Wrap Text
Old Mutual plc preliminary results for the year ended 31 December 2012 - Part 3
OLD MUTUAL
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
Adjusted Group MCEV by line of business
At 31 December 2012
GBPm
At At
31 December 31 December
Notes 2012 2011
MCEV of the core covered business (Long-Term Savings) B3 5,740 5,713
Adjusted net worth(1) 2,284 2,204
Value of in-force business 3,456 3,509
MCEV of the non-core covered business (Bermuda) B3 625 66
Adjusted net worth 680 187
Value of in-force business (55) (121)
MCEV of the discontinued covered business (Nordic)(2) B3 - 1,433
Adjusted net worth - 285
Value of in-force business - 1,148
Adjusted net worth of asset management and other businesses 1,772 1,955
Emerging Markets 444 499
Old Mutual Wealth 225 179
US Asset Management 1,103 1,270
Nordic(2) - 7
Value of the banking business 3,574 3,286
Nedbank (market value) 3,527 2,935
Emerging Markets (adjusted net worth) 47 29
Nordic (adjusted net worth)(2) - 322
Value of the general insurance business
Mutual & Federal (adjusted net worth) 261 294
Net other business(3) 45 175
Adjustment for present value of Black Economic Empowerment
scheme deferred consideration 245 270
Adjustment for value of own shares in ESOP schemes(4) 126 117
Market value of perpetual preferred securities(5) - (465)
Market value of perpetual preferred callable securities (686) (605)
Market value of subordinated debt (921) (1,445)
Adjusted Group MCEV 10,781 10,794
Adjusted Group MCEV per share (pence) 220.3 194.1
Number of shares in issue at the end of the financial period less treasury
shares millions6 4,893 5,562
(1) Adjusted net worth is after the elimination of inter-company loans.
(2) The sale of the Nordic business unit was completed on 21 March 2012.
(3) Includes any other business that is not included within the main lines of business, largely Old Mutual parent company IFRS equity net of Group adjustments,
consolidation adjustments in respect of intercompany transactions and debt and Bermuda asset management.
(4) Includes adjustment for value of excess own shares in employee share scheme trusts.
(5) On 24 September 2012, the Group repaid the US$750 million cumulative preference securities at their nominal value.
(6) The Group cancelled 239 million treasury shares on 13 January 2012. As part of the disposal of the Nordic business unit, a seven for eight share consolidation was
proposed and approved. For adjusted Group MCEV per share, the weighted average number of shares is effective from 23 April 2012.
Adjusted operating Group MCEV statement of earnings
For the year ended 31 December 2012
GBPm
Year ended Year ended
31 December 31 December
Notes 2012 2011
Long-Term Savings
Covered business B2 454 714
Asset management and other business 125 123
Banking 15 15
594 852
Nedbank
Banking 828 755
Mutual & Federal
General insurance 43 89
US Asset Management
Asset management 91 67
Other operating segments
Finance costs(1) (148) (155)
Corporate costs(2) (40) (43)
Other shareholders' income/(expenses) - (18)
Adjusted operating Group MCEV earnings before tax from core operations 1,368 1,547
(1) This includes interest payable from Old Mutual plc to non-core operations of GBP18 million for the year ended 31 December 2012 (December 2011: GBP27 million).
(2) Central costs of GBP14 million are allocated to the covered business and provisioned in the VIF (December 2011: GBP14 million). Hence net corporate costs under
MCEV of GBP40 million (December 2011: GBP43 million) differ from the IFRS amount of GBP54 million (December 2011: GBP57 million).
Significant corporate activities and business changes
Disposal of Nordic business
As previously reported, the Group had agreed at 31 December 2011 to dispose of its life assurance, asset management and banking operations in
Sweden, Denmark and Norway to Skandia Liv. Following final regulatory approval, on 8 March 2012 and subsequent shareholder approval, the sale
was completed on 21 March 2012. The MCEV earnings of the Nordic business have been categorised as discontinued within the MCEV results and
the comparative information has been restated where applicable to reflect this. Nordic has been treated as non-modelled for 2012 reporting
purposes with earnings for the period to 21 March 2012 reported on an IFRS basis.
The transaction has resulted in an uplift of GBP201 million to the adjusted Group MCEV, based on the differences between the purchase price of
GBP2,118 million, the removal of the MCEV balances for the Nordic business unit (VIF: GBP1,148 million, ANW: GBP286 million and other non-
covered business: GBP330 million) and further IFRS adjustments of GBP153 million.
Reporting of Retail Europe within Old Mutual Wealth
On 24 January 2012 the Group announced that it will combine its Old Mutual Wealth Continental Europe business (France and Italy) with the
Skandia Retail Europe business unit (Germany, Austria, Poland and Switzerland), for reporting purposes only. As a result the Retail Europe
segment is reported as part of the Old Mutual Wealth segment for the year ended 31 December 2012. The comparative information for the year
ended 31 December 2011 has been reclassified where applicable to reflect this.
Further, in September 2012, the Group announced the merger of the Skandia businesses (Skandia UK, Skandia International, Old Mutual Global
Investors and the Skandia European businesses outside of the Nordic region) into a single business called Old Mutual Wealth.
Bermuda capital resources and requirements
The Bermuda Monetary Authority (BMA) enacted its new Class E Prudential rules in December 2011. In July 2012, it was agreed with the BMA that
the Bermuda business should now directly hold capital resources comparable to those we expect to be required under Solvency II, as calculated by
the Group's existing internal capital model, which were previously held centrally. The capital requirements have been kept constant since July 2012.
In order to address the increased capital requirements, an injection of GBP352 million into Old Mutual Bermuda was made on 23rd July 2012,
comprising of GBP154 million plc loan notes, the transfer of ownership of seed capital in the US asset management business of GBP161 million
and an injection of GBP37 million cash to purchase US treasuries.
Adjusted operating Group MCEV earnings per share
For the year ended 31 December 2012
GBPm
Core Non-core
continuing continuing Discontinued
Year ended 31 December 2012 Notes operations operations operations Total
Adjusted operating Group MCEV earnings before tax 1,368 99 28 1,495
Covered business B2 454 99 18 571
Other business 914 - 10 924
Tax on adjusted operating Group MCEV earnings (376) - (3) (379)
Covered business B2 (118) - - (118)
Other business (258) - (3) (261)
Adjusted operating Group MCEV earnings after tax 992 99 25 1,116
Non-controlling interests
Ordinary shares (277) - - (277)
Preferred securities (50) - - (50)
Adjusted operating MCEV earnings after tax attributable to
equity holders 665 99 25 789
Adjusted operating Group MCEV earnings per share(1) 13.2 2.0 0.5 15.7
Adjusted weighted average number of shares millions 5,029
GBPm
Core Non-core
continuing continuing Discontinued
Year ended 31 December 2011 Notes operations operations operations Total
Adjusted operating Group MCEV earnings before tax 1,547 48 173 1,768
Covered business B2 714 48 156 918
Other business 833 - 17 850
Tax on adjusted operating Group MCEV earnings (364) (1) (31) (396)
Covered business B2 (162) (1) (28) (191)
Other business (202) - (3) (205)
Adjusted operating Group MCEV earnings after tax 1,183 47 142 1,372
Non-controlling interests
Ordinary shares (255) - - (255)
Preferred securities (62) - - (62)
Adjusted operating MCEV earnings after tax attributable to
equity holders 866 47 142 1,055
Adjusted operating Group MCEV earnings per share(1) 15.9 0.9 2.6 19.4
Adjusted weighted average number of shares millions 5,435
(1) Adjusted operating Group MCEV earnings per share is calculated on the same basis as adjusted operating Group MCEV earnings, but is stated after tax and non-
controlling interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted average
number of shares includes own shares held in policyholders' funds and Black Economic Empowerment trusts.
Group market consistent embedded value statement of earnings
For the year ended 31 December 2012
GBPm
Year ended Year ended
31 December 31 December
Notes 2012 2011
Adjusted operating Group MCEV earnings before tax from core operations 1,368 1,547
Adjusted operating Group MCEV earnings before tax from Bermuda non-core operations 99 48
Adjusted operating Group MCEV earnings before tax from continuing operations(1) 1,467 1,595
Adjusting items from continuing operations C2 486 (437)
Total Group MCEV earnings before tax from continuing operations 1,953 1,158
Income tax attributable to shareholders (490) (168)
Total Group MCEV earnings after tax from continuing operations 1,463 990
Total Group MCEV earnings after tax from discontinued operations 600 (15)
MCEV earnings after tax from discontinued operations(2) 6 (15)
Group MCEV uplift from sale of Nordic 201 -
Other Group adjustments related to the Nordic disposal(3) 393 -
Total Group MCEV earnings after tax for the financial year 2,063 975
Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent 1,749 674
Non-controlling interests
Ordinary shares 264 239
Preferred securities 50 62
Total Group MCEV earnings after tax for the financial year 2,063 975
Basic total Group MCEV earnings per ordinary share (pence) 36.7 13.1
Weighted average number of shares millions 4,768 5,136
(1) For long-term business and general insurance businesses, adjusted operating Group MCEV earnings are based on long-term and short-term investment returns
respectively, include investment returns on life fund investments in Group equity and debt instruments, and are stated net of income tax attributable to policyholder
returns. For the US asset management business it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in
accordance with IFRS. For all businesses, adjusted operating MCEV earnings exclude goodwill impairment, the impact of acquisition accounting, option revaluations
related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, profit/(loss) on acquisition/disposal of subsidiaries, associated undertakings and
strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt instruments.
(2) For Nordic, these are composed of earnings before tax of GBP28 million (December 2011: GBP173 million), adjusting items of GBP(20) million (December 2011:
GBP(161) million) and tax of GBP(2) million (December 2011: GBP(27) million).
(3) Included in Other Group adjustments related to the Nordic disposal, is GBP350 million related to the realisation of foreign exchange reserve on disposal. This was
previously included in equity translation reserves.
Reconciliation of movements in Group and Adjusted Group MCEV (after tax)
GBPm
Year ended 31 December 2012 Year ended 31 December 2011
Covered Non-covered Covered Non-covered
business business Total Group business business Total Group
Notes MCEV IFRS MCEV MCEV IFRS MCEV
Opening Group MCEV 7,212 2,516 9,728 7,515 2,386 9,901
Adjusted operating MCEV earnings B4 453 336 789 727 328 1,055
Non-operating MCEV earnings 473 487 960 (331) (50) (381)
Total Group MCEV earnings 926 823 1,749 396 278 674
Other movements in IFRS net equity C3 (1,773) (512) (2,285) (699) (148) (847)
Closing Group MCEV 6,365 2,827 9,192 7,212 2,516 9,728
Adjustments to bring Group investments
to market value B1 - 1,589 1,589 - 1,066 1,066
Adjusted Group MCEV 6,365 4,416 10,781 7,212 3,582 10,794
Notes to the MCEV basis supplementary information
For the year ended 31 December 2012
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 111 as 'MCEV')
adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008) issued in June 2008 and updated in
October 2009 by the CFO Forum ('the Principles') as the basis for the methodology used in preparing the supplementary information.
The CFO Forum announced changes to the MCEV Principles in October 2009 to reflect inter alia the inclusion of a liquidity premium. These
changes affirm that the risk free reference rate to be applied under MCEV should include both the swap yield curve appropriate to the currency of
the cash flows and a liquidity premium where appropriate.
The Principles have been materially complied with for all businesses at 31 December 2012. The detailed methodology and assumptions made in
presenting this supplementary information are set out in notes A2 and A3.
Throughout the supplementary information the following terminology is used to distinguish between the terms 'MCEV', 'Group MCEV' and 'adjusted
Group MCEV':
- MCEV is a measure of the consolidated value of shareholders' interests in the covered business and consists of the sum of the shareholders'
adjusted net worth in respect of the covered business and the value of the in-force covered business.
- Group MCEV is a measure of the consolidated value of shareholders' interests in covered and non-covered business. Non-covered business is
valued at the IFRS net asset value detailed in the primary financial statements adjusted to eliminate inter-company loans.
- The adjusted Group MCEV, a measure used by management to assess the shareholders' interest in the value of the Group, includes the
impact of marking all debt to market value, the market value of the Group's listed banking subsidiary, marking the value of deferred
consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE schemes') to market, as well as
including the market value of excess own shares held in ESOP schemes.
A2: Methodology
(a) Introduction
MCEV represents the present value of shareholders' interests in the earnings distributable from assets allocated to the in-force covered business
after sufficient allowance for the aggregate risks in the covered business and is measured in a way that is consistent with the value that would
normally be placed on the cash flows generated by these assets and liabilities in a deep and liquid market. MCEV is therefore a risk-adjusted
measure to the extent that financial risk is reflected through the use of market consistent techniques in the valuation of both assets and distributable
earnings and a transparent explicit allowance is made for non-financial risks.
The MCEV consists of the sum of the following components:
- Adjusted net worth, which excludes acquired intangibles and goodwill, consisting of:
- free surplus allocated to the covered business; and
- required capital to support the covered business.
- Value of in-force covered business (VIF).
The adjusted net worth is the market value of shareholders' assets held in respect of the covered business after allowance for the liabilities which
are dictated by local regulatory reserving requirements.
MCEV is calculated net of non-controlling shareholder interests and excludes the value of future new business.
(b) Coverage
Covered business includes, where material, any contracts that are regarded by local insurance supervisors as long-term life assurance business,
and other business, where material, directly related to such long-term life assurance business where the profits are included in the IFRS long-term
business profits in the primary financial statements. For the life businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe, and where the
covered business is not material, the treatment within this supplementary information is the same as in the primary financial statements (i.e.
expected future profits for this business is not capitalised for MCEV reporting purposes).
For December 2011 comparatives, the covered business does not include any business written in Skandia Liv, a mutual life insurance company
then part of the Group.
Some types of business are legally written by a life company, but under IFRS are classified as asset management because 'long-term business'
only serves as a wrapper. This business continues to be excluded from covered business, for example:
- New institutional investment platform pensions business written in the United Kingdom as it is more appropriately classified as unit trust
business; and
- Individual unit trusts and some group market-linked business written by the asset management companies in South Africa through the life
company as profits from this business arise in the asset management and asset administration companies.
The treatment within this supplementary information of all business other than the covered business is the same as in the primary financial
statements. The adjusted Group MCEV includes the impact of marking all debt to market value, the market value of the Group's listed banking
subsidiary, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE
schemes') to market, as well as including the market value of excess own shares held in ESOP schemes.
(c) Free surplus
Free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business. It is determined as the
market value of any excess assets attributed to the covered business but not backing the regulatory liabilities, less the required capital to support
the covered business.
(d) Required capital
Required capital is the market value of assets that is attributed to support the covered business, over and above that required to back statutory
liabilities for covered business, whose distribution to shareholders is restricted. The following capital measures are considered in determining the
required capital held for covered business so that it reflects the level of capital considered by the directors to be appropriate to manage the
business:
- Economic capital;
- Regulatory capital (i.e. the level of solvency capital which the local regulators require);
- Capital required by rating agencies in order to maintain the desired credit rating; and
- Any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon Old Mutual's own internal assessment of risks inherent in the underlying business. It
measures capital requirements on a basis consistent with a 99.93% confidence level over a one-year time horizon.
For Emerging Markets and Old Mutual Wealth 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 was the most onerous in 31 December 2011 comparatives. For Bermuda
the required capital is equal to regulatory capital, which is a change from December 2011, where internal capital (i.e. the adjusted net worth) was
used.
The required capital in respect of OMLAC(SA)'s covered business is partially covered by the market value of the Group's investments in banking
and general insurance in South Africa. On consolidation these investments are shown separately.
The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements.
GBPm
At 31 December 2012 At 31 December 2011
Required Regulatory Required R Regulatory
capital capital Ratio capital capital Ratio
Notes (a) (b) (a/b) (a) (b) (a/b)
Emerging Markets B3 1,312 923 1.4 1,368 1,012 1.4
Old Mutual Wealth(1) B3 294 212 1.4 314 241 1.3
Bermuda(2) B3 433 433 1.0 187 77 2.4
Nordic B3 n/a n/a n/a 127 127 1.0
Total 2,039 1,568 1.3 1,996 1,457 1.4
(1) Local regulators within many of the Old Mutual Wealth 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.
(2) During December 2011, the BMA insurance (Prudential Standards) (Class E Solvency Requirements) Rules 2011 were formally signed into Bermudan law. The
regulations allow for a transition period for the new capital requirement (50% for financial year 2011). The required capital calculated on this statutory basis was
approximately GBP77 million at 31 December 2011. In July 2012 it was agreed with the BMA that Bermuda business should hold capital resources of GBP433 million,
comparable to those expected to be required under Solvency II, as calculated by the Group's existing internal capital model. The capital requirement is held at a fixed
amount between statutory filing dates and the July 2012 requirement has therefore been kept constant for 31 December 2012.
(e) Value of in-force covered business
Under the MCEV methodology, VIF consists of the following components:
- Present value of future profits (PVFP) from in-force covered business; less
- Time value of financial options and guarantees; less
- Frictional costs of required capital; less
- Cost of residual non-hedgeable risks (CNHR).
Projected liabilities and cash flows are calculated net of outward risk reinsurance with allowance for default risk of reinsurance counterparties where
material.
(f) Present value of future profits
The PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that are
expected to emerge from the in-force covered business, including the value of contractual renewal of in-force business, on a best estimate basis
where assumed earned rates of return and discount rates are equal to the risk free reference rates. This is also known as a deterministic certainty
equivalent valuation of future distributable earnings, and is described in more detail in note A3. Any limitations on distribution of such earnings due
to statutory or internal capital requirements are taken into account separately in the calculation of frictional costs of required capital.
PVFP captures the intrinsic and time value of financial options and guarantees on in-force covered business which are included in the local
statutory reserves according to local requirements, but excludes any additional allowance for the time value of financial options and guarantees.
(g) Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of investment returns (i.e. asymmetric impact) on future shareholder cash
flows of policyholder financial options and guarantees within the in-force covered business.
The time value of financial options and guarantees describes that part of the value of financial options and guarantees that arises from the variability
of future investment returns on assets to the extent that it is not already included in the statutory reserves. The calculations are based on market
consistent stochastic modelling techniques where the actual assets held at the valuation date are used as the starting point for the valuation of such
financial options and guarantees. Projected cash flows are valued using economic assumptions such that they are valued in line with the price of
similar cash flows that are traded in the capital markets. The time value represents the difference between the average value of shareholder cash
flows under many generated economic scenarios and the deterministic shareholder value under the best estimate assumptions for the equivalent
business. Closed form solutions are also applied in Europe provided the nature of any guarantees is not complex.
The time value of financial options and guarantees also includes allowance for potential burn-through costs on participating business, i.e. the extent
to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal capital management
requirements or the extent to which reserves are inadequate to meet benefit payments during periods of 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 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 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 Bermuda business, 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 an appropriate number of simulations are run to ensure that a reasonable degree
of convergence of results has been obtained.
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 2012 has been valued using a risk-neutral market consistent asset
model, and is referred to as the 'Investment Guarantee Reserve' (IGR). This reserve includes a discretionary margin as defined by local guidelines
to allow for the sensitivity of the reserve to market movements, including interest rates, equity levels and the volatility implicit in the pricing of
derivative instruments in these markets. This discretionary margin is valued in the VIF.
Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum accumulation benefits on Variable Annuity contracts.
(h) Frictional costs of required capital
From the shareholders' viewpoint there is a cost due to restrictions on the distribution of required capital that is locked in entities within the Group.
Where material, an allowance has been made for the frictional costs in respect of the taxation on investment return (income and capital gains) and
investment costs on the assets backing the required capital for covered business. The allowance for taxation is based on the taxation rates
applicable to investment earnings on assets backing the required capital, although such tax rates are reduced, where applicable, to allow for
interest paid on debt which is used partly to finance the required capital.
The run-off pattern of the required capital is projected on an approximate basis over the lifetime of the underlying risks in line with drivers of the
capital requirement. The same drivers are used to split the total required capital between existing business and new business.
The allowance for frictional costs is independent of the allowance for the cost of residual non-hedgeable risks as described below.
(i) Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the time value of financial options and guarantees by using techniques
that are similar to the type of approaches used by capital markets. In addition the modelling of some non-hedgeable non-financial risks is
incorporated as part of the calculation of the PVFP (e.g. to the extent that expected operational losses are incorporated in the maintenance expense
assumptions) or the time value of financial options and guarantees (e.g. dynamic policyholder behaviour such as the interaction of the investment
scenario and the persistency rates). Residual non-financial risks include, for example, liability risks such as mortality, longevity and morbidity risks;
business risks such as persistency, expense and reinsurance credit risks; and operational risk.
For Bermuda, in addition to the allowance for residual non-hedgeable risks, CNHR includes an allowance for hedge ineffectiveness risk and credit
spread risk, which are not modelled in the PVFP or TVOG calculations.
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, i.e. commensurate
upside and downside impacts, 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 capital model based on appropriate shock scenarios consistent
with a 99.5% confidence level over a one-year time horizon, using the same approach when calculating economic capital at a 99.93% confidence
level. The internal capital model makes allowance for certain management actions, such as reductions in bonus rates, where deemed appropriate.
The residual non-hedgeable risk capital makes an allowance for non-linearities between financial and non-hedgeable risks.
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.
A cost of capital charge 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 rate is derived by considering a market based view of required return on equity for the covered business, and then deducting
risk-free investment returns, frictional costs and an allowance for franchise value. This translates into an equivalent cost of capital rate of
approximately 2.4% being applied to the Group diversified capital required in respect of such non-hedgeable risks.
(j) Participating business
For participating business in Emerging Markets and Bermuda, the method of valuation makes assumptions about future bonus rates and the
determination of profit allocation between policyholders and shareholders. These assumptions are made on a basis consistent with other projection
assumptions, especially the projected future risk free investment returns, established Company practice (with due consideration of the PPFM for
South African business), past external communication, any payout smoothing strategy, local market practice, regulatory/contractual restrictions and
bonus participation rules.
Where current benefit levels are higher than can be supported by the existing fund assets together with projected investment returns, a downward
'glide path' is projected in benefit levels so that the policyholder fund would be exhausted on payment of the last benefit.
(k) 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.
(l) 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.
(m) Consolidation adjustments
The MCEV result split by business unit takes account of both sides of any loan arrangements between Group companies, with the Group effect
included in net other business.
(n) 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.
(o) Taxation
In valuing shareholders' cash flows, allowance is made in the cash flow projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying current local corporate tax legislation and practice together with
known future changes and taking credit for any deferred tax assets.
The value of deferred tax assets is partly recognised in the MCEV. Typically those tax assets are expected to be utilised in future by being offset
against expected tax liabilities that are generated on expected profits emerging from in-force business. MCEV may therefore understate the true
economic value of such deferred tax assets because it does not allow for future new business sales which could affect the utilisation of such assets.
United Kingdom
The Emergency Budget that was held in June 2010 stated that the UK's mainstream corporation tax rate would be reduced from its current level of
28% down to 24% in annual 1% steps. Following that, there were further announcements for additional reductions (down to 22%), and accelerations
of these reductions. The reduction to 25%, effective from April 2012, has been allowed for in the December 2011 results. The December 2012
results allow for an additional 1% reduction to 24%, effective from April 2012 and the further 1% reduction to 23%, effective from April 2013. This
additional 2% reduction amounts to GBP8million in the December 2012 results. The impact of the remaining reduction from 23% down to 21%,
applicable from April 2014, is expected to be GBP7 million.
South Africa
A new dividend withholding tax system (replacing the current Secondary Tax on Companies (STC) system) was introduced in South Africa effective
from 1 April 2012. This was reflected in the results at 31 December 2011, i.e. no allowance was made for future dividend withholding tax in the
MCEV, with the exception of dividend witholding tax on the remittance of dividends to Old Mutual plc, as the actual level of taxation would depend
on the legal status of each shareholder.
Allowance has now been made for dividend withholding tax on dividends earned in the policyholder funds as well as allowing for the increase in
capital gains tax in policyholder funds.The average effective tax rate remains unchanged at 28%.
(p) Value of debt
Senior and subordinated debt securities are marked to market value (for IFRS reporting, debt is valued at either book value or fair value).
The IFRS value of total debt is GBP1,570 million (31 December 2011: GBP2,539 million) and MCEV value is GBP1,607million (31 December 2011:
GBP2,515 million). $750m perpetual preferred securities were repaid in 2012.
Where either the principal or the coupon of the debt security has been swapped into an alternate currency, the mark to market value of these
derivative instruments of GBP96 million (31 December 2011: GBP86 million) has not been included in the value of debt; however, it is included in
the Net Other Business value of GBP45 million (31 December 2011: GBP175 million) (Adjusted Group MCEV by line of business). Further
information relating to the debt securities can be found in Note E1 in the Notes to the Consolidated Financial Statements.
(q) New business and renewals
The market consistent value of new business (VNB) measures the value of the future profits expected to emerge from all new business sold, and in
some cases from premium increases to existing contracts, during the reporting period after allowance for the time value of financial options and
guarantees, frictional costs and the cost of residual non-hedgeable risks associated with writing the new business.
VNB includes contractual renewal of premiums and recurring single premiums, where the level of premium is pre-defined and is reasonably
predictable, and changes to existing contracts where these are not variations allowed for in the PVFP. Non-contractual increments are treated
similarly where the volume of such increments is reasonably predictable or likely (e.g. where premiums are expected to increase in line with salary
or price inflation).
Any variations in premiums on renewal of in-force business from that previously anticipated including deviations in non-contractual increases,
deviations in recurrent single premiums and re-pricing of premiums for in-force business are treated as experience variances or economic variances
on in-force business and not as new business.
VNB is calculated as follows:
- Economic assumptions at the start of the reporting period are used, except for OMLAC(SA)'s Non-Profit Annuities products where point of sale
assumptions are used.
- 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 stand-alone 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. Strategic business development expenses
are excluded.
- 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.
(r) 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 Old Mutual Wealth, core covered business 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 2012 (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 for comparability against current year earnings, the average exchange rates over 2012 are used. Therefore the expected existing
business contribution for the financial year ending 31 December 2013 ultimately reflected in the 2013 financial statements may differ from these
results.
(s) Group MCEV presentation
Presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the
unadjusted IFRS net asset value, with the exception of US Asset Management that is valued at IFRS NAV, allowing for the value of the loan note
held with Old Mutual plc. A mark to market adjustment is 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, apart from certain
development expenses (described below). Expense assumptions for run-off businesses consider cost reductions in future in line with management
actions that would be taken as in-force volumes decrease.
The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new
business, maintenance of in-force business (including investment management expenses) and development projects.
- All expected maintenance expense overruns affecting the covered business are allowed for in the calculations.
- The MCEV makes provision for future development costs and one-off expenses relating to covered business that are known with sufficient
certainty, based on three year business plans. The provision is reduced to the extent that projects have associated benefits that are directly
quantifiable and are considered to emerge within a reasonable timeframe (e.g. over the business plan period).
- Unallocated Group holding company expenses have been included to the extent that they are allocated to the covered business. The table
below shows the future expenses attributable to the long-term business. The allocation of these expenses is based on the proportion that the
management expenses incurred by the covered businesses bears to the total management expenses incurred by the Group.
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 incurred in any year. As such, in the 31 December 2011 VIF calculation, Skandia Leben (Germany) made
allowance for the acquisition expenses in relation to the new business written over the next three years when setting the best estimate assumptions
for the profit to be shared with policyholders in future years. As the business has been placed in run-off during 2012, acquisition expenses have not
been incorporated into profit sharing assumptions as at 31 December 2012.
Proportion of Group holding company expenses attributable to long-term business %
At At
31 December 31 December
2012 2011
Emerging Markets 18 17
Old Mutual Wealth 9 8
Bermuda(1) n/a n/a
Nordic n/a 3
Total 27 28
(1) Based on materiality, no Group holding expenses are allocated to Bermuda.
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 rates are set at levels consistent with the investment return assumptions.
Under a market consistent valuation, economic assumptions are determined such that projected cash flows are valued in line with the prices of
similar cash flows that are traded on the capital markets. Thus, risk free cash flows are discounted at a risk free reference rate and equity cash
flows at an equity rate. In practice for the PVFP, where cash flows do not depend on or vary linearly with market movements, a certainty equivalent
method is used which assumes that actual assets held earn, before tax and investment management expenses, risk free reference rates (including
any liquidity adjustment) and all the cash flows are discounted using risk free reference rates (including any liquidity adjustment) which are gross of
tax and investment management expenses. The deterministic certainty equivalent method is purely a valuation technique and over time the
expectation is still that risk premiums will be earned on assets such as equities and corporate bonds.
(a) Risk free reference rates and inflation
The risk free reference rates, reinvestment rates and discount rates are determined with reference to the swap yield curve appropriate to the
currency of the cash flows. For Europe the swap yield curve is obtained from Bloomberg. For Bermuda the swap yield curve is sourced from a third
party market consistent asset model that is used to generate the economic scenarios that are required to value the time value of financial options
and guarantees. For Emerging Markets the swap yield curve is sourced internally (using market data provided by the Bond Exchange of South
Africa) and it is checked for reasonability relative to the Bloomberg swap yield curve.
At 31 December 2012, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity
premium adjustment to OMLAC(SA)'s Immediate Annuity business and Fixed Bond businesses. A liquidity premium adjustment is applied to
OMLAC(SA)'s Fixed Bond business as OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in excess of the risk free
rate and the duration of the asset portfolio and the liability duration are a good match (meaning the asset portfolio is held to maturity). Cash flows on
this product are also predictable and the company has adequate liquidity to withstand a substantial increase in lapses at all durations without having
to sell bonds which further strengthens the case for applying a liquidity premium.
It is the directors' view that a proportion of non-government bond spreads at 31 December 2012 is attributable to a liquidity premium rather than
only to credit and default allowances and that returns in excess of swap rates can be achieved, rather than entire spreads being lost to worsening
default experience. For OMLAC(SA)'s Immediate Annuity business the currency, credit quality and duration of the actual bond portfolios were
considered and adjusted risk free reference rates were derived at 31 December 2012 by adding 50bps of liquidity premium for this business (2011:
50bps) to the swap rates used for setting investment return and discounting assumptions. For OMLAC(SA)'s Fixed Bond products 45 bps of liquidity
premium was added to the swap rates (2011: 50bps). These adjustments reflect the liquidity premium component in non-government bond spreads
over swap rates that is expected to be earned on the portfolios. In deriving the liquidity premia at 31 December 2012, we compared the yields of
similar durations on South African government bonds and bonds issues by state-owned enterprises.
At those durations where swap yields are not available, e.g. due to lack of a sufficiently liquid or deep swap market, the swap curve is extended
using appropriate interpolation or extrapolation techniques.
The risk free reference spot yields (excluding any applicable liquidity adjustments) 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.
Expense inflation rates have been derived by comparing real rates of return against nominal risk free rates for each territory, with adjustments for
higher business unit specific inflation where applicable.
Risk free reference spot yields (excluding any applicable liquidity adjustments)
%
GBP EUR USD ZAR SEK
At 31 December 2012
1 year 0.7 0.3 0.3 5.1 n/a
5 years 1.0 0.8 0.9 6.0 n/a
10 years 1.9 1.6 1.9 7.1 n/a
20 years 2.9 2.2 2.8 7.5 n/a
At 31 December 2011
1 year 1.4 1.4 0.7 5.7 2.1
5 years 1.6 1.7 1.2 7.1 2.3
10 years 2.4 2.4 2.1 8.1 2.5
20 years 3.0 2.7 2.6 8.1 2.1
(b) Volatilities and correlations
Where cash flows contain financial options and guarantees that do not move linearly with market movements, asset cash flows are projected and all
cash flows are discounted using risk-neutral stochastic models. These models project the assets and liabilities using a distribution of asset returns
where all asset types, on average, earn the same risk free reference rates.
Apart from the risk free reference yields specified above, other key economic assumptions for the calibration of economic scenarios include the
implied volatilities for each asset class and correlations of investment returns between different asset classes. For Bermuda, implied volatilities and
correlations are determined for each global equity and bond index modelled.
The volatility assumptions for the calibration of economic scenarios that are used in the stochastic models are, where possible, based on those
implied from appropriate derivative prices (such as equity options or swaptions in respect of guarantees that are dependent on changes in equity
markets and interest rates respectively) as observed on the valuation date. However, historic implied and historic observed volatilities of the
underlying instruments and expert opinion are considered where there are concerns over the depth or liquidity of the market. Where strict
adherence to the above is not possible, for example where markets only exist at short durations such as the swaption market in South Africa,
interpolation or extrapolation techniques, and where appropriate, historical data are used to derive volatility assumptions for the full term structure of
the liabilities. Correlation assumptions between asset classes that are used in stochastic models are based on an assessment of historic
relationships. Where historic data is used in setting volatility or correlation assumptions, a suitable time period is considered for analysing historic
data including consideration of the appropriateness of historical data where economic conditions were materially different to current conditions.
(c) Exchange rates
All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in Note A1 of the
Consolidated Financial Statements.
(d) Expected asset returns in excess of the risk free reference rates
The expected asset returns in excess of the risk free reference rates have no bearing on the calculated MCEV other than the calculation of the
expected existing business contribution in the analysis of MCEV earnings. Real-world economic assumptions are determined with reference to one-
year forward risk free reference rates applicable to the currency of the liabilities at the start of the reporting period. All other economic assumptions,
for example future bonus rates, are set at levels consistent with the real-world investment return assumptions.
Equity and property risk premiums incorporate both historical relationships and the directors' view of future projected returns in each region over the
analysis period. Pre-tax real-world economic assumptions are determined as follows:
- The equity risk premium is 3.7% for Africa (2011: 3.5%) and 3% for Europe.
- The cash return equals the one year risk free reference rate for all regions.
- The property risk premium is 1.5% in Africa and 2% in Europe.
- Returns on corporate bonds reference actual yields from assets held.
- No risk premium is assumed for Bermuda's Variable Annuity policyholder asset portfolios.
B: Segment information
B1: Components of Group MCEV and Adjusted Group MCEV
GBPm
At At
31 December 31 December
Notes 2012 2011
Adjusted net worth attributable to ordinary equity holders of the parent 5,791 5,193
Equity 7,833 8,488
Adjustment to IFRS net asset value C4 (1,360) (2,607)
Adjustment to remove perpetual preferred callable securities (682) (688)
Value of in-force business B3 3,401 4,535
Present value of future profits 3,946 5,248
Additional time value of financial options and guarantees (53) (136)
Frictional costs (221) (243)
Cost of residual non-hedgeable risks (271) (334)
Group MCEV 9,192 9,728
Adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value 1,255 655
Adjustment for value of own shares in ESOP schemes(1) 126 117
Adjustment for present value of Black Economic Empowerment scheme deferred consideration 245 270
Adjustment to bring external debt to market value (37) 24
Adjusted Group MCEV 10,781 10,794
Group MCEV value per share (pence) 187.9 174.9
Adjusted Group MCEV per share (pence) 220.3 194.1
Number of shares in issue at the end of the financial period less
treasury shares millions 4,893 5,562
Return on Group MCEV (ROEV) per annum from core operations 6.8% 8.8%
Return on Group MCEV (ROEV) per annum from continuing non-core operations 1.0% 0.5%
Return on Group MCEV (ROEV) per annum from discontinued operations 0.3% 1.4%
Return on Group MCEV (ROEV(2)) per annum 8.1% 10.7%
(1) Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2011 and 31 December 2012 is
the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants during the period 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.
(2) The ROEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of GBP789 million (December 2011: GBP1,055 million)
divided by the opening Group MCEV.
B2: Adjusted operating MCEV earnings for the covered business
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2012 business business Markets Wealth business business
Adjusted operating Group MCEV earnings before tax 571 454 459 (5) 99 18
Tax on adjusted operating Group MCEV earnings (118) (118) (131) 13 - -
Adjusted operating Group MCEV earnings after tax 453 336 328 8 99 18
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2011 business business Markets Wealth business business
Adjusted operating Group MCEV earnings before tax 918 714 468 246 48 156
Tax on adjusted operating Group MCEV earnings (191) (162) (119) (43) (1) (28)
Adjusted operating Group MCEV earnings after tax 727 552 349 203 47 128
B3: Components of MCEV of the covered business
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
At 31 December 2012 business business Markets1 Wealth business business
Adjusted net worth 2,964 2,284 1,818 466 680 -
Free surplus 925 678 506 172 247 -
Required capital 2,039 1,606 1,312 294 433 -
Value of in-force 3,401 3,456 1,478 1,978 (55) -
Present value of future profits 3,946 3,950 1,828 2,122 (4) -
Additional time value of financial options and guarantees (53) (14) - (14) (39) -
Frictional costs (221) (220) (207) (13) (1) -
Cost of residual non-hedgeable risks (271) (260) (143) (117) (11) -
MCEV 6,365 5,740 3,296 2,444 625 -
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
At 31 December 2011 business business Markets(1) Wealth business business
Adjusted net worth 2,676 2,204 1,768 436 187 285
Free surplus 680 522 400 122 - 158
Required capital 1,996 1,682 1,368 314 187 127
Value of in-force 4,536 3,509 1,399 2,110 (121) 1,148
Present value of future profits 5,248 4,001 1,740 2,261 36 1,211
Additional time value of financial options and guarantees (136) (14) - (14) (122) -
Frictional costs (243) (236) (218) (18) (2) (5)
Cost of residual non-hedgeable risks (333) (242) (123) (119) (33) (58)
MCEV 7,212 5,713 3,167 2,546 66 1,433
(1) The required capital in respect of Emerging Markets is partially covered by the market value of the Group's investments in banking and general insurance in South Africa. On
consolidation these investments are shown separately.
B4: Analysis of covered business MCEV earnings (after tax)
GBPm
Total covered business Year ended 31 December 2012 Year ended 31 December 2011
Free Required Adjusted Value of Free Required Adjusted Value of
surplus capital net worth in-force MCEV surplus capital net worth in-force MCEV
Opening MCEV 680 1,996 2,676 4,536 7,212 507 2,844 3,351 4,164 7,515
New business value (293) 163 (130) 327 197 (444) 187 (257) 490 233
Expected existing business
contribution (reference rate) 20 71 91 156 247 17 65 82 179 261
Expected existing business
contribution (in excess of
reference rate) 3 29 32 49 81 7 34 41 87 128
Transfers from VIF and
required capital to free
surplus 695 (216) 479 (479) - 943 (236) 707 (707) -
Experience variances (14) 17 3 6 9 10 30 40 111 151
Assumption changes 34 (7) 27 7 34 23 4 27 1 28
Other operating variance (26) 18 (8) (107) (115) 188 (205) (17) (57) (74)
Operating MCEV earnings 419 75 494 (41) 453 744 (121) 623 104 727
Economic variances 258 3 261 259 520 (221) (22) (243) (214) (457)
Other non-operating variance (284) 240 (44) (3) (47) 32 1 33 93 126
Total MCEV earnings 393 318 711 215 926 555 (142) 413 (17) 396
Closing adjustments (148) (275) (423) (1,350) (1,773) (382) (706) (1,088) 389 (699)
Capital and dividend flows 26 (3) 23 1 24 (243) 55 (188) - (188)
Foreign exchange variance (54) (145) (199) (139) (338) (75) (312) (387) (306) (693)
MCEV of sold business (120) (127) (247) (1,212) (1,459) (64) (449) (513) 695 182
Closing MCEV 925 2,039 2,964 3,401 6,365 680 1,996 2,676 4,536 7,212
Return on MCEV (RoEV)% per annum 6.3% 9.7%
Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
GBPm
Year ended 31 December 2012 Year ended 31 December 2011
Adjusted Value of Adjusted Value of
net worth in-force MCEV net worth in-force MCEV
Experience Variances 3 6 9 40 111 151
Persistency 51 10 61 20 84 104
Risk 52 - 52 43 4 47
Expenses (91) 11 (80) (44) 13 (31)
Other (9) (15) (24) 21 10 31
Assumption changes 27 7 34 27 1 28
Persistency 12 (25) (13) 21 40 61
Risk 13 37 50 - 8 8
Expenses 12 (3) 9 (7) (99) (106)
Other (10) (2) (12) 13 52 65
GBPm
Year ended 31 December 2013
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing business contribution (reference rate) 17 55 72 143 215
Expected existing business contribution (in excess of reference rate) 5 25 30 45 75
B5: Analysis per business unit
GBPm
Year ended 31 December 2012
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
business business Markets Wealth business business
Opening MCEV 7,212 5,713 3,167 2,546 66 1,433
New business value 197 197 135 62 - -
Expected existing business contribution (reference rate) 247 239 193 46 8 -
Expected existing business contribution (in excess of
reference rate) 81 55 32 23 26 -
Experience variances 9 (48) (29) (19) 39 18
Assumption changes 34 5 34 (29) 29 -
Other operating variance (115) (112) (37) (75) (3) -
Operating MCEV earnings 453 336 328 8 99 18
Economic variances 520 403 281 122 117 -
Other non-operating variance (47) (29) (26) (3) - (18)
Total MCEV earnings 926 710 583 127 216 -
Closing adjustments (1,773) (683) (454) (229) 343 (1,433)
Capital and dividend flows 24 (336) (147) (189) 360 -
Foreign exchange variance (338) (322) (307) (15) (17) 1
MCEV of acquired/sold business (1,459) (25) - (25) - (1,434)
Closing MCEV 6,365 5,740 3,296 2,444 625 -
Return on MCEV (RoEV)% per annum 6.3% 5.9% 10.7% 0.3% 154.0% 1.3%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from
total covered and core covered business, which are calculated in sterling. Discontinued covered business relates to Nordic.
Transfers from VIF and required capital to free surplus GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2012 business business Markets Wealth business business
Transfer from value of in-force (479) (540) (220) (320) 61 -
Transfer from required capital (216) (190) (153) (37) (26) -
Transfer to free surplus 695 730 373 357 (35) -
GBPm
Total Core Non-core D Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2012 business business Markets Wealth business business
Experience variances 9 (48) (29) (19) 39 18
Persistency 61 22 (1) 23 39 -
Risk 52 52 46 6 - -
Expenses (80) (82) (41) (41) 2 -
Other (24) (40) (33) (7) (2) 18
Assumption changes 34 5 34 (29) 29 -
Persistency (13) (32) (6) (26) 19 -
Risk 50 50 49 1 - -
Expenses 9 (11) (9) (2) 20 -
Other (12) (2) - (2) (10) -
B5: Analysis per business unit
GBPm
Year ended 31 December 2011
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
business business Markets Wealth business business
Opening MCEV 7,515 5,913 3,313 2,600 287 1,315
New business value 233 177 99 78 - 56
Expected existing business contribution (reference rate) 261 211 174 37 8 42
Expected existing business contribution (in excess of
reference rate) 128 57 30 27 38 33
Experience variances 151 130 102 28 24 (3)
Assumption changes 28 40 6 34 (8) (4)
Other operating variance (74) (63) (62) (1) (15) 4
Operating MCEV earnings 727 552 349 203 47 128
Economic variances (457) (7) 32 (39) (261) (189)
Other non-operating variance 126 89 93 (4) - 37
Total MCEV earnings 396 634 474 160 (214) (24)
Closing adjustments (699) (834) (620) (214) (7) 142
Capital and dividend flows (188) (177) 12 (189) - (11)
Foreign exchange variance (693) (657) (632) (25) (7) (29)
MCEV of acquired/sold
business 182 - - - - 182
Closing MCEV 7,212 5,713 3,167 2,546 66 1,433
Return on MCEV (RoEV)% per annum 9.7% 9.3% 11.9% 7.8% 17.0% 8.5%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from
total covered and core covered business, which are calculated in sterling. Discontinued covered business RoEV relates to Nordic.
Transfers from VIF and required capital to free surplus GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2011 business business Markets Wealth business business
Transfer from value of in-force (707) (569) (209) (360) (9) (129)
Transfer from required capital (236) (179) (150) (29) (57) -
Transfer to free surplus 943 748 359 389 66 129
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Year ended 31 December 2011 business business Markets Wealth business business
Experience Variances 151 130 102 28 24 (3)
Persistency 104 79 56 23 22 3
Risk 47 46 38 8 - 1
Expenses (31) (24) (9) (15) 3 (10)
Other 31 29 17 12 (1) 3
Assumption changes 28 40 6 34 (8) (4)
Persistency 61 47 55 (8) 20 (6)
Risk 8 8 - 8 - -
Expenses (106) (80) (49) (31) (26) -
Other 65 65 - 65 (2) 2
Results highlights
Core covered business
- Strong value of new business growth in Emerging Markets due to good volumes and an improvement in the mix of business leading to higher
margins.
- A significant portion of expense losses include one-off non-development costs of GBP(44) million incurred in Emerging Markets and Old
Mutual Wealth.
- Favourable equity and bond market performance has led to positive economic variances in Emerging Markets and Old Mutual Wealth.
- The 10% depreciation of the Rand against Sterling over 2012 has led to foreign exchange translation losses in MCEV closing adjustments.
- A significant portion of the continental European business has now closed to new business, with resulting changes to expense, lapse and profit
sharing assumptions (German PHP business) reducing the MCEV now recognised for these businesses.
Non-core covered business (Old Mutual Bermuda)
- Very favourable persistency experience on the Bermuda Variable Annuity book of business, leading to positive assumption changes.
- Capital has been transferred to Old Mutual Bermuda to meet the enhanced capital requirements of the Bermuda Monetary Authority (BMA).
- The expiration of the 5-year guarantees, higher than expected lapses, lapse assumption changes and favourable market performance has led
to a significant reduction in Variable Annuity guarantee reserves.
New business
Emerging Markets: VNB increased by 36% due to higher volumes and margins (mix of business, repricing of certain products and favourable
assumption changes), partially offset by the Rand depreciation over 2012. There have been strong recurring premium sales in Mass Foundation
Cluster and single premium annuity sales in Corporate Segment. However, covered single premium savings sales in Retail Affluent and Corporate
Segment have lagged in 2012 although non-covered single premium savings sales have improved significantly.
Old Mutual Wealth: Following the cessation of significant parts of uneconomic product lines as a result of business restructuring initiatives, there
have been lower covered sales in the UK. International sales were affected by regulatory changes that were overcome in the fourth quarter of 2012.
Transfers from the value of in-force business
Old Mutual Wealth: Lower expected transfers in 2012 are mainly as a result of the run-off of closed books and the sale of the Finnish business.
Non-core covered (Old Mutual Bermuda): The large negative expected transfer in 2012 is a result of the anticipated loss in fee income from the
significant number of Variable Annuity surrenders post the 5-year guarantee top-up point and the anticipated amortisation of Deferred Acquisition
Costs resulting from the business run-off.
Experience variances and operating assumption changes
Emerging Markets: Positive risk experience from Retail Affluent and Mass Foundation Cluster products continued in 2012, with positive
assumption changes of GBP49 million reflecting some of this experience. Other experience losses mainly relate to higher than anticipated taxation
in 2012. Experience variances also include an investment of GBP18 million in the development of our franchise in African countries and Mexico, as
well as the development cost of new strategic capabilities, and also expenses of a one off nature (including IT project expenditure) of GBP28
million.
Old Mutual Wealth: The positive persistency experience is mainly a result of a lower than anticipated number of surrenders in the UK Legacy
savings business in the run-up to the Retail Distribution Review (RDR). Negative persistency assumption changes relate mainly to a reduction in
anticipated lapses on protection products at later durations of GBP(11) million and the anticipated increase in surrenders of products in Germany
and Austria of GBP(7)million, consistent with recent experience. Expense losses include one-off restructuring costs of GBP16 million as well as
investments of GBP19 million in development initiatives in Platform and International businesses.
Non-core covered (Old Mutual Bermuda): Positive persistency profits reflect better than expected 5-year anniversary surrender experience on
Variable Annuity products. Non-Hong Kong Universal Guarantee Option (UGO) business experienced a 79% surrender rate and the Hong Kong
UGO business experienced a 63% lapse rate since these businesses entered the top-up period. In light of this experience, surrender assumptions
have been increased for policies that are yet to reach their 5-year anniversary (GBP20 million impact). Positive expense assumption changes of
GBP19 million reflect reduced aggregate expenses needed to meet the remaining obligations of the business. Other assumption changes of
GBP(10) million mainly driven by a reduction in rebate income as underlying client portfolios reach sub-scale levels.
Discontinued (Nordic): Experience variances reflect accrued IFRS profits during the year prior to the sale of the business.
Other operating variances
Emerging Markets: Other operating variances mainly reflect the impact of a management decision to utilise the future profit stream arising from
unclaimed benefits to fund an advisor training academy, and to enhance the surrender values on old generation reversionary bonus policies.
Old Mutual Wealth: Other operating variances include the GBP(73) million impact of the management action to place the German and Austrian
businesses into run-off. Setting expense assumptions on a run-off basis for these businesses reduced MCEV by GBP(26) million and a change in
profit sharing assumptions for the German PHP business reduced MCEV by GBP(47)million. Variances also include the release of development
provisions of GBP17 million (change in methodology to recognise project benefits as well as costs where benefits are directly quantifiable and
emerge within a reasonable timeframe) and CNHR modelling changes.
Economic variances
Emerging Markets: Significant positive economic variances have emerged from better than expected investment returns (favourable equity, bond
and credit market performance), together with the reduction in the swap yield curve, which has increased the VIF.
Old Mutual Wealth: Significantly positive economic variances have emerged from better than expected policyholder fund performance over 2012
due to better than expected equity and bond market returns.
Non-core covered (Old Mutual Bermuda): The positive variance resulting in significantly lower Variable Annuity guarantee reserves, is mainly due
to positive equity market performance, and reduced volatilities, partially offset by lower short-to-medium term interest rates.
Other non-operating variances
Emerging Markets: Other non-operating variances consist mainly of modelling changes to incorporate the new South African dividend withholding
tax regime, and higher capital gains tax, in the calculation of policyholder investment returns in MCEV models.
Closing adjustments
Emerging Markets: Capital and dividend flows include the net impact of dividends paid of GBP(130) million, the purchase of Africa operations from
Old Mutual plc of GBP(92) million, the transfer of net asset value of the Zimbabwe and Namibian holding companies from non-covered business of
GBP135 million and the Zimbabwe indigenisation costs of GBP(34) million. The negative foreign exchange variance reflects the 10% depreciation
of the rand over the period (GBP/ZAR exchange rate increased from 12.56 at 31 December 2011 to 13.77 at 31 December 2012).
Old Mutual Wealth: Closing adjustments include the impact of the sale of the Finnish business GBP(25) million.
Non-core covered (Old Mutual Bermuda): The positive capital and dividend flows of GBP360 million, include GBP352 million relating to the
transfer of capital to this business (in the form of additional Old Mutual plc loan notes and other assets) to enable it to meet the new enhanced
capital requirements of the Bermuda Monetary Authority (BMA).
C: Other key performance information
C1: Value of new business (after tax)
The tables below set out the regional analysis of the value of new business (VNB) after tax. New business profitability is measured by both the ratio
of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under PVNBP
margin and APE margin below. APE is calculated as recurring premiums plus 10% of single premiums. Old Mutual Bermuda is excluded from the
tables below as it is closed to new business.
Year ended 31 December 2012 GBPm
Annualised PVNBP
recurring Single capitalisation PVNBP APE
premiums premiums PVNBP factors(1) APE VNB margin margin
Core covered business 517 5,953 8,665 5.2 1,112 197 2.3% 18%
Emerging Markets 370 1,321 3,331 5.4 502 135 4.1% 27%
Old Mutual Wealth 147 4,632 5,334 4.8 610 62 1.2% 10%
Discontinued covered
business n/a n/a n/a n/a n/a n/a n/a n/a
Total covered business 517 5,953 8,665 5.2 1,112 197 2.3% 18%
Year ended 31 December 2011 GBPm
Annualised PVNBP
recurring Single capitalisation PVNBP APE
premiums premiums PVNBP factors(1) APE VNB margin margin
Core covered business 569 6,211 9,113 5.1 1,189 177 1.9% 15%
Emerging Markets 363 1,441 3,295 5.1 506 99 3.0% 20%
Old Mutual Wealth 206 4,770 5,818 5.1 683 78 1.3% 11%
Discontinued covered
business 153 753 1,347 3.9 229 56 4.2% 25%
Total covered business 722 6,964 10,460 4.8 1,418 233 2.2% 16%
(1) The PVNBP capitalisation factors are calculated as follows: (PVNBP single premiums)/annualised recurring premiums.
The VNB for Old Mutual Wealth in December 2012 has been calculated after the reallocation of certain development costs from acquisition
expenses to expense variances. If December 2011 VNB was calculated on the same basis, it would have been GBP85 million.
Additional new business written in the Group:
The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the Emerging Markets
long-term business of GBP1,093 million (2011: GBP884 million) is excluded as the profits on this business arise in the asset management business.
The value of new business also excludes premium increases arising from indexation arrangements in respect of existing business, as these are
already included in the value of in-force business.
The value of new institutional investment platform pensions business written in Old Mutual Wealth of GBP736 million (2011: GBP704 million) is
excluded as this is more appropriately classified as unit trust business.
New business single premiums of GBP37 million (2011: GBP31 million), annualised recurring premiums of GBP17 million (2011: GBP14 million),
and APE of GBP21 million (2011: GBP17 million), in respect of the life business in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe have been
excluded from the above tables, as no value of new business and PVNBP calculations have been performed for these businesses.
C2: Adjustments applied in determining total Group MCEV earnings before tax
GBPm
Year ended 31 December 2012 Year ended 31 December 2011
Covered Non-covered Total Covered Non-covered Total
business business Group business business Group
MCEV IFRS MCEV MCEV IFRS MCEV
Income/(expense)
Goodwill impairment and amortisation of non-covered
business acquired intangible assets and impact of
acquisition accounting - (7) (7) - (283) (283)
Economic variances 657 (25) 632 (554) (28) (582)
Other non-operating variances (56) - (56) 22 - 22
Acquired/divested business(1) - (12) (12) - 182 182
Other Group adjustments related to Nordic disposal (14) 414 400 - - -
Adjusted Group MCEV uplift from sale of Nordic - 201 201 - - -
Dividends declared to holders of perpetual preferred
callable securities - 42 42 - 44 44
Premium paid on early repayment of senior debt - (71) (71) - - -
Adjusting items relating to US Asset Management
equity plans and non-controlling interests - (5) (5) - (3) (3)
Fair value (losses)/gains on Group debt instruments - (57) (57) - 22 22
Adjusting items 587 480 1,067 (532) (66) (598)
Adjusting items from continuing operations 605 (119) 486 (378) (59) (437)
Adjusting items from discontinued operations (18) 599 581 (154) (7) (161)
Total MCEV adjusting items 587 480 1,067 (532) (66) (598)
(1) In December 2011, this related to the non-covered businesses in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe that were included for the first time.
C3: Other movements in IFRS net equity impacting Group MCEV
GBPm
Year ended 31 December 2012 Year ended 31 December 2011
Non- Non-
Covered covered Total Covered covered Total
business business Group business business Group
MCEV IFRS MCEV MCEV IFRS MCEV
Fair value movements(1) - (328) (328) - 24 24
Net investment hedge - 160 160 - 28 28
Currency translation differences/exchange
differences on translating foreign operations (338) (677) (1,015) (693) (498) (1,191)
Aggregate tax effects of items taken directly to or
transferred from equity - 9 9 - 11 11
Other movements(2) (1,459) 1,459 - 182 128 310
Net income recognised directly into equity (1,797) 623 (1,174) (511) (307) (818)
Capital and dividend flows for the year3 24 (1,238) (1,214) (257) (8) (265)
Inclusion of other African life businesses - - - 69 - 69
Net purchase of treasury shares - 8 8 - (17) (17)
Shares issued in lieu of cash dividends - - - - 124 124
Other shares issued - 33 33 - 10 10
Change in share based payment reserve - 62 62 - 50 50
Other movements in net equity (1,773) (512) (2,285) (699) (148) (847)
(1) Included in the fair value movements is the realisation of foreign exchange reserve on the Nordic disposal of GBP(350) million and other fair value movements of GBP22
million.
(2) The December 2012 amount relates to the transfer of Nordic covered MCEV balance on disposal and the sale of Finnish branch in Old Mutual Wealth. December 2011
reflects movements in respect of the disposal of US Life.
(3) December 2012 capital and dividend flows from the covered business include the purchase of the Rest of Africa businesses by Emerging Markets from Old Mutual plc and
the capital injection of GBP352 million into Old Mutual Bermuda. The special dividend of GBP915 million, paid on 7 June 2012 is included in non-covered business.
C4: 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
covered Term Emerging Old Mutual
At 31 December 2012 business Savings Markets Wealth Bermuda Nordic
IFRS net asset value(1) 4,288 3,580 1,275 2,305 708 -
statutory solvency basis (926) (898) 187 (1,085) (28) -
Inclusion of Group equity and debt instruments
held in life funds(2) 367 367 364 3 - -
Goodwill (765) (765) (8) (757) - -
Adjusted net worth attributable to ordinary
equity holders of the parent 2,964 2,284 1,818 466 680 -
GBPm
Total Long
covered Term Emerging Old Mutual
At 31 December 2011 business Savings Markets Wealth Bermuda Nordic
IFRS net asset value(1) 5,214 3,744 1,230 2,514 201 1,269
Adjustment to include long-term business on a
statutory solvency basis (1,905) (1,108) 182 (1,290) (14) (783)
Inclusion of Group equity and debt instruments
held in life funds(2) 365 365 365 - - -
Goodwill (998) (797) (9) (788) - (201)
Adjusted net worth attributable to ordinary
equity holders of the parent 2,676 2,204 1,768 436 187 285
(1) IFRS net asset value is after elimination of inter-company loans.
(2) A further GBP(36) million (2011: GBP(69) million) relates to the non-covered business. This brings the total adjustment to IFRS net asset value to GBP1,360 million
(2011: GBP2,607 million).
The adjustments to include long-term business on a statutory solvency basis reflect the difference between the net worth of each business on the
statutory basis (as required by the local regulator) and their portion of the Group's consolidated equity shareholder funds. In South Africa, these
values exclude items that are eliminated or shown separately on consolidation (such as Nedbank and inter-company loans). For some European
countries the value reflected in the adjustment to include long-term business on a statutory solvency basis includes the value of the deferred
acquisition cost asset, which is part of the equity.
The adjustment to include long-term business on a statutory solvency basis includes the following:
- The excess of the IFRS amount of the deferred acquisition cost (DAC) and value of business acquired (VOBA) assets over the statutory levels
included in the VIF with the exception of the Bermuda business where DAC is an admissible asset under local statutory basis.
- When projecting future profits on a statutory basis, the VIF includes the shareholders' value of unrealised capital gains. To the extent that
assets in IFRS are valued at market and the market value is higher than the statutory book value, these profits have already been taken into
account in the IFRS equity. For Bermuda business, VIF reflects the impact of amortising DAC allowed under the ANW at 31 December 2011.
DAC has been completely written off at 31 December 2012.
D1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2012 and the value of new business for the year
ended 31 December 2012 to the following:
- Economic assumptions 100 bps increase/decrease: Increasing/decreasing all pre-tax investment and economic assumptions (projected
investment returns and inflation) by 100 bps, with credited rates and discount rates changing commensurately.
- Equity/property market value 10% increase/decrease: Equity and property market value increasing/decreasing by 10%, with all pre-tax
investment and economic assumptions unchanged.
- 10bps increase of liquidity spreads: Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds
over the lifetime of the liabilities, with credited rates and discount rates changing commensurately.
- 25% increase in equity/property and swaption implied volatilities: 25% multiplicative increase in implied volatilities.
- VNB 10% increase in acquisition expenses: For value of new business, acquisition expenses other than commission and commission
related expenses increasing by 10%, with no corresponding increase in policy charges.
- VNB on closing economic assumptions: Value of new business calculated on economic assumptions at the end of reporting period.
- NHR capital diversification: Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-
hedgeable risks for covered business.
- 99.93% confidence level NHR capital: Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model.
For each sensitivity illustrated, all other assumptions have been left unchanged except where they are directly affected by the revised conditions.
Sensitivity scenarios therefore include consistent changes in cash flows directly affected by the changed assumption(s), for example future bonus
participation in changed economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modelling of dynamic reserves is extremely complex and the effect on value is second-
order. Therefore, in performing the sensitivities, reserving bases have been kept constant for non-linked business (including non-linked reserves for
linked business) whilst only varying future experience assumptions with similar considerations applying to required capital. However the sensitivities
for South Africa in respect of an increase/decrease of all pre-tax investment and economic assumptions, an increase/decrease in equity and
property market values and increases in equity, property and swaption implied volatilities allow for the change in the time value of financial
options and guarantees that form part of the Investment Guarantee Reserves(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.
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.
At 31 December 2011, Nordic was included in all sensitivities.
Sensitivity tests: MCEV
GBPm
At 31 December 2012 At 31 December 2011
Value of Value of Value of Value of
in-force new in-force new
MCEV business business MCEV business business
Central assumptions 6,365 3,401 197 7,212 4,536 233
MCEV, VIF & VNB given changes in:
Economic assumption 100 bps increase 6,253 3,285 180 7,103 4,384 215
Economic assumption 100 bps decrease 6,471 3,505 215 7,315 4,673 250
Equity/property market value 10% increase 6,647 3,632 206 7,585 4,790 244
Equity/property market value 10% decrease 6,169 3,248 192 6,869 4,283 223
10bps increase of liquidity spreads 6,374 3,410 198 7,221 4,545 234
50bps contraction on corporate bond spreads 6,380 3,402 197 7,232 4,540 233
25% increase in equity/property implied volatilities 6,311 3,358 197 7,124 4,513 232
25% increase in swaption implied volatilities 6,353 3,389 197 7,198 4,521 233
10% decrease in discontinuance rates 6,519 3,568 237 7,405 4,749 280
10% decrease in maintenance expense 6,580 3,616 216 7,471 4,795 255
5% decrease in mortality/morbidity rates 6,495 3,531 214 7,333 4,657 247
5% decrease in annuitant mortality assumption 6,358 3,394 197 7,190 4,514 233
Minimum capital requirement 6,421 3,457 202 7,267 4,590 238
NHR capital diversification 6,408 3,444 201 7,282 4,606 239
99.93% confidence level NHR capital 6,306 3,342 192 7,155 4,478 227
Sponsor:
Merrill Lynch South Africa (Pty) Ltd
Date: 01/03/2013 09:02:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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