Wrap Text
Old Mutual Group's Economic Capital Position as at 31 December 2013
OLD MUTUAL PLC
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
Old Mutual plc
Ref 52/14
15 May 2014
OLD MUTUAL GROUP’S ECONOMIC CAPITAL POSITION AS AT 31 DECEMBER 2013
Old Mutual plc today announces results from its Economic Capital (EC) framework which has been in
place for a number of years and has been developed to assess exposure to risk across the Group
relative to risk appetite. The intention of the framework is to look beyond the regional capital
constraints imposed by local or group-level regulatory or rating agency requirements and to represent
a simple economic view of capital.
These results are derived from our own economic capital model which has not, and will not, be
reviewed and approved by the Prudential Regulation Authority and therefore no inference should be
drawn as to our eventual Solvency II position. In addition, the economic capital position is not an
assessment of distributable capital or cash. Any local regulatory approvals, including exchange
controls, constrain the deployment of surplus capital. The results have not been subject to external
independent review.
As at 31 December 2013 Old Mutual reports an economic capital surplus of £4.8 billion, which implies
an economic capital cover ratio of 216%. This assumes that there are no restrictions on the transfer
of surplus between group companies.
The Group’s economic capital position as at 31 December 2013 is shown in the table below.
£ billion
Old Mutual Group Economic Capital position 31 December 2013
Available Financial Resources (AFR)(1) 9.0
Economic Capital at Risk requirement (ECaR)(2) 4.2
Surplus 4.8
Economic Capital cover ratio(3) 216%
1 The Group’s Available Financial Resources is the value of assets held by the Group in excess of its economic
liabilities.
2 Economic capital at risk requirement is the reduction in post-tax economic available financial resources over a
one-year forward-looking time horizon that should only be exceeded once in 200 years (99.5% confidence
level that the event will not occur). The confidence level was reviewed during 2013 and amended to 99.5% at
31 December 2013 from 99.93% at 30 June 2013, which is more closely aligned to the emerging regulatory
capital standard. The confidence level used for Nedbank is 99.93% and Nedbank results on that basis are
combined with the rest of the Group.
3 If it is assumed that no diversification exists with Nedbank and the rest of the Group, the Group surplus would
be £4.5 billion (cover ratio of 201%) and excluding Nedbank, the Group surplus would be £4.0 billion (cover
ratio of 228%).
Old Mutual is currently a standard formula firm for the purposes of determining capital requirements
for Solvency II and Solvency Assessment and Management (‘SAM’). There remain material areas of
uncertainty within the Solvency II and SAM rules, particularly around the extent to which SAM and
Solvency II will converge and whether South Africa will be deemed an equivalent regime under
Solvency II. Against this background of uncertainty and given the standard formula calibration, the
level of surplus over regulatory capital is expected to be lower than the figures stated on an economic
capital basis above and more in line with current FGD coverage. We believe that it is prudent to hold
a significant surplus above economic capital in order to have an appropriate buffer for absorbing
potentially more onerous regulatory requirements in future.
OLD MUTUAL GROUP ECONOMIC CAPITAL RISK PROFILES AS AT 31 DECEMBER 2013
An update to the Group risk profile presented within the Risk and Capital Management section of the
Old Mutual 2013 Annual Report and Accounts is provided below to reflect the December 2013
position as well as the change in the Economic Capital at Risk confidence level from 99.93% at June
2013 to 99.5% at December 2013, which is more closely aligned to the emerging regulatory capital
standard.
The table below sets out the Group risk profile with an indication of the relevant proportion of risk
exposure in economic capital terms. The Group’s risk profile is based on standalone economic capital
at risk where the relative contribution of each risk is determined before allowing for the impact of
diversification between risks. A diversified risk profile is also shown below.
ECaR requirement by risk
Standalone Diversified
Market 23% 32%
Credit and counterparty 11% 16%
Business 26% 20%
Liability 12% 3%
Operational 7% 7%
Currency translation 20% 20%
Not assessed 1% 2%
In moving from the standalone to the diversified ECaR risk profile, the relative contributions of market
and credit and counterparty risks increase. However, in absolute terms, the main sources of group-
wide diversification benefit are in respect of Group currency translation risk, banking credit risk, non-
life catastrophe risk, lapse and life liability risk.
Currency translation risk represents a significant portion of the Group risk profile. This risk relates
mainly to the translation of surplus capital from ZAR to GBP and is a structural feature of the Group.
As our capital is held where our risks exist, the risk would only be realised if we were to require a
transfer of surplus capital between regions during periods of stress. The relative contribution of
currency translation risk to the overall Group risk profile has decreased from 30 June 2013 to 31
December 2013 mainly due to the change to the ECaR confidence level and depreciation of the rand.
A depreciation of ZAR will reduce the absolute value of surplus in GBP terms but improves the overall
EC cover ratio as the ECaR is more sensitive than the AFR to currency movements.
Business risk and market risk remain top contributors to the Group risk profile and are influenced by
the economies and the knock-on impact on the consumer in the key regions where we operate. The
contribution of these risks to the Group risk profile has increased over the year due to strong market
performance in certain markets and general business growth.
Liability risk diversifies well against our other risks. It is also managed through the maintenance and
use of management information systems which provide current data of the risks to which we are
exposed, use of actuarial models to calculate premiums and monitor claims patterns using past
experience and statistical methods, guidelines for concluding insurance contracts and assuming
insurance risks e.g. underwriting principles and product pricing procedures and reinsurance to limit
our exposure to large single claims and catastrophes, particularly on the non-life business.
At 31 December 2013, the standalone Group ECaR requirement is split as follows: Emerging
Markets, Nedbank and Property & Casualty at 54%; Old Mutual Wealth at 23%; US Asset
Management at 2%; Old Mutual Bermuda at 2%; and Old Mutual Group (mostly currency translation
risk) at 19%.
SENSITIVITY OF GROUP ECONOMIC CAPITAL TO KEY MARKET MOVEMENTS
The economic capital position is resilient to changes in various economic factors.
The table below presents the sensitivity of the Group economic surplus and cover ratio under certain
standard financial stresses, which are defined by reasonably possible individual movements in key
market parameters while keeping all other parameters constant with the effects impacting both the
available financial resources and economic capital at risk requirement.
Impact on Group EC surplus and cover ratio at 31 December 2013
Surplus (£ billion) Cover ratio
Base Economic Capital Surplus 4.8 216%
Equity markets fall by 10% 4.6 215%
Equity markets fall by 25% 4.4 212%
Interest rates rise by 100 basis points 4.7 214%
Interest rates fall by 100 basis points 4.9 216%
Credit spreads increase by 100 basis points* 4.8 215%
ZAR:GBP exchange rate depreciates by 10% 4.6 218%
ZAR:GBP exchange rate depreciates by 30% 4.3 222%
* A 100bps increase in credit spreads is generally assumed 1 notch down grade on BBB to BB- ratings and 2 notches downgrade on lower
graded investments.
This announcement should be read in conjunction with the Risk and Capital Management section
within the 2013 Old Mutual Annual Report and Accounts at www.oldmutual.com/ar, which provides
further detail on our risk management and mitigation framework. A summary of the economic capital
methodology and assumptions is included in an appendix to this announcement.
Enquiries
External communications
Patrick Bowes UK +44 20 7002 7440
Investor relations
Dominic Lagan UK +44 20 7002 7190
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524833
Lead sponsor:
Merrill Lynch South Africa (Pty) Ltd
Joint Sponsor:
Nedbank Capital
Notes to Editors
Old Mutual provides life assurance, asset management, banking and general insurance to more than
16 million customers in Africa, the Americas, Asia and Europe. Originating in South Africa in 1845,
Old Mutual has been listed on the London and Johannesburg Stock Exchanges, among others, since
1999.
In the year ended 31 December 2013, the Group reported adjusted operating profit before tax of £1.6
billion (on an IFRS basis) and had £294 billion of funds under management from core operations.
For further information on Old Mutual plc, please visit the corporate website at www.oldmutual.com
Cautionary statement
This announcement contains forward-looking statements relating to certain of Old Mutual plc’s plans
and its current goals and expectations relating to its future financial condition, performance and
results. By their nature, all forward-looking statements involve risk and uncertainty because they
relate to future events and circumstances that are beyond Old Mutual plc’s control, including, among
other things, global, UK and South African domestic, economic and business conditions, market-
related risks such as fluctuations in interest rates and exchange rates, policies and actions of
regulatory authorities (including without limitation the manner of implementation of the EU Solvency II
Directive and Solvency Assessment and Management in South Africa), the impact of competition,
inflation, deflation, the timing and impact of other uncertainties, future acquisitions or combinations
within relevant industries, as well as the impact of tax and other legislation and regulations in
territories where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc’s actual future financial condition, performance and results may differ
materially from the plans, goals and expectations set out in its forward-looking statements. Old Mutual
plc undertakes no obligation to update any forward-looking statements contained in this
announcement or any other forward-looking statements that it may make.
APPENDIX: ECONOMIC CAPITAL METHODOLOGY AND ASSUMPTIONS
Old Mutual uses its own economic capital model to determine its economic cover ratio which reflects
the excess of available financial resources (AFR) over the economic capital at risk (ECaR)
requirement.
Economic available financial resources
The Group’s AFR is the value of assets held by the Group in excess of its economic liabilities, and
which might be used over the coming year to meet capital requirements following such a scenario.
More specifically, for insurance entities the AFR is determined as the market value balance sheet
based on Solvency II principles but adjusted for an internal view and current interpretation of key
methodologies around, for example, contract boundaries, discount rates and tax. The main
components of AFR for these entities include the market value of assets, insurance technical
provisions (represented as the sum of best estimate liabilities plus a risk margin) and other liabilities.
The best estimate liabilities correspond to the probability weighted average of future cash-flows taking
account of the time value of money. Allowance is made for the potential impact of variability of
investment returns (i.e. asymmetric impact) on future shareholder cash flows of policyholder financial
options and guarantees. Management and policyholders’ actions, where realistic, are captured within
the liabilities. The technical provisions also include a risk margin in order to ensure that the value of
technical provisions is equivalent to the amount that a third party would be expected to require in
order to take over and meet the insurance and reinsurance obligations, assuming a 6 per cent per
annum cost of capital, in line with current Solvency II rules.
For non-insurance entities, the AFR is determined as IFRS equity with adjustments to eliminate
intangible items such as goodwill.
Economic capital at risk requirement
The ECaR requirement has been calculated through a detailed process of identifying, quantifying and
aggregating the impact of risks across the Group’s principal business units. These calculations
incorporate exposures to Old Mutual’s life insurance, short-term insurance, banking and asset
management businesses across diverse regions.
Old Mutual defines its economic capital at risk requirement as the reduction in post-tax economic
available financial resources over a one-year forward-looking time horizon that should only be
exceeded once in 200 years (99.5% confidence level that the event will not occur).
The Nedbank results within the Group calculations are consistent with the bank’s Internal Capital
Adequacy Assessment Process (ICAAP) framework where the requirements are derived based on
current regulatory banking rules and are consolidated in the Group position on a 99.93% basis
reflecting the more onerous requirements under Basel III.
Diversification is allowed for both between different risks within entities and across sectors and
territories with no restrictions on the transfer of surplus between group companies.
Key assumptions
The methodology, assumptions and results are set with reference to internal capital model
governance policies and are subject to review by the Old Mutual plc Risk Committee. The risk
frameworks, governance and development of the Group’s capital model are overseen centrally but
implemented by our businesses locally so that local requirements can be addressed appropriately.
The governance at business unit level is reinforced through senior Group executive representation on
business unit regulatory boards and is supported with formal dual reporting for all key control
functions.
The key assumptions underlying the economic capital calibration include:
• market related assumptions determined such that projected cash flows are valued in line with
the prices of similar cash flows that are traded on the capital markets as at the valuation date
or appropriate methods (such as weighted average investment return forecasts) where there
is a lack of available market data;
• non-market related assumptions for future experience, including mortality, persistency and
expense assumptions 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;
• the risk free reference rates, reinvestment rates and discount rates are determined with
reference to the swap yield curve that is appropriate to the currency of the cash flows;
• assumptions underlying the calculation of the best estimate liability in respect of management
actions and policyholder behaviour;
• risk distribution assumptions used to set the level of stresses in determining the 1-in-200 level
for the ECaR requirement. These are set with reference to historical market data where
available, internal demographic and operating data and the application of expert judgment as
appropriate; and
• dependency assumptions to capture the interaction between risks, where these are set with
reference to historical market data where available and the application of expert judgment as
appropriate.
Old Mutual recognises that the risks quantified within an EC framework cannot capture all possible
risks that may impact a Group over the following twelve month period; in particular the risk of capital
loss owing to decisions yet to be taken, for example strategic risks, cannot realistically be modelled.
The risk of modelling error is also accepted in interpreting the results although this risk reduces as the
models become more widely understood, used and embedded. We will continue to consider and
implement improvements to the accuracy, consistency and coverage of our analysis, which may
impact future results. There are also likely to be further changes to the EC position where this is
impacted by methodologies adopted from Solvency II and SAM rules, which are not yet final.
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