Final Results (part 3)
Old Mutual PLC
25 February 2002
PART 3
OLD MUTUAL PLC
Results for the year ended 31 December 2001 (contd)
Embedded Value Information
1. Embedded value
The embedded value of Old Mutual plc at 31 December 2001 is set out below,
together with the corresponding position at 31 December 2000.
£m Rm
31 Dec 31 Dec 31 Dec 31 Dec
2001 2000 2001 2000
Adjusted net worth 2,624 4,730 45,716 53,517
Equity shareholders' funds 2,470 3,618 43,045 40,937
Excess of market value of listed subsidiaries over 455 1,132 7,922 12,805
their net asset value
Adjustment to include OMI life subsidiaries on a (17) (20) (303) (225)
statutory solvency basis
Adjustment to include OMUSL on a statutory (284) (4,948)
solvency basis
Value of in-force business 898 823 15,648 9,314
Value of in-force business before cost of solvency 981 886 17,101 10,028
capital
Cost of solvency capital (83) (63) (1,453) (714)
Embedded value 3,522 5,553 61,364 62,831
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 (OMUSL) life assurance subsidiaries
on a statutory solvency basis. The adjusted net worth also includes goodwill
relating to F&G Life of £65 million (R1,133 million).
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.
The investment and economic assumptions have been revised (including adjusting
the differences between some of the assumptions). In addition to these changes,
the embedded value at 31 December 2001 now also fully allows for the capital
gains tax introduced in South Africa with effect from 1 October 2001. Details
of these changes, as well as their impact, are set out in section 2 (the
embedded value at December 2000 has not been restated).
The assumptions used to calculate the embedded value are set out in section 4.
The table below sets out a geographical analysis of the value of in-force
business.
£m Rm
31 Dec 31 Dec 31 Dec 31 Dec
2001 2000 2001 2000
South Africa 544 706 9,474 7,988
Individual business 342 451 5,951 5,098
Group business 202 255 3,523 2,890
United States 271 - 4,722 -
Rest of World 83 117 1,452 1,326
Value of in-force business 898 823 15,648 9,314
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 twelve months to 31 December 2001 are set out below,
together with the corresponding figures for the twelve months to 31 December
2000.
£m Rm
12 months 12 months 12 months 12 months
to 31 Dec to 31 Dec to 31 Dec to 31 Dec
2001 2000 2001 2000
Embedded value at end of period 3,522 5,553 61,364 62,831
Embedded value at beginning of period 5,553 5,414 62,831 53,794
Increase in embedded value (2,031) 139 (1,467) 9,037
Less capital raised (211) (177) (2,639) (1,956)
New capital raised (208) (153) (2,602) (1,691)
Proceeds from sale of shares previously held to
satisfy claims and errors on demutualisation (3) (24) (37) (265)
Plus dividends proposed 172 163 2,606 1,714
Embedded value profits (2,070) 125 (1,500) 8,795
The components of the embedded value profits are set out below:
£m Rm
12 months 12 months 12 months 12 months
to 31 Dec to 31 Dec to 31 Dec to 31 Dec
2001 2000 2001 2000
Profits from new business 84 74 1,053 782
- Point of sale 79 68 990 718
- Expected return to end of period 5 6 63 64
Expected return 144 144 1,809 1,514
Experience variances 5 28 54 289
Experience assumption changes (7) 72 (86) 757
Profits before investment and exceptional items 226 318 2,830 3,342
Investment variances 33 (14) 420 (143)
Investment and economic assumption changes 101 10 1,265 101
Impact of capital gains tax (49) - (603) -
Development costs (28) - (344) -
Goodwill impairment (500) - (6,196) -
Nedcor market value return (421) 439 (5,220) 4,618
Other return on adjusted net worth 127 45 1,527 474
Exchange rate movements (1,559) (673) 4,821 403
Embedded value profits (2,070) 125 (1,500) 8,795
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 twelve months to 31 December 2001 are based on the
revised investment and economic assumptions, and fully allow for the impact of
capital gains tax in South Africa (figures for prior periods have not been
restated).
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 and economic assumption changes for December 2001
represent the combined impact of declining interest rates and the changes to the
differentials between the various investment and economic assumptions and the
risk discount rate. 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.
Development costs consist of £9 million (R113 million) F&G Life restructuring
costs and £19 million (R231 million) set-up costs for Selestia.
Other return on adjusted net worth represents the investment return earned on
the shareholder fund investments (excluding Nedcor, which has been shown
separately) and profits arising from other non-life businesses within the Group.
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 twelve months to 31 December 2001, and the twelve months to 31 December
2000. United States new business numbers for 2001 are in respect of 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).
12 months to 31 Dec 2001 12 months to 31 Dec 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 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
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*
* Value of new business net of cost of solvency capital of £9 million (R114
million).
** United States new business for six 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).
12 months to 31 Dec 2000 12 months to 31 Dec 2000
RP SP APE VNB RP SP APE VNB
£m £m £m £m Margin Rm Rm Rm Rm
South Africa 179 1,097 289 67 23% 1,886 11,542 3,040 708
Individual business 131 805 212 38 18% 1,384 8,465 2,230 399
Group business 48 292 77 29 38% 502 3,077 810 309
(excl
free shares)
United States - - - - - - - - -
Rest of World 20 211 41 5 13% 212 2,216 434 56
Total (pro forma) 199 1,308 330 72 22% 2,098 13,758 3,474 764
SA Group (free - 78 8 2 22% - 818 82 18
shares)
Total 199 1,386 338 74* 22% 2,098 14,576 3,556 782*
* Value of new business net of cost of solvency capital of £5 million (R52
million).
The value of new group business for the year to 31 December 2000 includes an
amount of £2 million (R18 million) in respect of the proceeds of free shares
issued to retirement funds at demutualisation, and re-invested with Old Mutual.
Note that the results for the prior year have not been restated to reflect the
new investment and economic assumptions, nor the impact of capital gains tax.
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. A
reconciliation of the new business premiums shown in the notes to the financial
statements to those shown above is set out below.
12 months to 31 Dec 2001 £m Rm
Recurring Single Recurring Single
premiums Premiums premiums Premiums
New business premiums in the notes to the financial statements 217 2,140 2,688 26,520
Less:
- Group market-linked business not valued - (222) - (2,751)
- Group business premiums held temporarily on deposit - (30) - (372)
- Unit trust business not valued - (62) - (771)
- New business premiums arising from indexation (39) - (485) -
Add:
- Difference in exchange rate for US business* - - 25 559
New Business premiums as per embedded value report 178 1,826 2,228 23,185
* This difference is due to the financial statements using a US$ to Rand
exchange rate based on the average for the full year, whilst the embedded value
numbers are based on an average for the six months ended December 2001.
12 months to 31 Dec 2000 £m Rm
Recurring Single Recurring Single
premiums Premiums premiums Premiums
New business premiums in the notes to the financial statements 248 1,902 2,609 20,010
Less:
- Group market-linked business not valued - (197) - (2,072)
- Group business premiums held temporarily on deposit - (71) - (747)
- Unit trust business not valued - (108) - (1,142)
- GCF transfers not valued in 2000 - (140) - (1,473)
- New business premiums arising from indexation (49) - (511) -
New Business premiums as per embedded value report 199 1,386 2,098 14,576
The assumptions used to calculate the value of new business are set out in
section 4.
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 31 Dec 31 Dec
2001 2000
Fixed Interest Return 12.0% 13.0%
Equity Return 14.0% 16.0%
Property Return 13.0% 16.0%
Inflation 8.0% 9.0%
Risk Discount Rate 14.5% 17.0%
United States 31 Dec 30 Jun
2001 2001
Treasury Yield 5.0% 5.5%
New Money Fixed Interest Return 6.6% 6.8%
In-force Portfolio Return 7.3% 7.4%
Inflation 3.0% 3.0%
Risk Discount Rate 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 U.S. business full allowance is made for existing tax attributes on 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.
• 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. 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 31 December 2001 and 31 December 2000 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 US$ per Rand per
Sterling Sterling US$
At 31 December 2001 17.4286 1.4542 11.9850
At 30 June 2001 11.3634 1.4116 8.0500
At 31 December 2000 11.3148
6 months to 31 December 2001 (average) 13.3482 1.4404 9.2670
12 months to 31 December 2001 (average) 12.3923
12 months to 31 December 2000 (average) 10.5213
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 31
December 2001 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 discount discount discount discount discount rate
rate - 1% rate rate +1% rate - 1% rate + 1%
Adjusted net worth 2,624 2,624 2,624 45,716 45,716 45,716
Value of in-force business 1,001 898 806 17,454 15,648 14,043
Value before cost of capital 1,035 981 932 18,044 17,101 16,248
Cost of solvency capital (34) (83) (126) (590) (1,453) (2,205)
Embedded value 3,625 3,522 3,430 63,170 61,364 59,759
The table below sets out the value of the new life assurance business for the 12
months to 31 December 2001 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 discount discount discount discount discount
rate - 1% rate rate +1% rate - 1% rate rate + 1%
Value before cost of capital 100 93 86 1,253 1,167 1,087
Cost of solvency capital (5) (9) (13) (61) (114) (161)
Value of new business 95 84 73 1,192 1,053 926
The table below shows the sensitivity of the value of in-force business at 31
December 2001 and the value of new business for the 12 months to 31 December
2001 to changes in key assumptions. All of the sensitivities have been
determined at the central discount rates and for each sensitivity illustrated,
all other assumptions have been left unchanged.
£m Rm
Value of Value of Value of Value of
in-force new life in-force new life
business business business business
at 31 for year at 31 for year
Dec 2001 to 31 Dec 2001 to 31
Dec 2001 Dec 2001
Central assumptions 898 84 15,648 1,053
Effect of:
• Decreasing the pre-tax investment
return assumptions by 1% with bonus
rates changing commensurately (90) (11) (1,570) (138)
- Value before cost of capital (49) (8) (848) (96)
- Cost of solvency capital (41) (3) (722) (42)
• Voluntary discontinuance rates increasing
by 25% (41) (14) (712) (179)
• Maintenance expense levels increasing by 20%
with no corresponding increase in policy
charges (57) (8) (988) (97)
• Increasing the inflation assumption by 1% (13) (2) (229) (26)
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 twelve months to 31 December 2001.
This information is provided by RNS
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