Final Results - Year Ended 31 December 1999 - Pt 2
Old Mutual PLC
8 March 2000
PART 2
Non-technical account -insurance and asset management activities
Pro forma
Year to year to
31 31
December December
1999 1998
£ £
Balance on the technical account -long term business 292 153
Tax attributable to shareholders'profits on
long term business 84 18
376 171
Profit from longterm business beforetax
Balance on the technical account -general business 59 86
Investment income 267 81
Unrealised gains on investments 64 -
Allocatedinvestment return transferred from / (to)
the long term businesstechnical account 543 (312)
Investment expenses and charges (33) (2)
Unrealised losses on investments - (167)
Alloca ted (56) (79)
investment return transferred to the general
business technical account
Other income 242 124
Other charges (238) (132)
Insurance operating profit /(loss)on ordinary 1,224 (230)
activities before tax
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Consolidated profit and loss account
Non-technical account - banking activities
Pro forma
Year to year to
31 31
December December
1999 1998
£ £
Interest receivable 1,652 1,940
Interest payable (1,208) (1,507)
Net interest income 44 433
Dividend income 6 9
Fees and commissions receivable 229 242
Fees and commissions payable (33) (6)
Dealing profits 88 74
Other operating income 7 32
Operating income 741 784
Administrative expenses (223) (233)
Depreciation and amortisation (34) (26)
Other operating charges (124) (173)
Operating profit before provisions 360 352
Provisions (71) (163)
Operating profit 197 281
Share of associated undertakings' operating profit 13 6
Banking operating profit on ordinary activities
before tax 210 287
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Consolidated profit and loss account
Non-technical account - insurance, asset
management and banking activities
Pro forma
Year to year to
31 31
December December
1999 1998
Notes £ £
Insurance and asset management operating
profit on ordinary activities before tax and
non-operating items 1,224 (230)
Banking operating profit on ordinary
activities before tax and non-operating items 210 287
Profit on ordinary activities before tax and
non-operating items 1,434 57
Non-operating items 12 54 -
Profit on sale of businesses 77 -
Cost of the free share selling service
offered to policyholders on demutualisation (23) -
Profit on ordinary activities before tax 1,488 57
Tax on profit on ordinary activities 11 (165) (85)
Profit / (loss) on ordinary activities after tax 1,323 (28)
Minority interests (257) (73)
Profit / (loss) on ordinary activities after
tax and minority interests 1,066 (101)
Dividends proposed 13 (69) -
Retained Profit / (loss) for the year 997 (101)
Consolidated statement of total recognised gains and losses
Pro forma
Year to year to
31 31
December December
1999 1998
£m £m
Profit / (loss) for the year 1,066 (101)
Foreign exchange movements (35) (87)
Total recognised gains and losses for the year 1,031 (188)
Reconciliation of movements in equityshareholders' funds
Pro forma
Year to year to
31 31
December December
1999 1998
£m £m
Total recognised gains and losses for the 1,031 (188)
year
Dividend proposed (69) -
Retained profit / (loss) for the financial 962 (188)
year
Issue of new capital on self-investment 404 -
transaction
Issue of new capital on listing 559 -
Net addition / (reduction) to equity 1,925 (188)
shareholders' funds
Equity shareholders' funds at the beginning 1,588 1,776
of the year
Equity shareholders' funds at the end of the 3,513 1,588
year
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Consolidated balance sheet
at 31 December 1999
At At
31 31
December December
1999 1998
£m £m
Insurance assets
Intangible assets
Goodwill 164 100
Investments
Land and buildings 914 885
Other financial investments 17,167 12,398
18,081 13,283
Assets held to cover linked liabilities 5,916 5,121
23,997 18,404
Reinsurers' share of technical provisions
Long term business provision 140 172
Claims outstanding 16 19
Provision for unearned premiums 5 5
161 196
Debtors 524 210
Other assets 133 89
Cash at bank and in hand 443 176
Prepayments and accrued income 317 335
1,417 810
Total insurance assets 25,739 19,510
Banking assets
Cash and balances at central banks 760 537
Treasury bills and other eligible bills 744 732
Loans and advances to banks 613 137
Loans and advances to customers 9,704 9,415
Debt securities 629 412
Equity securities 145 131
Tangible fixed assets 98 92
Land and buildings 89 101
Other assets 267 50
Prepayments and accrued income 168 252
Total banking assets 13,217 11,959
Total assets 38,956 31,469
At At
31 31
December December
1999 1998
£m £m
Liabilities
Capital and reserves
Called up share capital 344 -
Share premium account 868 -
Profit and loss account 2,301 -
Fund for future appropriations - 1,588
Equity shareholders' funds 3,513 1,588
Minority interests 857 808
Fund for future appropriations - 6
Insurance liabilities
Technical provisions
Long term business provision 14,767 11,716
Claims outstanding 261 319
Provision for unearned premiums 43 41
15,129 12,018
Technical provisions for linked liabilities 5,916 5,121
Provisions for other risks and charges 317 423
Creditors 1,093 372
Accruals and deferred income 43 44
Total insurance liabilities 22,498 17,978
Banking liabilities
Deposits by banks 798 1,223
Customer accounts 9,343 8,345
Debt securities in issue 1,194 896
Provisions for liabilities and charges 76 72
Other liabilities 609 493
Subordinated liabilities 68 60
Total banking liabilities 12,088 11,089
Total liabilities 38,956 31,469
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Consolidated cash flow statement excluding long
term business
Year to
31 December
1999
£m
Operating activities
Net cash inflow from insurance operating activities 495
Net cash inflow from banking operating activities 257
Net cash inflow from operating activities 752
Net cash outflow from returns on investments and (124)
servicing of finance
Total taxation paid (70)
Net cash outflow from capital expenditure and (84)
financial investment
Net cash inflow from acquisitions and disposals 66
Net cash inflow before financing activities 540
Net cash inflow from financing 547
Net cash inflow of the Group excluding long term 1,087
business
Year to
31 December
1999
£m
Cash flows relating to insurance activities were
invested as follows:
Increase in cash holdings 122
Increase in net portfolio investments 732
854
Cash flows relating to banking activities were
invested as follows:
Increase in cash and balances at central banks 233
Net cash inflow of the Group excluding long term 1,087
business
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
1. Basis of preparation
The financial information for the year ended 31 December 1999,
set out on pages 20 to 35, has been prepared on the basis of the
accounting policies set out in the Group's Prospectus dated 19
May 1999, and in accordance with the Statement of Recommended
Practice on Accounting for Insurance Business issued by the
Association of British Insurers.
Following the Group's decision to change its year end to 31
December, in preparation for demutualisation and listing,
comparative information has been presented on a pro forma basis.
The balance sheet and the pro forma profit and loss account
comparatives have been substantially derived from the financial
information contained in Parts 7 and 8 of the Group's Prospectus
dated 19 May 1999. The pro forma profit and loss account
combines the actual results for the six months from 1 July to 31
December 1998 with the first half year results to 30 June 1998
derived on a time apportioned basis. Certain reclassifications
have been made to the pro forma information in the Prospectus to
accord with the format adopted in this financial information.
No comparative cashflow has been presented as it is not
considered practicable or meaningful in a pre-demutualisation
environment.
Following the sale of our UK life subsidiary, Old Mutual Life
Assurance Company (OMLA), in December 1999 its results for the
year then ended have been disclosed as discontinued operations
in the Group's long term business technical account.
Rates of exchange used to translate Rand based amounts into
Sterling were:
Year Year
ended ended
31-Dec 31-Dec
1999 1998
Profit and loss account (weighted 9.8588 9.106
average rate)
Balance 9.9364 9.7763
sheet(yearend rate)
Financial information presented in the preliminary announcement
for the year ended 31 December 1999 constitutes non-statutory
accounts within the meaning of section 240 of the Companies Act
1985. The 1999 statutory accounts for the Group have not been
finalised, however, the financial information included in this
announcement has been prepared by the directors based upon the
results and position which will be reflected in the statutory
accounts when complete.
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial
information
2. Long term business - gross premiums written
South Rest of Rest of Total
Africa Africa world
£m £m £m £m
Single premiums
Year to 31 December 1999
Individual business
Life / endowment / other 565 4 168 737
Retirement and immediate 173 9 - 182
annuities
738 13 168 919
Group business 912 19 2 933
Total continuing operations 1,650 32 170 1,852
Discontinued operations - - 6 6
Total 1,650 32 176 1,858
Single premiums
Pro forma year to 31 December 1998
Individual business
Life / endowment / other 273 167 446 6
Retirement and immediate annuities 315 7 - 322
588 13 167 768
Group business 956 13 - 969
Total continuing operations 1,544 26 167 1,737
Discontinued operations - - 8 8
Total 1,544 26 175 1,745
Recurring premiums
Year to 31 December 1999
Individual business
Life / endowment / other 650 34 69 53
Retirement and other annuities 163 13 - 176
Affinity groups 119 - - 119
932 47 69 1,048
Group business 347 54 - 401
Total continuing operations 1,279 101 69 1,449
Discontinued operations 27 27
Total 1,279 101 96 1,476
Recurring premiums
Pro forma year to 31 December 1998
Individual business
Life / endowment / other 727 33 51 811
Retirement and other annuities 165 7 - 172
Affinity groups 116 5 - 121
1,008 45 51 1,104
Group business 426 61 - 487
Total continuing operations 106 51 1,591 1,434
Discontinued operations - - 29 29
Total 1,434 106 80 1,620
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
3. Long term business - new business premiums
South Rest of Rest of Total
Africa Africa world
£m £m £m £m
Single premiums - continuing business
Year to 31 December 1999
Individual business 738 13 168 919
Group business 912 19 2 933
Total 1,650 32 170 1,852
Single premiums - continuing business
Pro forma year to 31 December 1998
Individual business 588 13 167 768
Group business 956 13 - 969
Total 1,544 26 167 1,737
Recurring premiums - continuing business
Year to 31 December 1999
Individual business 182 14 15 211
Group business 22 7 - 29
Total 204 21 15 240
Recurring premiums - continuingbusiness
Pro forma year to 31 December 1998
Individual business 233 17 14 264
Group business 66 1 - 67
Total 299 18 14 331
Single premiums are those premiums arising on contracts where there
is no expectation of future premiums. Additional single premiums
are permitted on most contracts of this type and these are also
classified as single premiums. Individual recurring premiums are
those where there is a contractual obligation to pay on a regular
basis. Group business recurring premiums are those received during
the financial year in respect of new risk contracts and fund
management schemes. Flows into and out of investment products for
group business are dependent on the arrangements in place with
individual retirement funds and will vary considerably from year to
year.
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
4. Life operating profit -
continuing operations
Year to
31 December
1999
£m
Individual business 168
Group business 67
Rest of world 4
Life technical result from 239
continuing operations
Long term investment return 187
Total life operating profit from 426
continuing operations
5. Banking operating profit
In the year to 31 December 1999, the profit on the sale of
NedTravel and 15% of Nedcor Investment Bank (£66 million) has
been treated as a non-operating item in the consolidated profit
and loss account (see note 12). The increase in general risk
provisions of £71 million and property portfolio writedowns of
£23 million charged by Nedcor in their financial statements have
been grossed up for tax and deducted from operating earnings in
this UK GAAP financial information to arrive at a banking pre-tax
profit of £210 million.
6. Analysis of general
insurance result
Premiums Claims
written incurred
net of net of
reinsurance reinsurance
£m £m
Class of business
Year to 31 December 1999
Motor 123 98
Fire 40 70
Accident 86 26
Other 9 5
258 199
Pro forma year to 31 December 1998
Motor 119 96
Fire 33 26
Accident 96 69
Other 5 4
253 195
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
7. Other shareholder income/expenses
Pro
forma
Year to year to
31 December 31 December
1999 1998
£m £m
Investment return based on a long term 21 N/A
investment return
Other investment income 19 N/A
Other income 11 4
Other charges (88) (37)
(37) (33)
8. Funds under management
At At
31 31
December December
1999 1998
£m £m
Investments including assets held to cover 23,997 18,404
linked liabilities
Unit trusts
Capel-Cure Sharp 1,111 804
Old Mutual Asset Managers 2,686 1,979
Nedcor Investment Bank Asset Managers 1,035 857
4,832 3,640
Third party
Capel-Cure Sharp 8,538 8,412
Old Mutual Asset Managers 5,107 2,100
Nedcor Investment Bank Asset Managers 2,395 2,224
16,040 12,736
Total funds under management 44,869 34,780
9. Insurance long term investment return
Group operating profit is stated after allocating an investment
profit in the insurance businesses based on a long term investment
return. The long term investment return is based on achieved real
rates of return adjusted for current inflation expectations, and
consensus economic and investment forecasts. The return is applied
to assets held in the shareholders' funds for life assurance, and
general insurance businesses and other appropriate shareholders
funds outside of life assurance entities. The difference between
actual return and the long term investment return is included in
short term fluctuations.
The long term investment rate of return used in South Africa is 14%.
For other territories, the long term investment return used was
consistent with the investment returns experienced in those
territories. The directors are of the opinion that these rates of
return are prudent and have been selected with a view to ensuring
that returns credited to operating earnings are not inconsistent
with the actual returns expected to be earned over the long term.
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
10. Analysis of short term fluctuations
in investment returns
Pro
forma
Year to year to
31 31
December December
1999 1998
£m £m
Technical account - long term business
Actual return attributable to shareholders 731 (180)
Long term return credited to operating 187 132
results
544 (312)
Technical account - general business
Actual return attributable to shareholders 230 (86)
Long term return credited to operating 56 79
results
174 (165)
Non- technical account
Actual return attributable to shareholders 81 -
Long term return credited to operating 21 -
results
60 -
Excess/ (deficit) of actual returns over 778 (477)
long term return
11. Taxation
Pro
forma
Year to year to
31 31
December December
1999 1998
£m £m
United Kingdom (7) (1)
Overseas (158) (84)
(165) (85)
12. Non-operating items
Profit attributable to shareholders for the year ended 31 December
1999 is stated after (charging)/ crediting the following non-
recurring items
Year to
31
December
1999
£m
Profit on sale of NedTravel 20
Profit on flotation of Nedcor Investment 46
Bank
Profit on sale of UK Life assurance 15
operations
Provisions for cost associated with the withdrawal of the (4)
Group from its UK life assurance operation
Profit on sale of businesses 77
Cost of the free share selling services offered (23)
to policyholders on demutualisation
Non-operating items before 54
tax and minorities
Taxation -
Non-operating items after
tax and before minorities 54
Minority interests (35)
Non-operating items after
tax and minorities 19
Old Mutual plc
Preliminary results for the year ended 31 December 1999
Notes to the financial information
13. Earnings and dividend
per share
The basic earnings per share shown in the profit and loss account is
calculated by reference to the earned profit/ (loss) attributable to
shareholders of £1,066 million for the year ended 31 December 1999 (1998:
loss of £101 million) and a weighted average number of shares in issue of
3,127 million (1998: 2,971 million). In accordance with merger accounting
principles, it has been assumed that the number of shares issued as a result
of the self-investment transaction and demutualisation in February and May
1999 respectively were in issue throughout the year. The diluted earnings per
share calculation reflects the impact of shares in an Employee Share Ownership
Trust, which on conversion will have an anticipated dilution effect of 13
million shares.
Earnings have been decreased by net short term fluctuations of £667
million and by £19 million to adjust for post tax and minority non-operating
items to calculate the earnings per share based on a long term rate of return.
The dividend per share of 2p has been calculated using the 3,444 million
shares in issue at 31 December 1999.
14. Post balance sheet events
In January 2000, the group made an offer to purchase the entire
share capital of the Gerrard Group plc for approximately £525
million. The transaction remains subject to regulatory approval
which is expected to be received during March 2000.
EMBEDDED VALUE REPORT
Supplementary embedded value information
1. Embedded value
The embedded value of Old Mutual plc as at 31 December 1999 is
set out below, together with the corresponding position at 31
December 1998.
31 Dec 31 Dec 1998
1999 £m
£m
Adjusted net worth 4,608 2,315
Equity shareholders' funds 3,513 1,588
Excess of market value of 1,114 748
listed subsidiaries over their
net asset value
Adjustment to include UK and (19) (21)
offshore life subsidiaries on
a statutory solvency basis
Value of in-force business 806 771
Value of in-force business 884 849
before cost of solvency
capital
Cost of solvency capital (78) (78)
Embedded value 5,414 3,086
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
distributable profits from its life assurance business in force
at the valuation date, adjusted for the cost of holding solvency
capital equal to 100 per cent of the South African Statutory
Capital Adequacy Requirement (or equivalent for non-African
operations).
The adjusted net worth is equal to the consolidated equity
shareholders' funds adjusted to reflect the group's listed
subsidiaries at market value, and UK and offshore life assurance
subsidiaries on a statutory solvency basis.
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 basis of taxation of life assurance companies in South
Africa changed with effect from 1 January 2000, and this has
been fully taken into account in determining the embedded value
as at 31 December 1999. No account has been taken of the
proposed capital gains tax to be introduced in South Africa with
effect from 1 April 2001, as announced by the Minister of
Finance in his Budget Speech on 23 February 2000.
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.
31 Dec 31 Dec 1998
1999 £m
£m
South Africa 687 632
Individual business 448 456
Group business 239 176
Rest of World 119 139
Value of in-force 806 771
business
The value of in-force business as at 31 December 1999 excludes
the value in respect of Old Mutual Life Assurance Company in the
UK, which was sold towards the end of the year.
2. Embedded value profits
Embedded value profits represent the change in embedded value
over the year, adjusted for any capital raised and dividends
proposed. The after-tax embedded value profits for the 12 months
to 31 December 1999 are set out below.
Year to
31 Dec 1999
£m
Embedded value at 31 December 5,414
1999
3,086
Embedded value at 1 January
1999
Increase in embedded value 2,328
Less capital raised 963
Self-investment transaction 404
Capital raised at listing 559
Plus dividends proposed 69
Embedded value profits 1,434
The components of the embedded value profits are set out below:
Year to
31 Dec 1999
£m
Profits from new business (1999 75
SA tax basis)
- Point of sale 69
- Expected return to end of 6
year
Profits from existing business 160
- Expected return 13
- Experience variances (52)
- Additional pensions mis-
selling provisions
99
Investment variances
1,331
Investment return on adjusted
net worth (121)
Impact of 2000 SA tax change (12)
Sale of UK life operation (59)
Exchange rate movements
Embedded value profits 1,434
The profits from new life assurance business comprise the value
of new business written during the year, determined initially at
the point of sale and then accumulated to the end of the year 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 year.
The profits from existing life assurance business consist of the
expected return on the in-force business and experience
variances. The expected return is determined by applying the
discount rate to the value of in-force business at the beginning
of the year and adding back the expected cost of solvency
capital over the year. The experience variances are caused by
differences between the actual experience in the year and the
assumptions used to calculate the value at the start of the
year, as well as changes in assumptions regarding future
experience.
The investment variances represent the differences between the
actual returns in the year and the assumptions used to calculate
the value at the start of the year, together with changes in
future investment return and discount rate assumptions.
The investment return on adjusted net worth represents the
actual investment return earned on the adjusted net worth (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.
As mentioned above, the basis of taxation of life assurance
companies in South Africa changed with effect from 1 January
2000. The amount shown represents the net effect of the
increased tax payable by shareholders as a result of the new tax
basis (including the tax payable on transition to the new
system) after allowing for the portion thereof to be borne by
policyholders.
Towards the end of the year, Old Mutual Life Assurance Company
in the UK reinsured its annuity portfolio of some £400 million
with XL Mid Ocean Reinsurance Ltd and was sold to Century Life
plc, arising in a gain in net asset value of £15 million. The
embedded value loss on the sale of the company of £12 million
shown above includes the gain in net asset value of £15 million.
3. Value of new business
The value of new business written in the year is the present
value, at the point of sale, of the projected stream of after-
tax profits from that business, adjusted for the cost of holding
solvency capital.
The table below sets out a geographical analysis of the value of
new business, based on both the 1999 South African tax basis,
and the 2000 South African tax basis. The value shown on the
2000 tax basis reflects the net effect of the increased tax
payable by shareholders after allowing for the portion thereof
to be borne by new policies. The amounts of new recurring and
single premiums written during the year are also shown.
12 months to 31 December
1999
New premiums Value of new
business
Recur Single 1999 2000
ring SA SA
tax tax
basis basis
£m £m
£m £m
South Africa 162 1,218 62 54
Individual 141 697 33 25
business 21 521 29 29
Group business
36 172 7 7
Rest of World
Total 198 1,390 69* 61*
* Net of cost of solvency capital of £7m
The value of new group business includes £7.2 million in respect
of the proceeds of free shares issued to retirement funds at
demutualisation, and re-invested with Old Mutual.
The value of new business excludes the value of new group market-
linked and unit trust business, the profits on which 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 value of new business however includes
the value of new Investment Frontiers business that originated
from existing policies that matured. A reconciliation of the new
business premiums shown above to those shown in note 3 to the
financial information is set out below:
Recurring Single
Premiums Premiums
£m £m
New business premiums 198 1,390
as per the embedded
value report
Add:
- group market-linked
business not valued 1 427
- unit trust business
not valued - 137
- new business 41 -
premiums arising from
premium indexation
Less transfer of
maturing policies to
Investment Frontiers - (96)
Less discontinued operations (6)
New business premiums 240 1,852
in note 3 to the
financial information
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 business were as follows:
South Africa 31 December 31 December
1999 1998
Fixed Interest 14.0% 16.5%
Return
Equity & Property 17.0% 19.5%
Return
Inflation 10.0% 12.5%
Risk Discount Rate 18.0% 20.5%
For the non-South African operations, appropriate investment
and economic assumptions were chosen on bases consistent with
those adopted in South Africa.
* Rates of future bonuses have been set at levels consistent
with the investment return assumptions.
* For the in-force business, projected company taxation is
based on the new tax basis that applies to SA life assurers, and
includes an estimate of STC that may be payable in South Africa.
* For the in-force business, assumed future policy charges
are based on the policy charges that will apply in 2000 as a
result of the new tax basis in South Africa.
* 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 split between expenses relating to the
acquisition of new business and the maintenance of business in
force. Assumed future expenses were based on current levels of
expenses. Expense savings arising from Project 500 have been
only partially taken into account. Further savings are expected
to materialise in 2000, and will be reflected in subsequent
valuations. The future expenses attributable to life insurance
business do not include group expenses incurred at the holding
company level.
* 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 1998 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.
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 1999 at alternative discount rates. In determining the
values at different discount rates, all other assumptions have
been left unchanged. The sensitivity of the value of in-force
business and value of new business to changes in other
assumptions is shown later.
Value Value Value at
at at Central
Central Central Discount
Discount Discount Rate
Rate Rate +1%
-1%
£m
£m £m
Adjusted net 4,608 4,608 4,608
worth
Value of in- 930 806 693
force business
Value before 932 884 839
cost of
capital
(2) (78) (146)
Cost of
solvency
capital
Embedded value 5,538 5,414 5,301
The table below sets out the value of new life assurance
business on the 2000 South African tax basis for the 12 months
to 31 December 1999 at alternative discount rates.
12 months to 31 December 1999
Value at Value at Value at
Central Central Central
Discount Discount Discount Rate
Rate Rate +1%
-1%
£m £m £m
Value 73 68 63
before
cost of
capital
Cost of - (7) (13)
solvency
capital
Value of 73 61 50
new
business
The table below shows the sensitivity of the value of in-force
business at 31 December 1999 and the value of new business on
the 2000 South African tax basis for the 12 months to 31
December 1999 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.
Value of in- Value of new
force life business
business at for year to
31 Dec 1999 31 Dec 1999
£m £m
Central assumptions 806 61
Effect of:
* Decreasing the (109) (10)
pre-tax investment
return assumptions by
1% with bonus rates
changing
commensurately
* Voluntary (35) (9)
discontinuance rates
increasing by 25%
* Maintenance (87) (8)
expense levels
increasing by 20%
with no corresponding
increase in policy
charges
* Increasing the (11) (2)
inflation assumption
by 1%
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
insurance business during the 12 months to 31 December 1999.
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