Final Results - Part 2

Old Mutual PLC 24 February 2003 PART 2 Notes to the Financial Statements for the year ended 31 December 2002 1 FOREIGN CURRENCIES The information contained in these financial statements is expressed in both Sterling and South African Rand. This is in order both to meet the legal requirements of the UK Companies Act 1985 and to provide the users of the accounts in South Africa with illustrative information. The principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are: Rand US$ Year to Year to Year Year 31 Dec 31 Dec to to 2002 2001 31 Dec 31 Dec 2002 2001 Profit and loss account (average rate) 15.7878 12.3923 1.5030 1.4405 Balance sheet (closing rate) 13.8141 17.4286 1.6105 1.4542 Foreign currency revenue transactions are translated at average exchange rates for the year. Foreign currency assets and liabilities are translated at year end exchange rates. Exchange differences arising from the translation of net investments in foreign subsidiary undertakings are taken to the consolidated statement of total recognised gains and losses. Exchange differences arising on the translation of foreign integrated operations are taken through the non-technical account. Other exchange differences are included in the profit and loss account. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 2 EARNINGS AND EARNINGS PER SHARE Basic earnings per share is calculated based upon the profit or loss after tax attributable to equity shareholders after the amortisation and impairment of goodwill arising on acquisitions, the write-down of investment in Dimension Data Holdings plc, Nedcor restructuring and integration costs, short term fluctuations in investment return and non-operating items. The directors' view is that operating earnings per share derived from operating profit or loss based on a long term investment return and before goodwill amortisation and impairment, write-down of investment in Dimension Data Holdings plc, Nedcor restructuring and integration costs and non-operating items provides a better indication of the underlying performance of the Group. A table reconciling profit / (loss) on ordinary activities after tax and minority interests to this underlying measure of operating earnings is included below. Â£m Rm Notes Year Year to Year Year to to 31 Dec to 31 Dec 31 2001 31 2001 Dec Dec 2002 (Restated) 2002 (Restated) Profit / (loss) on ordinary activities after tax and minority 157 (264) 2,472 (3,274) interests Goodwill amortisation net of minority interests 104 120 1,646 1,487 Goodwill impairment - 500 - 6,196 Write-down of investment in Dimension Data Holdings plc net of tax and 4 29 144 467 1,788 minority interests Nedcor restructuring and integration costs net of tax and minority 3(d)(ii)7 - 104 - interests Short term fluctuations in investment returns net of tax and minority 75 (73) 1,192 (905) interests Non-operating items net of tax 6(b) 44 - 688 - Operating earnings after tax and minority interests based on a long 416 427 6,569 5,292 term investment return before goodwill amortisation and impairment, write-down of investment in Dimension Data Holdings plc and Nedcor restructuring and integration costs p c Basic earnings / (loss) per share 4.3 (7.4) 67.4 (92.2) Goodwill amortisation net of minority interests 2.8 3.4 44.9 41.9 Goodwill impairment - 14.1 - 174.5 Write-down of investment in Dimension Data Holdings plc net of tax and 0.8 4.1 12.7 50.3 minority interests Nedcor restructuring and integration costs net of tax and minority 0.2 - 2.8 - interests Short term fluctuations in investment returns net of tax and minority 2.0 (2.1) 32.5 (25.4) interests Non-operating items net of tax 1.2 - 18.7 - Operating earnings per share after tax and minority interests based on 11.3 12.1 179.0 149.1 a long term investment return before goodwill amortisation and impairment, write-down of investment in Dimension Data Holdings plc and Nedcor restructuring and integration costs Basic earnings per share is calculated by reference to the profit / (loss) on ordinary activities after tax and minority interests of Â£157 million (R2,472 million) for the year ended 31 December 2002 (2001: loss Â£264 million (R3,274 million)) and a weighted average number of shares in issue of 3,670 million (2001: 3,550 million). This is calculated after taking into account shares held by Employee Share Ownership Plans (ESOPs), which have waived their rights to dividends. The diluted earnings per share calculation reflects the impact of the shares in the ESOP Trusts, the US Dollar Guaranteed Convertible Bond and potential issue of shares to satisfy the Pilgrim Baxter deferred consideration. 316 million (2001: 316 million) Old Mutual plc shares held by policyholders' funds are included in the weighted average number of shares used in the earnings per share calculation, reflecting the policyholders' economic interest in these shares. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS 3(a) Summary of operating profit on Â£m Rm ordinary activities before tax Notes South United UK & Total South United UK & Total Africa States Rest of Africa States Rest of World World Year to 31 December 2002 Life assurance 3(b)(iii)343 83 (3) 423 5,414 1,310 (47) 6,677 Asset management 3(c)(i) 28 95 2 125 441 1,500 31 1,972 Banking 3(d)(i) 165 - 56 221 2,605 - 884 3,489 General insurance business 3(e)(i) 35 - - 35 556 - - 556 Other shareholders' income / 3(f) - - (22) (22) - - (347) (347) (expenses) Debt service costs - - (58) (58) - - (916) (916) Operating result based on a long 571 178 (25) 724 9,016 2,810 (395) 11,431 term investment return Goodwill amortisation (31) (70) (19) (120) (490) (1,105) (300) (1,895) Write-down of investment in 4 (68) - - (68) (1,080) - - (1,080) Dimension Data Holdings plc Nedcor restructuring and integration costs 3(d)(ii) (14) - - (14) (227) - - (227) Short term fluctuations in (292) 181 20 (91) (4,613) 2,858 316 (1,439) investment return Operating profit on ordinary 166 289 (24) 431 2,606 4,563 (379) 6,790 activities before tax Analysed as: Life assurance 93 258 (17) 334 1,464 4,073 (268) 5,269 Asset management 28 31 (13) 46 441 490 (206) 725 Banking 53 - 52 105 824 - 821 1,645 General insurance business (8) - - (8) (123) - - (123) Other shareholders' income / - - 12 12 - - 190 190 (expenses) Debt service costs - - (58) (58) - - (916) (916) Operating profit on ordinary 166 289 (24) 431 2,606 4,563 (379) 6,790 activities before tax Year to 31 December 2001 Life assurance 3(b)(iii) 397 13 (2) 408 4,915 161 (25) 5,051 Asset management 3(c)(i) 37 116 (3) 150 458 1,437 (38) 1,857 Banking 3(d)(i) 290 - 79 369 3,593 - 979 4,572 General insurance business 3(e)(i) 46 - - 46 570 - - 570 Other shareholders' income / 3(f) 12 - (41) (29) 149 - (508) (359) (expenses) Debt service costs - (3) (64) (67) - (37) (793) (830) Write-down of strategic investments 3(f) - - (21) (21) - - (260) (260) Operating result based on a long 782 126 (52) 856 9,685 1,561 (645) 10,601 term investment return Goodwill amortisation (27) (78) (27) (132) (334) (966) (336) (1,636) Goodwill impairment - (335) (165) (500) - (4,151) (2,045) (6,196) Write-down of investment in 4 (269) - - (269) (3,334) - - (3,334) Dimension Data Holdings plc Short term fluctuations in 77 31 18 126 954 384 223 1,561 investment return Operating profit on ordinary 563 (256) (226) 81 6,971 (3,172) (2,803) 996 activities before tax Analysed as: Life assurance 464 42 4 510 5,745 520 49 6,314 Asset management 37 (295) (193) (451) 458 (3,655) (2,393) (5,590) Banking (4) - 77 73 (50) - 953 903 General insurance business 88 - - 88 1,090 - - 1,090 Other shareholders' income / (22) - (29) (51) (272) - (359) (631) (expenses) Debt service costs - (3) (64) (67) - (37) (793) (830) Write-down of strategic investments - - (21) (21) - - (260) (260) Operating profit on ordinary 563 (256) (226) 81 6,971 (3,172) (2,803) 996 activities before tax Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(b) Life assurance South United UK & Total South United UK & Total Africa States Rest of Africa States Rest of World World (i) Gross premiums written Year to 31 December 2002 Individual business Single 610 2,633 104 3,347 9,631 41,562 1,637 52,830 Recurring 612 146 49 807 9,662 2,312 779 12,753 1,222 2,779 153 4,154 19,293 43,874 2,416 65,583 Group business Single 647 - 9 656 10,215 - 142 10,357 Recurring 241 - 9 250 3,805 - 142 3,947 888 - 18 906 14,020 - 284 14,304 Total gross premiums 2,110 2,779 171 5,060 33,313 43,874 2,700 79,887 Year to 31 December 2001 Individual business Single 854 578 97 1,529 10,583 7,163 1,202 18,948 Recurring 757 78 87 922 9,381 967 1,078 11,426 1,611 656 184 2,451 19,964 8,130 2,280 30,374 Group business Single 598 - 13 611 7,411 - 161 7,572 Recurring 280 - 29 309 3,470 - 359 3,829 878 - 42 920 10,881 - 520 11,401 Total gross premiums 2,489 656 226 3,371 30,845 8,130 2,800 41,775 Business transacted with South African residents in terms of their personal offshore allowances is conducted by the Group's offshore companies and is therefore disclosed under the Rest of World segment. (ii) Gross new business premiums written Year to 31 December 2002 Individual business Single 610 2,633 104 3,347 9,631 41,562 1,637 52,830 Recurring 115 73 11 199 1,808 1,154 175 3,137 725 2,706 115 3,546 11,439 42,716 1,812 55,967 Group business Single 647 - 9 656 10,215 - 142 10,357 Recurring 19 - 1 20 296 - 11 307 666 - 10 676 10,511 - 153 10,664 Total gross new business premiums 1,391 2,706 125 4,222 21,950 42,716 1,965 66,631 written Annual premium equivalent 260 336 23 619 4,089 5,310 364 9,763 Year to 31 December 2001 Individual business Single 854 578 97 1,529 10,583 7,163 1,202 18,948 Recurring 159 26 11 196 1,970 322 136 2,428 1,013 604 108 1,725 12,553 7,485 1,338 21,376 Group business Single 598 - 13 611 7,411 - 161 7,572 Recurring 20 - 1 21 248 - 12 260 618 - 14 632 7,659 - 173 7,832 Total gross new business premiums 1,631 604 122 2,357 20,212 7,485 1,511 29,208 written Annual premium equivalent 324 84 23 431 4,017 1,038 284 5,339 Annual premium equivalent is defined as one tenth of single premiums plus recurring premiums. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(b) Life assurance continued South United UK & Total South United UK & Total Africa States Rest of Africa States Rest of World World (iii) Life assurance operating result Year to 31 December 2002 Individual business 149 83 (8) 224 2,352 1,310 (126) 3,536 Group business 59 - 1 60 931 - 16 947 Life assurance technical result 208 83 (7) 284 3,283 1,310 (110) 4,483 Long term investment return 135 - 4 139 2,131 - 63 2,194 Life assurance operating result before 343 83 (3) 423 5,414 1,310 (47) 6,677 short term fluctuations in investment return Year to 31 December 2001 Individual business 174 13 (8) 179 2,152 161 (99) 2,214 Group business 75 - 1 76 933 - 12 945 Life assurance technical result 249 13 (7) 255 3,085 161 (87) 3,159 Long term investment return 148 - 5 153 1,830 - 62 1,892 Life assurance operating result before 397 13 (2) 408 4,915 161 (25) 5,051 short term fluctuations in investment return Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(c) Asset management Notes Year to Year to Year to Year to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 (i) Analysis of operating result Fund management worldwide South Africa Old Mutual Asset Managers 13 16 205 198 Old Mutual Unit Trusts 3 11 47 136 Other 3 1 47 12 19 28 299 346 United States Old Mutual Asset Managers 3(c)(ii) 31 38 490 471 Pilgrim Baxter 3(c)(ii) 18 29 284 359 Other Old Mutual US affiliates 3(c)(ii) 46 49 726 607 95 116 1,500 1,437 United Kingdom and Rest of World (2) 6 (32) 74 112 150 1,767 1,857 Private client UK - Gerrard Gross profit 3 2 47 25 Profit on disposal of current investments 6 - 95 - Integration costs (5) (12) (79) (149) 4 (10) 63 (124) Other financial services South Africa 9 9 142 112 United Kingdom and Rest of World - 1 - 12 9 10 142 124 Asset management operating result before goodwill amortisation 125 150 1,972 1,857 and impairment Analysed as: South Africa 28 37 441 458 United States 95 116 1,500 1,437 United Kingdom and Rest of World 2 (3) 31 (38) Asset management operating result before goodwill amortisation 125 150 1,972 1,857 and impairment Â£m Rm OMAM Pilgrim Other Total OMAM Pilgrim Other Total (US) Baxter Affiliates (US) Baxter Affiliates (ii) Old Mutual (US) Holdings Year to 31 December 2002 Revenue 123 50 200 373 1,942 789 3,158 5,889 Expenses (92) (32) (154) (278) (1,452) (505) (2,432) (4,389) Asset management operating result 31 18 46 95 490 284 726 1,500 before goodwill amortisation Year to 31 December 2001 Revenue 147 85 219 451 1,822 1,053 2,713 5,588 Expenses (109) (56) (170) (335) (1,351) (694) (2,106) (4,151) Asset management operating result 38 29 49 116 471 359 607 1,437 before goodwill amortisation and impairment Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(d) Banking South UK & Total South UK & Rest Total Africa Rest of Africa of World World (i) Banking operating result Year to 31 December 2002 Interest receivable 1,372 142 1,514 21,661 2,242 23,903 Interest payable (1,003) (108) (1,111) (15,835) (1,705) (17,540) Net interest income 369 34 403 5,826 537 6,363 Dividend income 11 - 11 174 - 174 Fees and commissions receivable 261 45 306 4,121 710 4,831 Fees and commissions payable (9) (2) (11) (142) (32) (174) Other operating income 112 21 133 1,768 332 2,100 Total operating income 744 98 842 11,747 1,547 13,294 Specific and general provisions charge (87) (1) (88) (1,374) (16) (1,390) Net income 657 97 754 10,373 1,531 11,904 Operating expenses (497) (46) (543) (7,847) (726) (8,573) Banking operating result before goodwill 160 51 211 2,526 805 3,331 amortisation, share of associated undertakings' profit, write-down of investment in Dimension Data Holdings plc and Nedcor restructuring and integration costs Share of associated undertakings' profit 5 5 10 79 79 158 Banking operating result before goodwill 165 56 221 2,605 884 3,489 amortisation, write-down of investment in Dimension Data Holdings plc and Nedcor restructuring and integration costs Year to 31 December 2001 Net interest income 386 43 429 4,783 533 5,316 Non-interest revenue 413 55 468 5,118 681 5,799 Total operating income 799 98 897 9,901 1,214 11,115 Specific and general provisions charge (118) - (118) (1,462) - (1,462) Net income 681 98 779 8,439 1,214 9,653 Operating expenses (399) (26) (425) (4,945) (322) (5,267) Banking operating result before goodwill 282 72 354 3,494 892 4,386 amortisation, share of associated undertakings' profit and write-down of investment in Dimension Data Holdings plc Share of associated undertakings' profit 8 7 15 99 87 186 Banking operating result before goodwill 290 79 369 3,593 979 4,572 amortisation and write-down of investment in Dimension Data Holdings plc Operating expenses includes translation losses of Â£64 million (R1,011 million). Non-interest revenue in 2001 includes exceptional revenue of Â£36 million (R441 million). Specific and general provisions charge for the year includes the release of an exceptional provision of Â£25 million (R400 million). The exceptional provision included in the specific and general provisions charge for 2001 was Â£32 million (R400 million). There are no banking operations in the United States. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(d) Banking continued Year to Year to 31 Dec 31 Dec 2002 2002 (ii) Nedcor restructuring and integration costs Costs before tax and minority interests 14 227 Tax (1) (23) Costs after tax and before minority interests 13 204 Minority interests (6) (100) Costs after tax and minority interests 7 104 In 2002, one-off merger and restructuring costs of Â£13 million (R204 million) after tax have been charged to the profit and loss account. This figure includes Â£5 million (R86 million) for Nedcor's restructuring and integration costs in connection with the acquisition of BoE and Â£8 million (R118 million) for the closure and restructuring costs of Permanent Bank's deposit-taking activities and infrastructure, which are being merged with Old Mutual Bank. Although these costs are considered significant to the operating results of the Group, they do not fall under the definition of exceptional items as described in Financial Reporting Standard 3 and as such are classified as operating activities for statutory reporting. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(e) Other technical income, net of reinsurance Year to Year to Year to Year to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 (i) General insurance technical account Earned premiums, net of reinsurance Premiums written, net of reinsurance Gross premiums written 355 394 5,603 4,882 Outward reinsurance premiums (45) (43) (717) (533) 310 351 4,886 4,349 Change in the provision for unearned premiums, net of reinsurance Gross amount (13) (2) (212) (25) Reinsurers' share 8 1 132 12 (5) (1) (80) (13) 305 350 4,806 4,336 Allocated investment return transferred from the non-technical 35 41 554 508 account Claims incurred, net of reinsurance Claims paid Gross amount (234) (290) (3,682) (3,594) Reinsurers' share 18 33 275 409 (216) (257) (3,407) (3,185) Change in the provision for claims, net of reinsurance Gross amount (20) (4) (312) (50) Reinsurers' share 7 1 112 12 (13) (3) (200) (38) (229) (260) (3,607) (3,223) Net operating expenses (76) (85) (1,197) (1,051) General insurance operating result before short term 35 46 556 570 fluctuations in investment returns Â£m Rm Earned Claims Operating Earned Claims Operating premiums incurred result premiums incurred result net of net of based on a net of net of based on a reinsurance reinsurance long term reinsurance reinsurance long term investment investment return return (ii) General insurance result by class of business Year to 31 December 2002 Commercial 125 89 3 1,968 1,400 40 Corporate 15 11 (2) 234 180 (28) Personal lines 145 111 (1) 2,284 1,747 (8) Risk financing 20 18 - 320 280 (2) 305 229 - 4,806 3,607 2 Long term investment return 35 554 35 556 Year to 31 December 2001 Commercial 134 98 1 1,659 1,212 8 Corporate 17 14 - 210 167 - Personal lines 177 130 4 2,196 1,615 54 Risk financing 22 18 - 271 229 - 350 260 5 4,336 3,223 62 Long term investment return 41 508 46 570 (iii) Other technical income Other technical income principally consists of fees earned in respect of South African policyholders' funds and fees earned for healthcare administration. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(f) Other shareholders' income / (expenses) and write-down of Year Year Year Year strategic investments to to to to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 Long term investment return credited to operating result - 12 - 149 Other income 13 - 205 - Net corporate expenses (35) (41) (552) (508) Other shareholders' income / (expenses) (22) (29) (347) (359) Write-down of strategic investments - (21) - (260) Â£m Rm 3(g) Net assets South United UK & Rest Total South United UK & Rest Total Africa States of World Africa States of World At 31 December 2002 Life assurance 1,095 851 71 2,017 15,126 11,756 981 27,863 Asset management 100 1,005 322 1,427 1,381 13,883 4,449 19,713 Banking 541 - 89 630 7,473 - 1,230 8,703 General insurance 78 - - 78 1,077 - - 1,077 Other (19) - (158) (177) (261) - (2,183) (2,444) 1,795 1,856 324 3,975 24,796 25,639 4,477 54,912 Debt (1,189) (16,426) Net assets 2,786 38,486 At 31 December 2001 Life assurance 802 588 28 1,418 13,978 10,248 488 24,714 Asset management 60 1,252 469 1,781 1,046 21,821 8,173 31,040 Banking 341 - 147 488 5,943 - 2,562 8,505 General insurance 69 - 3 72 1,203 - 52 1,255 Other 75 - (6) 69 1,307 - (109) 1,198 1,347 1,840 641 3,828 23,477 32,069 11,166 66,712 Debt (1,358) (23,667) Net assets 2,470 43,045 Notes to the Financial Statements for the year ended 31 December 2002 (continued) 3 SEGMENTAL ANALYSIS CONTINUED Â£m Rm 3(h) Funds under management South United UK & Total South United UK & Total Africa States Rest of Africa States Rest of World World At 31 December 2002 Investments including assets 13,968 6,793 3,058 23,819 192,955 93,839 42,243 329,037 held to cover linked liabilities Unit trusts Old Mutual Asset Managers 773 - 1,376 2,149 10,678 - 19,008 29,686 Nedcor unit trusts 633 - 712 1,345 8,744 - 9,836 18,580 Other asset management - - 11 11 - - 152 152 1,406 - 2,099 3,505 19,422 - 28,996 48,418 Third party Old Mutual Asset Managers 3,833 - 105 3,938 52,949 - 1,450 54,399 Old Mutual Asset Managers - 37,457 - 37,457 - 517,435 - 517,435 (US) Pilgrim Baxter - 4,207 - 4,207 - 58,116 - 58,116 Old Mutual Affiliates - 24,781 5,875 30,656 - 342,327 81,158 423,485 3,833 66,445 5,980 76,258 52,949 917,878 82,608 1,053,435 Private client UK - - 12,030 12,030 - - 166,184 166,184 Nedcor portfolio management 3,845 310 3,501 7,656 53,115 4,282 48,363 105,760 Other financial services 18 - 310 328 249 - 4,282 4,531 7,696 66,755 21,821 96,272 106,313 922,160 301,437 1,329,910 Total funds under management 23,070 73,548 26,978 123,596 318,690 1,015,999 372,676 1,707,365 At 31 December 2001 Investments including assets 11,519 4,497 5,699 21,715 200,760 78,376 99,325 378,461 held to cover linked liabilities Unit trusts Old Mutual Asset Managers 670 - 360 1,030 11,677 - 6,274 17,951 Private client UK - - 1,051 1,051 - - 18,317 18,317 Other asset management - - 159 159 - - 2,771 2,771 670 - 1,570 2,240 11,677 - 27,362 39,039 Third party Old Mutual Asset Managers 2,783 - 401 3,184 48,504 - 6,989 55,493 Old Mutual Asset Managers - 48,884 - 48,884 - 851,979 - 851,979 (US) Pilgrim Baxter - 8,675 - 8,675 - 151,193 - 151,193 Old Mutual Affiliates - 33,595 8,081 41,676 - 585,514 140,840 726,354 2,783 91,154 8,482 102,419 48,504 1,588,686 147,829 1,785,019 Private client UK - - 16,347 16,347 - - 284,905 284,905 Other financial services 12 - 363 375 209 - 6,327 6,536 2,795 91,154 25,192 119,141 48,713 1,588,686 439,061 2,076,460 Total funds under management 14,984 95,651 32,461 143,096 261,150 1,667,062 565,748 2,493,960 Nedcor managed funds have been included in 2002 as a result of growth in this business. Unit Trust private client UK business was transferred to Old Mutual Asset Managers in January 2002. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 4 INVESTMENT IN DIMENSION DATA HOLDINGS PLC Â£m Rm Year to Year to Year to Year to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 Write-down of investment in Dimension Data Holdings plc before tax 68 269 1,080 3,334 and minority interests Tax (11) 14 (171) 171 Write-down of investment in Dimension Data Holdings plc before 57 283 909 3,505 minority interests Minority interests (28) (139) (442) (1,717) Write-down of investment in Dimension Data Holdings plc after tax 29 144 467 1,788 and minority interests During 2001, an impairment in the carrying value of the Group's investment in Dimension Data Holdings plc was recognised, reflecting a market value of R14.50 per share at 31 December 2001. A further impairment has been recognised for the year ended 31 December 2002 based on a closing market value of R4.02 per share. Although these events are exceptional in the context of their significance to the Group, the losses form part of banking operating profit in the statutory financial statements. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 5 TAX ON PROFIT ON ORDINARY ACTIVITIES Â£m Rm 5(a) Analysis of tax charge Year to Year to Year to Year to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 (Restated) (Restated) United Kingdom tax UK corporation tax 40 64 632 793 Double tax relief (20) (49) (316) (607) 20 15 316 186 Overseas tax South Africa 51 48 805 594 United States 8 31 126 384 Rest of World (1) 4 (16) 50 Secondary tax on companies (STC) 3 23 47 285 61 106 962 1,313 Adjustment in respect of prior periods (1) (7) (16) (87) Current tax for the year 80 114 1,262 1,412 Current tax attributable to shareholders' profits on long term 38 40 596 497 business Total current tax on ordinary activities 118 154 1,858 1,909 Deferred tax - non-technical account 17 88 272 1,087 Deferred tax attributable to shareholders' profits on long term 89 36 1,405 445 business Adjustment for adoption of FRS19 - 41 - 507 Total tax on profit on ordinary activities 224 319 3,535 3,948 The tax charge is analysed as follows: Operating profit 195 250 3,082 3,094 Short term fluctuations 3 55 47 683 Investment in Dimension Data Holdings plc (11) 14 (171) 171 Nedcor restructuring and integration costs (1) - (23) - Non-operating losses on disposal of businesses 38 - 600 - 224 319 3,535 3,948 5(b) Reconciliation of tax charge Tax at UK rate of 30.0 per cent. (2001: 30.0 per cent.) on profit 128 24 2,011 299 on ordinary activities before tax Untaxed and low taxed income (including tax exempt investment (64) (118) (1,010) (1,462) return) Disallowable expenditure 128 418 2,021 5,175 STC 3 23 47 285 Movement in deferred tax (106) (165) (1,674) (2,045) Other 29 (28) 463 (343) Current tax charge 118 154 1,858 1,909 Comparative amounts have been restated to reflect the adoption of Financial Reporting Standard 19 'Deferred tax'. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 6 ACQUISITIONS AND DISPOSALS / NON-OPERATING ITEMS 6(a) Acquisitions (i) BoE Limited (BoE) On 2 July 2002, the Group's banking subsidiary, Nedcor Limited, acquired 100% of the net assets of BoE, a South African banking business, for a total consideration of Â£485 million (R7,697 million). This consideration comprised 10.4 million Nedcor Limited ordinary shares valued at Â£84 million (R1,339 million), cash payments of Â£391 million (R6,199 million) and additional costs directly associated with the acquisition of Â£10 million (R159 million). The table below shows the fair value of the banking assets and liabilities acquired. Â£m Rm Book value Provisional Accounting Provisional Provisional on fair value policy fair value fair value acquisition adjustments alignments to Group to Group Goodwill 55 (55) - - - Cash and balances at central banks 114 - 1 115 1,833 Treasury bills and other eligible bills 199 (2) - 197 3,114 Loans and advances to banks 109 - - 109 1,723 Loans and advances to customers 2,326 (24) (21) 2,281 36,162 Other investment securities 715 (2) 1 714 11,323 All other assets 393 - 12 405 6,414 Deposits by banks (580) - - (580) (9,195) Customer accounts (1,937) - (4) (1,941) (30,761) All other liabilities (1,017) (6) (6) (1,029) (16,285) Net assets acquired 377 (89) (17) 271 4,328 Consideration satisfied by: Cash 391 6,199 Ordinary shares 84 1,339 Acquisition costs 10 159 485 7,697 Goodwill arising on acquisition 214 3,369 Provisional fair value adjustments The fair value adjustments relate to the revaluation of BoE assets and liabilities at the date of acquisition and accounting policy alignments between BoE and Nedcor Ltd. Adjustments in respect of treasury bills and other eligible bills includes impairment of banking bonds; loans and advances to customers have been adjusted to reflect additional provisions against specific banking book assets; other liabilities include a provision against an onerous lease. Pre-acquisition performance The following shows the profit and loss accounts of BoE from the beginning of its financial year, 1 October 2001, to the date of acquisition, and for the previous financial year ended 30 September 2001. Â£m Rm 1 Oct 1 Oct 1 Oct 1 Oct 2001 2000 2001 2000 to to to to 1 July 30 Sep 1 July 30 Sep 2002 2001 2002 2001 Total operating income 199 329 3,148 4,033 (Loss) / profit on ordinary activities before tax (57) 36 (897) 443 Tax (5) (13) (81) (160) (Loss) / profit on ordinary activities after tax (62) 23 (978) 283 Post-acquisition performance From the date of acquisition to 31 December 2002, BoE contributed Â£114 million (R1,797 million) to banking operating income, Â£23 million (R359 million) to operating profit before tax and minority interests. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 6 ACQUISITIONS AND DISPOSALS / NON-OPERATING ITEMS CONTINUED 6(a) Acquisitions continued (ii) Nedcor Investment Bank Holdings Limited (NIB) In October 2002, Nedcor Limited, a banking subsidiary of the Group, acquired the 11.6% of the share capital of Nedcor Investment Bank Holdings Limited that the Group did not already own. The consideration paid, net of costs, was Â£43 million (R685 million) and the goodwill arising was Â£17 million (R274 million). (iii) Franklin Templeton Nedcor Investment Bank Asset Management Limited With effect from 1 October 2002, Nedcor Investment Bank Holdings Limited acquired the remaining 50% of Franklin Templeton Nedcor Investment Bank Asset Management Limited. The consideration paid was Â£11 million (R180 million) and the goodwill arising was Â£9 million (R150 million). (iv) Other Other acquisitions made by the US asset management business during the year gave rise to additional goodwill of Â£5 million (R79 million). 6(b) Disposals / Non-operating items (i) Summary The following gains and losses on the disposal of business operations have been disclosed as non-operating. There were no non-operating items during 2001. Â£m Rm Notes Year to Year to 31 Dec 31 Dec 2002 2002 United States - asset management affiliates 6(b)(ii) 35 558 United Kingdom - asset management subsidiaries 6(b)(iii)(61) (963) Rest of World - Old Mutual International (Isle of Man) Limited 6(b)(iv) 20 317 Loss on disposal before tax (6) (88) Tax - United States asset management affiliates (38) (600) Loss on disposal after tax (44) (688) (ii) United States - asset management affiliates Following the acquisition of United Asset Management in September 2000, the Group has rationalised the affiliates held. Disposals during the year were NWQ Investment Management Company Inc., C.S. McKee & Company Inc., Suffolk Capital Management, J.R. Senecal & Associates Investment Counsel and Fiduciary Management Associates. The total consideration received was Â£125 million (R1,724 million). The total profit before tax on disposal was Â£35 million (R553 million) after charging goodwill attributable to the businesses of Â£71 million (R981 million) and the associated tax charge was Â£38 million (R600 million). (iii) United Kingdom - asset management subsidiaries The Group disposed of GNI Holdings Limited in November 2002 and Old Mutual Securities Limited and King & Shaxson Bond Brokers Limited in December 2002 for total cash consideration of Â£106 million (R1,674 million). Provisions have been established in relation to the businesses sold of Â£28 million (R387 million). A loss on disposal of Â£61 million (R963 million) has been incurred after charging goodwill attributable to the businesses of Â£54 million (R746 million). In respect of Old Mutual Securities Limited, deferred consideration is to be determined on an earn-out basis over three years. In determining the loss on disposal, no amount has been included for deferred consideration. (iv) Rest of World - Old Mutual International (Isle of Man) Limited In January 2002, Old Mutual International (Isle of Man) Limited, an offshore life assurance business and a 100% subsidiary of the Group, was sold for cash consideration of Â£36 million (R574 million), resulting in a profit on disposal of Â£20 million (R317 million) and no tax was payable. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 7 GOODWILL Â£m Rm Notes At At At At 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 At beginning of year 1,580 2,279 27,537 25,786 Additions arising on acquisitions in the period 6(a) 245 174 3,872 2,122 Adjustments in respect of prior year acquisitions 5 2 79 25 Disposals 6(b) (125) (10) (1,727) (174) Impairment loss - (500) - (6,196) Pilgrim Baxter & Associates revenue share adjustments 101 (241) 1,604 (4,200) Amortisation for the year (107) (113) (1,689) (1,400) Foreign exchange and other movements (101) (11) (7,601) 11,574 At end of year 1,598 1,580 22,075 27,537 Analysed between: Life assurance 84 76 1,160 1,325 Asset management 1,187 1,412 16,397 24,609 General insurance 12 10 166 174 Banking 315 82 4,352 1,429 1,598 1,580 22,075 27,537 Adjustments in respect of prior year acquisitions Adjustments have been made to goodwill of Â£67 million (R785 million) that arose on the acquisition in July 2001 of Fidelity & Guaranty Life Insurance Company. The addition to goodwill of Â£21 million (R332 million), net of tax, reflects a revision to the original estimate of the costs involved in exiting an onerous contract. In addition, the adjustments in respect of prior year acquisitions includes a credit of Â£16 million (R253 million) which reflects the latest estimate of the deferred consideration payable for the purchase of revenue shares of certain affiliates combined with the effect of disposing of affiliates held for resale at values in excess of the original estimated carrying amount. The ultimate costs of purchasing these revenue shares will remain uncertain as they are dependent upon future events and hence are subject to adjustment in future years. Impairment loss The impairment loss in the prior year arose from a review of the carrying value of the Group's UK private client and US asset management businesses. As a result of this exercise, the Group reduced the carrying value of its unamortised goodwill by Â£500 million (R6,196 million), reflecting the impact of declining equity markets. A further review was undertaken as at 31 December 2002 which supports the existing carrying value of the goodwill. Pilgrim Baxter & Associates revenue share adjustments During 2001, a reduction to goodwill of Â£241 million (R4,200 million), net of tax, reflected the expiry on 31 December 2001 of the Group's option to purchase the remaining revenue share from Pilgrim Baxter. On 14 March 2002, the Group negotiated terms for the purchase of the remaining revenue share which comprised a combination of fixed instalments and a variable earn-out depending upon profit growth. Adjustments have been made to goodwill of Â£101 million (R1,604 million), which represents the best estimate of the total obligation. Amortisation for the year The goodwill amortisation charge for the period of Â£120 million (R1,895 million) (2001: Â£132 million (R1,636 million)) comprises Â£107 million (R1,689 million) (2001: Â£113 million (R1,400 million)) disclosed above and Â£13 million (R206 million) (2001: Â£19 million (R236 million)) shown within investments in associated undertakings. Notes to the Financial Statements for the year ended 31 December 2002 (continued) 8 AMOUNTS OWED TO CREDIT INSTITUTIONS Â£m Rm At 31 December 2002 Bank overdrafts repayable on demand 2 28 Bank and other loans: Repayable within one year: Floating rate notes 45 622 Commercial paper 330 4,559 Term loan 30 414 405 5,595 Repayable between one and two years: Floating rate notes 12 166 Repayable between two and five years: Syndicated revolving credit facilities 78 1,077 Euro notes 217 2,998 Floating rate notes 7 97 Other 41 566 343 4,738 Repayable after five years: Other 5 69 767 10,596 At 31 December 2001 Bank overdrafts repayable on demand 1 17 Bank and other loans: Repayable within one year: Syndicated revolving credit facilities 294 5,124 Floating rate notes 74 1,289 Commercial paper 112 1,952 Other 4 70 484 8,435 Repayable between one and two years: Term loan 30 523 Repayable between two and five years: Syndicated revolving credit facilities 376 6,553 Term loan 6 105 382 6,658 897 15,633 Notes to the Financial Statements for the year ended 31 December 2002 (continued) 8 AMOUNTS OWED TO CREDIT INSTITUTIONS CONTINUED The multi-currency Revolving Credit Facility of Â£900 million (amount drawn down at 31 December 2002: Â£78 million (R1,077 million)) is repayable on 13 July 2006. Commercial paper is used under a Â£600 million Euro Commercial Paper ('ECP') programme for periods of up to 12 months. Commercial papers are issued in various currencies, the proceeds of which are generally swapped into US dollars at the date of issuance. During the year the company entered into $600 million and $60 million multi-currency revolving credit facilities as back stop for the Â£600 million multi-currency ECP programme. Both facilities are 364 day facilities, although the company has term out options of 18 and 12 months respectively. At 31 December 2002 neither facility was drawn. The Floating Rate Notes consist of a Â£45 million note repayable on 31 December 2010 with the holders having the option to elect for early redemption every six months, a $20 million note repayable by 17 September 2004 and a $10.5 million note repayable on 18 January 2005. The term loan of Â£30 million (R414 million) is repayable on 30 April 2003. Amounts owed to credit institutions bear interest at variable rates except for a â‚¬400 million note. The Old Mutual plc â‚¬400 million Euro Notes due 2007 were issued on 10 April 2002. The capital and interest on the notes were immediately swapped into US Dollars and used to repay existing debt. 8(a) Convertible loan stock (i) Insurance and other assets On 2 May 2001, Old Mutual Finance (Cayman Islands) Limited, a 100 per cent. owned subsidiary of the Group, issued US$650 million 3.625 per cent. Convertible Bonds, which are guaranteed by and convertible into the ordinary shares of Old Mutual plc at a conversion price of 190p per share at an exchange rate of one US dollar to 69.52p sterling. The bonds are repayable on 2 May 2005 with the bond holders having the option to elect for redemption on 2 May 2003. (ii) Banking The banking unsecured loan stock was acquired with BoE. It is denominated in South African Rand, has an interest rate of 18.1 per cent. and is repayable at the discretion of the borrower. 9 POST BALANCE SHEET EVENTS There have been no significant events between the balance sheet date and 24 February 2003. Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 1 CONSOLIDATED PROFIT AND LOSS ACCOUNT ON AN ACHIEVED PROFITS BASIS FOR THE YEAR ENDED 31 DECEMBER 2002 Â£m Rm Year Year Year to Year to to to 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 South Africa Life assurance 418 588 6,605 7,297 Asset management 28 37 441 458 Banking 165 290 2,605 3,593 General insurance 35 46 556 570 646 961 10,207 11,918 United States Life assurance 138 17 2,182 220 Asset management 95 116 1,500 1,437 233 133 3,682 1,657 United Kingdom and Rest of World Life assurance 5 (5) 73 (51) Asset management 2 (3) 31 (38) Banking 56 79 884 979 63 71 988 890 942 1,165 14,877 14,465 Other shareholders' income / (expenses) (22) (29) (347) (359) Debt service costs (58) (67) (916) (830) Write-down of strategic investments - (21) - (260) Operating profit based on a long term investment return before goodwill 862 1,048 13,614 13,016 amortisation and impairment, write-down of investment in Dimension Data Holdings plc and Nedcor restructuring and integration costs Goodwill amortisation and impairment (120) (632) (1,895) (7,832) Write-down of investment in Dimension Data Holdings plc (68) (269) (1,080) (3,334) Nedcor restructuring and integration costs (14) (227) Short term fluctuations in investment return (including economic assumption changes) Life assurance (338) 178 (5,340) 2,205 Other (9) 22 (128) 272 Impact of Capital Gains Tax (CGT) - (78) - (969) Operating profit on ordinary activities before tax 313 269 4,944 3,358 Non-operating items (26) - (409) - Profit on ordinary activities before tax 287 269 4,535 3,358 Tax on profit on ordinary activities (190) (371) (2,998) (4,600) Profit / (loss) on ordinary activities after tax 97 (102) 1,537 (1,242) Minority interests (44) (26) (695) (322) Profit / (loss) for the financial year 53 (128) 842 (1,564) Dividends paid and proposed (176) (172) (2,556) (2,606) Retained loss for the financial year (123) (300) (1,714) (4,170) Earnings per share - achieved profits basis p c Operating earnings per share 14.1 15.4 222.8 190.8 Basic earnings / (loss) per share 1.4 (3.6) 22.9 (44.1) Weighted average number of shares - millions 3,670 3,550 3,670 3,550 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 2 CONSOLIDATED BALANCE SHEET ON AN ACHIEVED PROFITS BASIS AS AT 31 DECEMBER 2002 Â£m Rm At At At At 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 Assets: Intangible assets (goodwill) 1,598 1,580 22,075 27,537 Insurance and other assets 26,593 31,915 367,358 556,232 Banking assets 21,377 11,309 295,291 197,099 Total long term in-force business asset 640 597 8,843 10,397 Total assets 50,208 45,401 693,567 791,265 Liabilities: Achieved profits equity shareholders' funds 3,426 3,067 47,329 53,442 Minority interests 927 565 12,808 9,847 Subordinated liabilties 18 22 249 383 Insurance and other liabilities 25,602 31,292 353,666 545,377 Banking liabilities 20,235 10,455 279,515 182,216 Total liabilities 50,208 45,401 693,567 791,265 Reconciliation of total long term in-force business asset: Value of in-force business 1,089 881 15,045 15,350 Adjustment for discounting CGT - 17 (6) 298 OMI life subsidiaries statutory solvency adjustment (18) (17) (242) (303) OMUSL statutory solvency adjustment (431) (284) (5,954) (4,948) Total long term in-force business asset 640 597 8,843 10,397 3 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES ON AN ACHIEVED PROFITS BASIS FOR THE YEAR ENDED 31 DECEMBER 2002 Â£m Rm Year Year to Year to Year to to 31 Dec 31 Dec 31 Dec 31 Dec 2001 2002 2001 2002 Profit / (loss) for the financial year 53 (128) 842 (1,564) Foreign exchange movements 442 (1,277) (5,034) 4,622 Total recognised gains and losses for the year 495 (1,405) (4,192) 3,058 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 4 RECONCILIATION OF MOVEMENTS IN THE CONSOLIDATED ACHIEVED PROFITS EQUITY SHAREHOLDERS' FUNDS FOR THE YEAR ENDED 31 DECEMBER 2002 Â£m Rm Year Year to Year to Year to to 31 Dec 31 Dec 31 Dec 31 Dec 2001 2002 2001 2002 Total recognised gains and losses for the year 495 (1,405) (4,192) 3,058 Dividends paid and proposed (176) (172) (2,556) (2,606) 319 (1,577) (6,748) 452 Issue of new capital 39 - 619 - Issue of new capital in connection with the acquisition of Fidelity & - 203 - 2,690 Guaranty Life Shares issued under option schemes 1 5 16 61 Proceeds from sale of shares previously held to satisfy claims and errors - 3 - 37 on demutualisation Net increase / (decrease) in achieved profits equity shareholders' funds 359 (1,366) (6,113) 3,240 Achieved profits equity shareholders' funds at the beginning of the year 3,067 4,433 53,442 50,202 Achieved profits equity shareholders' funds at the end of the year 3,426 3,067 47,329 53,442 5 BASIS OF PREPARATION These supplementary financial statements have been prepared in accordance with the methodology for supplementary reporting for long term insurance business (the achieved profits method) issued in December 2001 by the Association of British Insurers. These supplementary financial statements have been audited by KPMG Audit Plc and prepared in conjunction with our consulting actuaries Tillinghast-Towers Perrin. The objective of the achieved profits method is to recognise profit as it is earned arising from contracts of long term insurance business. The methodology is based on an attribution of the assets of a life insurance company between those backing long term insurance contracts (backing assets) and the residual assets representing unencumbered capital. The backing assets cover : (i) the long term liabilities calculated in accordance with local supervisory requirements; and (ii) the solvency capital requirements in each country (or equivalent where there is no local requirement). Under the achieved profits method the profits of the long term insurance business comprise: (i) the cash transfers to the residual assets from the backing assets as determined following the statutory valuation; (ii) the movement over the accounting period in the present value of the expected future cash flows to the residual assets from contracts in-force at the balance sheet date and their backing assets; and (iii) the return on the residual assets. Shareholder profit arises fundamentally from: (i) the difference between (a) the amounts charged to policyholders for guarantees, expenses and insurance and (b) the actual experience in respect of these items; and (ii) the investment return earned on capital. In addition for the United States business, the guarantees for interest credited to policyholder funds are reset periodically. The assumed future credited interest rates are consistent with investment earnings made and in line with recent company policy. The United States business is included from the effective acquisition date of 1 July 2001. The treatment within these supplementary statements of all businesses other than life assurance is unchanged from the primary financial statements. The requirements of FRS19, Deferred Tax, have been complied with for both 2001 and 2002. Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 6 COMPONENTS OF ACHIEVED PROFITS EQUITY SHAREHOLDERS' FUNDS Â£m Rm At At At At 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 Shareholders' adjusted net worth 2,337 2,186 32,284 38,092 Equity shareholders' funds 2,786 2,470 38,486 43,045 Adjustment to include OMI life subsidiaries on a statutory solvency (18) (17) (242) (303) basis Adjustment to include OMUSL on a statutory solvency basis (431) (284) (5,954) (4,948) Adjustment for discounting CGT - 17 (6) 298 Value of in-force business 1,089 881 15,045 15,350 Value of in-force business before cost of solvency capital 1,195 964 16,506 16,803 Cost of solvency capital (106) (83) (1,461) (1,453) Achieved profits equity shareholders' funds 3,426 3,067 47,329 53,442 Pro-forma adjustment to bring listed subsidiaries to market value Achieved profits equity shareholders' funds 3,426 3,067 47,329 53,442 Adjustment to bring listed subsidiaries to market value 502 455 6,938 7,922 Adjusted embedded value 3,928 3,522 54,267 61,364 The achieved profits equity shareholders' funds are the sum of the shareholders' adjusted net worth and the value of in-force business. Old Mutual plc's adjusted net worth comprises the assets backing the solvency capital, the residual assets in the life insurance companies and the other net assets of the Group. The value of in-force is the present value of the expected future cash flows to the residual assets from contracts in-force at the balance sheet date and their backing assets less the amount of the solvency capital. The shareholders' adjusted net worth is equal to the consolidated equity shareholders' funds adjusted to reflect: (i) the Old Mutual International (OMI) and Old Mutual US life assurance (OMUSL) subsidiaries on a statutory solvency basis. The adjusted net worth also includes goodwill relating to OMUSL of Â£74 million (R1,022 million) at 31 December 2002 and Â£65 million (R1,133 million) at 31 December 2001; (ii) the difference between the face value and discounted value of accrued Capital Gains Tax on South African shareholders' funds. The value of in-force has been restated as this adjustment was previously included in the value of in-force. All non-life subsidiaries are included at net asset value plus goodwill (as reflected in the primary financial statements) in the achieved profits shareholders' funds. A pro forma adjustment to include listed subsidiaries at market value has been provided separately. The table below sets out a geographical analysis of the value of in-force business. Â£m Rm At At At At 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 South Africa 682 527 9,419 9,176 Individual business 417 325 5,751 5,653 Group business 265 202 3,668 3,523 United States 341 271 4,712 4,722 United Kingdom and Rest of World 66 83 914 1,452 Value of in-force business 1,089 881 15,045 15,350 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 6 COMPONENTS OF ACHIEVED PROFITS EQUITY SHAREHOLDERS' FUNDS CONTINUED The encumbered and unencumbered capital as at 31 December 2002 and 31 December 2001 is shown in the table below. Â£m Rm At At At At 31 Dec 31 Dec 31 Dec 31 Dec 2002 2001 2002 2001 South Africa 1,139 1,000 15,739 17,414 Encumbered capital 1,008 729 13,925 12,697 Unencumbered capital 131 271 1,814 4,717 United States 355 206 4,904 3,591 Encumbered capital 155 92 2,144 1,605 Unencumbered capital 200 114 2,760 1,986 For South Africa the average unencumbered capital applicable for the year ended 31 December 2002 and the year ended December 2001 was Â£160 million (R2,524 million) and Â£139 million (R1,722 million) respectively. These average figures were used to determine the expected return on the unencumbered capital. Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 7 SEGMENTAL ANALYSIS OF RESULTS Â£m Rm South United UK & Rest Total South United UK & Rest Total Africa States of World Africa States of World Year to 31 December 2002 New business contribution 114 80 3 197 1,806 1,261 42 3,109 Profits from existing business Expected return on in-force 150 35 6 191 2,367 561 100 3,028 business Expected return on encumbered 113 6 4 123 1,778 98 63 1,939 capital Experience variances 36 - (10) 26 569 (3) (160) 406 Operating assumption changes (17) (9) 2 (24) (268) (141) 28 (381) Risk margin changes - 18 - 18 - 284 - 284 Expected return on unencumbered 22 8 - 30 353 122 - 475 capital Life assurance operating profit 418 138 5 561 6,605 2,182 73 8,860 before tax Investment return variances On value of in-force (87) (25) (2) (114) (1,381) (396) (23) (1,800) On capital (250) (4) (14) (268) (3,950) (60) (221) (4,231) Effect of economic assumption 24 19 1 44 371 303 17 691 changes Life assurance achieved profits 105 128 (10) 223 1,645 2,029 (154) 3,520 before tax Attributed tax (68) (32) - (100) (1,067) (508) - (1,575) Life assurance achieved profits 37 96 (10) 123 578 1,521 (154) 1,945 after tax Year to 31 December 2001 New business contribution 109 19 3 131 1,350 244 42 1,636 Profits from existing business Expected return on in-force 191 20 13 224 2,369 250 160 2,779 business Expected return on encumbered 147 3 5 155 1,820 35 62 1,917 capital Experience variances 42 (15) 2 29 525 (189) 26 362 Operating assumption changes 3 - (9) (6) 39 - (110) (71) Risk margin changes 77 - - 77 953 - - 953 Development costs - (13) (19) (32) - (161) (231) (392) Expected return on unencumbered 19 3 - 22 241 41 - 282 capital Life assurance operating profit 588 17 (5) 600 7,297 220 (51) 7,466 before tax Investment return variances On value of in-force 50 8 (3) 55 617 100 (34) 683 On capital 40 (13) 15 42 492 (172) 186 506 Effect of economic assumption 64 11 6 81 799 139 78 1,016 changes Impact of Capital Gains Tax (78) - - (78) (969) - - (969) Life assurance achieved profits 664 23 13 700 8,236 287 179 8,702 before tax Attributed tax (211) (6) (11) (228) (2,626) (71) (136) (2,833) Life assurance achieved profits 453 17 2 472 5,610 216 43 5,869 after tax Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 7 SEGMENTAL ANALYSIS OF RESULTS CONTINUED The new business contribution is the value of new business written during the period, determined initially at the point of sale, and then accumulated to the end of the period by applying the discount rate to the value of new business at the point of sale and adding back the expected cost of solvency capital between the point of sale and the end of the period. The expected return on the in-force business is determined by applying the discount rate to the value of in-force business at the beginning of the period and adding back the expected cost of solvency capital over the period. The expected return on encumbered capital is determined by applying the equity return assumption at the previous year end to the opening solvency capital. The experience variances arise in the period due to differences between the actual experience and the assumptions used to calculate the value at the start of the period. The amount under operating assumption changes reflects revised expectations of future experience. The risk margin change for December 2001 reflects a 0.5% reduction in the South African risk margin. The risk margin change for December 2002 reflects a 0.5% reduction in the United States risk margin. The United States risk margin was reviewed in line with the United States market practice. The investment assumptions are shown in section 9. Expected return on the unencumbered capital for South Africa is 14% of the unencumbered capital and 7% for the United States. The unencumbered capital is the life capital in excess of the solvency capital referred to previously. For South Africa, the life capital is an average value of investible shareholders' assets, excluding subsidiaries eliminated on consolidation, adjusted for net fund flow. Investment return variances consist of two components: investment variances on the value in-force which represent the differences between the actual returns in the period and the assumptions used to calculate the value at the start of the period; and short term fluctuations of investment return on the life capital. Effect of economic assumption changes represents the impact of interest rate changes. The impact of changes to the differentials between the various investment and economic assumptions are also included. However, the risk margin changes for December 2001 and December 2002, referred to previously, are included under profits from existing business (risk margins changes). The investment assumptions are shown in section 9. The impact of CGT relates to the change in the cost of capital as at 31 December 2001 as a result of the introduction of capital gains tax in South Africa in October 2001. This is a one-off item as going forward the impact of capital gains tax is allowed for in the calculation of the value of in-force business. The segmental results for the United States include the operating profits generated by Old Mutual Reassurance in Ireland, a subsidiary of Old Mutual plc, which provides reinsurance to the United States life companies. The difference between the total tax charge shown in the above segmental analysis, and the total tax charge shown in the profit and loss account in section 1, represents the tax charge on the non-life assurance businesses as shown in the primary financial statements. Â£m Rm Year to 31 December 2002 Tax on life assurance achieved profits South Africa - value of in-force 80 1,264 - capital (12) (197) United States 32 508 United Kingdom and Rest of World - - 100 1,575 Tax on non-life assurance businesses 90 1,423 Tax on profit of ordinary activities 190 2,998 Year to 31 December 2001 Tax on life assurance achieved profits South Africa - value of in-force 200 2,490 - capital 11 136 United States 6 71 United Kingdom and Rest of World 11 136 228 2,833 Tax on other businesses 143 1,767 Tax on profit of ordinary activities 371 4,600 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 8 VALUE OF NEW BUSINESS The tables below set out a geographical analysis of the value of new business (VNB) for the year to 31 December 2002 and the year to 31 December 2001. United States new business numbers for 2001 are in respect of second six months only. New business profitability (as measured by the ratio of the value of new business to the Annual Premium Equivalent) is also shown. Annual Premium Equivalent (APE) is calculated as recurring premiums (RP) plus 10% of single premiums (SP). The value of new business is grossed up to the pre-tax level. The assumptions and tax rates used to calculate the value of new business are set out in section 9. For the year to For the year to 31 December 2002 31 December 2002 RP SP APE VNB Margin RP SP APE VNB Â£m Â£m Â£m Â£m Rm Rm Rm Rm South Africa 134 1,014 235 114 49% 2,104 16,009 3,705 1,806 Individual business 115 546 170 53 31% 1,808 8,624 2,670 841 Group business 19 468 65 61 93% 296 7,385 1,035 965 United States 37 2,629 300 80 27% 586 41,500 4,736 1,261 UK & Rest of World 12 104 22 3 12% 186 1,641 350 42 Total 183 3,747 557 197 36% 2,876 59,150 8,791 3,109 For the year to 31 December 2001 For the year to 31 December 2001 RP SP APE VNB Margin RP SP APE VNB Â£m Â£m Â£m Â£m Rm Rm Rm Rm South Africa 140 1,142 254 109 43% 1,728 14,143 3,142 1,350 Individual business 120 792 199 66 33% 1,486 9,812 2,467 813 Group business 20 350 55 43 80% 242 4,331 675 537 United States* 26 578 84 19 22% 349 7,719 1,121 244 UK & Rest of World 12 106 23 3 15% 151 1,323 283 42 Total 178 1,826 361 131 36% 2,228 23,185 4,547 1,636 * United States new business for 6 months only The value of new business after tax is shown in the tables below. For the year to 31 December 2002 For the year to 31 December 2002 RP SP APE VNB Margin RP SP APE VNB Â£m Â£m Â£m Â£m Rm Rm Rm Rm South Africa 134 1,014 235 71 30% 2,104 16,009 3,705 1,124 Individual business 115 546 170 33 20% 1,808 8,624 2,670 524 Group business 19 468 65 38 58% 296 7,385 1,035 600 United States 37 2,629 300 56 19% 586 41,500 4,736 883 UK & Rest of World 12 104 22 3 12% 186 1,641 350 42 Total 183 3,747 557 130 23% 2,876 59,150 8,791 2,049 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 8 VALUE OF NEW BUSINESS CONTINUED For the year to 31 December 2001 For the year to 31 December 2001 RP SP APE VNB Margin RP SP APE VNB Â£m Â£m Â£m Â£m Rm Rm Rm Rm South Africa 140 1,142 254 68 27% 1,728 14,143 3,142 840 Individual business 120 792 199 41 21% 1,486 9,812 2,467 506 Group business 20 350 55 27 49% 242 4,331 675 334 United States* 26 578 84 13 15% 349 7,719 1,121 171 UK & Rest of World 12 106 23 3 15% 151 1,323 283 42 Total 178 1,826 361 84 23% 2,228 23,185 4,546 1,053 * United States new business for 6 months only The value of new individual unit trust and some group market-linked business written by the life companies is excluded, as the profits on this business arise in the asset management subsidiaries. It 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 premiums shown for the United States exclude reinsurance ceded externally. The increase in the margin for South Africa occurred because a higher proportion of Group Business with-profit annuities was sold. A reconciliation of the new business premiums shown in the notes to the financial statements to those shown above, for the year ended 31 December 2002, is set out below. Â£m Rm Year to 31 December 2002 Recurring Single Recurring Single premiums premiums premiums premiums New business premiums in the notes to the financial statements 219 4,003 3,444 63,187 Less: United States reinsurance ceded externally (36) (4) (568) (62) Group market-linked business not valued - (185) - (2,921) Unit trust business not valued - (64) - (1,007) Selestia business not valued - (3) - (47) New business premiums as per achieved profits supplementary 183 3,747 2,876 59,150 statements Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 9 ASSUMPTIONS The principal assumptions used in the calculation of the value of in-force business and the value of new business are set out below. â€¢ The pre-tax investment and economic assumptions used for South African and United States businesses were as follows: South Africa 31 Dec 31 Dec 2002 2001 Fixed interest return 11.0% 12.0% Equity return 13.0% 14.0% Property return 12.0% 13.0% Inflation 7.0% 8.0% Risk discount rate 13.5% 14.5% United States 31 Dec 31 Dec 2002 2001 Treasury yield 4.0% 5.0% Inflation 3.0% 3.0% New money yield assumed 6.0% 6.6% Net portfolio earned rate 7.2% 7.3% Risk discount rate 8.0% 9.5% â€¢ For the other operations, appropriate investment and economic assumptions were chosen on bases consistent with those adopted in South Africa. (i) Where applicable, rates of future bonuses have been set at levels consistent with the investment return assumptions. (ii) Projected company taxation is based on the current tax basis that applies in each country. â€¢ For the South African business full allowance has been made for Secondary Tax on Companies that may be payable in South Africa. Full account has been taken of the impact of CGT introduced in South Africa with effect from 1 October 2001. It has been assumed that 10% of the equity portfolio (excluding group subsidiaries) will be traded each year. For the United States business full allowance has been made for existing tax attributes of the companies, including the use of existing carry forwards and preferred tax credit investments. Achieved profits results are initially calculated on an after tax basis and are then grossed up to the pre-tax level for presentation in the profit and loss account and the segmental analysis of results. The tax rates used were the effective corporation tax rates of 37.8% for South African business (December 2001: 37.8%), 30% for United States business (December 2001: 30%) and 0% for United Kingdom and Rest of World (December 2001: 0%) except for the investment return on capital for which the attributed tax was derived from the primary accounts. â€¢ The assumed future mortality, morbidity and voluntary discontinuance rates have been based as far as possible on analyses of recent operating experience. Allowance has been made where appropriate for the effect of expected AIDS-related claims. â€¢ The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in-force. Assumed future expenses were based on levels experienced up to 31 December 2002. The future expenses attributable to life assurance business do not include Group holding company expenses. â€¢ Material development costs are disclosed separately in 2001. No allowance has been made for future development costs. â€¢ Future investment expenses were based on the current scales of fees payable by the life assurance companies to the asset management subsidiaries. To the extent that these fees include profit margins for the asset management subsidiaries, these margins have not been included in the value of in-force business or the value of new business. Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 9 ASSUMPTIONS CONTINUED â€¢ The effect of increases in premiums over the period for policies in-force at 31 December 2002 and at 31 December 2001 has been included in the value of in-force business only where such increases are associated with indexation arrangements. Other increases in premiums of existing policies are included in the value of new business. â€¢ New schemes written on which recurring single premiums are expected to be received on a regular basis are treated as new business. The annualised premium is recognised as recurring premium new business at inception of the scheme and is determined by annualising the actual premiums received during the year in question. Subsequent recurring single premiums received in future years are not treated as new business, as these have already been provided for in calculating the value of in-force business. â€¢ The value of in-force and value of new business is sensitive to changes in various economic and non-economic assumptions. The sensitivities of the value of in-force and value of new business to changes in key assumptions are set out in section 9. â€¢ Conversions between Rand, US Dollar and Sterling were carried out at the following exchange rates: Rand per US$ per Rand per Sterling Sterling US$ At 31 December 2002 13.8141 1.6105 8.5775 At 31 December 2001 17.4286 1.4542 11.9850 Year to 31 December 2002 (average) 15.7878 1.5030 10.5042 Year to 31 December 2001 (average) 12.3923 1.4405 9.2670 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 10 ALTERNATIVE ASSUMPTIONS The tables below for South Africa and the United States show the sensitivity of the value of in-force at 31 December 2002 and the value of new business for the year ended 31 December 2002 to changes in key assumptions. For each sensitivity illustrated, all other assumptions have been left unchanged. The sensitivity of the adjustment for discounting CGT, which is included in the shareholders' adjusted net worth, to changes in the central discount rate is not material and is not included in the table below. Â£m Rm South Africa Value of Value of Value of Value of in-force new life in-force new life business business business business at 31 Dec at 31 Dec at 31 Dec at 31 Dec 2002 2002 2002 2002 Central assumptions 682 114 9,419 1,806 Value before cost of solvency capital 763 123 10,545 1,950 Cost of solvency capital (81) (9) (1,126) (144) Effect of: Central discount rate +1% 586 100 8,090 1,582 Value before cost of solvency capital 722 115 9,971 1,821 Cost of solvency capital (136) (15) (1,881) (239) Central discount rate -1% 790 130 10,920 2,056 Value before cost of solvency capital 809 132 11,187 2,093 Cost of solvency capital (19) (2) (267) (37) Decreasing the pre-tax investment return assumptions by 1% with 592 103 8,184 1,626 bonus rates changing commensurately Value before cost of solvency capital 734 118 10,150 1,868 Cost of solvency capital (142) (15) (1,966) (241) Voluntary discontinuance rates increasing by 25% 651 100 8,989 1,584 Maintenance expense levels increasing by 20% with no corresponding 613 105 8,464 1,653 increase in policy charges Increasing the inflation assumption by 1% 672 112 9,278 1,769 Achieved Profits Basis Supplementary Information for the year ended 31 December 2002 (continued) 10 ALTERNATIVE ASSUMPTIONS CONTINUED Â£m Rm United States Value of Value of Value of Value of in-force new life in-force new life business business business business at 31 Dec at 31 Dec at 31 Dec at 31 Dec 2002 2002 2002 2002 Central assumptions 341 80 4,712 1,261 Value before cost of solvency capital 364 94 5,029 1,490 Cost of solvency capital (23) (14) (317) (229) Effect of: Central discount rate +1% 317 72 4,374 1,135 Value before cost of solvency capital 344 89 4,753 1,408 Cost of solvency capital (27) (17) (379) (273) Central discount rate -1% 368 89 5,084 1,401 Value before cost of solvency capital 386 100 5,332 1,579 Cost of solvency capital (18) (11) (248) (178) Decreasing the pre-tax investment return assumptions by 1% with 345 81 4,765 1,281 credited rates changing commensurately Value before cost of solvency capital 367 95 5,074 1,504 Cost of solvency capital (22) (14) (309) (223) Voluntary discontinuance rates increasing by 25% 316 74 4,362 1,166 Maintenance expense levels increasing by 20% with no corresponding 331 77 4,566 1,219 increase in policy charges Increasing the inflation assumption by 1% 341 80 4,705 1,260 Increasing Risk Based Capital to 200%, with 1% reduction in central 344 78 4,752 1,232 discount rate Value before cost of solvency capital 380 100 5,249 1,579 Cost of solvency capital (36) (22) (497) (347) -------------------------- (1) Operating profit is based on a long term investment return, before goodwill amortisation and impairment, write-down of investment in Dimension Data Holdings plc, Nedcor restructuring and integration costs and non-operating items. Operating earnings per share are stated on the same basis, but after tax and minority interests. (1)Operating profit is based on a long term investment return, before goodwill amortisation and impairment, write-down of investment in Dimension Data Holdings plc, Nedcor restructuring and integration costs and non-operating items. Operating earnings per share are stated on the same basis, but after tax and minority interests. (2) Debt from the Group's insurance and asset management activities, net of cash and short term investments which are immediately available to repay debt. This information is provided by RNS The company news service from the London Stock Exchange X

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