Interim Results - Part 4
Old Mutual PLC
12 August 2002
PART 4
Embedded value information
1 EMBEDDED VALUE
The embedded value of Old Mutual plc at 30 June 2002 is set out below, together
with the corresponding positions at 31 December 2001 and 30 June 2001.
£m Rm
30 June 2002 31 December 30 June 30 June 2002 31 December 30 June
2001 2001 2001 2001
(restated) (restated)
Adjusted net worth 2,850 2,624 4,838 45,163 45,716 54,986
Equity shareholders' 2,684 2,470 3,715 42,528 43,045 42,217
funds
Excess of market 473 455 1,143 7,496 7,922 12,994
value of listed
subsidiaries over
their net asset
value
Adjustment to (18) (17) (20) (287) (303) (225)
include OMI life
subsidiaries on a
statutory solvency
basis
Adjustment to (289) (284) - (4,574) (4,948) -
include OMUSL on a
statutory solvency
basis
Value of in-force 925 898 866 14,651 15,648 9, 837
business
Value of in-force 1,019 981 954 16,135 17,101 10,836
business before cost
of solvency capital
Cost of solvency (94) (83) (88) (1,484) (1,453) (999)
capital
Embedded value 3,775 3,522 5,704 59,814 61,364 64,823
An embedded value is an actuarially determined estimate of the economic value of
a life assurance company, excluding any value that may be attributed to future
new business. Old Mutual plc's embedded value is the sum of its adjusted net
worth and the present value of the projected stream of future after-tax profits
from its life assurance business in force at the valuation date, adjusted for
the cost of holding solvency capital equal to the local statutory capital
requirement in each country (or equivalent where there is no local requirement).
The adjusted net worth is equal to the consolidated equity shareholders' funds
adjusted to reflect the Group's listed subsidiaries at market value, plus 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 £61 million (R967 million) as at 30 June 2002 and £65
million (R1,133 million) as at 31 December 2001.
The embedded value does not include a market valuation of the Group's asset
management subsidiaries (including asset management business written through the
life assurance companies), nor of any other in-force non-life business of the
Group, except to the extent of any goodwill included in the consolidated equity
shareholders' funds. The assumptions used to calculate the embedded value are
set out in section 4.
Embedded value information continued
Where indicated, comparative figures have been restated to reflect the adoption
of Financial Reporting Standard 19 'Deferred Tax'. Refer to the notes to the
financial statements for further details. The change in accounting policy has
had no impact on the current period's results. The adjusted net worth has been
increased by £44 million (R503 million) as at 31 December 2000 and by £23
million (R263 million) as at 30 June 2001. The value of in-force business had
originally placed some value on this tax asset, and this value has consequently
now been removed. The value of in-force business has been reduced by £29 million
(R327 million) as at 31 December 2000 and by £14 million (R162 million) as at 30
June 2001. These changes have increased embedded value by £15 million (R176
million) as at 31 December 2000 and by £9 million (R101 million) as at 30 June
2001.
The table below sets out a geographical analysis of the value of in-force
business.
£m Rm
30 June 2002 31 December 30 June 30 June 2002 31 December 30 June
2001 2001 2001 2001
(restated) (restated)
South Africa 579 544 755 9,176 9,474 8,573
Individual business 354 342 502 5,608 5,951 5,698
Group business 225 202 253 3,568 3,523 2,875
United States 283 271 - 4,484 4,722 -
Rest of the World 63 83 111 991 1,452 1,264
Value of in-force 925 898 866 14,651 15,648 9,837
business
Embedded value information continued
2 EMBEDDED VALUE PROFITS
Embedded value profits represent the change in embedded value over the period,
adjusted for any capital raised and dividends proposed. The after-tax embedded
value profits for the six months to 30 June 2002 are set out below, together
with the corresponding figures for the six months to 30 June 2001 and the twelve
months to 31 December 2001.
£m Rm
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 30 June 2001 31 December 30 June 30 June 31 December
2002 (restated) 2001 2002 2001 2001
(restated) (restated) (restated)
Embedded value at 3,775 5,704 3,522 59,814 64,823 61,364
end of period
Embedded value at 3,522 5,568 5,568 61,364 63,007 63,007
beginning of period
Increase in embedded 253 136 (2,046) (1,550) 1,816 (1,643)
value
Less capital raised (39) (4) (211) (619) (46) (2,788)
New capital raised (39) - (208) (619) - (2,751)
Proceeds from sale - (4) (3) - (46) (37)
of shares previously
held to satisfy
claims and errors on
demutualisation
Plus dividends 63 59 172 998 674 2,606
proposed
Embedded value 277 191 (2,085) (1,171) 2,444 (1,825)
profits
The components of the embedded value profits are set out below:
£m Rm
6 months to 6 months to Year to 6 months to 6 months to Year to
30 June 2002 30 June 2001 31 December 30 June 30 June 31 December
(restated) 2001 2002 2001 2001
(restated) (restated) (restated)
Profits from new 58 28 84 927 319 1,053
business
Point of sale 56 27 79 899 309 990
Expected return 2 1 5 28 10 63
to end of period
Expected return 65 69 144 1,031 791 1,809
Experience 16 16 5 254 189 54
variances
Experience 4 - (7) 55 - (86)
assumption
changes
Profits before 143 113 226 2,267 1,299 2,830
investment and
exceptional items
Investment (43) 13 33 (682) 146 420
variances
Investment and (9) 109 101 (148) 1,244 1,265
economic
assumption
changes
Impact of capital - (52) (49) - (592) (603)
gains tax
Development costs (6) (9) (28) (95) (103) (344)
Goodwill - - (500) - - (6,196)
impairment
Return on (20) 51 (294) (289) 585 (3,693)
adjusted net
worth
Exchange rate 212 (28) (1,560) (2,224) (60) 4,672
movements
Restatement for - (6) (14) - (75) (176)
adoption of FRS19
Deferred Tax
Embedded value 277 191 (2,085) (1,171) 2,444 (1,825)
profits
Embedded value information continued
The profits from new life assurance business comprise 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 new
business profits for the six months to 30 June 2002 are based on the revised
investment and economic assumptions.
The profits from existing life assurance business consist of the expected return
on the in-force business, experience variances and changes in experience
assumptions. The expected return 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 experience variances
are caused by differences between the actual experience in the period and the
assumptions used to calculate the value at the start of the period. The amount
under assumption changes reflects revised expectations of future experience.
The investment variances represent the differences between the actual returns in
the period and the assumptions used to calculate the value at the start of the
period. The investment assumptions are shown in section 4.
The impact of capital gains tax relates to capital gains tax introduced in South
Africa in October 2001.
Return on adjusted net worth represents the actual investment return earned on
the shareholder portfolio investments (which includes the return on the market
value of the shareholders' investments in Nedcor, Mutual & Federal and Nedcor
Investment Bank), as well as the profits arising from other non-life businesses
within the Group.
Development costs for the six months to 30 June 2002 consist of £6 million (R95
million) start-up costs for Selestia.
Comparative figures have been restated to reflect the adoption of FRS 19
'Deferred Tax'. Refer to section 1. The June 2001 figures have also been
restated to allow for Guaranteed Capital Fund transfers in respect of South
African Individual business. Refer to section 3.
Embedded value information continued
The table below sets out a segmental analysis of embedded value profits for the
six months to 30 June 2002.
£m Adjusted Value of in-force business Total
net embedded
worth South Africa United States Rest of World value
6 months to 30 June 2002
Value at end of period 2,850 579 283 63 3,775
Value at beginning of period 2,624 544 271 83 3,522
Increase in value 226 35 12 (20) 253
Less capital raised (39) - - - (39)
Plus dividends proposed 63 - - - 63
Effect of the sale of Old (20) - - 20 -
Mutual International (Isle of
Man) Limited
Life assurance operating (58) 60 4 (6) -
profit after tax on statutory
solvency basis
Embedded value profits 172 95 16 (6) 277
Profits from new business - 25 31 2 58
Expected return - 46 15 4 65
Experience variances - 16 (2) 2 16
Experience assumption changes - - 5 (1) 4
Profits before investment and - 87 49 7 143
exceptional items
Investment variances - (24) (19) - (43)
Investment and economic - (8) - (1) (9)
assumption changes
Developments costs - - - (6) (6)
Return on adjusted net worth (5) (15)* - - (20)
Exchange rate movements 177 55 (14) (6) 212
Embedded value profits 172 95 16 (6) 277
* Change in the difference between face value and discounted value of accrued
Capital Gains Tax on South African shareholders' funds.
Embedded value information continued
Adjusted Value of in-force business Total
Rm net embedded
worth South Africa United States Rest of World value
6 months to 30 June 2002
Value at end of period 45,163 9,176 4,484 991 59,814
Value at beginning of period 45,716 9,474 4,722 1,452 61,364
Increase in value (553) (298) (238) (461) (1,550)
Less capital raised (619) - - - (619)
Plus dividends proposed 998 - - - 998
Effect of the sale of Old (317) - - 317 -
Mutual International (Isle
of Man) Limited
Life assurance operating (916) 946 65 (95) -
profit after tax on
statutory solvency basis
Embedded value profits (1,407) 648 (173) (239) (1,171)
Profits from new business - 403 498 26 927
Expected return - 731 244 56 1,031
Experience variances - 257 (35) 32 254
Experience assumption - - 74 (19) 55
changes
Profits before investment - 1,391 781 95 2,267
and exceptional items
Investment variances - (374) (302) (6) (682)
Investment and economic - (135) - (13) (148)
assumption changes
Developments costs - - - (95) (95)
Return on adjusted net worth (55) (234)* - - (289)
Exchange rate movements (1,352) - (652) (220) (2,224)
Embedded value profits (1,407) 648 (173) (239) (1,171)
* Change in the difference between face value and discounted value of accrued
Capital Gains Tax on South African shareholders' funds.
Embedded value information continued
3 VALUE OF NEW BUSINESS
The value of new business (VNB) written in the period is the present value of
the projected stream of after-tax profits from that business, adjusted for the
cost of holding solvency capital. The value is determined initially at the point
of sale and then accumulated to the end of the period as described in section 2
above.
The tables below set out a geographical analysis of the value of new business
for the six months to 30 June 2002, six months to 30 June 2001, and the twelve
months 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).
6 months to 30 June 2002 6 months to 30 June 2002
RP SP APE VNB RP SP APE VNB
£m £m £m £m Margin Rm Rm Rm Rm
South Africa 62 404 102 25 25% 982 6,420 1,624 403
Individual 52 285 80 16 21% 817 4,529 1,270 261
business
Group business 10 119 22 9 40% 165 1,891 354 142
United States 21 1,535 175 31 18% 326 24,368 2,763 498
Rest of the 5 60 11 2 14% 89 949 184 26
World
Total 88 1,999 288 58* 20% 1,397 31,737 4,571 927*
* Value of new business net of cost of solvency capital of £12 million (R190 million).
6 months to 30 June 2001 6 months to 30 June 2001
RP SP APE VNB RP SP APE VNB
£m £m £m £m Margin Rm Rm Rm Rm
South Africa 62 556 118 26 22% 704 6,353 1,340 296
Individual 58 417 100 19 19% 663 4,766 1,140 219
business
Group business 4 139 18 7 39% 41 1,587 200 77
United States - - - - - - - - -
Rest of the World 8 62 14 2 14% 87 712 158 23
Total 70 618 132 28* 21% 791 7,065 1,498 319*
* Value of new business net of cost of solvency capital of £2 million (R24 million).
Embedded value information continued
South African Individual business single premiums include £35 million (R399
million) in respect of transfers from the Guaranteed Capital Fund (a vehicle for
extending policies at maturity) to purchase new products, that were not
previously categorised as new business premiums. The embedded value of the new
business associated with this was £0.8 million (R9 million). The above figures
for the six months ended 30 June 2001 have been restated to reflect the
transfers from the Guaranteed Capital Fund.
12 months to 31 December 2001 12 months to 31 December 2001
RP SP APE VNB RP SP APE VNB
£m £m £m £m Margin Rm Rm Rm Rm
South Africa 140 1,142 254 68 27% 1,728 14,143 3,142 840
Individual 120 792 199 41 21% 1,486 9,812 2,467 506
business
Group business 20 350 55 27 49% 242 4,331 675 334
United 26 578 84 13 15% 349 7,719 1,121 171
States**
Rest of the 12 106 23 3 15% 151 1,323 283 42
World
Total 178 1,826 361 84* 23% 2,228 23,185 4,546 1,053*
* Value of new business net of cost of solvency capital of £9million
(R114 million).
** United States new business for 6 months only.
South African Individual business single premiums include £61 million (R761
million) in respect of transfers from the Guaranteed Capital Fund (a vehicle for
extending policies at maturity) to purchase new products, that were not
previously categorised as new business premiums. The embedded value of the new
business associated with this was £1 million (R15 million). The above figures
for the twelve months ended 31 December 2001 are as reported.
The value of new business excludes the value of new individual unit trust and
some group market-linked business written by the life companies, 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.
Embedded value information continued
A reconciliation of the new business premiums shown in the notes to the
financial statements to those shown above,
for the six months ended 30 June 2002, is set out below.
£m Rm
6 months to June 2002 Recurring premiums Single premiums Recurring premiums Single premiums
New business premiums in the 104 2,164 1,651 34,364
notes to the financial
statements
Less:
Group market-linked - (91) - (1,460)
business not valued
Group business premiums - (21) - (331)
held temporarily on
deposit
Unit trust business not - (31) - (487)
valued
New business premiums (16) - (254) -
arising from indexation
Selestia business not - (22) - (349)
valued
New business premiums 88 1,999 1,397 31,737
as per embedded value
report
The assumptions used to calculate the value of new business are set out in
section 4.
Embedded value information continued
4 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.
• The pre-tax investment and economic assumptions used for South African
and United States businesses were as follows:
South Africa 30 June 31 Dec 30 June
2002 2001 2001
Fixed interest return 12.5% 12.0% 11.0%
Equity return 14.5% 14.0% 13.0%
Property return 13.5% 13.0% 12.0%
Inflation 8.5% 8.0% 7.0%
Risk discount rate 15.0% 14.5% 13.5%
United States 30 June 31 Dec 30 June
2002 2001 2001
Treasury yield 5.0% 5.0% 5.5%
Inflation 3.0% 3.0% 3.0%
New money yield assumed 6.7% 6.6% 6.8%
Net portfolio earned rate 7.1% 7.3% 7.4%
Risk discount rate 9.5% 9.5% 10.0%
For the other operations, appropriate investment and economic assumptions were
chosen on bases consistent with those adopted in South Africa.
• Where applicable, rates of future bonuses have been set at levels
consistent with the investment return assumptions.
• Projected company taxation is based on the current tax basis that applies
in each country.
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 capital gains tax 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. No allowance has been made for
capital gains tax on the shareholder investments in Nedcor and Mutual & Federal.
For the US 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.
• 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.
Embedded value information continued
• 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 2001 and increased with inflation up to 30 June
2002. The future expenses attributable to life insurance business do not include
Group holding company expenses.
• Future investment expenses were based on the current scales of fees
payable by the life insurance 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.
• The effect of increases in premiums over the period for policies in-force
as at 30 June 2002, 31 December 2001 and 30 June 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.
• Conversions between Rand, US Dollar and Sterling were carried out at the
following exchange rates:
Rand per Sterling US$ per Sterling Rand per US$
At 30 June 2002 15.8451 1.5279 10.3702
At 31 December 2001 17.4286 1.4542 11.9850
At 30 June 2001 11.3634 1.4116 8.0500
6 months to 30 June 2002 (average) 15.8800 1.4445 10.9926
6 months to 31 December 2001 (average) 13.3482 1.4404 9.2670
12 months to 31 December 2001 (average) 12.3923
6 months to 30 June 2001 (average) 11.4211
Embedded value information continued
5 ALTERNATIVE ASSUMPTIONS
The discount rate appropriate to an investor will depend on the investor's own
requirements, tax position and perception of the risks associated with the
realisation of the future profits. To illustrate the effect of using different
discount rates, the table below shows the embedded value of Old Mutual plc at 30
June 2002 at alternative discount rates. In determining the values at different
discount rates, all other assumptions have been left unchanged.
£m Rm
Value at Value at Value at Value at Value at Value at
central central central central central central
discount rate discount rate discount rate discount discount discount
- 1% +1% rate - 1% rate rate +1%
Adjusted net 2,850 2,850 2,850 45,163 45,163 45,163
worth
Value of 1,030 925 823 16,324 14,651 13,033
in-force
business
Value before 1,070 1,019 965 16,949 16,135 15,288
cost of
capital
Cost of (40) (94) (142) (625) (1,484) (2,255)
solvency
capital
Embedded value 3,880 3,775 3,673 61,487 59,814 58,196
The table below sets out the value of the new life assurance business (VNB) for
the 6 months to 30 June 2002 at alternative discount rates.
£m Rm
Value at Value at Value at Value at Value at Value at
central central central central central central
discount rate discount rate discount rate discount discount discount
- 1% +1% rate - 1% rate rate +1%
VNB before 74 70 66 1,172 1,117 1,054
cost of
capital
Cost of (9) (12) (14) (145) (190) (232)
solvency
capital
Value of new 65 58 52 1,027 927 822
business
6 EXTERNAL REVIEW
These results have been reviewed by Tillinghast-Towers Perrin who have confirmed
to the Directors that the methodology and assumptions used to determine the
embedded value are reasonable and that the embedded value profits are reasonable
in the context of the operating performance and experience of the life assurance
business during the six months to 30 June 2002.
This information is provided by RNS
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