Wrap Text
Old Mutual plc Interim Results for the half year ended 30 June 2013
Old Mutual
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
Adjusted Group MCEV by line of business
At 30 June 2013
GBPm
At At At
30 June 30 June 31 December
Notes 2013 2012 2012
MCEV of the core covered business (Emerging Markets) B3 3,245 3,345 3,316
Adjusted net worth(1) 1,868 1,905 1,838
Value of in-force business 1,377 1,440 1,478
MCEV of the core covered business (Old Mutual Wealth) B3 2,599 2,544 2,444
Adjusted net worth(1) 619 477 466
Value of in-force business 1,980 2,067 1,978
MCEV of the non-core covered business (Old Mutual Bermuda)(2) B3 713 141 625
Adjusted net worth 713 232 680
Value of in-force business - (91) (55)
Adjusted net worth of asset management and other business 1,827 1,847 1,772
Emerging Markets 456 460 444
Old Mutual Wealth 218 215 225
US Asset Management 1,153 1,172 1,103
Value of the banking business 3,054 3,517 3,574
Nedbank (market value) 2,997 3,481 3,527
Emerging Markets (adjusted net worth) 57 36 47
Value of the general insurance business
Property & Casualty (adjusted net worth) 209 292 261
Net other business(3) (152) 1,059 34
Adjustment for present value of Black Economic Empowerment
scheme deferred consideration 219 273 245
Adjustment for value of own shares in ESOP schemes(4) 120 106 126
Market value of perpetual preferred securities(5) - (481) -
Market value of perpetual preferred callable securities (708) (637) (686)
Market value of subordinated debt (861) (1,341) (921)
Adjusted Group MCEV 10,265 10,665 10,790
Adjusted Group MCEV per share (pence) 209.7 218.2 220.5
Number of shares in issue at the end of the financial period less treasury
shares millions 4,896 4,887 4,893
(1)Adjusted net worth is after the elimination of inter-company loans.
(2)The valuation basis for Old Mutual Bermuda has been simplified from a full bottom-up MCEV calculation to an adjusted IFRS basis. The revised approach uses the IFRS
net asset value calculated in accordance with the primary financial statements, with variable annuity guarantee liabilities restated to reflect a best estimate valuation consistent with MCEV principles.
(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 inter-company transactions and debt and Old Mutual Bermuda asset management. Old Mutual Bermuda asset management was
liquidated during the current period.
(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.
Adjusted operating Group MCEV statement of earnings
For the six months ended 30 June 2013
GBPm
Six months Six months Year
ended ended ended
30 June 30 June 31 December
Notes 2013 2012 2012
Emerging Markets 269 279 619
Covered business B2 190 198 459
Asset management 72 75 145
Banking 7 6 15
Old Mutual Wealth 55 66 (19)
Covered business B2 47 66 (5)
Asset management 8 - (14)
Nedbank
Banking 387 405 825
Property & Casualty
General insurance 10 31 37
US Asset Management
Asset management 54 42 91
Other operating segments
Finance costs(1) (52) (88) (148)
Corporate costs(2) (15) (18) (39)
Other net (expenses)/income(3) (2) 13 (14)
Adjusted operating Group MCEV earnings before tax from core
operations 706 730 1,352
(1)This includes interest payable from Old Mutual plc to non-core operations of GBP6 million for six months ended 30 June 2013 (June 2012: GBP13 million; December
2012: GBP18 million).
(2)Central costs of GBP6 million are allocated to the covered business and provisioned in the VIF (June 2012: GBP7 million; December 2012: GBP14 million). Hence net
corporate costs under MCEV of GBP15 million (June 2012: GBP18 million; December 2012: GBP39 million) differ from the IFRS amount of GBP21 million (June 2012:
GBP25 million; December 2012: GBP53 million).
(3)Other net expenses exclude capital gains on seed capital in the US asset management business of GBP2 million (June 2012: GBP0 million; December 2012: GBP14
million).
Significant corporate activities and the restatement of comparative information
Old Mutual Bermuda valuation basis change
For the current period, the valuation basis for Old Mutual Bermuda has been simplified from a full bottom-up MCEV calculation to an
adjusted IFRS basis. The revised approach uses the IFRS net asset value calculated in accordance with the primary financial statements,
with variable annuity guarantee liabilities restated to reflect a best estimate valuation consistent with MCEV principles.
The main effect of this change is the removal of items previously included in the value of in-force business, apart from expected variable
annuity guarantee losses, which are now included in ANW. Items no longer included in the MCEV calculation as a result of not calculating
the value of in-force business include the cost of non-hedgeable risk, future annuity contract fee income, and future expenses.
This simplification is part of the consolidation of reporting processes for Old Mutual Bermuda following a significant run-off of the book
(surrenders of variable annuities post five-year top-up points) and management actions taken to de-risk the business. As a result, Old
Mutual Bermuda's value-in-force has become less significant to the Group from a valuation and risk perspective. Earnings calculated on
the adjusted IFRS basis are similar to bottom-up calculated MCEV earnings.
Comparative information has not been restated to reflect the valuation basis change.
As a result of this change a simplified analysis of earnings approach has been adopted, with economic gains and losses related to variable
annuity guarantee reserves recorded in economic variances.
Old Mutual Bermuda capital resources and requirements
In July 2012 it was agreed with the Bermuda Monetary Authority (BMA) that the Old Mutual Bermuda business should hold a capital
requirement of $703 million, comparable to those expected to be required under Solvency II as at December 2011, as calculated by the
Group's existing internal capital model. In order to address the increased capital requirements, an injection of GBP352 million into Old
Mutual Bermuda was made on 23 July 2012. The capital requirement is held at a fixed amount between statutory filing dates and the July
2012 requirement has therefore been kept constant for June 2013. In July 2013, the BMA formally approved that Old Mutual Bermuda can
proceed with the repatriation of GBP296 million of capital resources through the cancellation of OM Group (UK) Limited loan notes. This
has not been reflected in the June 2013 position.
Restatement of comparative information
- IAS 19 (Employee Benefits) and IFRS 10 (Consolidated Financial Statements) restatements
The Group adopted IAS 19 (Employee Benefits) and IFRS 10 (Consolidated Financial Statements) with a date of initial application of 1
January 2013.
The change in accounting policies has been applied retrospectively and as a result, the comparative information for the six months ended
30 June 2012 and the year ended 31 December 2012 have been restated accordingly.
- US Asset Management seed capital gains
The US asset management seed capital has been consolidated into Old Mutual Bermuda for MCEV reporting purposes following the
transfer of ownership in July 2012. Seed capital gains of GBP2 million (December 2012: GBP14 million) are recorded in economic
variances in MCEV reporting and are therefore excluded from operating MCEV earnings. The December 2012 operating MCEV earnings
have been restated to reflect this treatment. This differs from the approach for IFRS reporting where seed capital gains are included in
adjusted operating earnings.
Adjusted operating Group MCEV earnings per share
For the six months ended 30 June 2013
GBPm
Core Non-core
continuing continuing Discontinued
Six months ended 30 June 2013 Notes operations operations operations Total
Adjusted operating Group MCEV earnings before tax 706 1 - 707
Covered business B2 237 1 - 238
Other business 469 - - 469
Tax on adjusted operating Group MCEV earnings (186) - - (186)
Covered business B2 (56) - - (56)
Other business (130) - - (130)
Adjusted operating Group MCEV earnings after tax 520 1 - 521
Non-controlling interests
Ordinary shares (133) - - (133)
Preferred securities (9) - - (9)
Adjusted operating MCEV earnings after tax attributable to
equity holders 378 1 - 379
Adjusted operating Group MCEV earnings per share(1) 7.8 - - 7.8
Adjusted weighted average number of shares millions 4,835
GBPm
Core Non-core
continuing continuing Discontinued
Six months ended 30 June 2012 Notes operations operations operations Total
Adjusted operating Group MCEV earnings before tax 730 23 28 781
Covered business B2 264 23 18 305
Other business 466 - 10 476
Tax on adjusted operating Group MCEV earnings (197) - (3) (200)
Covered business B2 (60) - - (60)
Other business (137) - (3) (140)
Adjusted operating Group MCEV earnings after tax 533 23 25 581
Non-controlling interests
Ordinary shares (134) - - (134)
Preferred securities (30) - - (30)
Adjusted operating MCEV earnings after tax attributable to
equity holders 369 23 25 417
Adjusted operating Group MCEV earnings per share(1) 7.1 0.4 0.5 8.0
Adjusted weighted average number of shares millions 5,231
GBPm
Core Non-core
continuing continuing Discontinued
Year ended 31 December 2012 Notes operations operations operations Total
Adjusted operating Group MCEV earnings before tax 1,352 99 28 1,479
Covered business B2 454 99 18 571
Other business 898 - 10 908
Tax on adjusted operating Group MCEV earnings (373) - (3) (376)
Covered business B2 (118) - - (118)
Other business (255) - (3) (258)
Adjusted operating Group MCEV earnings after tax 979 99 25 1,103
Non-controlling interests
Ordinary shares (277) - - (277)
Preferred securities (50) - - (50)
Adjusted operating MCEV earnings after tax attributable to
equity holders 652 99 25 776
Adjusted operating Group MCEV earnings per share(1) 12.9 2.0 0.5 15.4
Adjusted weighted average number of shares millions 5,029
(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 six months ended 30 June 2013
GBPm
Six months Six months Year
ended ended ended
30 June 30 June 31 December
Notes 2013 2012 2012
Adjusted operating Group MCEV earnings before tax from core
operations 706 730 1,352
Adjusted operating Group MCEV earnings before tax from OM Bermuda non-
core operations 1 23 99
Adjusted operating Group MCEV earnings before tax from continuing operations(1) 707 753 1,451
Adjusting items from continuing operations C2 177 171 492
Total Group MCEV earnings before tax from continuing operations 884 924 1,943
Income tax attributable to shareholders (203) (212) (490)
Total Group MCEV earnings after tax from continuing operations 681 712 1,453
Total Group MCEV earnings after tax from discontinued operations (8) 600 600
Total Group MCEV earnings after tax for the financial period 673 1,312 2,053
Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent 541 1,159 1,747
Non-controlling interests
Ordinary shares 123 123 256
Preferred securities 9 30 50
Total Group MCEV earnings after tax for the financial period 673 1,312 2,053
Basic total Group MCEV earnings per ordinary share (pence) 11.8 23.4 36.6
Weighted average number of shares millions 4,596 4,952 4,768
(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.
Reconciliation of movements in Group and Adjusted Group MCEV (after tax)
GBPm
Six months ended 30 June 2013 Six months ended 30 June 2012
Covered Non-covered Covered Non-covered
business business Total Group business business Total Group
Notes MCEV IFRS MCEV MCEV IFRS MCEV
Opening Group MCEV 6,385 2,790 9,175 7,217 2,491 9,708
Adjusted operating MCEV earnings B4 182 197 379 245 172 417
Non-operating MCEV earnings 141 21 162 164 578 742
Total Group MCEV earnings 323 218 541 409 750 1,159
Other movements in IFRS net equity C3 (151) (476) (627) (1,596) (116) (1,712)
Closing Group MCEV 6,557 2,532 9,089 6,030 3,125 9,155
Adjustments to bring Group investments
to market value B1 - 1,176 1,176 - 1,510 1,510
Adjusted Group MCEV 6,557 3,708 10,265 6,030 4,635 10,665
GBPm
Year ended 31 December 2012
Covered Non-covered
business business Total Group
Notes MCEV IFRS MCEV
Opening Group MCEV 7,217 2,491 9,708
Adjusted operating MCEV earnings B4 453 323 776
Non-operating MCEV earnings 473 498 971
Total Group MCEV earnings 926 821 1,747
Other movements in IFRS net equity C3 (1,758) (522) (2,280)
Closing Group MCEV 6,385 2,790 9,175
Adjustments to bring Group investments to
market value B1 - 1,615 1,615
Adjusted Group MCEV 6,385 4,405 10,790
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
A: MCEV policies
A1: Basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 92 to 116 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 in the preparation of MCEV information for Emerging Markets and Old Mutual Wealth
businesses at 30 June 2013. As a result of the consolidation of reporting processes for Old Mutual Bermuda, MCEV information has been
prepared using IFRS results prepared in accordance with the primary financial statements, apart from variable annuity guarantee liabilities,
which have been restated to reflect a best estimate valuation consistent with the MCEV Principles. 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) 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. For Old Mutual Bermuda regulatory required capital is the most onerous capital measure.
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 30 June 2013 At 30 June 2012 At 31 December 2012
Required Regulatory Required Regulatory Required Regulatory
capital capital Ratio capital capital Ratio capital capital Ratio
Notes (a) (b) (a/b) (a) (b) (a/b) (a) (b) (a/b)
Emerging Markets B3 1,261 869 1.5 1,371 1,019 1.3 1,312 923 1.4
Old Mutual Wealth(1) B3 306 221 1.4 310 232 1.3 294 212 1.4
Old Mutual Bermuda(2) B3 463 463 1.0 232 136 1.7 433 433 1.0
Total 2,030 1,553 1.3 1,913 1,387 1.4 2,039 1,568 1.3
(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)In July 2012 it was agreed with the Bermuda Monetary Agency (BMA) that the Old Mutual Bermuda business should hold a capital requirement of $703 million,
comparable to those expected to be required under Solvency II at 31 December 2011, as calculated by the Group's existing internal capital model. The dollar
denominated capital requirement is held at a fixed amount between statutory filing dates and the July 2012 requirement has therefore been kept constant for June 2013.
Foreign exchange fluctuations are reflected in the amounts above.
(b) Cost of residual non-hedgeable risks
The cost of residual non-hedgeable risks (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.
(c) 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.
South Africa
In October 2012, tax relief in respect of sales, administration and indirect expenses attributable to taxable income in the individual and
company policyholder funds was announced (effective from 1 January 2013).
This has not been included in the June 2013 assumptions.
United Kingdom
The Emergency Budget that was held in June 2010 set in motion a series of reductions to the UK's mainstream corporation tax rate. The
impact of the corporation tax rate reducing from 23% down to 21%, applicable from April 2014, is included in the June 2013 results. The
impact of the further announced reduction to 20%, applicable from April 2015, is expected to be GBP4 million.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
(d) 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 GBP1,520 million (June 2012: GBP2,408 million; December 2012: GBP1,570 million) and MCEV value is
GBP1,569 million (June 2012: GBP2,459 million; December 2012: GBP1,607 million). $750 million 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 GBP56 million (June 2012: GBP79 million; December 2012: GBP96 million) has not been included in the
value of debt; however, it is included in the Net other business value of GBP(152) million (June 2012: GBP1,059 million; December 2012:
GBP34 million) (Adjusted Group MCEV by line of business). Further information relating to the debt securities can be found in Note E2 in
the Notes to the Consolidated Financial Statements.
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 30 June 2012 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 and 30 June 2013.
Proportion of Group holding company expenses attributable to long-term business %
At At At
30 June 30 June 31 December
2013 2012 2012
Emerging Markets 17 18 18
Old Mutual Wealth 8 9 9
Old Mutual Bermuda(1) n/a n/a n/a
Total 25 27 27
(1)Based on materiality, no Group holding expenses are allocated to Old Mutual Bermuda. Holding company expenses are not valued according to the adjusted IFRS
earnings approach at June 2013.
Economic assumptions
(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 Old Mutual 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 is checked for reasonability relative to the Bloomberg swap yield curve.
At 30 June 2013, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity
premium adjustment to OMLAC(SA)'s Immediate Annuity business and Fixed Bond business. A liquidity premium adjustment is applied to
OMLAC(SA)'s Fixed Bond business as OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in excess of the
risk free rate and the duration of the asset portfolio and the liability duration are a good match (meaning the asset portfolio is held to
maturity). Cash flows on this product are also predictable and the company has adequate liquidity to withstand a substantial increase in
lapses at all durations without having to sell bonds which further strengthens the case for applying a liquidity premium.
It is the directors' view that a proportion of non-government bond spreads at 30 June 2013 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 30 June 2013 by adding 50bps of liquidity premium for
this business (June 2012: 50bps; December 2012: 50bps) to the swap rates used for setting investment return and discounting
assumptions. For OMLAC(SA)'s Fixed Bond products 45bps of liquidity premium was added to the swap rates (June 2012: 55bps;
December 2012: 45bps). 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 30 June 2013, we compared the yields of similar durations
on South African government bonds and bonds issues by state-owned enterprises.
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
At 30 June 2013
1 year 0.7 0.4 0.4 5.7
5 years 1.6 1.2 1.6 7.5
10 years 2.6 2.1 2.8 8.5
20 years 3.4 2.6 3.6 9.0
At 30 June 2012
1 year 1.0 0.9 0.5 5.5
5 years 1.4 1.3 1.0 6.5
10 years 2.2 2.0 1.8 7.6
20 years 3.0 2.4 2.5 7.8
At 31 December 2012
1 year 0.7 0.3 0.3 5.1
5 years 1.0 0.8 0.9 6.0
10 years 1.9 1.6 1.9 7.1
20 years 2.9 2.2 2.8 7.5
(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 Old Mutual
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.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
(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 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 Old Mutual Bermuda's Variable Annuity policyholder asset portfolios.
According to the simplified analysis of earnings approach, earnings for the Old Mutual Bermuda business no longer reflect an expected
return component.
B: Segment information
B1: Components of Group MCEV and Adjusted Group MCEV
GBPm
At At At
30 June 30 June 31 December
Notes 2013 2012 2012
Adjusted net worth attributable to ordinary equity holders of the parent 5,732 5,739 5,774
Equity 7,729 7,947 7,816
Adjustment to IFRS net asset value C4 (1,315) (1,520) (1,360)
Adjustment to remove perpetual preferred callable securities (682) (688) (682)
Value of in-force business B3 3,357 3,416 3,401
Present value of future profits 3,842 4,042 3,946
Additional time value of financial options and guarantees (13) (100) (53)
Frictional costs (223) (245) (221)
Cost of residual non-hedgeable risks (249) (281) (271)
Group MCEV 9,089 9,155 9,175
Adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value 886 1,182 1,281
Adjustment for value of own shares in ESOP schemes(1) 120 106 126
Adjustment for present value of Black Economic Empowerment scheme deferred
consideration 219 273 245
Adjustment to bring external debt to market value (49) (51) (37)
Adjusted Group MCEV 10,265 10,665 10,790
Group MCEV value per share (pence) 185.6 187.3 187.5
Adjusted Group MCEV per share (pence) 209.7 218.2 220.5
Number of shares in issue at the end of the financial period less
treasury shares millions 4,896 4,887 4,893
Return on Group MCEV (ROEV) per annum from core operations 8.4% 8.0% 6.7%
Return on Group MCEV (ROEV) per annum from continuing non-core operations 0.0% 0.5% 1.0%
Return on Group MCEV (ROEV) per annum from discontinued operations 0.0% 0.5% 0.3%
Return on Group MCEV (ROEV ) per annum(2) 8.4% 9.0% 8.0%
(1)Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2012 and 30 June 2013 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 GBP379 million (June 2012: GBP417 million,
December 2012: GBP776 million) divided by the opening Group MCEV.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
B: Segment information continued
B2: Adjusted operating MCEV earnings for the covered business
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Six months ended 30 June 2013 business business Markets Wealth business business
Adjusted operating Group MCEV earnings before tax 238 237 190 47 1 -
Tax on adjusted operating Group MCEV earnings (56) (56) (49) (7) - -
Adjusted operating Group MCEV earnings after tax 182 181 141 40 1 -
GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Six months ended 30 June 2012 business business Markets Wealth business business
Adjusted operating Group MCEV earnings before tax 305 264 198 66 23 18
Tax on adjusted operating Group MCEV earnings (60) (60) (54) (6) - -
Adjusted operating Group MCEV earnings after tax 245 204 144 60 23 18
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
B3: Components of MCEV of the covered business
GBPm
Total Core Non-core
covered covered Emerging Old Mutual covered
At 30 June 2013 business business Markets(1) Wealth business(2)
Adjusted net worth 3,200 2,487 1,868 619 713
Free surplus 1,170 920 607 313 250
Required capital 2,030 1,567 1,261 306 463
Value of in-force 3,357 3,357 1,377 1,980 -
Present value of future profits 3,843 3,843 1,712 2,131 -
Additional time value of financial options and guarantees (13) (13) - (13) -
Frictional costs (223) (223) (207) (16) -
Cost of residual non-hedgeable risks (250) (250) (128) (122) -
MCEV 6,557 5,844 3,245 2,599 713
GBPm
Total Core Non-core
covered covered Emerging Old Mutual covered
At 30 June 2012 business business Markets(1) Wealth business
Adjusted net worth 2,614 2,382 1,905 477 232
Free surplus 701 701 534 167 -
Required capital 1,913 1,681 1,371 310 232
Value of in-force 3,416 3,507 1,440 2,067 (91)
Present value of future profits 4,042 4,020 1,799 2,221 22
Additional time value of financial options and guarantees (100) (15) - (15) (85)
Frictional costs (245) (243) (227) (16) (2)
Cost of residual non-hedgeable risks (281) (255) (132) (123) (26)
MCEV 6,030 5,889 3,345 2,544 141
GBPm
Total Core Non-core
covered covered Emerging Old Mutual covered
At 31 December 2012 business business Markets(1) Wealth business
Adjusted net worth 2,984 2,304 1,838 466 680
Free surplus 945 698 526 172 247
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 6,385 5,760 3,316 2,444 625
(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.
(2)For the current period, the valuation basis for Old Mutual Bermuda has been simplified from a full bottom-up MCEV calculation to an adjusted IFRS basis and the
valuation therefore does not include a value of in-force component.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
B4: Analysis of covered business MCEV earnings (after tax)
Total covered business Six months ended 30 June 2013
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 945 2,039 2,984 3,401 6,385
New business value (132) 84 (48) 156 108
Expected existing business contribution (reference rate) 15 27 42 64 106
Expected existing business contribution (in excess of reference rate) 3 5 8 19 27
Transfers from VIF and required capital to free surplus 360 (97) 263 (263) -
Experience variances (54) 20 (34) (12) (46)
Assumption changes 4 - 4 (4) -
Other operating variance (19) 7 (12) (1) (13)
Operating MCEV earnings 177 46 223 (41) 182
Economic variances 87 11 98 40 138
Other non-operating variance (4) - (4) 7 3
Total MCEV earnings 260 57 317 6 323
Closing adjustments (35) (66) (101) (50) (151)
Capital and dividend flows (11) 7 (4) - (4)
Foreign exchange variance (16) (73) (89) (108) (197)
MCEV of sold business 15 - 15 - 15
Old Mutual Bermuda change in valuation basis (23) - (23) 58 35
Closing MCEV 1,170 2,030 3,200 3,357 6,557
Return on MCEV (RoEV)% per annum 5.9%
Return on MCEV for total covered business is calculated as the annualised operating MCEV earnings after tax divided by opening MCEV in sterling.
The operating assumption changes and other operating variances are not annualised.
Total covered business Six months ended 30 June 2012 Year ended 31 December 2012
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 685 1,996 2,681 4,536 7,217 685 1,996 2,681 4,536 7,217
New business value (154) 74 (80) 154 74 (293) 163 (130) 327 197
Expected existing business
contribution (reference rate) 11 36 47 79 126 20 71 91 156 247
Expected existing business
contribution (in excess of
reference rate) 2 18 20 24 44 3 29 32 49 81
Transfers from VIF and required
capital to free surplus 379 (113) 266 (266) - 695 (216) 479 (479) -
Experience variances 8 17 25 13 38 (14) 17 3 6 9
Assumption changes (5) - (5) - (5) 34 (7) 27 7 34
Other operating variance (44) 48 4 (36) (32) (26) 18 (8) (107) (115)
Operating MCEV earnings 197 80 277 (32) 245 419 75 494 (41) 453
Economic variances 86 5 91 108 199 258 3 261 259 520
Other non-operating variance (32) - (32) (3) (35) (284) 240 (44) (3) (47)
Total MCEV earnings 251 85 336 73 409 393 318 711 215 926
Closing adjustments (235) (168) (403) (1,193) (1,596) (133) (275) (408) (1,350) (1,758)
Capital and dividend flows (61) (1) (62) - (62) 41 (3) 38 1 39
Foreign exchange variance (15) (40) (55) (45) (100) (54) (145) (199) (139) (338)
MCEV of acquired/sold business (159) (127) (286) (1,148) (1,434) (120) (127) (247) (1,212) (1,459)
Closing MCEV 701 1,913 2,614 3,416 6,030 945 2,039 2,984 3,401 6,385
Return on MCEV (RoEV)%
per annum 7.3% 6.3%
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
B5: Analysis per business unit
GBPm
Six months ended 30 June 2013
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
business business Markets Wealth business(1) business
Opening MCEV 6,385 5,760 3,316 2,444 625 -
New business value 108 108 69 39 - -
Expected existing business contribution (reference rate) 106 106 91 15 - -
Expected existing business contribution (in excess of
reference rate) 27 27 15 12 - -
Experience variances (46) (47) (25) (22) 1 -
Assumption changes - - - - - -
Other operating variance (13) (13) (9) (4) - -
Operating MCEV earnings 182 181 141 40 1 -
Economic variances 138 130 78 52 8 -
Other non-operating variance 3 3 (1) 4 - -
Total MCEV earnings 323 314 218 96 9 -
Closing adjustments (151) (230) (289) 59 79 -
Capital and dividend flows (4) (4) (18) 14 - -
Foreign exchange variance (197) (241) (271) 30 44 -
MCEV of acquired/sold business 15 15 - 15 - -
Bermuda change in valuation basis 35 - - - 35 -
Closing MCEV 6,557 5,844 3,245 2,599 713 -
Return on MCEV (RoEV)% per annum 5.9% 6.5% 9.1% 3.4% 0.4% -
Return on MCEV is calculated as the annualised operating MCEV earnings after tax divided by opening MCEV. The operating assumption changes
and other operating variances are not annualised. This is calculated in local currency, apart from total covered and core covered business, which are
calculated in sterling.
Transfers from VIF and required capital to free surplus GBPm
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
Six months ended 30 June 2013 business business Markets Wealth business(1) business
Transfer from value of in-force (263) (263) (108) (155) - -
Transfer from required capital (97) (97) (74) (23) - -
Transfer to free surplus 360 360 182 178 - -
(1)A simplified analysis of earnings approach has been adopted for Old Mutual Bermuda according to the new adjusted IFRS valuation approach.
B5: Analysis per business unit
GBPm
Six months ended 30 June 2012
Total Core Non-core Discontinued
covered covered Emerging Old Mutual covered covered
business business Markets Wealth business business
Opening MCEV 7,217 5,718 3,172 2,546 66 1,433
New business value 74 74 52 22 - -
Expected existing business contribution (reference rate) 126 122 99 23 4 -
Expected existing business contribution (in excess of
reference rate) 44 27 15 12 17 -
Experience variances 38 13 13 - 7 18
Assumption changes (5) - - - (5) -
Other operating variance (32) (32) (35) 3 - -
Operating MCEV earnings 245 204 144 60 23 18
Economic variances 199 146 121 25 53 -
Other non-operating variance (35) (17) (21) 4 - (18)
Total MCEV earnings 409 333 244 89 76 -
Closing adjustments (1,596) (162) (71) (91) (1) (1,433)
Capital and dividend flows (62) (62) 8 (70) - -
Foreign exchange variance (100) (100) (79) (21) (1) 1
MCEV of acquired/sold business (1,434) - - - - (1,434)
Closing MCEV 6,030 5,889 3,345 2,544 141 -
Return on MCEV (RoEV)% per annum 7.3% 7.7% 10.1% 4.6% 76.5% 2.6%
Return on MCEV is calculated as the annualised operating MCEV earnings after tax divided by opening MCEV. The operating assumption changes
and other operating variances are not annualised. 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
Six months ended 30 June 2012 business business Markets Wealth business business
Transfer from value of in-force (266) (289) (120) (169) 23 -
Transfer from required capital (113) (97) (76) (21) (16) -
Transfer to free surplus 379 386 196 190 (7) -
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
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 7,217 5,718 3,172 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 (1,758) (668) (439) (229) 343 (1,433)
Capital and dividend flows 39 (321) (132) (189) 360 -
Foreign exchange variance (338) (322) (307) (15) (17) 1
MCEV of acquired/sold business (1,459) (25) - (25) - (1,434)
Closing MCEV 6,385 5,760 3,316 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 annualised operating MCEV earnings after tax divided by opening MCEV. The operating assumption changes
and other operating variances are not annualised. 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) -
Results highlights
Core covered business
- Strong value of new business growth in both Old Mutual Wealth and Emerging Markets businesses due to higher aggregate sales
volumes and higher margins.
- Experience variances include adverse variances of GBP29 million due to development spend and one-off costs. Experience variances
improve to GBP(18) million if these costs are excluded.
- Favourable market performance led to positive economic variances, partially offset by the effect of higher yields on the value of in-
force business.
- The 10% depreciation of the rand against sterling over H1 2013 has led to reduced earnings from Emerging Markets in sterling and
foreign exchange translation losses in MCEV closing adjustments.
New business
Emerging Markets: VNB increased by 49% compared to H1 2012 (in rand) mainly due to higher sales volumes in Mass Foundation
Cluster and Corporate Segment, and higher margins as a result of favourable assumption changes implemented at the end of 2012.
Old Mutual Wealth: VNB increased by 77% compared to H1 2012, with the improvement in new business margins mainly due to less
development expenses allocated to new business in H1 2013 compared to H1 2012 (circa GBP9 million) and general expense savings
resulting from the cost reduction initiatives at the end of 2012. Old Mutual Wealth also experienced higher sales in H1 2013, with improved
sales in the International business across all regions apart from the UK. Sales on the Platform are slightly lower following the impact of
uncertainty around new regulations on distribution in the UK, although sales increased favourably in Q2 2013.
Expected existing business contribution
The reduction in the expected existing business contribution for core covered business is a result of lower anticipated investment returns
based on lower opening yields at the start of 2013 compared to the start of 2012.
Experience variances
Emerging Markets: Positive risk experience on protection business is offset by the negative impact of one-off transfers out of Corporate
Segment customised annuity business of GBP(8) million and worsening persistency experience in Mass Foundation Cluster. Experience
losses include development expenditure of GBP7 million incurred across the Emerging Markets operations.
Old Mutual Wealth: Experience variances were broadly neutral after allowing for development expenditure of GBP16 million and one-off
costs of GBP6 million.
Other operating variances
Variances include the impact of increased capital requirements on the cost of non-hedgeable risk, as well as the impact of discretionary
cover increases on Mass Foundation cluster products.
Economic variances
Emerging Markets: Favourable economic variances are mainly due to favourable investment performance on policyholder funds and on
shareholder funds in Zimbabwe, partially offset by the adverse impact of higher yields on the value of in-force business.
Old Mutual Wealth: Favourable economic variances were mainly due to investment gains on policyholder funds, partially offset by the
adverse impact of higher yields on the value of in-force business.
Non-core covered (Old Mutual Bermuda): Favourable economic variances are mainly due to positive variable annuity guarantee
performance (net of experience on hedge portfolio) and current year unrealised gains associated with capital seed investments.
Closing adjustments
Emerging Markets: The negative foreign exchange variance reflects the 10% depreciation of the rand over the period (ZAR/GBP
exchange rate increased from 13.77 at 31 December 2012 to 15.08 at 30 June 2013).
Old Mutual Wealth: Closing adjustments include the impact of the release of a tax provision related to the sale of the Finnish business as
well as a positive foreign exchange variance from the appreciation of the euro against sterling.
Non-core covered (Old Mutual Bermuda): Closing adjustments include the valuation basis restatement from a bottom-up MCEV
calculation basis to an adjusted IFRS basis and a positive foreign exchange variance from the appreciation of the US dollar against
sterling.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
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.
Six months ended 30 June 2013 GBPm
Annualised PVNBP
recurring Single capitalisation PVNBP APE
premiums premiums PVNBP factors(1) APE VNB margin margin
Core covered business 229 3,400 4,647 5.4 569 108 2.3% 19%
Emerging Markets 171 798 1,755 5.6 251 69 3.9% 28%
Old Mutual Wealth 58 2,602 2,892 5.0 318 39 1.4% 12%
Total covered business 229 3,400 4,647 5.4 569 108 2.3% 19%
Six months ended 30 June 2012 GBPm
Annualised PVNBP
recurring Single capitalisation PVNBP
premiums premiums PVNBP factors(1) APE VNB margin APE margin
Core covered business 259 2,836 4,122 5.0 542 74 1.8% 14%
Emerging Markets 177 593 1,498 5.1 235 52 3.5% 22%
Old Mutual Wealth 82 2,243 2,624 4.6 307 22 0.8% 7%
Total covered business 259 2,836 4,122 5.0 542 74 1.8% 14%
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%
Total covered business 517 5,953 8,665 5.2 1,112 197 2.3% 18%
(1)The PVNBP capitalisation factors are calculated as follows: (PVNBP single premiums)/annualised recurring premiums.
The VNB for Old Mutual Wealth in June 2013 has been calculated after the reallocation of certain development costs from acquisition
expenses to expense variances. The June 2012 VNB number has not been restated to reflect this treatment.
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 GBP523 million (June 2012: GBP518 million; December 2012: GBP1,093 million) is excluded from VNB
above as the profits in 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 GBP315 million (June 2012: GBP322
million; December 2012: GBP736 million) is excluded as this is more appropriately classified as unit trust business.
New business single premiums of GBP25 million (June 2012: GBP16 million; December 2012: GBP37 million), annualised recurring
premiums of GBP10 million (June 2012: GBP9 million; December 2012: GBP17 million), and APE of GBP12 million ( June 2012: GBP11
million; December 2012: GBP21 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.
At 30 June 2012, new business recurring premiums of GBP8 million in relation to credit life sales in Emerging Markets were excluded in
APE figures and annualised recurring premium. These have been included in June 2013 and December 2012 along with the VNB and
PVNBP.
Additionally, new business single premiums of GBP127 million, annualised recurring premiums of GBP12 million, and APE of GBP25
million, in respect of the life business in India and China have been excluded from the above tables, as no value of new business and
PVNBP calculations have been performed for these businesses at June 2013.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
C2: Adjustments applied in determining total Group MCEV earnings before tax
GBPm
Six months ended 30 June 2013 Six months ended 30 June 2012
Non-
Covered Non-covered Total Covered 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 - (2) (2) - (5) (5)
Economic variances 186 (6) 180 214 (5) 209
Other non-operating variances (6) - (6) (54) - (54)
Acquired/divested business - (1) (1) - 20 20
Other Group adjustments related to Nordic disposal (9) - (9) - 392 392
Adjusted Group MCEV uplift from sale of Nordic - - - - 202 202
Dividends declared to holders of perpetual preferr
callable securities - 22 22 - 21 21
Adjusting items relating to US Asset Management
equity plans and non-controlling interests - (17) (17) - (4) (4)
Fair value (losses)/gains on Group debt instruments - 1 1 - (36) (36)
Adjusting items 171 (3) 168 160 585 745
Adjusting items from continuing operations 171 6 177 178 (7) 171
Adjusting items from discontinued operations - (9) (9) (18) 592 574
Total MCEV adjusting items 171 (3) 168 160 585 745
GBPm
Year ended 31 December 2012
Covered Total
business Non-covered Group
MCEV business IFRS MCEV
Income/(expense)
Goodwill impairment and amortisation of non-covered
business acquired intangible assets and impact of
acquisition accounting - (7) (7)
Economic variances 657 (11) 646
Other non-operating variances (56) - (56)
Acquired/divested business - (12) (12)
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
Premium paid on early repayment of senior debt - (71) (71)
Adjusting items relating to US Asset Management
equity plans and non-controlling interests - (13) (13)
Fair value gains on Group debt instruments - (57) (57)
Adjusting items 587 486 1,073
Adjusting items from continuing operations 605 (113) 492
Adjusting items from discontinued operations (18) 599 581
Total MCEV adjusting items 587 486 1,073
C3: Other movements in IFRS net equity impacting Group MCEV
GBPm
Six months ended 30 June 2013 Six months ended 30 June 2012
Covered Non-covered Total Covered Non-covered Total
business business Group business business Group
MCEV IFRS MCEV MCEV IFRS MCEV
Fair value movements - (1) (1) - (347) (347)
Net investment hedge - 9 9 - 123 123
Currency translation differences/exchange
differences on translating foreign operations (197) (199) (396) (100) (326) (426)
Aggregate tax effects of items taken directly to or
transferred from equity - 5 5 - 4 4
Other movements(1) 15 (15) - (1,425) 1,428 3
Net income recognised directly into equity (182) (201) (383) (1,525) 882 (643)
Capital and dividend flows for the year (4) (256) (260) (71) (1,044) (1,115)
Old Mutual Bermuda valuation change basis 35 - 35 - - -
Net purchase of treasury shares - (29) (29) - (2) (2)
Other shares issued - 8 8 - 25 25
Change in share based payment reserve - 2 2 - 23 23
Other movements in net equity (151) (476) (627) (1,596) (116) (1,712)
GBPm
Year ended 31 December 2012
Non-
Covered covered Total
business business Group
MCEV IFRS MCEV
Fair value movements - (328) (328)
Net investment hedge - 160 160
Currency translation differences/exchange
differences on translating foreign operations (338) (677) (1,015)
Aggregate tax effects of items taken directly to or
transferred from equity - 9 9
Other movements(1) (1,444) 1,449 5
Net income recognised directly into equity (1,782) 613 (1,169)
Capital and dividend flows for the year 24 (1,238) (1,214)
Net purchase of treasury shares - 8 8
Other shares issued - 33 33
Change in share based payment reserve - 62 62
Other movements in net equity (1,758) (522) (2,280)
(1)The June 2013 and December 2012 amounts include the sale of the Finnish branch in Old Mutual Wealth. The December 2012 and June 2012 amounts include the impact of
the IAS 19 restatement and the transfer of the Nordic covered MCEV balance on disposal.
Notes to the MCEV basis supplementary information
For the six months ended 30 June 2013
C: Other key performance information continued
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 Core Non-core
covered covered Emerging Old Mutual covered
At 30 June 2013 business business Markets Wealth business
IFRS net asset value(1) 4,487 3,737 1,353 2,384 750
Adjustment to include long-term business on a
statutory solvency basis (841) (841) 165 (1,006) -
Inclusion of Group equity and debt instruments
held in life funds(2) 366 366 358 8 -
Goodwill (775) (775) (8) (767) -
Old Mutual Bermuda guarantee cost valuation change(3) (37) - - - (37)
Adjusted net worth attributable to ordinary
equity holders of the parent 3,200 2,487 1,868 619 713
GBPm
Total Core Non-core
covered covered Emerging Old Mutual covered
At 30 June 2012 business business Markets Wealth business
IFRS net asset value(1) 4,076 3,827 1,369 2,458 249
Adjustment to include long-term business on a
statutory solvency basis (1,024) (1,007) 187 (1,194) (17)
Inclusion of Group equity and debt instruments
held in life funds(2) 353 353 356 (3) -
Goodwill (791) (791) (7) (784) -
Adjusted net worth attributable to ordinary
equity holders of the parent 2,614 2,382 1,905 477 232
GBPm
Total Core Non-core
covered covered Emerging Old Mutual covered
At 31 December 2012 business business Markets Wealth business
IFRS net asset value(1) 4,308 3,600 1,295 2,305 708
Adjustment to include long-term business on a
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 2,984 2,304 1,838 466 680
(1)IFRS net asset value is after elimination of inter-company loans.
(2)A further GBP(28) million (June 2012: GBP(58) million; December 2012: GBP(36) million) relates to the non-covered business. This brings the total
adjustment to IFRS net asset value to GBP1,315 million (June 2012: GBP1,520 million; December 2012: GBP1,360million).
(3)Variable annuity guarantee liabilities are restated from an IFRS basis to reflect a best estimate valuation consistent with MCEV principles.
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 Old Mutual 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 Old Mutual 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 table below shows the sensitivity of the MCEV, value of in-force business at 30 June 2013 and the value of new business for the six
months ended 30 June 2013 to the following:
- Economic assumptions 100bps increase/ decrease: Increasing/ decreasing all pre-tax investment and economic assumptions
(projected investment returns and inflation) by 100bps, with credited rates and discount rates changing commensurately.
- 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.
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.
Sensitivity tests: MCEV
GBPm
At 30 June 2013
Value of Value of
in-force new
MCEV business business
Central assumptions 6,557 3,357 108
MCEV, VIF & VNB given changes in:
Economic assumption 100bps increase 6,437 3,240 98
Economic assumption 100bps decrease 6,673 3,463 117
10bps increase of liquidity spreads 6,564 3,364 108
Sponsor:
Merrill Lynch South Africa (Pty) Ltd
Date: 07/08/2013 08:02:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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