Wrap Text
OML - Old Mutual Plc - Preliminary results for the year ended 31 December 2010
(Part 3: Continued)
OLD MUTUAL PLC
ISIN: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
Group Market Consistent Embedded Value statement of earnings
For the year ended 31 December 2010
GBPm
Year ended Year ended
Notes 31 December 31 December
2010 2009
Long Term Savings
Covered business 705 252
Asset management and other business 127 26
Banking 16 16
848 294
Nedbank
Banking 601 470
Mutual & Federal
General insurance 103 70
US Asset Management
Asset management 87 83
Other operating segments
Finance costs* (183) (144)
Other shareholders` expenses (57) (69)
Adjusted operating Group MCEV earnings
before tax from core operations 1 399 704
Adjusted operating Group MCEV earnings
before tax from Bermuda non-core operations (28) 8
Adjusted operating Group MCEV earnings
before tax from continuing operations** 1 371 712
Adjusting items from continuing
operations C3 499 478
Total Group MCEV earnings before tax
from continuing operations 1 870 1 190
Income tax attributable to shareholders (410) (108)
Total Group MCEV earnings after tax from
continuing operations 1 460 1 082
Total Group MCEV earnings after tax from
US Life discontinued operations*** 227 700
Total Group MCEV earnings after tax for
the financial period 1 687 1 782
Total Group MCEV earnings for the
financial period attributable to:
Equity holders of the parent 1 429 1 562
Non-controlling interests
Ordinary shares 196 156
Preferred securities 62 64
Total Group MCEV earnings after tax for
the financial period 1 687 1 782
Basic total Group MCEV earnings per
ordinary share (pence) 28.2 31.3
Weighted average number of shares -
millions 5 064 4 994
* This includes interest payable from Old Mutual plc to non-core operations of
GBP55 million for the year ended 31 December 2010 (GBP40 million for the year
ended 31 December 2009).
** For long-term business and general insurance businesses, adjusted operating
MCEV earnings are based on short-term and long-term investment returns
respectively, include investment returns on life funds` 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, 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.
*** This is 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 (earnings before tax of GBP302 million, adjusting items of GBP435 million
and tax of GBP(36) million for the year ended 31 December 2009). Further
detail relating to adjusting items can be found in section C3.
Adjusted operating Group MCEV earnings per share
For the year ended 31 December 2010
Year ended 31 December 2010 GBPm
GBPm
Non-core
Core continuing continuing
Notes operations operations
Adjusted operating Group MCEV
earnings before tax 1 399 (28)
Tax on adjusted operating Group MCEV
earnings B2 (313) 4
Adjusted operating Group MCEV
earnings after tax 1 086 (24)
Non-controlling interests
Ordinary shares (217) -
Preferred securities (62) -
Adjusted operating MCEV earnings
after tax attributable to equity holders 807 (24)
Adjusted operating Group MCEV
earnings per share* 15.0 (0.4)
Adjusted weighted average number of shares - millions
Discontinued
operations Total
Adjusted operating Group MCEV earnings before tax 48 1 419
Tax on adjusted operating Group MCEV earnings (1) (310)
Adjusted operating Group MCEV earnings after tax 47 1 109
Non-controlling interests
Ordinary shares - (217)
Preferred securities - (62)
Adjusted operating MCEV earnings after tax attributable
to equity holders 47 830
Adjusted operating Group MCEV earnings per share* 0.9 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.
Year ended 31 December 2009
GBPm
Non-core
Core continuing continuing
Notes operations operations
Adjusted operating Group MCEV
earnings before tax 704 8
Tax on adjusted operating Group MCEV
earnings B2 (146) (27)
Adjusted operating Group MCEV
earnings after tax 558 (19)
Non-controlling interests
Ordinary shares (179) -
Preferred securities (64) -
Adjusted operating MCEV earnings
after tax attributable to equity holders 315 (19)
Adjusted operating Group MCEV
earnings per share* 6.0 (0.4)
Adjusted weighted average number of
shares - millions
Discontinued
operations Total
Adjusted operating Group MCEV earnings before tax 302 1 014
Tax on adjusted operating Group MCEV earnings (36) (209)
Adjusted operating Group MCEV earnings after tax 266 805
Non-controlling interests
Ordinary shares - (179)
Preferred securities - (64)
Adjusted operating MCEV earnings after tax attributable
to equity holders 266 562
Adjusted operating Group MCEV earnings per share* 5.1 10.7
Adjusted weighted average number of shares - millions 5 229
* 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.
Components of Group MCEV and adjusted Group MCEV
At 31 December 2010
GBPm
Components of Group MCEV
At At
Notes 31 December 31 December
2010 2009
Adjusted net worth attributable to
ordinary equity holders of the parent 5 737 4 417
Equity 8 951 8 464
Adjustment to include long-term business
on a statutory solvency basis:
Long Term Savings C5 (2 053) (2 238)
Bermuda C5 (29) (6)
US Life C5 260 (388)
Adjustment for market value of life
funds` investments in Group equity and
debt instruments held in life funds 306 268
Adjustment to remove perpetual preferred
callable securities and accrued dividends (688) (688)
Adjustment to exclude acquisition
goodwill from the covered business:
Long Term Savings C5 (1 010) (995)
Value of in-force business 4 164 3 212
Present value of future profits 5 256 4 255
Additional time value of financial
options and guarantees (433) (416)
Frictional costs (276) (221)
Cost of residual non-hedgeable risks (383) (406)
Group MCEV 9 901 7 629
Group MCEV value per share (pence) 181.5 144.5
Return on Group MCEV (RoEV) per annum
from continuing core operations 10.6% 6.0%
Return on Group MCEV (RoEV) per annum
from continuing non-core operations (0.3)% (0.4)%
Return on Group MCEV (RoEV) per annum
from discontinued operations 0.6% 5.1%
Return on Group MCEV (RoEV) per annum 10.9% 10.7%
Number of shares in issue at the end of
the financial period less treasury
shares - millions 5 456 5 279
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, 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 RoEV is calculated as the adjusted operating Group MCEV earnings after tax
and non-controlling interests of GBP830 million (year ended 31 December 2009:
GBP562 million) divided by the opening Group MCEV.
Components of Group MCEV and adjusted Group MCEV
For the year ended 31 December 2010
GBPm
Components of adjusted Group MCEV
At At
Notes 31 December 31 December
2010 2009
Group MCEV 9 901 7 629
Pro forma adjustments to bring Group
investments to market value
Adjustment to bring listed subsidiaries
to market value 715 805
Nedbank 715 623
Mutual & Federal - 182
Adjustment for value of own shares in
ESOP schemes* 85 71
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 266 221
Adjustment to bring external debt to
market value 63 302
Adjusted Group MCEV B1 11 030 9 028
Adjusted Group MCEV per share (pence) 202.2 171.0
Number of shares in issue at the end of
the financial period less treasury
shares - millions 5 456 5 279
* Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2009 and 31 December 2010 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 2010
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.
Reconciliation of movements in Group MCEV (after tax)
GBPm
Year ended 31 December 2010
Covered Non-covered Total Group
Notes business MCEV business 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 C4 112 731 843
Closing Group MCEV 7 515 2 386 9 901
Year ended 31 December 2009
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Opening Group MCEV 4 183 1 079 5 262
Adjusted operating MCEV earnings 492 70 562
Non-operating MCEV earnings 1 191 (191) 1 000
Total Group MCEV earnings 1 683 (121) 1 562
Other movements in IFRS net equity 161 644 805
Closing Group MCEV 6 027 1 602 7 629
Notes to the MCEV basis supplementary information
For the year ended 31 December 2010
A: MCEV policies
A1: Basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in
the supplementary statements on pages 88 to 137 as `MCEV`) adopts the Market
Consistent Embedded Value Principles 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 2010. The detailed methodology and assumptions made in presenting
this supplementary information are set out in notes A2 and A3.
Where reference is made to `Europe` only, this generally captures the Nordic,
Retail Europe and Wealth Management businesses.
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
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.
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.
The covered business does not include any business written in Skandia Liv.
Skandia Liv is a mutual life insurance company wholly owned by Old Mutual plc.
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 companies.
The treatment within this supplementary information of all business other than
the covered business is the same as in the primary financial statements,
except for the adjusted Group MCEV which includes the impact of marking all
debt to market value, the market value of the Group`s listed banking
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.
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.
Required capital
Required capital is the market value of assets that are attributed to support
the covered business, over and above that required to back statutory
liabilities for covered business, whose distribution to shareholders is
restricted. The following capital measures are considered in determining the
required capital held for covered business so that it reflects the level of
capital considered by the directors to be appropriate to manage the business:
- Economic capital;
- Regulatory capital (i.e. the level of solvency capital which the local
regulators require);
- Capital required by rating agencies in respect of the North American
business 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 an economic statement of financial position, with MCEV
as the available capital, 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 is based on the amount
that management deems necessary to maintain the desired credit rating for the
Company, whilst for Bermuda the required capital is set with reference to
internal management objectives.
The required capital in respect of OMSA`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.
GBPm
At 31 December 2010
Required Regulatory
capital (a) capital (b) Ratio (a/b)
Emerging Markets 1 498 1 153 1.3
Nordic* 135 135 1.0
Retail Europe** 62 85 0.7
Wealth Management*** 278 162 1.7
US Life 468 196 2.4
Bermuda**** 403 - n/a
Total 2 844 1 731 1.6
At 31 December 2009
Required Regulatory
capital (a) capital (b) Ratio (a/b)
Emerging Markets 1 225 930 1.3
Nordic* 104 92 1.1
Retail Europe** 32 52 0.6
Wealth Management*** 213 143 1.5
US Life 462 193 2.4
Bermuda**** 363 - n/a
Total 2 399 1 410 1.7
* The regulatory capital for Nordic has increased from 31 December 2009 to 31
December 2010 as a result of an increase in funds under management.
** 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. The required capital has increased due to a legislative change in
Germany which has impacted the factoring business; receivables from factoring
are required to be covered by share capital.
*** The required capital for Wealth Management has increased from 31 December
2009 to 31 December 2010 as a result of modelling refinements. The regulatory
capital requirement for Wealth Management has been restated at 31 December
2009 to exclude the impact of a policyholder tax credit in Italy, which may be
used to off-set the capital requirement.
**** The Bermudan regulator allows intangible assets to be included as
admissible regulatory capital.
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.
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.
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
1000 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 2010
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 future interest rate and equity market
movements. This discretionary margin is valued in the VIF.
US Life
The financial options and guarantees mainly relate to minimum crediting
(bonus) rates.
Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum
accumulation benefits on Variable Annuity contracts.
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.
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
2010 2009
Emerging Markets* 751 606
Nordic 362 333
Retail Europe 115 143
Wealth Management** 622 563
US Life 678 661
Bermuda*** 274 619
Total 2 802 2 925
* The capital held in respect of non-hedgeable risk for Emerging Markets has
increased from 31 December 2009 to 31 December 2010 as a result of the
strengthening of the South African Rand to Sterling.
** The capital held in respect of non-hedgeable risk for Wealth Management at
31 December 2009 has been restated from GBP640 million to GBP563 million due
to calculation refinements.
*** The capital held in respect of non-hedgeable risks for Bermuda has reduced
from 31 December 2009 to 31 December 2010 as a result of the change in the
allowance for hedging basis risk that is now made in the determination of
reserves for guaranteed benefits, as well as other calculation refinements.
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 2.9% being applied to the Group diversified capital
required in respect of such non-hedgeable risks.
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.
Spread-based products
A market consistent valuation of spread-based products (such as Fixed Indexed
Annuities in US Life and 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.
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.
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.
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.
Look-through principle
PVFP and value of new business cash flow projections look through and include
the profits/losses of owned service companies, e.g. distribution and
administration, related to the management of the covered business. Any profit
margins that are included in investment management fees payable by the life
assurance companies to the asset management subsidiaries have not been
included in the value of in-force business or the value of new business on the
grounds of materiality and because a significant proportion of these profits
arise from performance-based fees.
Taxation
In valuing shareholders` cash flows, allowance is made in the cash flow
projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying
current local corporate tax legislation and practice together with known
future changes and taking credit for any deferred tax assets.
No allowance is made for any further additional tax that would be incurred on
the remittance of dividends from the life subsidiaries to Old Mutual plc,
apart from the South African business where full allowance has been made for
Secondary Tax on Companies (STC) that may be payable in South Africa at a rate
of 10% and the impact of capital gains tax. Furthermore, for the South African
business it has been assumed that a reasonable proportion of the shareholder
fund equity portfolio (excluding Group subsidiaries) will be traded each year.
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 off-set
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 is currently 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. At
present we continue to treat fee income from our Swedish unit-linked business
as being exempt from corporation tax within our MCEV. An allowance for adverse
taxation treatment is included as an operational risk within our CNHR.
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 MCEV results at 31 December 2010 have been calculated using an
ongoing UK corporation tax rate of 27% and each reduction in the tax rate will
be included in future results as and when they are enacted. The estimated
positive impact on the VIF in respect of Wealth Management at 31 December
2010, assuming that all the annual reductions in the tax rate will be enacted,
is GBP18 million. However, only GBP4 million is allowed for at 31 December
2010 as an assumption change relating to the first tax rate reduction to 27%.
Further allowance will be made once future annual reductions are enacted.
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 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 predefined 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 repricing 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 OMSA`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.
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 2010 (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.
Therefore the ultimate expected existing business contribution for the
financial year ending 31 December 2011 may differ from these results.
Analysis of Group MCEV earnings
Presentation of Group MCEV consists of the covered business under the MCEV
methodology and the non-covered business valued as the unadjusted IFRS net
asset value. A mark-to-market adjustment is therefore not performed for
external borrowings and other items not on a mark-to-market basis under IFRS
relating to non-covered business.
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
exceptional 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 relate to the covered business. The table below shows the 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
2010 2009
Emerging Markets 17 16
Nordic 4 4
Retail Europe 3 3
Wealth Management 6 8
US Life 2 2
Bermuda - -
Total 32 33
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.
Economic assumptions continued
Risk free reference rates and inflation
The risk free reference rates, reinvestment rates and discount rates are
determined with reference to the swap yield curve appropriate to the currency
of the cash flows. For Europe the swap yield curve is obtained from a number
of sources including Bloomberg, Nordea Bank and Reuters. For the Emerging
Markets and United States businesses, 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.
At 31 December 2010, no adjustments are made to swap yields to allow for
liquidity premiums or credit risk premiums, apart from a liquidity adjustment
to the US Life business and OMSA`s Immediate Annuity business. Any other risk
premiums are recognised within the MCEV as and when they are earned.
A wide range of liquidity market data and literature was reviewed at 31
December 2010. This included the CRO/CFO Forum formula which derives the
liquidity premium based on corporate bond spreads, with 100% of the liquidity
premium applied to immediate annuity business and 75% applied to participating
business and fixed deferred annuities to allow for differences in the
predictability of cash flows on these products. The review also included the
Barrie+Hibbert calibration of US corporate bond spreads using a structural
Merton-style model which decomposes the yields of illiquid assets into their
constituent parts, and a comparison of the yields of similar durations on
South African government bonds and bonds issued by State-owned enterprises.
It is the directors` view that a proportion of corporate bond spreads at 31
December 2010 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 corporate bond spreads being lost to worsening
default experience. For the US Life business and OMSA`s Immediate Annuity
business the currency, credit quality and duration of the actual corporate
bond portfolios were considered and adjusted risk free reference rates were
derived at 31 December 2010 by adding 75bps of liquidity premium for the US
Life business (31 December 2009: 100bps) and adding 45bps of liquidity premium
for OMSA`s Immediate Annuity business (31 December 2009: 50bps) to the swap
rates used for setting investment return and discounting assumptions. These
adjustments reflect the liquidity premium component in corporate bond spreads
over swap rates that is expected to be earned on the portfolios. Old Mutual
believes that the differences between market yields on US Life`s and OMSA`s
bond portfolios and the adjusted risk free reference rates still provide
substantial implied margins for default. 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.
Consumer price inflation assumptions are determined as those implied by index-
linked government stocks or real swap yields if a liquid market of sufficient
size exists. In other markets, the consumer price inflation assumptions are
modelled considering a spread compared to swap rates. However, where modelling
system capabilities are restricted (e.g. US Life), consumer price inflation is
set as a flat assumption. Other types of inflation such as expense inflation
are derived on a consistent basis and, where deemed appropriate, include a
percentage addition to the consumer price inflation rate, for example as life
company expenses include a large element of salary related expenses.
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
At 31 December 2010
1 year 0.9 1.3 0.4
5 years 2.7 2.5 2.2
10 years 3.6 3.3 3.4
20 years 4.0 3.7 4.0
At 31 December 2009
1 year 0.9 1.3 0.7
5 years 3.4 2.8 3.0
10 years 4.1 3.6 4.0
20 years 4.3 4.1 4.5
ZAR SEK
At 31 December 2010
1 year 5.6 2.3
5 years 7.4 3.3
10 years 8.2 3.7
20 years 8.1 4.0
At 31 December 2009
1 year 7.3 0.8
5 years 8.9 2.9
10 years 9.2 3.7
20 years 8.2 4.1
* In prior reporting periods, the risk free spot yields disclosed for GBP were
on a one-year forward basis. The assumptions as at 31 December 2010, as well
as 31 December 2009, are now shown as annualised spot yields, consistent with
other regions.
%
Expense inflation
GBP EUR USD ZAR SEK
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
At 31 December 2009
1 year 3.3 2.5 3.0 6.4 1.1
5 years 3.8 2.5 3.0 7.5 2.6
10 years 4.4 2.5 3.0 7.7 2.8
20 years 4.8 2.5 3.0 6.7 3.0
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 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. 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,
e.g. volatilities for property returns. Where strict adherence to the above is
not possible, for example where markets only exist at short durations such as
the equity option market in South Africa, interpolation or extrapolation
techniques are used to derive volatility assumptions for the full-term
structure of the liabilities. Correlation assumptions between asset classes
that are used in stochastic models are based on an assessment of historic
relationships. Where historic data is used in setting volatility or
correlation assumptions, a suitable time period is considered for analysing
historic data including consideration of the appropriateness of historical
data where economic conditions were materially different to current
conditions.
For the Emerging Markets stochastic models, due to the immateriality of
corporate bond and property holdings, corporate bonds are assumed to yield the
same returns as equivalent long-term government bonds and property is assumed
to earn a return equal to a portfolio that is invested 50% in local equities
and 50% in long-term government bonds.
The at-the-money annualised asset volatility assumptions of the asset classes
incorporated in the stochastic models are detailed below.
ZAR volatilities* %
1 year swap 5 year swap 10 year swap 20 year swap
At 31 December
2010
Option term
1 year 18.7 16.9 15.8 15.1
5 years 16.4 15.5 14.9 14.4
10 years 15.6 15.0 14.5 13.9
20 years 13.8 13.3 12.8 11.9
At 31 December
2009
1 year 18.3 16.2 15.1 14.8
5 years 16.9 15.8 15.3 15.1
10 years 15.7 15.2 14.7 14.1
20 years 14.5 13.8 13.1 12.0
ZAR volatilities* %
At 31 December 2010 Equity (total return Property (total
Option term index) return index)
1 year 23.4 16.0
5 years 25.5 15.7
10 years 27.0 15.9
20 years 27.8 15.4
At 31 December 2009
1 year 27.4 17.1
5 years 25.5 14.8
10 years 26.2 14.1
20 years 27.0 14.2
* Due to limited liquidity in the ZAR swaption and equity option market, the
market consistent asset model has been calibrated by extrapolating swaption
and equity option implied volatility data beyond terms of two years and three
years respectively.
USD volatilities* %
1 year swap 5 year swap 10 year swap 20 year swap
At 31 December
2010
Option term
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
At 31 December
2009
1 year 39.0 36.5 33.2 29.6
5 years 27.1 25.0 23.5 21.1
10 years 19.4 18.9 17.6 16.2
20 years 16.8 16.1 14.2 12.7
* In prior reporting periods USD volatilities were based on market quoted
information. The assumptions for 31 December 2010 as well as 31 December 2009
are now shown as modelled volatilities, consistent with the disclosure of
interest rate volatilities in South Africa. Market volatilities for one-year
option terms and one-year swap tenors are significantly different to modelled
volatilities, with the calibration ensuring a reasonable fit across the entire
spectrum of modelled option terms and swap tenors instead of focusing the
calibration in this area.
International equity volatilities (applicable to Old Mutual Bermuda)*
SPX RTY TPX HSCEI TWY
At 31 December 2010
Option term
1 year 21.5 28.1 26.7 27.8 21.5
5 years 23.6 32.6 28.3 32.3 25.5
10 years 23.6 32.6 28.3 32.3 25.5
At 31 December 2009
1 year 22.1 28.6 28.3 33.5 22.9
5 years 24.4 32.9 29.4 34.2 26.4
10 years 25.0 32.6 29.0 37.4 27.5
KOSP12 NIFTY SX5E UKX
At 31 December 2010
Option term
1 year 21.4 22.0 24.3 21.5
5 years 24.0 26.6 25.2 24.2
10 years 24.0 26.6 25.2 24.2
At 31 December 2009
1 year 23.3 26.5 24.7 23.1
5 years 24.2 26.4 25.4 24.1
10 years 30.0 31.2 27.4 25.9
International equity volatilities
(applicable to Old Mutual Bermuda)*
%
EEM USAgg EUAgg APAgg
At 31 December 2010
Option term
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
At 31 December 2009
1 year 31.6 4.5 12.0 11.6
5 years 30.8 4.5 12.0 11.6
10 years 36.7 4.5 12.0 11.6
* Long-term option implied volatility has been calibrated assuming a flat
volatility term structure beyond five years due to limited data availability
for some indices. In prior reporting periods, the volatilities disclosed for
Bermuda were on a one-year forward basis for most indices. The assumptions at
31 December 2010, as well as the comparatives for prior periods, are now 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.
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 IFRS statements.
Expected asset returns in excess of the risk free reference rates
The expected asset returns in excess of the risk free reference rates have no
bearing on the calculated MCEV other than the calculation of the expected
existing business contribution in the analysis of MCEV earnings. 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. Pre-tax
real-world economic assumptions are determined as follows:
- The equity risk premium is 3.5% for Africa and 3% for Europe and the United
States.
- The corporate bond return is based on actual corporate bond spreads on the
reporting date less an allowance for defaults.
- The property risk premium is 1.5% in Africa and 2% in Europe.
Tax
The weighted average effective tax rates that apply to the cash flow
projections within the VIF at 31 December 2010 are set out below:
- OMSA - 33% (31 December 2009: 33%)
- Namibia - 0% (31 December 2009: 0%)
- Nordic - 4% (31 December 2009: 4%)
- Retail Europe - 27% (31 December 2009: 28%)
- Wealth Management -11% (31 December 2009: 13%)
- US Life - 0% (31 December 2009: 0%)
- Bermuda - 0% (31 December 2009: 0%)
B: Segment information
B1: Adjusted Group MCEV presented per business line
GBPm
At At
31 December 31 December
2010 2009
MCEV of the core covered business 7,417 6,147
Adjusted net worth* 2,414 1,954
Value of in-force business 5,003 4,193
MCEV of the Bermuda non core covered business 287 198
Adjusted net worth* 403 363
Value of in-force business (116) (165)
MCEV of the US Life discontinued covered business (189) (318)
Adjusted net worth* 534 498
Value of in-force business (723) (816)
Adjusted net worth of asset management and other
businesses 1,950 1,716
Emerging Markets 289 216
Nordic** 4 (75)
Retail Europe 14 12
Wealth Management 171 152
US Asset Management 1,472 1,411
Value of the banking business 3,603 2,948
Nordic (adjusted net worth) 328 314
Nedbank (market value) 3,275 2,634
Value of the general insurance business
Mutual & Federal*** 409 448
Net other business 31 123
Adjustment for present value of Black Economic
Empowerment scheme deferred consideration 266 221
Adjustment for value of own shares in ESOP
schemes**** 85 71
Perpetual preferred securities (US$ denominated) (449) (385)
Perpetual preferred callable securities (598) (477)
GBP denominated (270) (224)
Euro denominated (328) (253)
Debt (1,782) (1,664)
Rand denominated (304) (290)
USD denominated (337) (338)
GBP denominated (842) (759)
SEK denominated (297) (256)
Euro denominated (2) (21)
Adjusted Group MCEV 11,030 9,028
* 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.
*** Reflected at IFRS net asset value at 31 December 2010 and at market value
for 31 December 2009 as a result of the acquisition of the remaining non-
controlling interest in Mutual & Federal.
**** Includes adjustment for value of excess own shares in employee share
scheme trusts. The movement in value between 31 December 2009 and 31 December
2010 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 2010
and the reduction in overall shares held due to exercises of rights to take
delivery of, or net settle, share grants during the year.
B2: Adjusted operating MCEV earnings for the
covered business
GBPm
Year ended Year ended
31 December 31 December
2010 2009
Adjusted operating MCEV earnings before tax for
the covered business
Long Term Savings 705 252
Emerging Markets 443 272
Nordic 65 78
Retail Europe 68 (58)
Wealth Management 129 (40)
US Life 48 302
Bermuda (28) 8
725 562
Tax on adjusted operating MCEV earnings for the
covered business
Long Term Savings (138) (7)
Emerging Markets (99) (60)
Nordic (20) 3
Retail Europe (2) 14
Wealth Management (17) 36
US Life (1) (36)
Bermuda 4 (27)
(135) (70)
Adjusted operating MCEV earnings after tax for the
covered business
Long Term Savings 567 245
Emerging Markets 344 212
Nordic 45 81
Retail Europe 66 (44)
Wealth Management 112 (4)
US Life 47 266
Bermuda (24) (19)
590 492
Tax on adjusted operating MCEV earnings comprises
Tax on adjusted operating MCEV earnings for
the covered business (135) (70)
Tax on adjusted operating MCEV earnings for
other business (175) (139)
Tax on adjusted operating MCEV earnings (310) (209)
B3: Components of MCEV of the covered business
GBPm
At At
31 December 31 December
2010 2009
MCEV of the covered business 7,515 6,027
Adjusted net worth 3,351 2,815
Value of in-force business 4,164 3,212
Long Term Savings
Adjusted net worth 2,414 1,954
Free surplus 441 380
Required capital 1,973 1,574
Value of in-force business 5,003 4,193
Present value of future profits 5,557 4,667
Additional time value of financial options and
guarantees (12) (7)
Frictional costs (267) (211)
Cost of residual non-hedgeable risks (275) (256)
Consisting of:
Emerging Markets
Adjusted net worth* 1,804 1,305
Free surplus 306 80
Required capital 1,498 1,225
Value of in-force business 1,509 1,158
Present value of future profits 1,849 1,424
Additional time value of financial options and
guarantees - -
Frictional costs (240) (181)
Cost of residual non-hedgeable risks (100) (85)
Nordic
Adjusted net worth 186 195
Free surplus 51 91
Required capital 135 104
Value of in-force business 1,318 1,114
Present value of future profits 1,397 1,196
Additional time value of financial options and
guarantees - -
Frictional costs (6) (11)
Cost of residual non-hedgeable risks (73) (71)
Retail Europe
Adjusted net worth 103 78
Free surplus 41 46
Required capital 62 32
Value of in-force business 520 453
Present value of future profits 573 507
Additional time value of financial options and
guarantees (10) (6)
Frictional costs (11) (7)
Cost of residual non-hedgeable risks (32) (41)
B3: Components of MCEV of the covered business
GBPm
At At
31 December 31 December
2010 2009
Wealth management
Adjusted net worth 321 376
Free surplus 43 163
Required capital 278 213
Value of in-force business 1,656 1,468
Present value of future profits 1,738 1,540
Additional time value of financial options and
guarantees (2) (1)
Frictional costs (10) (12)
Cost of residual non-hedgeable risks (70) (59)
US Life (Discontinued)
Adjusted net worth 534 498
Free surplus 66 36
Required capital 468 462
Value of in-force business (723) (816)
Present value of future profits (446) (511)
Additional time value of financial options and
guarantees (186) (213)
Frictional costs (7) (6)
Cost of residual non-hedgeable risks (84) (86)
Bermuda (Non-core)
Adjusted net worth 403 363
Free surplus - -
Required capital 403 363
Value of in-force business (116) (165)
Present value of future profits 145 99
Additional time value of financial options and
guarantees (235) (196)
Frictional costs (2) (4)
Cost of residual non-hedgeable risks (24) (64)
* The required capital in respect of OMSA is partially covered by the market
value of the Group`s investments in banking and general insurance in South
Africa. On consolidation these investments are shown separately.
B4: Analysis of covered business MCEV earnings (after tax)
The Long Term Savings segment consists of Emerging Markets, Nordic, Retail
Europe and Wealth Management.
GBPm
Long Term Savings (LTS) Year ended 31 December 2010
Free Required Adjusted
surplus capital net worth
Opening MCEV 380 1,574 1,954
New business value (419) 160 (259)
Expected existing business contribution 8 77 85
(reference rate)
Expected existing business contribution (in 7 (3) 4
excess of reference rate)
Transfers from VIF and required capital to
free 802 (184) 618
surplus
Experience variances (16) 28 12
Assumption changes 23 2 25
Other operating variance (93) 37 (56)
Operating MCEV earnings 312 117 429
Economic variances 100 41 141
Other non-operating variance (7) 25 18
Total MCEV earnings 405 183 588
Closing adjustments (344) 216 (128)
Capital and dividend flows (383) - (383)
Foreign exchange variance 39 216 255
MCEV of acquired/sold business - - -
Closing MCEV 441 1,973 2,414
Return on MCEV (RoEV)% per annum
Long Term Savings (LTS) Year ended 31 December 2010
Value of MCEV
in-force
Opening MCEV 4,193 6,147
New business value 459 200
Expected existing business contribution 168 253
(reference rate)
Expected existing business contribution (in 59 63
excess of reference rate)
Transfers from VIF and required capital to free (618) -
surplus
Experience variances 43 55
Assumption changes (25) -
Other operating variance 52 (4)
Operating MCEV earnings 138 567
Economic variances 342 483
Other non-operating variance - 18
Total MCEV earnings 480 1,068
Closing adjustments 330 202
Capital and dividend flows - (383)
Foreign exchange variance 330 585
MCEV of acquired/sold business - -
Closing MCEV 5,003 7,417
Return on MCEV (RoEV)% per annum 9.2%
Long Term Savings (LTS) Year ended 31 December 2009
Free Required Adjusted
surplus capital net worth
Opening MCEV 101 1,441 1,542
New business value (438) 129 (309)
Expected existing business contribution 5 92 97
(reference rate)
Expected existing business contribution (in (1) 5 4
excess of reference rate)
Transfers from VIF and required capital to
free 766 (186) 580
surplus
Experience variances (11) (8) (19)
Assumption changes 33 (22) 11
Other operating variance 154 (44) 110
Operating MCEV earnings 508 (34) 474
Economic variances 50 34 84
Other non-operating variance 39 (20) 19
Total MCEV earnings 597 (20) 577
Closing adjustments (318) 153 (165)
Capital and dividend flows (335) (1) (336)
Foreign exchange variance 4 151 155
MCEV of acquired/sold business 13 3 16
Closing MCEV 380 1,574 1,954
Return on MCEV (RoEV)% per annum
Long Term Savings (LTS) Year ended 31 December 2009
Value of MCEV
in-force
Opening MCEV 3,950 5,492
New business value 462 153
Expected existing business contribution 191 288
(reference rate)
Expected existing business contribution (in 59 63
excess of reference rate)
Transfers from VIF and required capital to free (580) -
surplus
Experience variances (64) (83)
Assumption changes (242) (231)
Other operating variance (55) 55
Operating MCEV earnings (229) 245
Economic variances 217 301
Other non-operating variance 168 187
Total MCEV earnings 156 733
Closing adjustments 87 (78)
Capital and dividend flows 0 (336)
Foreign exchange variance 111 266
MCEV of acquired/sold business (24) (8)
Closing MCEV 4,193 6,147
Return on MCEV (RoEV)% per annum 4.5%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
Experience variances 12 43 55
Persistency 18 20 38
Risk 22 8 30
Expenses (54) 5 (49)
Other 26 10 36
Assumption changes 25 (25) -
Persistency - (4) (4)
Risk 17 14 31
Expenses (2) (20) (22)
Other 10 (15) (5)
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (19) (64) (83)
Persistency (18) (80) (98)
Risk 31 - 31
Expenses (56) 13 (43)
Other 24 2 26
Assumption changes 11 (242) (231)
Persistency (29) (164) (193)
Risk 30 53 83
Expenses 10 (161) (151)
Other (1) 31 30
Return on MCEV is calculated as the operating MCEV earnings after tax divided
by opening MCEV in sterling.
GBPm
Long Term Savings (LTS) Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) 16 65 81 173 254
Expected existing
business contribution
(in excess of
reference rate) 6 (4) 2 67 69
GBPm
Year ended 31 December 2010
Emerging Markets*
Free Required Adjusted Value of MCEV
surplus Capital net worth in-force
Opening MCEV 80 1,225 1,305 1,158 2,463
New business value (159) 134 (25) 111 86
Expected existing
business contribution 6 73 79 124 203
(reference rate)
Expected existing
business contribution (in - (3) (3) 16 13
excess of reference
rate)
Transfers from VIF
and required capital
to free 356 (166) 190 (190) -
surplus
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
MCEV of acquired/sold
business - - - - -
Closing MCEV 306 1,498 1,804 1,509 3,313
Return on MCEV
(RoEV)% per annum 13.2%
Year ended 31 December 2009
Emerging Markets*
Free Required Adjusted Value of MCEV
surplus capital net worth in-force
Opening MCEV (92) 1,075 983 1,090 2,073
New business value (136) 110 (26) 91 65
Expected existing
business contribution
(reference rate) (7) 85 78 129 207
Expected existing
business contribution (in
excess of reference
rate) - 5 5 16 21
Transfers from VIF
and required capital
to free surplus 314 (146) 168 (168) -
surplus
Experience variances (9) (9) (18) (35) (53)
Assumption changes 40 (29) 11 (90) (79)
Other operating
variance 46 (27) 19 32 51
Operating MCEV earnings 248 (11) 237 (25) 212
Economic variances 54 1 55 (39) 16
Other non-operating
variance - - - - -
Total MCEV earnings 302 (10) 292 (64) 228
Closing adjustments (130) 160 30 132 162
Capital and dividend
flows (146) (3) (149) - (149)
Foreign exchange variance 3 160 163 156 319
MCEV of acquired/sold
business 13 3 16 (24) (8)
Closing MCEV 80 1,225 1,305 1,158 2,463
Return on MCEV
(RoEV)% per annum 9.8%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (18) (35) (53)
Persistency (9) (44) (53)
Risk 16 - 16
Expenses (30) 11 (19)
Other 5 (2) 3
Assumption changes 11 (90) (79)
Persistency (29) (55) (84)
Risk 30 20 50
Expenses 10 (55) (45)
Other - - -
GBPm
Emerging Markets Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) 12 60 72 107 179
Expected existing
business contribution
(in excess of
reference rate) - (4) (4) 16 12
* The MCEV for Emerging Markets is presented after the adjustment for market
value of life fund investments in Group equity and debt instruments.
The marginal decrease in `expected existing business contribution (reference
rate)` from 2009 to 2010 is mainly attributable to a lower one-year swap rate
at 31 December 2009 (7.3%) compared to 31 December 2008 (9.3%) off-set by a
higher opening MCEV.
The `expected existing business contribution (in excess of reference rate)` on
the ANW has reduced from 2009 to 2010 due to a higher cash allocation assumed
for shareholder funds.
The positive experience variances are mainly attributable to favourable
persistency experience, as well as a small positive contribution from risk
experience.
Operating assumption changes are positive in 2010 consisting mainly of an
improvement in fees relative to maintenance expenses in the Corporate Segment
due to economies of scale from an increasing fund membership; and an increase
in annuitant mortality rates in Retail Affluent, following a recent mortality
investigation which is supported by positive annuitant mortality experience
variances.
The negative other operating variance was caused by various methodology
changes and error corrections.
In addition to the effects above, other significant movements affecting the
closing MCEV include a large positive impact from economic variances due to a
combination of better than assumed equity returns and the effect of the
changes in the shape of the swap yield curve. This was partially off-set by
modelling enhancements to the economic scenario generator used to calculate
the investment guarantee reserve, which caused a decrease in the margin
(buffer) held to protect against future market volatility, resulting in less
value being released as profit in the future.
The capital and dividend flows mainly consist of the purchase of additional
Nedbank shares.
The strengthening of the rand relative to sterling had a significant positive
effect on the increase in MCEV.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV in rand (including conversion of results for Mexico to rand). GBPm
Year ended 31 December 2010
Nordic
Free Required Adjusted Value of MCEV
surplus capital net worth in-force
Opening MCEV 91 104 195 1,114 1,309
New business value (49) 6 (43) 84 41
Expected existing
business contribution
(reference rate) - 1 1 14 15
Expected existing
business contribution (in
excess of reference rate) - - - 26 26
Transfers from VIF
and required capital
to free surplus 103 - 103 (103) -
Experience variances 30 (5) 25 (1) 24
Assumption changes - - - (55) (55)
Other operating
variance (44) 4 (40) 34 (6)
Operating MCEV
earnings 40 6 46 (1) 45
Economic variances (4) 12 8 86 94
Other non-operating
variance 17 - 17 - 17
Total MCEV earnings 53 18 71 85 156
Closing adjustments (93) 13 (80) 119 39
Capital and dividend
flows (100) - (100) - (100)
Foreign exchange
variance 7 13 20 119 139
Closing MCEV 51 135 186 1,318 1,504
Return on MCEV
(RoEV)% per annum 3.3%
Nordic Year ended 31 December 2009
Free Required Adjusted Value of MCEV
surplus capital net worth in-force
Opening MCEV 58 105 163 882 1,045
New business value (57) 6 (51) 95 44
Expected existing
business contribution 4 - 4 18 22
(reference rate)
Expected existing
business
contribution (in
excess of reference
rate) - - - 14 14
Transfers from VIF
and required capital
to free surplus 81 (17) 64 (64) -
surplus
Experience variances 28 (7) 21 10 31
Assumption changes 3 - 3 (30) (27)
Other operating
variance - - - (3) (3)
Operating MCEV
earnings 59 (18) 41 40 81
Economic variances (5) 17 12 192 204
Other non-operating
variance 18 - 18 1 19
Total MCEV earnings 72 (1) 71 233 304
Closing adjustments (39) - (39) (1) (40)
Capital and dividend
flows (37) - (37) - (37)
Foreign exchange
variance (2) - (2) (1) (3)
Closing MCEV 91 104 195 1,114 1,309
Return on MCEV
(RoEV)% per annum 8.1%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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)
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances 21 10 31
Persistency (2) 5 3
Risk 6 (1) 5
Expenses 3 (1) 2
Other 14 7 21
Assumption changes 3 (30) (27)
Persistency - (29) (29)
Risk - 19 19
Expenses - (18) (18)
Other 3 (2) 1
GBPm
Nordic Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) 3 2 5 34 39
Expected existing
business contribution
(in excess of
reference rate) - - - 30 30
The `expected existing business contribution (in excess of reference rate)` is
not significant on the adjusted net worth portion of the business. This is
because shareholder assets backing capital requirements are typically invested
in highly secure government paper and other short-term instruments.
Expected existing business contributions in 2011 are significantly higher than
in 2010 due to higher one-year swap rates at 31 December 2010 relative to
those at 31 December 2009 and a higher opening value of in-force.
The positive experience variances were largely caused by profit made on the
sale of a private equity investment, higher than expected fee income and
increased take-ups of drawdown products. There were no one-off expense
variances.
Operating assumption changes were made to recognise higher expected commission
payments, anticipated pricing pressure in the corporate segment, expectations
of adverse persistency and adjustments to pricing of the Waiver of Premium
business.
The other operating variance was mainly due to modelling refinements to
deferred tax assets and more accurate valuation of tendered business.
The economic variances were mainly due to the positive effect of market
movements on funds under management.
The capital and dividend flows mainly represent dividends, repayment of loans,
internal reclassification and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV in Swedish krona.
GBPm
Retail Europe Year ended 31 December 2010
Free Required Adjusted Value of MCEV
surplus capital net worth in-force
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%
Retail Europe Year ended 31 December 2009
Free Required Adjusted Value of MCEV
surplus capital net worth In-force
Opening MCEV 15 64 79 517 596
New business value (74) 1 (73) 68 (5)
Expected existing
business contribution
(reference rate) 1 - 1 10 11
Expected existing
business contribution
(in excess of
reference rate) - - - 3 3
Transfers from VIF
and required capital
to free surplus 97 7 104 (104) -
Experience variances (20) 1 (19) (4) (23)
Assumption changes - - - (26) (26)
Other operating variance 18 (19) (1) (3) (4)
Operating MCEV earnings 22 (10) 12 (56) (44)
Economic variances (1) 4 3 26 29
Other non-operating
variance 20 (20) - 3 3
Total MCEV earnings 41 (26) 15 (27) (12)
Closing adjustments (10) (6) (16) (37) (53)
Capital and dividend
flows (10) (3) (13) - (13)
Foreign exchange
variance - (3) (3) (37) (40)
Closing MCEV 46 32 78 453 531
Return on MCEV
(RoEV)% per annum (7.9)%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (19) (4) (23)
Persistency (1) (1) (2)
Risk 3 1 4
Expenses (5) - (5)
Other (16) (4) (20)
Assumption changes - (26) (26)
Persistency - 2 2
Risk - 1 1
Expenses - (22) (22)
Other - (7) (7)
GBPm
Retail Europe Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) - 1 1 9 10
Expected existing
business contribution
(in excess of
reference rate) - - - 4 4
The `expected existing business contribution (in excess of reference rate)` is
not significant on the adjusted net worth portion of the business. This is
because shareholder assets backing capital requirements are typically invested
in highly secure government paper and other short-term instruments.
Expected existing business contributions in 2011 are higher than in 2010 due
to a higher opening asset-base.
Experience variances are mainly due to higher than anticipated profit sharing
on participating contracts in Germany, as well as higher than expected fee
income. In addition, there was a one-off expense variance in respect of
project costs. Mortality and morbidity experience continues to be positive
across all Retail Europe countries.
Operating assumption changes were made to recognise higher expected fee income
in Germany and Poland following sustained favourable fee income experience.
Future profit sharing assumptions for the German business were revised upwards
in line with expected new business levels.
Further operating assumption changes were made to recognise positive
persistency experience and maintenance expense experience in Switzerland, and
to reflect the capitalisation of Retail Europe overhead expenses.
The other operating variances are mainly due to improvements in the modelling
of disability business in Switzerland and a reduction in the cost of non-
hedgeable risk due to lower non-hedgeable risk capital.
The economic variances are mainly due to the positive effect of market
movements on funds under management as well as the beneficial impact of lower
swap rates across the region.
The capital and dividend flows mainly represent dividends.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV in euro.
Wealth Management GBPm
Year ended 31 December 2010
Free Required Adjusted Value of MCEV
surplus capital net worth in-force
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) -
surplus
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%
Year ended 31 December 2009
Wealth Management
Free Required Adjusted Value of MCEV
surplus capital net worth In-force
Opening MCEV 120 197 317 1,461 1,778
New business value (171) 12 (159) 208 49
Expected existing
business
contribution 7 7 14 34 48
(reference rate)
Expected existing
business
contribution (in
excess of reference
rate) (1) - (1) 26 25
Transfers from VIF
and required
capital to free
surplus 274 (30) 244 (244) -
Experience variances (10) 7 (3) (35) (38)
Assumption changes (10) 7 (3) (96) (99)
Other operating
variance 90 2 92 (81) 11
Operating MCEV
earnings 179 5 184 (188) (4)
Economic variances 2 12 14 38 52
Other non-operating
variance 1 - 1 164 165
Total MCEV earnings 182 17 199 14 213
Closing adjustments (139) (1) (140) (7) (147)
Capital and
dividend flows (142) 5 (137) - (137)
Foreign exchange
variance 3 (6) (3) (7) (10)
Closing MCEV 163 213 376 1,468 1,844
Return on MCEV
(RoEV)% per annum (0.3)%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (3) (35) (38)
Persistency (6) (39) (45)
Risk 6 - 6
Expenses (24) 2 (22)
Other 21 2 23
Assumption changes (3) (96) (99)
Persistency - (81) (81)
Risk - 12 12
Expenses - (66) (66)
Other (3) 39 36
GBPm
Wealth Management Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) 1 2 3 24 27
Expected existing
business contribution
(in excess of
reference rate) 6 - 6 17 23
The `expected existing business contribution (in excess of reference rate)` is
not significant on the required capital portion of the business. This is
because shareholder assets backing capital requirements are typically invested
in highly secure government paper and other short-term instruments.
Adverse expense variances were predominately one-off variances of GBP(38)
million relating to software development and restructuring costs. The `other`
variances are predominantly fee income being higher than expected. Positive
persistency variance is driven by positive experience in International and
Continental Europe business.
Positive operating assumption changes were made to `other` and risk
assumptions. The `other` assumption change relates to fee income, consistent
with positive experience in 2010. The risk assumption change relates to
positive experience in Skandia UK.
Expense and persistency assumptions were strengthened. The expense assumption
change is largely due to changes to reflect the new expense allocation review
in UK and International, and a new provision to streamline existing expense
provisions relating to development projects. The persistency assumption change
is driven by a reduction in persistency to allow for the potential impact of
the Retail Distribution Review (RDR) in the UK offset by increasing
persistency assumptions due to positive experience in International.
Economic variances are due to positive market movements, exchange rate
movements and tax deductions on income and gains as a result of the current
tax position of the UK tax group.
The other non-operating variance is driven by the effect from changes in the
United Kingdom corporation tax rate from 28% to 27%.
The capital and dividend flows mainly represent dividends, repayments of loans
and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening
MCEV in sterling.
GBPm
US Life Year ended 31 December 2010
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Opening MCEV 36 462 498 (816) (318)
New business value (66) 66 - (28) (28)
Expected existing
business contribution
(reference rate) 1 9 10 15 25
Expected existing
business
contribution (in
excess of reference
rate) - - - 80 80
Transfers from VIF
and required capital
to free surplus 81 (47) 34 (34) -
Experience variances 33 (23) 10 30 40
Assumption changes (6) - (6) (57) (63)
Other operating
variance - - - (7) (7)
Operating MCEV
earnings 43 5 48 (1) 47
Economic variances 71 (18) 53 127 180
Other non-operating
variance - - - - -
Total MCEV earnings 114 (13) 101 126 227
Closing adjustments (84) 19 (65) (33) (98)
Capital and dividend
flows (85) - (85) - (85)
Foreign exchange
variance 1 19 20 (33) (13)
Closing MCEV 66 468 534 (723) (189)
Return on MCEV
(RoEV)% per annum 14.1%
Year ended 31 December 2009
US Life
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Opening MCEV (85) 550 465 (1,725) (1,260)
New business value (35) 41 6 8 14
Expected existing
business contribution (3) 21 18 (45) (27)
(reference rate)
Expected existing
business
contribution (in
excess of
reference rate) - 1 1 257 258
Transfers from VIF
and required
capital to free
surplus 52 (54) (2) 2 -
Experience
variances 137 (103) 34 (35) (1)
Assumption changes - - - 30 30
Other operating
variance - - - (8) (8)
Operating MCEV
earnings 151 (94) 57 209 266
Economic variances (181) 59 (122) 556 434
Other
non-operating
variance - - - - -
Total MCEV earnings (30) (35) (65) 765 700
Closing adjustments 151 (53) 98 144 242
Capital and
dividend flows 146 - 146 - 146
Foreign exchange
variance 5 (53) (48) 144 96
Closing MCEV 36 462 498 (816) (318)
Return on MCEV
(RoEV)% per annum 22.7%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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 - - -
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances 34 (35) (1)
Persistency (17) 20 3
Risk - 17 17
Expenses 17 - 17
Other 34 (72) (38)
Assumption changes - 30 30
Persistency - 18 18
Risk - 12 12
Expenses - - -
Other - - -
GBPm
US Life Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) 1 6 7 18 25
Expected existing
business contribution
(in excess of
reference rate) - - - 62 62
The results for US Life include allowance for Old Mutual Reassurance (Ireland)
Limited (OMRe), which provides reinsurance to the United States Life
Companies.
The `expected existing business contribution (in excess of reference rate)` is
calculated using the corporate bond spread that is expected to be earned over
and above the adjusted risk free reference rate (inclusive of the liquidity
premium adjustment).
The main reason for the significantly negative VNB result is due to very low
swap yields compressing potential earnings on spread-based annuity business,
resulting in significant future losses anticipated on an MCEV basis.
The experience variances were largely caused by positive persistency
experience due to higher surrenders of Fixed Indexed Annuity contracts, which
make future losses on an MCEV basis. Expense variances benefited from tight
cost controls in this business. There were no material experience variance
items that were one-off in nature.
Operating assumption changes include the increasing of premium persistency
assumptions on certain unprofitable Universal Life and Term Assurance
products.
The other operating variance was mainly due to modelling changes and error
corrections.
The economic variances were mainly due to gains in the underlying investment
portfolio and lower swap yields, partially offset by a reduction in the
assumed liquidity premium from 100bps to 75bps.
The capital and dividend flows include the payment of dividends to Old Mutual
plc.
Return on MCEV was calculated as the operating MCEV earnings after tax divided
by the absolute value of the opening MCEV in US dollars. GBPm
Year ended 31 December 2010
Bermuda
Adjusted Value of MCEV
Free Required net worth in-force
surplus Capital
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)%
Year ended 31 December 2009
Bermuda
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Opening MCEV 342 34 376 (425) (49)
New business value - - - - -
Expected existing
business
contribution
(reference rate) 5 1 6 (4) 2
Expected existing
business
contribution (in
excess of
reference rate) 33 - 33 39 72
Transfers from VIF
and required
capital to free
surplus (5) (4) (9) 9 -
Experience
variances (72) - (72) (21) (93)
Assumption changes (36) - (36) (46) (82)
Other operating
variance (345) 345 - 82 82
Operating MCEV
earnings (420) 342 (78) 59 (19)
Economic variances 102 - 102 167 269
Other
non-operating
variance - - - - -
Total MCEV earnings (318) 342 24 226 250
Closing adjustments (24) (13) (37) 34 (3)
Capital and
dividend flows - - - - -
Foreign exchange
variance (24) (13) (37) 34 (3)
Closing MCEV - 363 363 (165) 198
Return on MCEV
(RoEV)% per annum (41.0)%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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)
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (72) (21) (93)
Persistency (52) (13) (65)
Risk - - -
Expenses (10) 1 (9)
Other (10) (9) (19)
Assumption changes (36) (46) (82)
Persistency - (65) (65)
Risk - - -
Expenses - (29) (29)
Other (36) 48 12
GBPm
Bermuda Year ended 31 December 2011
Adjusted Value of MCEV
Free Required net worth in-force
surplus capital
Expected existing
business contribution
(reference rate) - 2 2 6 8
Expected existing
business contribution
(in excess of
reference rate) - 24 24 16 40
The `expected existing business contribution (in excess of reference rate)` is
calculated using the corporate bond spread that is expected to be earned over
and above the adjusted risk free reference rate (inclusive of the liquidity
premium adjustment), while the adjusted net worth component includes interest
received from Old Mutual plc.
The experience variances include adverse persistency experience on Variable
Annuity contracts and expense losses as a result of higher than anticipated
expenditure on projects GBP(4) million and an increased head-count. Other
experience variances include a one-off tax variance of GBP5 million due to the
release of a tax contingency reserve. There were no other material experience
variance items that were one-off in nature.
Operating assumption changes include the strengthening of expense assumptions
consistent with 2010 experience and refinements to surrender assumptions as a
result of the most recent experience investigation.
The other operating variance was mainly due to modelling changes and error
corrections.
Economic variances were driven by good equity market performance and gains on
the corporate bond portfolio, partially offset by increased variable Annuity
Guarantee costs due to declining interest rates.
Return on MCEV was calculated as the operating MCEV earnings after tax divided
by the absolute value of the opening MCEV in US dollars.
Total covered business includes the MCEV contribution from the US Life and
Bermuda business segments.
GBPm
Year ended 31 December 2010
Total covered business
Free Required Adjusted Value of in- MCEV
surplus capital net worth force
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 - 899 (276) 623 (623)
surplus
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%
Year ended 31 December 2009
Total covered business
Free Required Adjustedn Value of MCEV
surplus capital et worth in-force
Opening MCEV 358 2,025 2,383 1,800 4,183
New business value (473) 170 (303) 470 167
Expected existing
business
contribution
(reference rate) 7 114 121 142 263
Expected existing
business
contribution (in
excess of reference
rate) 32 6 38 355 393
Transfers from VIF
and required capital
to free 813 (244) 569 (569) -
surplus
Experience variances 54 (111) (57) (120) (177)
Assumption changes (3) (22) (25) (258) (283)
Other operating
variance (191) 301 110 19 129
Operating MCEV
earnings 239 214 453 39 492
Economic variances (29) 93 64 940 1,004
Other non-operating
variance 39 (20) 19 168 187
Total MCEV earnings 249 287 536 1,147 1,683
Closing adjustments (191) 87 (104) 265 161
Capital and dividend
flows (189) (1) (190) - (190)
Foreign exchange
variance (15) 85 70 289 359
MCEV of
acquired/sold
business 13 3 16 (24) (8)
Closing MCEV 416 2,399 2,815 3,212 6,027
Return on MCEV
(RoEV)% per annum 11.8%
GBPm
Year ended 31 December 2010
Adjusted Value of MCEV
net worth in-force
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)
Year ended 31 December 2009
Adjusted Value of MCEV
net worth in-force
Experience variances (57) (120) (177)
Persistency (87) (72) (159)
Risk 31 17 48
Expenses (49) 13 (36)
Other 48 (78) (30)
Assumption changes (25) (258) (283)
Persistency (29) (210) (239)
Risk 30 64 94
Expenses 10 (190) (180)
Other (36) 78 42
GBPm
Total covered business Year ended 31 December 2011
Free Required Adjustedn Value of MCEV
surplus capital et worth in-force
Expected existing
business contribution
(reference rate) 17 73 90 197 287
Expected existing
business contribution
(in excess of
reference rate) 6 20 26 145 171
Return on MCEV for total covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in sterling.
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 annualised recurring premiums plus 10% of
single premiums.
GBPm
Year ended Year ended
31 December 31 December
2010 2009
Annualised recurring premiums
Long Term Savings (LTS) 698 685
Emerging Markets 325 249
Nordic 144 183
Retail Europe 63 62
Wealth Management 166 191
US Life 10 14
Bermuda - -
708 699
Single premiums
Long Term Savings (LTS) 7,932 6,257
Emerging Markets 1,611 1,437
Nordic 573 527
Retail Europe 63 53
Wealth Management 5,685 4,240
US Life 824 549
Bermuda - 15
8,756 6,821
PVNBP
Long Term Savings (LTS) 11,266 9,563
Emerging Markets 3,269 2,834
Nordic 1,104 1,150
Retail Europe 513 537
Wealth Management 6,380 5,042
US Life 889 639
Bermuda - 15
12,155 10,217
PVNBP capitalisation factors*
Long Term Savings (LTS) 4.8 4.8
Emerging Markets 5.1 5.6
Nordic 3.7 3.4
Retail Europe 7.2 7.8
Wealth Management 4.2 4.2
US Life 6.6 6.6
Bermuda n/a n/a
* The PVNBP capitalisation factors are calculated as follows: (PVNBP - single
premiums)/annualised recurring premiums.
APE
Long Term Savings (LTS) 1,491 1,312
Emerging Markets 487 393
Nordic 201 235
Retail Europe 69 67
Wealth Management 734 617
US Life 92 68
Bermuda - 1
1,381
1,583
VNB
Long Term Savings (LTS) 200 153
Emerging Markets 86 65
Nordic 41 44
Retail Europe 7 (5)
Wealth Management 66 49
US Life* (28) 14
Bermuda - -
172 167
PVNBP margin
Long Term Savings (LTS) 1.8% 1.6%
Emerging Markets 2.6% 2.3%
Nordic 3.7% 3.8%
Retail Europe 1.4% (1.0)%
Wealth Management 1.0% 1.0%
US Life (3.2)% 2.2%
Bermuda n/a n/a
1.4% 1.6%
APE margin
Long Term Savings (LTS) 13% 12%
Emerging Markets 18% 16%
Nordic 21% 19%
Retail Europe 11% (8)%
Wealth Management 9% 8%
US Life (31)% 20%
Bermuda n/a n/a
11% 12%
* The US Life VNB is negative then calculated on an MCEV basis, due to the
reliance on spread in the pricing basis, and the current 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 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 is excluded as this is more appropriately classified as
unit trust business.
GBPm
Year ended Year ended
Gross premium excluded from value of new business 31 December 31 December
2010 2009
Emerging Markets** 723 1,658
Wealth Management 304 153
** New business premiums not valued have reduced compared to 2009, mainly
because single premium new business figures for 2009 include inflows relating
to in-force business following OMSA`s acquisition of Futuregrowth and Acsis
Life. The results for the year ended 31 December 2009 have also been restated
to include Namibia`s contribution to new business premiums not valued
(GBP1,625 million excluding Namibia).
C2: Product analysis of new covered business premiums
GBPm
Recurring Year ended
Emerging Markets 31 December 2010
Single
Total business 325 1,611
Individual business 284 889
Savings 69 713
Protection 70 -
Annuity - 176
Mass foundation cluster* 145 -
Group business 41 722
Savings 20 585
Protection 21 1
Annuity - 136
Recurring Year ended
Emerging Markets 31 December 2009
Single
Total business 249 1,437
Individual business 220 716
Savings 50 539
Protection 56 21
Annuity - 155
Mass foundation cluster* 114 1
Group business 29 721
Savings 13 564
Protection 16 -
Annuity - 157
* Previously described as Retail Mass.
GBPm
Recurring Year ended Recurring Year ended
Nordic 31 December 2010 31 December 2009
Single Single
Unit-linked
and life
assurance 144 573 183 527
GBPm
Recurring Year ended Recurring Year ended
Retail Europe 31 December 2010 31 December 2009
Single Single
Unit-linked
and life assurance 63 63 62 53
GBPm
Recurring Year ended Recurring Year ended
Wealth
Management 31 December 2010 31 December 2009
Single Single
Unit-linked
and life assurance 166 5,685 191 4,240
GBPm
Recurring Year ended Recurring Year ended
US Life 31 December 2010 31 December 2009
Single Single
Total business 10 824 14 549
Fixed deferred
annuity - 163 - 30
Fixed indexed
annuity - 502 - 383
Variable annuity - - - -
Life 10 1 14 13
Immediate annuity - 158 - 123
The table above does not include the contribution from the mutual fund
business. This is detailed in the Business Review section.
C3: Adjustments applied in determining total Group MCEV earnings before tax
GBPm
Year ended 31 December 2010
Covered Non-covered Total Group
Analysis of adjusting items business MCEV business IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-covered
business - (20) (20)
acquired intangible assets and
impact of acquisition
accounting
Economic variances 864 (7) 857
Other non-operating variances 17 - 17
Acquired/divested business - (22) (22)
Closure of unclaimed share
trust - - -
Dividends declared to holders
of perpetual preferred
callable - 44 44
securities
Adjusting items relating to US
Asset Management equity plans - 6 6
and non-controlling interests
Fair value gains on Group debt
instruments - (203) (203)
Adjusting items 881 (202) 679
Adjusting items from
continuing operations 701 (202) 499
Adjusting items from
discontinued operations 180 - 180
Total MCEV adjusting items 881 (202) 679
Year ended 31 December 2009
Covered Non-covered Total Group
Analysis of adjusting items business MCEV business IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-covered
business - 65 65
acquired intangible assets and
impact of acquisition
accounting
Economic variances 1,108 (10) 1,098
Other non-operating variances 18 - 18
Acquired/divested business - (48) (48)
Closure of unclaimed share
trust - - -
Dividends declared to holders
of perpetual preferred
callable - 45 45
securities
Adjusting items relating to US
Asset Management equity plans - (1) (1)
and non-controlling interests
Fair value gains on Group debt
instruments - (264) (264)
Adjusting items 1,126 (213) 913
Adjusting items from
continuing operations 691 (213) 478
Adjusting items from
discontinued operations 435 - 435
Total MCEV adjusting items 1,126 (213) 913
C4: Other movements in IFRS net equity impacting Group MCEV
GBPm
Year ended 31 December 2010
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Fair value gains/(losses) - 8 8
Net investment hedge - (86) (86)
Currency translation
differences/exchange
differences on 580 448 1,028
translating foreign operations
Aggregate tax effects of items
taken directly to or
transferred - 14 14
from equity
Correction to transfers* - - -
Other movements - (24) (24)
Net income recognised directly
into equity 580 360 940
Capital and dividend flows for
the year (468) 322 (146)
Net sale of treasury shares - (28) (28)
Share buy back - - -
Net issues of ordinary share
capital by the Company 162 162
Acquisition of non-controlling
interest in Mutual & Federal - (93) (93)
Exercise of share options - 4 4
Change in share based payment
reserve - 4 4
Other movements in net equity 112 731 843
Year ended 31 December 2009
Covered Non-covered Total Group
business MCEV business IFRS MCEV
Fair value gains/(losses) - 2 2
Net investment hedge - (41) (41)
Currency translation
differences/exchange
differences on 359 197 556
translating foreign operations
Aggregate tax effects of items
taken directly to or
transferred - 13 13
from equity
Correction to transfers* - 316 316
Other movements (8) (7) (15)
Net income recognised directly
into equity 351 480 831
Capital and dividend flows for
the year (190) 145 (45)
Net sale of treasury shares - - -
Share buy back - - -
Net issues of ordinary share
capital by the Company - 2 2
Acquisition of non-controlling
interest in Mutual & Federal - - -
Exercise of share options - 3 3
Change in share based payment
reserve - 14 14
Other movements in net equity 161 644 805
* Refinement arising from the allocation of assets between covered and non-
covered business at 31 December 2008
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 Long Term Emerging Nordic
At 31 December 2010
Savings Markets
IFRS net asset value* 5,794 5,088 1,216 1,243
Adjustment to include long-term
business on a (1,822) (2,053) 207 (851)
statutory solvency basis
Inclusion of Group equity and
debt instruments 389 389 389 -
held in life funds
Goodwill (1,010) (1,010) (8) (206)
Adjusted net worth attributable
to ordinary equity holders
of the parent 3,351 2,414 1,804 186
Retail Wealth Bermuda
At 31 December 2010
Europe Management US Life
IFRS net asset value* 632 1,997 274 432
Adjustment to include long-term
business on a (331) (1,078) 260 (29)
statutory solvency basis
Inclusion of Group equity and
debt instruments - - - -
held in life funds
Goodwill (198) (598) - -
Adjusted net worth attributable
to ordinary 103 321 534 403
equity holders of the parent
GBPm
Total Long Term Emerging Markets Nordic
At 31 December 2009
Savings
IFRS net asset value* 6,103 4,848 821 1,222
Adjustment to include
long-term business on a (2,632) (2,238) 153 (841)
statutory solvency basis
Inclusion of Group
equity and debt instruments 339 339 339 -
held in life funds
Goodwill (995) (995) (8) (186)
Adjusted net worth
attributable to ordinary 2,815 1,954 1,305 195
equity holders of the
parent
Retail Wealth Bermuda
At 31 December 2009
Europe Management US Life
IFRS net asset value* 664 2,141 886 369
Adjustment to include long-term
business on a (382) (1,168) (388) (6)
statutory solvency basis
Inclusion of Group equity and
debt instruments - - - -
held in life funds
Goodwill (204) (597) - -
Adjusted net worth attributable
to ordinary 78 376 498 363
equity holders of the parent
* IFRS net asset value is after elimination of inter-company loans.
The adjustment to include long-term business on a statutory solvency basis
includes the following:
- The excess of the IFRS amount of the deferred acquisition cost (DAC) and
value of business acquired (VOBA) assets over the statutory levels included in
the VIF.
- When projecting future profits on a statutory basis, the VIF includes the
shareholders` value of unrealised capital gains. To the extent that assets in
IFRS are valued at market and the market value is higher than the statutory
book value, these profits have already been taken into account in the IFRS
equity.
- 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.
D: Other income statement notes
D1: Drivers of new business value for covered business
%
PVNBP Margin
Long Term Savings* Year ended Year ended
31 December 31 December
2010 2009
Margin at the end of comparative period 1.6 1.5
Change in volume (0.1) (0.1)
Change in product mix 0.2 -
Change in country mix - -
Change in operating assumptions 0.1 0.1
Change in economic assumptions (0.1) -
Change in tax/regulation - 0.1
Exchange rate movements 0.1 -
Margin at the end of the period 1.8 1.6
Emerging Markets**
Margin at the end of comparative period 2.3 2.2
Change in volume 0.1 (0.1)
Change in product mix 0.4 (0.2)
Change in country mix - -
Change in operating assumptions (0.1) 0.4
Change in economic assumptions (0.1) -
Margin at the end of the period 2.6 2.3
Nordic***
Margin at the end of comparative period 3.8 3.3
Change in volume (0.1) (0.1)
Change in product mix 0.6 -
Change in country mix - -
Change in operating assumptions (0.4) 0.4
Change in economic assumptions (0.2) 0.2
Margin at the end of the period 3.7 3.8
Retail Europe****
Margin at the end of comparative period (1.0) 1.8
Change in volume 1.6 (2.1 )
Change in product mix (0.2) (0.8 )
Change in country mix - (0.1 )
Change in operating assumptions 0.9 0.5
Change in economic assumptions 0.1 (0.3 )
Margin at the end of the period 1.4 (1.0 )
Wealth Management*
Margin at the end of comparative period 1.0 1.2
Change in volume (0.1) (0.2)
Change in product mix (0.1) -
Change in country mix - -
Change in operating assumptions 0.2 (0.2)
Change in economic assumptions - -
Change in tax/regulation - 0.2
Margin at the end of the period 1.0 1.0
US Life*****
Margin at the end of comparative period 2.2 (0.9)
Change in volume (0.1) -
Change in product mix (0.9) 1.5
Change in country mix - -
Change in operating assumptions (0.6) -
Change in economic assumptions (3.8) 1.6
Margin at the end of the period (3.2) 2.2
Total covered business*
Margin at the end of comparative period 1.6 0.8
Change in volume (0.1) 0.8
Change in product mix 0.1 -
Change in country mix - -
Change in operating assumptions 0.1 0.1
Change in economic assumptions (0.4) -
Change in tax/regulation - 0.1
Exchange rate movements 0.1 (0.2)
Margin at the end of the period 1.4 1.6
* The PVNBP margin changes are calculated in sterling.
** The PVNBP margin changes are calculated in rand.
*** The PVNBP margin changes are calculated in krona.
**** The PVNBP margin changes are calculated in euro.
***** The PVNBP margin changes are calculated in dollars.
E1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business
at 31 December 2010 and the value of new business for the year ended 31
December 2010 to changes in key assumptions.
For each sensitivity illustrated all other assumptions have been left
unchanged except where they are directly affected by the revised conditions.
Sensitivity scenarios therefore include consistent changes in cash flows
directly affected by the changed assumption(s), for example future bonus
participation in changed economic scenarios.
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.
Long Term Savings (LTS)
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 7,417 5,003 200
Effect of:
Required capital equal to the minimum
statutory requirement 7,474 5,060 204
Increasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately 7,289 4,887 185
Decreasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately 7,553 5,125 216
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, 7,425 5,011 202
with credited rates and discount rates
changing commensurately
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 7,736 5,274 208
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 7,107 4,741 193
50bps contraction on corporate bond
spreads 7,437 5,003 200
25% multiplicative increase in equity and
property implied volatilities 7,395 4,981 200
25% multiplicative increase in swaption
implied volatilities 7,408 4,994 200
Voluntary discontinuance rates decreasing
by 10% 7,606 5,193 238
Maintenance expense levels decreasing by
10%, with no corresponding decrease in
policy charges 7,653 5,239 220
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 7,536 5,122 212
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 7,392 4,979 199
For value of new business, acquisition
expenses other than commission and
commission related expenses increasing by
10%, with no n/a n/a 185
corresponding increase in policy charges
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 219
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable and
non-hedgeable risks for 7,462 5,049 203
covered business
Economic capital for residual
non-hedgeable risks calculated assuming a
99.93% confidence level which is targeted
by an internal 7,365 4,952 196
economic capital model
Emerging Markets
GBPm
MCEV Value of Value of new
At 31 December 2010
in-force business
business
Central assumptions 3,313 1,509 86
Effect of:
Required capital equal to the minimum
statutory requirement 3,366 1,562 90
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 3,285 1,479 80
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 3,342 1,540 91
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, 3,321 1,517 88
with credited rates and discount
rates changing commensurately
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 3,446 1,594 86
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 3,180 1,422 86
50bps contraction on corporate bond
spreads 3,333 1,509 86
25% multiplicative increase in equity
and property implied volatilities 3,292 1,488 86
25% multiplicative increase in
swaption implied volatilities 3,306 1,502 86
Voluntary discontinuance rates
decreasing by 10% 3,369 1,566 105
Maintenance expense levels decreasing
by 10%, with no corresponding
decrease in policy charges 3,446 1,641 98
Mortality and morbidity assumptions
for assurances decreasing by 5%, with
no corresponding decrease in policy
charges 3,414 1,609 97
Mortality assumption for annuities
decreasing by 5%, with no
corresponding increase in policy
charges* 3,290 1,487 85
For value of new business,
acquisition expenses other than
commission and commission related
expenses increasing by 10%, with no n/a n/a 79
corresponding increase in policy
charges
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 100
Residual non-hedgeable risk capital
reduced to incorporate
diversification benefits between
hedgeable and non-hedgeable risks for 3,330 1,526 87
covered business
Economic capital for residual
non-hedgeable risks calculated
assuming a 99.93% confidence level
which is targeted by an internal 3,290 1,486 85
economic capital model
* No impact on with-profit annuities as the mortality risk is borne by
policyholders.
Nordic
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 1,504 1,318 41
Effect of:
Required capital equal to the minimum
statutory requirement 1,504 1,318 41
Increasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 1,480 1,294 41
Decreasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 1,532 1,346 42
Equity and property market value increasing by
10%, with all pre-tax investment and economic
assumptions unchanged 1,610 1,424 45
Equity and property market value decreasing by
10%, with all pre-tax investment and economic
assumptions unchanged 1,398 1,213 37
50bps contraction on corporate bond spreads 1,504 1,318 41
25% multiplicative increase in equity and
property implied volatilities 1,504 1,318 41
25% multiplicative increase in swaption
implied volatilities 1,504 1,318 41
Voluntary discontinuance rates decreasing by
10% 1,544 1,358 49
Maintenance expense levels decreasing by 10%,
with no corresponding decrease in policy
charges 1,545 1,360 43
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 1,506 1,320 41
Mortality assumption for annuities decreasing
by 5%, with no corresponding increase in
policy charges 1,502 1,316 41
For value of new business, acquisition
expenses other than commission and commission
related expenses increasing by 10%, with no n/a n/a 40
corresponding increase in policy charges
Value of new business calculated on economic
assumptions at the end of reporting period n/a n/a 41
Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between
hedgeable and non-hedgeable risks for 1,522 1,337 43
covered business
Economic capital for residual non-hedgeable
risks calculated assuming a 99.93% confidence
level which is targeted by an internal 1,504 1,318 41
economic capital model
Retail Europe
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 623 520 7
Effect of:
Required capital equal to the minimum statutory
requirement 626 523 7
Increasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 606 505 5
Decreasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 637 533 10
Equity and property market value increasing by
10%, with all pre-tax investment and economic
assumptions unchanged 636 533 7
Equity and property market value decreasing by
10%, with all pre-tax investment and economic
assumptions unchanged 610 508 7
50bps contraction on corporate bond spreads 623 520 7
25% multiplicative increase in equity and
property implied volatilities 623 520 7
25% multiplicative increase in swaption implied
volatilities 621 518 7
Voluntary discontinuance rates decreasing by 10% 638 535 9
Maintenance expense levels decreasing by 10%,
with no corresponding decrease in policy
charges 648 546 9
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 627 525 8
Mortality assumption for annuities decreasing
by 5%, with no corresponding increase in policy
charges 623 520 7
For value of new business, acquisition expenses
other than commission and commission related
expenses increasing by 10%, with no n/a n/a 6
corresponding increase in policy charges
Value of new business calculated on economic
assumptions at the end of reporting period n/a n/a 8
Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between
hedgeable and non-hedgeable risks for 624 521 6
covered business
Economic capital for residual non-hedgeable
risks calculated assuming a 99.93% confidence
level which is targeted by an internal 615 513 7
economic capital model
Wealth management
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 1,977 1,656 66
Effect of:
Required capital equal to the minimum
statutory requirement 1,978 1,657 66
Increasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 1,918 1,609 59
Decreasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 2,042 1,706 73
Equity and property market value increasing by
10%, with all pre-tax investment and economic
assumptions unchanged 2,044 1,723 70
Equity and property market value decreasing by
10%, with all pre-tax investment and economic
assumptions unchanged 1,919 1,598 63
50bps contraction on corporate bond spreads 1,977 1,656 66
25% multiplicative increase in equity and
property implied volatilities 1,976 1,655 66
25% multiplicative increase in swaption
implied volatilities 1,977 1,656 66
Voluntary discontinuance rates decreasing by
10% 2,055 1,734 75
Maintenance expense levels decreasing by 10%,
with no corresponding decrease in policy
charges 2,014 1,692 70
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 1,989 1,668 66
Mortality assumption for annuities decreasing
by 5%, with no corresponding increase in
policy charges 1,977 1,656 66
For value of new business, acquisition
expenses other than commission and commission
related expenses increasing by 10%, with no n/a n/a 60
corresponding increase in policy charges
Value of new business calculated on economic
assumptions at the end of reporting period n/a n/a 70
Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between
hedgeable and non-hedgeable risks for 1,986 1,665 67
covered business
Economic capital for residual non-hedgeable
risks calculated assuming a 99.93% confidence
level which is targeted by an internal 1,956 1,635 63
economic capital model
US Life
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions (189) (723) (28)
Effect of:
Required capital equal to the minimum
statutory requirement (185) (719) (28)
Increasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately (380) (914) (5)
Decreasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately (18) (552) (60)
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, (145) (679) (26)
with credited rates and discount rates
changing commensurately
Recognising the present value of an
additional 50% of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, (34) (568) (18)
with credited rates and discount rates
changing commensurately*
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged (189) (723) (28)
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged (189) (723) (28)
50bps contraction on corporate bond
spreads 80 (454) (28)
25% multiplicative increase in swaption
implied volatilities (270) (804) (53)
Voluntary discontinuance rates decreasing
by 10% (137) (671) (27)
Maintenance expense levels decreasing by
10%, with no corresponding decrease in
policy charges (173) (707) (28)
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges (169) (703) (27)
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges (215) (749) (28)
For value of new business, acquisition
expenses other than commission and
commission related expenses increasing by
10%, with no n/a n/a (31)
corresponding increase in policy charges
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a (30)
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable and
non-hedgeable risks for (187) (721) (28)
covered business
Economic capital for residual
non-hedgeable risks calculated assuming a
99.93% confidence level which is targeted
by an internal (209) (743) (30)
economic capital model
* At 31 December 2010 the size of the base liquidity premium adjustment for US
Life business of 75bps is greater than the base liquidity premium adjustment
for OMSA`s Retail Affluent Immediate Annuity business of 45bps. Therefore in
addition to the 10bps liquidity spread sensitivity that is also shown for
Emerging Markets, a sensitivity was calculated to illustrate the impact of an
additional 50% of liquidity spreads for US Life business.
Bermuda
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 287 (116) n/a
Effect of:
Required capital equal to the minimum statutory
requirement 289 (114) n/a
Increasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 350 (126) n/a
Decreasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 226 (105) n/a
Equity and property market value increasing by
10%, with all pre-tax investment and economic
assumptions unchanged 339 (110) n/a
Equity and property market value decreasing by
10%, with all pre-tax investment and economic
assumptions unchanged 229 (123) n/a
50bps contraction on corporate bond spreads 298 (105) n/a
25% multiplicative increase in equity and
property implied volatilities 190 (120) n/a
25% multiplicative increase in swaption implied
volatilities 285 (118) n/a
Voluntary discontinuance rates decreasing by 10% 278 (107) n/a
Maintenance expense levels decreasing by 10%,
with no corresponding decrease in policy
charges 297 (106) n/a
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 287 (115) n/a
Mortality assumption for annuities decreasing
by 5%, with no corresponding increase in policy
charges 287 (116) n/a
For value of new business, acquisition expenses
other than commission and commission related
expenses increasing by 10%, with no n/a n/a n/a
corresponding increase in policy charges
Value of new business calculated on economic
assumptions at the end of reporting period n/a n/a n/a
Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between
hedgeable and non-hedgeable risks for 290 (113) n/a
covered business
Economic capital for residual non-hedgeable
risks calculated assuming a 99.93% confidence
level which is targeted by an internal 281 (122) n/a
economic capital model
Total covered business
Total covered business includes the MCEV contribution from the US Life and
Bermuda business segments.
GBPm
MCEV Value of Value of
At 31 December 2010
in-force new
business business
Central assumptions 7,515 4,164 172
Effect of:
Required capital equal to the minimum
statutory requirement 7,578 4,227 176
Increasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 7,259 3,847 180
Decreasing all pre-tax investment and economic
assumptions by 1%, with credited rates and
discount rates changing commensurately 7,761 4,468 156
Recognising the present value of an additional
10bps of liquidity spreads assumed on
corporate bonds over the lifetime of the
liabilities, 7,567 4,216 176
with credited rates and discount rates
changing commensurately
Equity and property market value increasing by
10%, with all pre-tax investment and economic
assumptions unchanged 7,886 4,441 180
Equity and property market value decreasing by
10%, with all pre-tax investment and economic
assumptions unchanged 7,147 3,895 165
50bps contraction on corporate bond spreads 7,815 4,444 172
25% multiplicative increase in equity and
property implied volatilities 7,396 4,138 172
25% multiplicative increase in swaption
implied volatilities 7,423 4,072 147
Voluntary discontinuance rates decreasing by
10% 7,747 4,415 211
Maintenance expense levels decreasing by 10%,
with no corresponding decrease in policy
charges 7,777 4,426 192
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 7,654 4,304 185
Mortality assumption for annuities decreasing
by 5%, with no corresponding increase in
policy charges 7,464 4,114 171
For value of new business, acquisition
expenses other than commission and commission
related expenses increasing by 10%, with no n/a n/a 154
corresponding increase in policy charges
Value of new business calculated on economic
assumptions at the end of reporting period n/a n/a 189
Residual non-hedgeable risk capital reduced to
incorporate diversification benefits between
hedgeable and non-hedgeable risks for 7,565 4,215 175
covered business
Economic capital for residual non-hedgeable
risks calculated assuming a 99.93% confidence
level which is targeted by an internal 7,437 4,087 166
economic capital model
GBPm
MCEV Value of Value of new
At 31 December 2009 in-force business
business
Central assumptions 6,027 3,212 167
Effect of:
Required capital equal to the minimum
statutory requirement 6,076 3,262 172
Increasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately 5,746 2,865 161
Decreasing all pre-tax investment and
economic assumptions by 1%, with credited
rates and discount rates changing
commensurately 6,346 3,589 167
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the
liabilities, 6,080 3,266 169
with credited rates and discount rates
changing commensurately
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 6,401 3,447 179
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 5,671 2,996 157
50bps contraction on corporate bond spreads6,360 3,530 167
25% multiplicative increase in equity and
property implied volatilities 5,929 3,190 167
25% multiplicative increase in swaption
implied volatilities 5,906 3,092 161
Voluntary discontinuance rates decreasing
by 10% 6,211 3,492 209
Maintenance expense levels decreasing by
10%, with no corresponding decrease in
policy charges 6,269 3,454 188
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 6,166 3,351 185
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 5,989 3,175 167
For value of new business, acquisition
expenses other than commission and
commission related expenses increasing by
10%, with no n/a n/a 150
corresponding increase in policy charges
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 153
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable and
non-hedgeable risks for 6,160 3,345 173
covered business
Economic capital for residual
non-hedgeable risks calculated assuming a
99.93% confidence level which is targeted
by an internal 5,932 3,118 161
economic capital model
08 March 2011
Sponsor:
Merrill Lynch South Africa (Pty) Limited
Date: 08/03/2011 09:10:21 Supplied by www.sharenet.co.za
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