RNS Number : 7273A
Old Mutual PLC
06 August 2008
European Embedded Value basis supplementary information
For the six months ended 30 June 2008
Income statement on a European embedded value basis
£m
6 months ended 6 months ended Year ended
30 June 30 June 31
2008 2007 December
Restated 2007
South Africa
Covered business 224 267 345
Asset management 55 54 98
Banking 320 288 622
599 609 1,065
United States
Covered business (6) (54) 63
Asset management 70 76 162
64 22 225
Europe
Covered business 345 176 350
Asset management 7 12 26
Banking 13 8 14
365 196 390
Other (8) 2 2
1,020 829 1,682
Finance costs (71) (69) (119)
Other shareholders' (12) (14) (31)
income/(expenses)
Adjusted operating profit before 937 746 1,532
tax*
Adjusting items (556) 176 315
EEV profit before tax (net of 381 922 1,847
income tax attributable to
policyholder returns)
Income tax attributable to (42) (164) (472)
shareholders
EEV profit for the financial 339 758 1,375
period after tax from continuing
operations
EEV profit for the financial 13 36 57
period after tax from
discontinued operations
EEV profit for the financial 352 794 1,432
period after tax
EEV profit for the financial
period attributable to:
Equity holders of the parent 216 667 1,155
Minority interests
Continuing ordinary shares 107 94 213
Discontinued ordinary shares 3 9 14
Preferred securities 26 24 50
EEV profit for the financial 352 794 1,432
period after tax
* For long-term business and general insurance businesses, adjusted operating profit is
based on a long-term investment return,
includes investment returns on life funds' investments in Group equity and debt instruments,
and is stated net of income tax attributable to
policyholder returns. For the US Asset Management business it includes compensation costs in
respect of certain long-term incentive schemes
defined as minority interests in accordance with IFRS. For all businesses, adjusted operating
profit excludes goodwill impairment, the
impact of acquisition accounting, put revaluations related to long-term incentive schemes, the
impact of closure of unclaimed shares trusts,
profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments,
dividends declared to holders of perpetual
preferred callable securities, and fair value (profits)/losses on certain Group debt
movements.
Income statement on a European embedded value basis continued
Adjusted operating profit after £m
tax attributable to ordinary
equity holders
6 months ended 6 months ended Year ended
30 June 30 June 31
2008 2007 December
Restated 2007
Adjusted operating profit before 937 746 1,532
tax
Tax on adjusted operating profit (243) (165) (366)
Adjusted operating profit after 694 581 1,166
tax from continuing operations
Adjusted operating profit after 23 26 61
tax from discontinued operations
Adjusted operating profit after 717 607 1,227
tax
Minority interests
Continuing ordinary shares (115) (106) (225)
Discontinued ordinary shares (7) (8) (20)
Preferred securities (26) (24) (50)
Adjusted operating profit after 569 469 932
tax attributable to ordinary
equity holders
Adjusted operating earnings per
share
Based on adjusted operating 10.5 8.3 16.5
profit from continuing operations
(pence)
Based on adjusted operating 0.3 0.4 0.7
profit from discontinued
operations (pence)
Adjusted operating earnings per 10.8 8.7 17.2
share* (pence)
Basic EEV earnings per share
Based on EEV profit from 4.1 12.4 21.5
continuing operations (pence)
Based on EEV profit from 0.2 0.5 0.8
discontinued operations (pence)
Basic EEV earnings per ordinary 4.3 12.9 22.3
share (pence)
Adjusted weighted average number 5,245 5,407 5,411
of shares - millions
Weighted average number of shares 5,010 5,172 5,176
- millions
Adjusted operating profit of the covered business
Adjusted operating profit for the covered business 563 389 758
South Africa 224 267 345
United States (6) (54) 63
Europe 345 176 350
Tax on adjusted operating profit for the covered business 165 75 154
South Africa 54 75 75
United States 30 (18) 21
Europe 81 18 58
Adjusted operating profit after tax for the covered business 398 314 604
South Africa 170 192 270
United States (36) (36) 42
Europe 264 158 292
Tax on adjusted operating profit comprises
Covered business 165 75 154
Other business 78 90 212
Tax on adjusted operating profit 243 165 366
* Adjusted operating earnings per share is calculated on the same basis as adjusted
operating profit, but is stated after tax and
minority interests. It excludes income attributable to Black Economic Empowerment trusts of
listed subsidiaries. The calculation of the
adjusted weighted average number of shares includes own shares held in policyholders' funds
and Black Economic Empowerment trusts.
Notes to the European embedded value basis supplementary information
For the six months ended 30 June 2008
1 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 CFO Forum and the additional EEV guidance issued in October 2005. The directors
acknowledge their responsibility for the
preparation of this supplementary information.
The results for the six months ended 30 June 2008 and the position at that date (other
than where stated) have been prepared on the same
basis as that used in the 31 December 2007 EEV supplementary statements.
2 Adjustments applied in determining adjusted operating profit
Analysis of adjusting items £m
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2008 2007 2007
Restated
Income/(expense)
Goodwill impairment and (5) 5 (11)
amortisation of non-covered
business acquired intangible
assets
Profit on disposal of 62 7 25
subsidiaries, associated
undertakings and strategic
investments
Short-term fluctuations in (679) 151 206
investment returns (including
economic assumption
changes) for the covered
business
Cost of capital methodology and (1) 3 14
modelling changes
Material revision to actuarial - - -
models
Dividends declared to holders of 22 22 40
perpetual preferred callable
securities
Closure of unclaimed share - (12) 1
trusts
US Asset Management equity plans 5 - 11
and minority holders
Fair value gains on Group debt 40 - 29
instruments
Adjusting items (556) 176 315
3 Reconciliation of movements in Group embedded value
£m
6 months ended 6 months ended Year ended
30 June 30 June 31
2008 2007 December
2007
Group embedded value at beginning 7,869 7,117 7,117
of the period
Opening adjustments (67) (67)
Restated Group embedded value at 7,869 7,050 7,050
beginning of the period
Change in equity arising in the
period
Fair value gains/(losses) (2) 2 21
Net investment hedge (5) 31 (13)
Currency translation (414) (212) 116
differences/exchange differences
on translating foreign
operations
Aggregate tax effects of items 6 2 13
taken directly to or transferred
from equity
Other movements (48) 60 29
Net income recognised directly (463) (117) 166
into equity
Profit for the period 216 667 1,155
Total recognised income and (247) 550 1,321
expense for the period
Dividend for the period (249) (220) (373)
Share buy back (174) - (177)
Net issue of ordinary share 4 - 3
capital by the Company
Exercise of share options 3 3 9
Fair value equity settled share 17 18 36
options
Group embedded value at end of 7,223 7,401 7,869
the period
4 Components of Group embedded value
£m
At At At
30 June 30 June 31 December
2007 2007
2008
Adjusted net worth attributable to ordinary 3,106 3,106 3,431
equity holders of the parent
Equity 7,802 7,359 7,961
Adjustment to include long-term business on a
statutory solvency basis:
South Africa 141 142 147
United States (527) (665) (621)
Europe (2,584) (2,411) (2,581)
Adjustment for market value of life funds' 230 491 428
investments in Group equity and debt
instruments held in life funds
Adjustment to remove perpetual preferred (688) (688) (688)
callable securities and accrued dividends
Adjustment to exclude acquisition goodwill
from the covered business:
United States (57) (56) (60)
Europe (1,211) (1,066) (1,155)
Value of in-force business 4,117 4,295 4,438
Value of in-force business before items 4,565 4,712 4,872
listed below
Additional time-value of financial options (50) (49) (50)
and guarantees
Cost of required capital (392) (342) (378)
Minority interest in value of in-force (6) (26) (6)
Group embedded value 7,223 7,401 7,869
Group embedded value per share (pence) 136.9 134.5 145.6
Return on Group embedded value (ROEV) per 14.0% 14.5% 13.2%
annum
Number of shares in issue - millions 5,275 5,505 5,405
The adjustments to include long-term business on a statutory solvency basis reflect the
difference between the net worth of each
business on the statutory basis (as required by the local regulator) and their portion of the
Group's consolidated equity shareholders'
funds. In South Africa, these values exclude items that are eliminated or shown separately on
consolidation (such as Nedbank, Mutual &
Federal and inter company loans). For some European territories this adjustment excludes the
write-off of deferred acquisition costs, which
remain part of adjusted net worth for EEV purposes.
The ROEV is calculated as the adjusted operating profit after tax and minority interests
of £569 million (six months ended 30 June 2007:
£469 million, year ended 31 December 2007: £932 million) divided by the opening group
embedded value. The operating assumption changes of
£33 million (six months ended 30 June 2007: £84 million) are not annualised.
The impact of marking all debt to market value is an increase of £241 million, i.e. 4.6p
per share (six months ended 30 June 2007: £122
million, i.e. 2.2p per share, year ended 31 December 2007: £120 million, i.e. 2.2p per
share).
5. Components of adjusted Group embedded value
£m
At At At
30 30 31 December
June June 2007
2008 2007
Pro forma adjustments to bring Group investments
to market value
Group embedded value 7,223 7,401 7,869
Adjustment to bring listed subsidiaries to 111 1,163 1,163
market value
South Africa banking business 25 951 957
South Africa general insurance business 86 212 206
Adjustment for present value of Black Economic 135 179 179
Empowerment scheme deferred consideration
Adjustment for value of own shares in ESOP 83 153 158
schemes*
Adjusted Group embedded value 7,552 8,896 9,369
Adjusted Group embedded value per share (pence) 143.2 161.6 173.3
Number of shares in issue - millions 5,275 5,505 5,405
* Includes adjustment for value of excess own shares in employee share scheme trusts.
6 Reconciliation of Group embedded value of the covered business to the adjusted Group
embedded value
£m
At At At
30 June 30 June 31 December
2007 2007
2008
Embedded value of the covered business 6,153 6,820 6,861
Adjusted net worth* 2,036 2,525 2,423
Value of in-force business** 4,117 4,295 4,438
Adjusted net worth of the asset management 1,705 1,556 1,637
business
South Africa 233 205 232
United States 1,297 1,209 1,245
Europe 175 142 160
Value of the banking business 1,666 2,443 2,716
South Africa (market value) 1,435 2,178 2,411
Europe (adjusted net worth) 231 265 305
Market value of the general insurance
business
South Africa 268 420 405
Net other business 14 (78) (35)
Adjustment for present value of Black 135 179 179
Economic Empowerment scheme deferred
consideration
Adjustment for value of own shares in ESOP 83 153 158
schemes
Perpetual preferred securities (US$ (458) (458) (458)
denominated)
Perpetual preferred callable securities (688) (688) (688)
GBP denominated (350) (350) (350)
Euro denominated (338) (338) (338)
Debt (1,326) (1,451) (1,406)
Rand denominated (193) (212) (221)
USD denominated (482) (496) (408)
GBP denominated (323) (325) (272)
SEK denominated (328) (418) (505)
Adjusted Group embedded value 7,552 8,896 9,369
* Adjusted net worth is after the elimination of inter company loans.
** Net of minority interests.
7 Components of embedded value of the covered business
£m
At At At
30 June 30 31 December
June 2007
2008 2007
Embedded value of the covered business 6,153 6,820 6,861
Adjusted net worth 2,036 2,525 2,423
Value of in-force business 4,117 4,295 4,438
South Africa
Adjusted net worth 1,203 1,600 1,470
Required capital 1,040 1,131 1,159
Free surplus 163 469 311
Value of in-force business 988 1,178 1,207
Value of in-force business before items listed 1,168 1,350 1,392
below
Additional time-value of financial options and - - -
guarantees
Cost of required capital (174) (167) (179)
Minority interest in value of in-force (6) (5) (6)
United States
Adjusted net worth 340 442 505
Required capital 434 429 424
Free surplus * (94) 13 81
Value of in-force business 451 584 564
Value of in-force business before items listed 613 710 703
below
Additional time-value of financial options and (48) (48) (48)
guarantees
Cost of required capital (114) (78) (91)
Europe
Adjusted net worth 493 483 448
Required capital 342 330 324
Free surplus 151 153 124
Value of in-force business 2,678 2,533 2,667
Value of in-force business before items listed 2,784 2,653 2,777
below
Additional time-value of financial options and (2) (1) (2)
guarantees
Cost of required capital (104) (98) (108)
Minority interest in value of in-force - (21) -
* Capital of £45 million was transferred to Old Mutual Bermuda on 31 July 2008. A further
amount of £105 million was transferred on 5
August 2008.
Adjusted net worth of the covered business excludes acquired intangibles and goodwill.
8 Analysis of covered business embedded value results (after tax)
£m
6 months ended
30 June
2008
Required capital Free surplus Adjusted net worth Value of
in-force Total
Embedded value of the covered 1,907 516 2,423
4,438 6,861
business at beginning of the
period
Opening fair value adjustments - - -
- -
1,907 516 2,423
4,438 6,861
New business contribution 100 (299) (199)
311 112
Expected return on existing - - -
189 189
business return on value of
in-force
Expected return on existing - 385 385
(385) -
business transfer to net worth
Expected release of required (108) 108 -
- -
capital transfer to free
surplus
Experience variances 24 (72) (48)
33 (15)
Operating assumption changes - (47) (47)
80 33
Recalibration of risk-margins - - -
- -
Expected return on adjusted 42 37 79
- 79
net worth
Adjusted operating profit 58 112 170
228 398
after tax
Investment return variances on (17) 23 6
(387) (381)
in-force business
Investment return variances on - 50 50
- 50
adjusted net worth
Effect of economic assumption - (17) (17)
(119) (136)
changes
Methodology changes impacting 2 (2) -
(1) (1)
cost of required capital
Profit after tax 43 166 209
(279) (70)
Exchange rate movements (134) (37) (171)
(41) (212)
Change in minority interest - - -
(1) (1)
Net transfers from covered - (425) (425)
- (425)
business
Embedded value of the covered 1,816 220 2,036
4,117 6,153
business at end of the period
£m
6 months ended Year ended
30 June 31 December
2007 * 2007
Adjusted Value of Total Required capital Free Adjusted Value of Total
net net in-force
worth in-force surpl worth
us
4,172 6,453 2,281 4,172 6,453
2,281
(181) 114 (67) (181) 114 (67)
2,100 4,286 6,386 1,903 197 2,100 4,286 6,386
(203) 327 124 193 (601) (408) 674 266
- 178 178 - - - 351 351
369 (369) - - 685 685 (685) -
- - - (226) 226 - - -
(24) 48 24 36 60 96 (111) (15)
13 (97) (84) 4 (20) (16) (102) (118)
- - - - - - (15) (15)
72 - 72 116 19 135 - 135
227 87 314 123 369 492 112 604
6 94 100 2 25 27 (1) 26
148 - 148 (27) 229 202 - 202
(5) (97) (102) 15 (17) (2) (80) (82)
- 3 3 (117) 117 - 13 13
376 87 463 (4) 723 719 44 763
(59) (81) (140) 10 5 15 85 100
(2) 3 1 (2) 3 1 23 24
110 - 110 - (412) (412) - (412)
2,525 4,295 6,820 1,907 516 2,423 4,438 6,861
* No reconciliation of the Required capital and Free surplus for the six months ended 30
June 2007 is available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
South Africa covered business
£m
6 months ended
30 June
2008
Required capital Free surplus Adjusted net worth Value of
in-force Total
Embedded value of the covered 1,159 311 1,470
1,207 2,677
business at beginning of the
period
New business contribution 33 (44) (11)
36 25
Expected return on existing - - -
67 67
business return on value of
in-force
Expected return on existing - 88 88
(88) -
business transfer to net worth
Expected release of required (54) 54 -
- -
capital transfer to free
surplus
Experience variances - 11 11
(5) 6
Operating assumption changes - 2 2
13 15
Recalibration of risk-margins - - -
- -
Expected return on adjusted 44 13 57
- 57
net worth
Adjusted operating profit 23 124 147
23 170
after tax
Investment return variances on 2 (4) (2)
(57) (59)
in-force business
Investment return variances on - 133 133
- 133
adjusted net worth
Effect of economic assumption - (15) (15)
(33) (48)
changes
Methodology changes impacting 3 (3) -
(1) (1)
cost of required capital
Profit after tax 28 235 263
(68) 195
Exchange rate movements (147) (36) (183)
(150) (333)
Change in minority interest - - -
(1) (1)
Net transfers from covered - (347) (347)
- (347)
business
Embedded value of the covered 1,040 163 1,203
988 2,191
business at end of the period
Return on embedded value
13.5%
(ROEV)%
Experience variances were positively impacted by higher risk profits and one-off tax
profits offset by switches to lower margin absolute
growth portfolios in the Corporate segment and adverse retention in the retail businesses as a
result of the tougher economic environment.
The main operating assumption changes are a reduction in the corporate tax rate from 29
per cent to 28 per cent slightly offset by some
small corrections in valuation methodology.
The net transfers from covered business for the six months ended 30 June 2008 mainly
include special and normal dividend payments (net
of dividends received from Nedbank and Mutual & Federal), tax on the special dividend, the
purchase of additional shares in Nedbank, as well
as head office expenses.
The embedded value for South Africa is after the adjustment for market value of life
funds' investments in Group equity and debt
instruments.
Return on embedded value is the annualised adjusted operating profit after tax divided by
opening embedded value in local currency. The
operating assumption changes are not annualized.
£m
6 months ended Year ended
30 June 31 December
2007 * 2007
Adjusted Value of Total Required capital Free Adjusted Value of Total
net worth in-force net worth in-force
surpl
us
1,160 2,568 1,249 159 1,408 1,160 2,568
1,408
(9) 36 27 67 (78) (11) 72 61
- 65 65 - - - 133 133
87 (87) - - 172 172 (172) -
- - - (93) 93 - - -
10 21 31 (33) 33 - (15) (15)
(4) 18 14 - (22) (22) 1 (21)
- - - - - - - -
55 - 55 99 13 112 - 112
139 53 192 40 211 251 19 270
9 31 40 (3) 22 19 41 60
145 - 145 - 225 225 - 225
(4) (32) (36) (13) 11 (2) (39) (41)
- 7 7 (117) 117 - 19 19
289 59 348 (93) 586 493 40 533
(50) (41) (91) 3 6 9 8 17
(2) . - (2) - (3) (3) (1) (4)
(45) - (45) - (437) (437) - (437)
1,600 1,178 2,778 1,159 311 1,470 1,207 2,677
14.8% 10.8%
* No reconciliation of the Required capital and Free surplus for the six months ended 30
June 2007 is available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
United States covered business
£m
6 months ended
30 June
2008
Required capital Free surplus Adjusted net worth Value of
in-force Total
Embedded value of the covered 424 81 505
564 1,069
business at beginning of the
period
New business contribution 57 (64) (7)
33 26
Expected return on existing - - -
27 27
business return on value of
in-force
Expected return on existing - 49 49
(49) -
business transfer to net worth
Expected release of required (52) 52 -
- -
capital transfer to free
surplus
Experience variances - (85) (85)
48 (37)
Operating assumption changes - (50) (50)
(9) (59)
Recalibration of risk-margins - - -
- -
Expected return on adjusted - 7 7
- 7
net worth
Adjusted operating profit 5 (91) (86)
50 (36)
after tax
Investment return variances on - - -
(96) (96)
in-force business
Investment return variances on - (81) (81)
- (81)
adjusted net worth
Effect of economic assumption - - -
(64) (64)
changes
Material revision to actuarial - - -
- -
models
Methodology changes impacting - - -
- -
cost of required capital
Profit after tax 5 (172) (167)
(110) (277)
Exchange rate movements 5 (4) 1
(3) (2)
Net transfers to covered - 1 1
- 1
business
Embedded value of the covered 434 (94) 340
451 791
business at end of the period
Return on embedded value
(1.3%)
(ROEV)%
The segment results of United States include Old Mutual Reassurance (Ireland) Limited
(OMRe), which provides reinsurance to the United
States life companies, and Old Mutual (Bermuda) Limited.
Capital of £45 million was transferred to Old Mutual Bermuda on 31 July 2008. A further
amount of £105 million was transferred on 5
August 2008.
The experience variances were largely driven by a one-off tax loss that arose in Old
Mutual (Bermuda) Limited.
The main operating assumption changes related to an additional provision made in respect
of investment volatility on guaranteed
products. Several changes were made to the economic assumptions due to the current adverse
investment environment: the credit default
assumption was increased by 4 basis points, and the risk discount rate was increased from 7.4
per cent to 8.4 per cent to allow for an
additional risk margin.
Return on embedded value is the annualised adjusted operating profit after tax divided by
opening embedded value in local currency. The
operating assumption changes are not annualised.
£m
6 months ended Year ended
30 June 31 December
2007 * 2007
Adjusted Value of Total Required capital Free Adjusted Value of Total
net worth in-force surpl net worth in-force
us
690 1,144 390 64 454 690 1,144
454
(28) 56 28 108 (193) (85) 157 72
- 32 32 - - - 61 61
65 (65) - - 98 98 (98) -
- - - (120) 120 - - -
(53) 33 (20) 46 10 56 (81) (25)
17 (98) (81) 23 4 27 (104) (77)
- - - - - - - -
5 - 5 9 2 11 - 11
6 (42) (36) 66 41 107 (65) 42
- (9) (9) - - - (36) (36)
(6) - (6) (27) (6) (33) - (33)
- (35) (35) - - - (11) (11)
- - - - - - - -
- (4) (4) - - - (4) (4)
- (90) (90) 39 35 74 (116) (42)
(11) (16) (27) (5) - (5) (10) (15)
(1) - (1) - (18) (18) - (18)
442 584 1,026 424 81 505 564 1,069
0.9% 3.8%
* No reconciliation of the Required capital and Free surplus for the six months ended 30
June 2007 is available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
Europe covered business
£m
6 months ended
30 June
2008
Required capital Free surplus Adjusted net worth Value of
in-force Total
Embedded value of the covered 324 124 448
2,667 3,115
business at beginning of the
period
Opening fair value adjustments - - -
- -
for Skandia
324 124 448
2,667 3,115
New business contribution 10 (191) (181)
242 61
Expected return on existing - - -
95 95
business return on value of
in-force
Expected return on existing - 248 248
(248) -
business transfer to net worth
Expected release of required (2) 2 -
- -
capital transfer to free
surplus
Experience variances 24 2 26
(10) 16
Operating assumption changes - 1 1
76 77
Recalibration of risk-margins - - -
- -
Expected return on adjusted (2) 17 15
- 15
net worth
Adjusted operating profit 30 79 109
155 264
after tax
Investment return variances on (19) 27 8
(234) (226)
in-force business
Investment return variances on - (2) (2)
- (2)
adjusted net worth
Effect of economic assumption - (2) (2)
(22) (24)
changes
Methodology changes impacting (1) 1 -
- -
cost of required capital
Profit after tax 10 103 113
(101) 12
Exchange rate movements 8 3 11
112 123
Minority interest - - -
- -
Net transfers to covered - (79) (79)
- (79)
business
Embedded value of the covered 342 151 493
2,678 3,171
business at end of the period
Return on embedded value
14.5%
(ROEV)%
The segmental results of Europe include the Skandia Life companies in the United Kingdom,
Nordic region, Europe and Latin America.
The experience variances mainly arose from a higher level of fee income than that assumed
and a contribution from profits not valued,
which was partially offset by negative persistency variances.
The main operating assumption changes are the introduction of modelling of currency spread
transactional revenue, recognition of trail
commission and changes to the recognition of fee income. The transfers from covered business
include internal financing arrangements and
allocation of head office expenses.
Return on embedded value is the annualised adjusted operating profit after tax divided by
opening embedded value. The operating
assumption changes are not annualised.
£m
6 months ended Year ended
30 June 31 December
2007 * 2007
Adjusted Value of Total Required capital Free Adjusted Value of Total
net in-force net worth in-force
worth surpl
us
2,321 2,740 419 2,321 2,740
419
(181) 114 (67) (181) 114 (67)
238 2,435 2,673 264 (26) 238 2,435 2,673
(166) 235 69 18 (330) (312) 445 133
- 81 81 - - - 157 157
217 (217) - - 415 415 (415) -
- - - (13) 13 - - -
19 (6) 13 23 17 40 (15) 25
- (17) (17) (19) (2) (21) 1 (20)
- - - - - - (15) (15)
12 - 12 8 4 12 - 12
82 76 158 17 117 134 158 292
(3) 72 69 5 3 8 (6) 2
9 - 9 - 10 10 - 10
(1) (30) (31) 29 (29) _ (30) (30)
- - - - - - (1) (1)
87 118 205 51 101 152 121 273
2 (23) (21) 12 (1) 11 87 98
- 3 3 (3) 7 4 24 28
156 - 156 - 43 43 - 43
483 2,533 3,016 324 124 448 2,667 3,115
12.3% 10.9%
* No reconciliation of the Required capital and Free surplus for the six months ended 30
June 2007 is available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
9 Value of new business (after tax)
The tables below set out the geographic analysis of the value of new business (VNB) after
tax. Annual premium equivalent (APE) is
calculated as recurring premiums plus 10 per cent of single premiums. New business
profitability is measured by both the ratio of the VNB to
the APE as well as to the present value of new business premiums (PVNBP), and shown under APE
margin and PVNBP margin below. PVNBP is
defined as the present value of regular premiums plus single premiums for any given period and
is calculated on the same assumptions as for
the value of new business contribution.
£m
6 months ended 6 months ended Year ended
30 June 30 June 31
2008 2007 December
2007
Recurring premiums
South Africa 109 113 237
United States 18 22 39
Europe 248 199 415
375 334 691
Single premiums
South Africa 592 466 1,115
United States 1,575 1,238 2,962
Europe 2,808 3,548 6,607
4,975 5,252 10,684
APE
South Africa 168 159 348
United States 175 146 335
Europe 529 554 1,077
872 859 1,760
PVNBP
South Africa 1,150 1,039 2,323
United States 1,661 1,351 3,150
Europe 3,857 4,453 8,405
6,668 6,843 13,878
VNB
South Africa 25 27 61
United States 26 28 72
Europe 61 69 133
112 124 266
APE margin
South Africa 15% 17% 18%
United States 15% 19% 21%
Europe 12% 13% 12%
13% 14% 15%
PVNBP margin
South Africa 2.2% 2.6% 2.7%
United States 1.6% 2.1% 2.3%
Europe 1.6% 1.6% 1.6%
1.7% 1.8% 1.9%
9 Value of new business (after tax) continued
The value of new individual unit trust linked retirement annuities and pension fund asset
management business written by the South
Africa long-term business, which amounted to £145 million (six months ended 30 June 2007:
£173 million, year ended 31 December 2007: £435
million) for the six months ended 30 June 2008, is excluded as the profits on this business
arise in the asset management business. The
value of new business also excludes premium increases arising from indexation arrangements in
respect of existing business, as these are
already included in the value of in-force business.
The value of new institutional investment platform pensions business written in the United
Kingdom, the gross premium of which amounted
to £155 million (six months ended 30 June 2007: £71 million, year ended 31 December 2007:
£165 million) for the six months ended 30 June
2008, is excluded as this is more appropriately classified as mutual fund business.
10 Product analysis of new covered business premiums
£m
6 months ended30 June2008 6 months ended30 June2007
Year ended
31
December2007
South Africaproduct analysis Recurring Single Recurring Single
Recurring Single
Total business 109 592 113 466
237 1,115
Individual business 96 332 99 296
208 641
Savings 24 253 25 220
50 494
Protection 33 2 37 3
77 5
Annuity * 76 * 72
* 141
Retail mass market 39 1 37 1
81 1
Group business 13 260 14 170
29 474
Savings 3 206 1 130
5 394
Protection 5 1 5 1
11 1
Annuity * 53 * 39
* 79
Healthcare 5 * 8 *
13 *
South Africacontract analysis
Total business * 109 592 113 466
237 1,115
Individual business 96 332 99 296
208 641
Insurance contracts 56 76 57 67
123 132
Investment contracts with 21 25 22 16
44 35
discretionary participating
features
Other investment contracts 19 231 20 213
41 474
Group business 13 260 14 170
29 474
Insurance contracts 10 48 13 40
24 80
Investment contracts with 3 82 1 50
5 160
discretionary participating
features
Other investment contracts * 130 * 80
* 234
United Statesproduct analysis
Total business 18 1,575 22 1,238
39 2,962
Fixed deferred annuity * 94 * 20
* 97
Fixed indexed annuity * 342 * 535
* 960
Variable annuity * 1,066 * 620
* 1,757
Life 18 8 22 *
39 18
Immediate annuity * 65 * 63
* 130
United Statescontract analysis
Total business * 18 1,575 22 1,238
39 2,962
Insurance contracts 18 1,447 22 1,155
39 2,790
Other investment contracts * 128 * 83
* 172
10 Product analysis of new covered business premiums continued
£m
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2008 2007 2007
Europe product analysis Recurring Single Recurring Single Recurring Single
Total business 248 2,808 198 3,548 415 6,607
Unit-linked assurance 248 2,807 197 3,546 413 6,601
Life - 1 1 2 2 6
* Within the preceding contract analysis the classification of insurance contracts,
investment contracts with discretionary
participating features and other investment contracts is in accordance with the primary
financial statements definitions. All categories of
business are subject to EEV accounting.
11 Drivers of new business value
Total covered business £m
6 months Year ended
ended 31
30 June December
2008 2007
APE PVNBP APE PVNBP
Margi Margi Margin %
n % Margi n %
n %
Margin at the end of the comparative period 14.0 1.8 16.2 2.1
Change in volume +0.8 +0.2 (0.7) (0.1)
Change in product mix (0.8) (0.1) (0.4) (0.1)
Change in country mix (0.1) - +0.6 +0.1
Change in operating assumptions (0.8) (0.1) (0.4) -
Change in economic assumptions (0.6) (0.1) +0.2 -
Exchange rate movements +0.5 - (0.3) (0.1)
Margin at the end of the period 13.0 1.7 15.2 1.9
APE PVNBP APE PVNBP
Margi Margi
n % Margi n % Margi
n % n %
South Africa covered business
Margin at the end of the comparative period 16.6 2.6 18.7 2.8
Change in volume +0.7 - +0.6 +0.2
Change in product mix (0.4) (0.1) +0.4 -
Change in operating assumptions (1.2) (0.2) (2.1) (0.3)
Change in economic assumptions (0.7) (0.1) - -
Margin at the end of the period 15.0 2.2 17.6 2.7
The APE and PVNBP per cent margin changes are calculated in local currency.
APE PVNBP APE PVNBP
Margi Margi
n % Margi n % Margi
n % n %
United States covered business
Margin at the end of the comparative period 19.1 2.1 18.3 2.0
Change in volume +0.1 (0.1) - (0.2)
Change in product mix +0.2 +0.1 +3.1 +0.5
Change in operating assumptions (4.3) (0.5) - -
Margin at the end of the period 15.1 1.6 21.4 2.3
The APE and PVNBP per cent margin changes are calculated in local currency.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six months ended
30 June 2007 are available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
11 Drivers of new business value continued
£m
6 months Year
ended ended
30 June 31
2008 December
2007
Europe covered business APE PVNBP
Margin
% Margin
%
Margin at the end of the comparative period 12.6 1.6 15.5 1.8
Opening adjustment - - (0.6) (0.1)
Adjusted prior year 12.6 1.6 14.9 1.7
Change in volume - +0.2 (2.5) (0.2)
Change in product mix (1.2) (0.2) (1.7) (0.2)
Change in country mix (0.2) - +0.9 +0.1
Change in operating assumptions +0.5 +0.1 +0.1 +0.1
Change in economic assumptions (0.8) (0.1) +0.3 -
Exchange rate movements +0.8 - +0.3 +0.1
Margin at the end of the period 11.7 1.6 12.3 1.6
The 2007 opening new business margins in Nordic have been restated to incorporate the
impact of the Liv-Link agreement negotiated in
2007.
APE and PVNBP per cent margin changes are calculated in Sterling.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six months ended 30
June 2007 are available as the enhanced
disclosure was introduced for the first time as at 31 December 2007.
12 Assumptions
Introduction
The principal assumptions used in the calculation of the value of in-force business and
VNB are set out below. The assumptions are best
estimate and actively reviewed.
> Adjusted operating profit is calculated on closing operating assumptions and opening
economic assumptions.
> The effect of increases in premiums over the period for policies in-force has been
included in the value of in-force business only
where such increases are associated with indexation arrangements. Other increases in premiums
of existing policies are included in the value
of new business.
> New schemes written on which recurring single premiums are expected to be received on
a regular basis are treated as new business.The annualised premium is recognised as recurring premium new business at inception of the
scheme and is determined by annualising the
actual premiums received during the year in question. Subsequent recurring single premiums
received in future years are not treated as new
business, as these have already been provided for in calculating the value of in-force
business.
> The value of new business has been based on opening economic assumptions and closing
operating assumptions accumulated to the
period end.
> The sensitivity of the value of in-force and value of new business to changes in the
risk discount rate is set out in note 13.
Economic assumptions
The pre-tax investment and economic assumptions are updated every six months to reflect
the economic conditions prevailing on the
valuation date. Risk-free rates have a duration similar to that of the underlying liabilities.Equity and property risk premiums incorporate
both historical relationships and the directors' view of future projected returns in each
geography.
> The risk-margins reflect the distinctive risks of the products in the respective
business units. These risk-margins do not include
the risk associated with financial options and guarantees. The risk-margins were recalibrated
as at 31 December 2007. The risk-margin for
the United States business was increased by 100 basis points as at 30 June 2008 to allow for
the volatility inherent in the business.
> Where applicable, rates of future bonuses or crediting rates have been set at levels
consistent with the investment return
assumptions. Projected company taxation is based on the current tax basis that applies in each
country.
> For the South Africa business projected taxation is based on the current tax basis
that applies in each country. Full allowance has
been made for secondary tax on companies (STC) at a rate of 10 per cent that may be payable in
South Africa. Full account has been taken of
the impact of capital gains tax. It has been assumed that 10 per cent of the equity portfolio
(excluding Group subsidiaries) will be traded
each year. The effective tax rate was 33 per cent for South Africa and 0 per cent for Namibia,
except for the investment return on capital
for which the attributed tax was derived from the primary accounts.
> For the United States business full allowance has been made for existing tax
attributes of the companies, including the use of
existing carry-forwards and preferred tax credit investments. The effective rate was 33 per
cent.
> For the Europe businesses, projected tax is based on the current tax rate that
applies in each country. In Sweden, no allowance has
been made for additional tax on dividends remitted to the UK. Tax has however been allowed for
on dividends to be remitted to the UK from
the Isle of Man. The effective tax rates for Nordic, United Kingdom and the balance of Europe
were a range of 2 per cent to 28 per cent, 12
per cent to 28 per cent and a range of 19 per cent to 49 per cent.
12 Assumptions continued
Economic assumptions continued
South Africa At At At
30 30 31
June June December
2008 2007 2007
Risk-free rate (10 year Government bond) 11.0% 8.6% 8.5%
Cash return 9.0% 6.6% 6.5%
Equity return 14.5% 12.1% 12.0%
Property return 12.5% 10.1% 10.0%
Expense inflation 8.0% 5.6% 5.5%
Traditional embedded value risk discount rate1 13.7% 11.4% 11.2%
Risk-free rate 11.0% 8.6% 8.5%
Risk-margin2 2.1% 2.0% 2.1%
Cost of financial options and guarantees3 - - -
Cost of required capital in excess of statutory 0.6% 0.8% 0.6%
minimum4
United States
Risk-free rate (10 year Treasury yield) 4.0% 4.9% 4.0%
Expense inflation 3.0% 3.0% 3.0%
New money yield assumed* 5.3% 6.8% 5.8%
Net portfolio earned rate 6.1% 5.8% 6.0%
Traditional embedded value risk discount rate1 10.3% 10.0% 9.3%
Risk-free rate 4.0% 4.9% 4.0%
Risk-margin2 4.4% 3.0% 3.4%
Cost of financial options and guarantees3 0.9% 1.0% 0.9%
Cost of required capital in excess of statutory 1.0% 1.1% 1.0%
minimum4
* The new money yield assumed in the first two months was 6.2 per cent.
1 This is the risk discount rate that would be applicable on a traditional embedded
value basis if the calculations did not allow for
the time-value of options and guarantees and required capital in excess of the statutory
minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial options and
guarantees and for the required capital in
excess of statutory minimum. The risk-margin in the United States was increased by 100 basis
points to allow for the volatility inherent in
the business.
3 This is the time-value of financial options and guarantees not allowed for in
statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the
statutory minimum.
12 Assumptions continued
Economic assumptions continued
Europe At At At
30 June 30 June 31
2008 2007 December
2007
United Kingdom
Risk-free rate (10 year Government bond) 5.2% 5.5% 4.6%
Cash return 4.2% 3.7% 3.6%
Equity return 8.1% 8.4% 7.5%
Property return 6.6% 7.0% 6.6%
Expense inflation 5.3% 4.7% 4.6%
Traditional embedded value risk discount 7.9% 8.0% 7.6%
rate1
Risk-free rate 5.2% 5.5% 4.6%
Risk-margin2 2.2% 2.1% 2.2%
Cost of financial options and guarantees3 - - -
Cost of required capital in excess of 0.5% 0.4% 0.8%
statutory minimum4
Sweden
Risk-free rate (10 year Government bond) 4.5% 4.5% 4.4%
Cash return 3.5% 3.5% 3.4%
Equity return 7.5% 7.5% 7.4%
Property return 6.0% 7.0% 5.9%
Expense inflation 3.7% 3.3% 3.6%
Traditional embedded value risk discount 7.9% 7.5% 7.7%
rate1
Risk-free rate 4.5% 4.4% 4.4%
Risk-margin2 3.4% 3.1% 3.4%
Cost of financial options and guarantees3 - - -
Cost of required capital in excess of - - -
statutory minimum4
Rest of Europe
Risk-free rate (10 year Government bond) 3.3%-6.1% 3.2%-5.5% 3.1%-5.7%
Cash return 2.3%-5.1% 2.2%-4.5% 2.1%-4.7%
Equity return 6.3%-9.1% 6.2%-7.8% 6.1%-8.7%
Property return 4.8%-7.6% 4.7%-7.0% 4.6%-7.2%
Expense inflation 2.5%-3.0% 2.5%-3.0% 2.5%-5.0%
Traditional embedded value risk discount 4.0%-8.1% 4.6%-7.8% 4.0%-7.7%
rate1
Risk-free rate 3.3%-6.1% 3.2%-5.5% 3.1%-5.5%
Risk-margin 0.9%-2.9% 1.4%-3.0% 0.9%-2.9%
Cost of financial options and guarantees3 - - -
Cost of required capital in excess of 0.0%-3.0% 0.0%-3.0% 0.0%-3.0%
statutory minimum4
1 This is the risk discount rate that would be applicable on a traditional embedded
value basis if the calculations did not allow for
the time-value of options and guarantees and required capital in excess of the statutory
minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial options and
guarantees and for the required capital in
excess of statutory minimum.
3 This is the time-value of financial options and guarantees not allowed for in
statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the
statutory minimum.
12 Assumptions continued
Non-economic assumptions
> The assumed future mortality, morbidity and voluntary discontinuance rates have been
based as far as possible on analyses of recent
operating experience. Allowance has been made where appropriate for the effect of expected
AIDS-related claims.
> The management expenses attributable to life assurance business have been analysed
between expenses relating to the acquisition of
new business and the maintenance of business in-force. The future expenses attributable to
life assurance business include 36 per cent of
the Group holding company expenses, with 14 per cent allocated to South Africa, 4 per cent
allocated to United States and 18 per cent
allocated to Europe.
> The allocation of these expenses aligns to the proportion that the management
expenses incurred by the business bears to the total
management expenses incurred in the Group.
> No allowance has been made for future productivity improvements in the expense
assumptions.
> Future investment expenses are based on the current scales of fees payable by the
life assurance companies to the asset management
subsidiaries. To the extent that these fees include profit margins for the asset management
subsidiaries, these margins have not been
included in the value of in-force business or the value of new business.
> The embedded value makes no provision for future development costs. However,
provision is included within certain business units
for project costs where these are known with sufficient certainty.
Required capital
> For the South Africa business, the required capital is calculated for each of the
major business units. The non-investment items
are based on a multiple of the non-investment components of the local Statutory Capital
Adequacy Requirements set out in PGN104 issued by
the Actuarial Society of South Africa (ASSA). The investment item is based on internal models
developed for capital allocation and pricing
purposes. The models project assets and liabilities for the business forward for 10 years
using stochastically determined investment returns
on a realistic basis. Bonus rates and adjustments to non-vested bonuses are determined using a
consistent formula based on a weighted
average of past returns and the level of the Bonus Smoothing Account (BSA) at the time. To the
extent that the BSA falls to lower than
normally allowable minimum levels, the shareholder is considered to be required to provide
support to the business. The capital requirement,
based on the discounted value of the maximum shareholder support required, is determined using
a conditional tail expectation at the 97.5 percentile level. The required capital is invested
in local
equities, local cash and international cash. The asset allocation as at 30 June 2008 is 60, 33
and 7 per cent (six months ended 30 June
2007: 60, 33 and 7 per cent, 31 December 2007: 60, 33 and 7 per cent) respectively. In
aggregate required capital is subject to a minimum of
130 per cent of the statutory capital requirement. The level of required capital was 136 per
cent of the minimum statutory requirements as
at 30 June 2008 (six months ended 30 June 2007: 137 per cent, 31 December 2007: 134 per cent).
> For the United States business, the required capital is based on the multiple of the
local Risk Based Capital (RBC) requirement
that management deems necessary to maintain the desired credit rating for the company in
question. The multiple is 300 per cent (six months
ended 30 June 2007: 260 per cent, 31 December 2007: 296 per cent) as at 30 June 2008. The
required capital for Old Mutual (Bermuda) Limited
is based on the level of capital considered by management appropriate to manage the business,
which is calculated as 125 per cent of United
States RBC calculated on local reserves, subject to a minimum of local statutory requirements.The required capital for Old Mutual
Reassurance (Ireland) Limited is based on the level of capital considered by management
appropriate to manage the business which is based on
125 per cent of the new Irish Capital Requirements. The required capital for the United States
business is invested in fixed interest
assets.
12 Assumptions continued
Required capital continued
> For the Europe businesses the required capital reflects the level of capital
considered by management appropriate to manage the
business, allowing for local minimum statutory requirements. In certain regions, for example
Nordic, statutory capital is partially covered
by the deferred acquisition costs which are implicitly included in the value of in-force
business rather than the adjusted net worth. The
required capital is invested in short and medium-term fixed interest assets. The required
capital as a per cent of minimum statutory capital
is 180 per cent for the United Kingdom, 73 per cent for Nordic, 200 per cent for the Isle of
Man and ranging from 0 per cent to 139 per cent
for the balance of Europe.
13 Sensitivity tests
The tables below for South Africa, United States and Europe show the sensitivity of the
value of in-force at 30 June 2008 and the value
of new business for the period ended 30 June 2008 to changes in the discount rate.
30 June 2008 £m
Value of Value of new business
in-force
business
South Africa
Central assumptions 988 25
Effect of:
Central discount rate increasing by 1 869 20
per cent
United States
Central assumptions 451 26
Effect of:
Central discount rate increasing by 1 404 21
per cent
Europe
Central assumptions 2,678 61
Effect of:
Central discount rate increasing by 1 2,510 49
per cent
APPENDIX 1
Please see attached link to view appendix
http://www.rns-pdf.londonstockexchange.com/rns/7273A_-2008-8-5.pdf
This information is provided by RNS
The company news service from the London Stock Exchange
END
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