4
Value of in-force business 1,474 1,229
Value of in-force business before items
listed below 1,918 1,482
Additional time-value reserves for financial
options and (74) (66)
guarantees
Cost of required capital (368) (185)
Minority interest in value of in-force
business (2) (2)
Group embedded value 4,385 3,802
Pro-forma adjustments to bring Group
investments to market value
Group embedded value 4,385 3,802
Adjustment to bring listed subsidiaries to
market value 631 272
Adjustment for market value of own shares
held in policyholders` 368 312
funds
Adjusted embedded value 5,384 4,386
p p
Adjusted embedded value per share 139.7 114.0
Return on adjusted embedded value (ROEV) %
p.a. 19.9% 16.2%
Number of shares in issue at the end of the
period including own shares
held in policyholders` funds - millions 3,854 3,849
The ROEV is calculated as the adjusted operating profit after tax and
minorities of GBP751m (GBP301m) together with an expected equity return on the
pro-forma adjustment of GBP62m (GBP28m)divided by the opening adjusted embedded
value increased/(reduced) by the weighted value of any capital
raised/(dividends paid).
5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE
ADJUSTED EMBEDDED VALUE
At 31 December 2004 At 30 June 2004
GBPm GBPm
Embedded value of the Covered
Business 3,555 2,944
Adjusted net worth 2,081 1,715
Value of in-force business * 1,474 1,229
Adjusted Net Worth Asset Management
Businesses 990 969
Africa 101 132
North America 889 837
United Kingdom & Rest of World - -
Market value Banking 1,442 1,102
Africa 1,442 1,102
United Kingdom & Rest of World - -
Market value General Insurance
Africa 486 405
Net other businesses 95 81
Preferred securities (385) (405)
Debt (799) (710)
Rand denominated (60) (59)
USD denominated (687) (651)
GBP denominated (52) -
Adjusted embedded value 5,384 4,386
* Net of minority interests.
The shareholders` adjusted net worth includes goodwill relating to the
North American subsidiaries of GBP59 million (June 2004: GBP62 million).
6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS
At 31 December 2004 At 30 June 2004
GBPm GBPm
Embedded value of the covered
business 3,555 2,944
Adjusted net worth 2,081 1,715
Value of in-force business 1,474 1,229
Africa
Adjusted net worth 1,537 1,224
Required capital (equivalent to
157% of Statutory 1,595 1,480
minimum capital at 31 December 2004)
Free surplus (58) (256)
Value of in-force business 1,005 852
Value of in-force business before
items listed below 1,341 1,011
Additional time-value reserves for
financial options and (49) (44)
guarantees *
Cost of required capital (287) (115)
North America
Adjusted net worth 515 468
Required capital (equivalent to
282% of Statutory 451 406
minimum capital at 31 December 2004)
Free surplus 64 62
Value of in-force business 444 352
Value of in-force business before
items listed below 547 441
Additional time-value reserves for
financial options and (25) (22)
guarantees
Cost of required capital (78) (67)
United Kingdom and Rest of World
Adjusted net worth 29 23
Required capital 10 10
Free surplus 19 13
Value of in-force business 25 25
Value of in-force business before
items listed below 28 28
Additional time-value reserves for
financial options and - -
guarantees
Cost of required capital (3) (3)
* These time-value reserves in respect of financial options and guarantees are
in addition to those already held within the policyholder liabilities.
The required capital at 1 January 2004 in respect of the African, North
American and UK & ROW covered business was GBP1,608m (equivalent to 157% of the
Statutory minimum capital),GBP391m (equivalent to 256% of the Statutory minimum
capital) and GBP10m respectively.
7. METHODOLOGY
Basis of preparation
This supplementary information has been prepared in accordance with the
European Embedded Value (EEV) Principles issued in May 2004 by the European
Chief Financial Officers` Forum. The Group has replaced the Achieved Profits
basis with the EEV basis for the covered business, and figures for 31 December
2004 and 30 June 2004 have been restated accordingly.
Covered business is currently defined as the long-term business in the primary
financial statements. This business covers life assurance, long-term healthcare
and accident insurance, savings, pensions and annuity business written by the
life assurance subsidiaries. The results of Group companies providing
administration and distribution services have been included to the extent that
they relate to the covered business. The results do not include services
provided by Group investment management companies. Unallocated Group holding
company expenses have been included to the extent that they relate to the
covered business.
The Group has prepared the consolidated EEV supplementary information at 31
December 2004, in accordance with the EEV Principles (`the preliminary
supplementary information`) as set out on pages 1 to 29 to establish the EEV
financial position and results of operations of the Group necessary to provide
the comparative supplementary information expected to be included in the
Group`s EEV supplementary information for the year to 31 December 2005. The
preliminary supplementary information should be read in conjunction with the
Group`s preliminary IFRS information contained within its press release dated 3
May 2005.
The preliminary IFRS financial information is based on the UK GAAP financial
statements approved by the Board on 28 February 2005, and adjusted to comply
with IFRS. In accordance with IFRS 1 there have been no adjustments to the
estimates made at the time of the preparation of the UK GAAP financial
statements.
The Board acknowledges its responsibility for the preparation of the
preliminary supplementary information which has been prepared in accordance
with the EEV Principles using the approaches expected to be adopted when the
Board prepares the Group`s first set of EEV supplementary information for the
year to 31 December 2005. The Board delegated approval of the preliminary
supplementary information to its Actuarial Review Committee, which approved the
preliminary supplementary information on 17 June 2005.
The preliminary supplementary information may require adjustment before its
inclusion as comparative information in the EEV supplementary information in
the Group`s EEV supplementary information for the year to 31 December 2005.
This is because of the continuing work of the IASB and possible amendments to
the interpretative guidance and the Group`s accounting policies. Any such
changes or adjustments would affect only the non-covered business, as the
treatment of covered business is governed by the EEV Principles.
The treatment within this supplementary information of all business other than
the covered business is unchanged from the primary financial statements on an
IFRS basis.
Under the EEV methodology, profit is recognised as it is earned over the life
of products defined within the covered business.
The embedded value of the covered business is the sum of the shareholders` net
worth in respect of the covered business, and the value of the in-force covered
business. The group embedded value includes the value of all other business at
the book value detailed in the primary financial statements on an IFRS basis.
The adjusted embedded value, a measure used by management to assess the
shareholders` interest in the value of the Group, includes the Group`s listed
banking and general insurance subsidiaries at market value as well as the value
of own shares held in policyholders` funds.
The net worth of the covered business is the market value of shareholders`
assets held in respect of the covered business, and consists of the required
capital and free surplus. The level of required capital of the covered business
reflects the level of capital considered by the Directors to be appropriate to
manage the business allowing for minimum local or Group statutory requirements
(or equivalent where there is no local requirement), our internal assessment of
the market, insurance and operational risk inherent in the underlying products
and the level of capital required by rating agencies in respect of our North
American business in order to maintain the desired credit rating.
The level of required capital is on average equivalent to 157%, and 282% of the
minimum local statutory requirements in Africa and North America respectively
at 31 December 2004. The free surplus comprises the market value of assets
allocated to the covered business in excess of the required capital. The
required capital in respect of the South African 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 value of in-force covered business is the present value at the appropriate
risk discount rate (which incorporates a risk margin) of the statutory
distributable profits to shareholders projected to arise from the in-force
covered business on a best-estimate basis, less a deduction for the cost of
holding the required level of capital.
Statutory distributable profit arises from the difference between amounts
charged to policyholders for guarantees, expenses and insurance and the actual
experience of these items, together with the investment return earned on
shareholders` assets.
Allowance has been made for the cost (intrinsic value) of financial options and
guarantees to policyholders in the local statutory reserves according to local
requirements. In South Africa an investment guarantee reserve on a stochastic
basis is included in the local statutory reserves. A deduction from the value
of in-force business has been made to allow for the impact of future
variability of investment returns on the cost of policyholder financial options
and guarantees (time- value) to the extent that it is not already included in
the statutory reserves. This time value has been determined using stochastic
modelling techniques and 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. In the
generated economic scenarios allowance is made, where appropriate, for the
effect of management and or policyholder actions in different circumstances.
The risk margin in each geography above the risk-free rates for the African and
North American life covered businesses were 2.3%p.a. and 3.2%p.a. respectively.
The Directors believe that the embedded value of the covered business is
broadly market-consistent.
8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS
(after tax)
Year to 31 December 2004 GBPm
Total covered business Adjusted Value of Total
net worth in-force
Embedded value of the covered business 1,832 1,232 3,064
at the beginning of the year
New business contribution (103) 211 108
Expected return on existing business - - 148 148
return on VIF
Expected return on existing business - 194 (194) -
transfer to net worth
Experience variances 13 35 48
Operating assumption changes 15 48 63
Expected return on adjusted net worth 163 - 163
Adjusted operating profit after tax 282 248 530
Investment return variances on value of 30 25 55
in-force
Investment return variances on adjusted 72 - 72
net worth
Economic assumption changes - 51 51
Effect of changes in and cost of required - (143) (143)
capital
Profit after tax 384 181 565
Exchange rate movements 104 61 165
Capital injected to covered business 164 - 164
Amounts released from covered business (122) - (122)
Transfer from covered business to other (281) - (281)
segments *
Embedded value of the covered business 2,081 1,474 3,555
at the end of the period
Six months to 30 June 2004 GBPm
Total covered business
