Interim Results Part 3
European Embedded Value basis supplementary information
For the six months ended 30 June 2008
Income statement on a European embedded value basis
|
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 Restated |
Year ended 31 December 2007 |
|
South Africa |
|
|
|
|
Covered business |
224 |
267 |
345 |
|
Asset management |
55 |
54 |
98 |
|
Banking |
320 |
288 |
622 |
|
|
599 |
609 |
1,065 |
|
United States |
|
|
|
|
Covered business |
(6) |
(54) |
63 |
|
Asset management |
70 |
76 |
162 |
|
|
64 |
22 |
225 |
|
Europe |
|
|
|
|
Covered business |
345 |
176 |
350 |
|
Asset management |
7 |
12 |
26 |
|
Banking |
13 |
8 |
14 |
|
|
365 |
196 |
390 |
|
Other |
(8) |
2 |
2 |
|
|
1,020 |
829 |
1,682 |
|
Finance costs |
(71) |
(69) |
(119) |
|
Other shareholders' income/(expenses) |
(12) |
(14) |
(31) |
|
Adjusted operating profit before tax* |
937 |
746 |
1,532 |
|
Adjusting items |
(556) |
176 |
315 |
|
EEV profit before tax (net of income tax attributable to policyholder returns) |
381 |
922 |
1,847 |
|
Income tax attributable to shareholders |
(42) |
(164) |
(472) |
|
EEV profit for the financial period after tax from continuing operations |
339 |
758 |
1,375 |
|
EEV profit for the financial period after tax from discontinued operations |
13 |
36 |
57 |
|
EEV profit for the financial period after tax |
352 |
794 |
1,432 |
|
EEV profit for the financial period attributable to: |
|
|
|
|
Equity holders of the parent |
216 |
667 |
1,155 |
|
Minority interests |
|
|
|
|
Continuing ordinary shares |
107 |
94 |
213 |
|
Discontinued ordinary shares |
3 |
9 |
14 |
|
Preferred securities |
26 |
24 |
50 |
|
EEV profit for the financial period after tax |
352 |
794 |
1,432 |
* For long-term business and general insurance businesses, adjusted operating profit is based on a long-term investment return, includes investment returns on life funds' investments in Group equity and debt instruments, and is stated net of income tax attributable to policyholder returns. For the US Asset Management business it includes compensation costs in respect of certain long-term incentive schemes defined as minority interests in accordance with IFRS. For all businesses, adjusted operating profit excludes goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt movements.
Income statement on a European embedded value basis continued
|
Adjusted operating profit after tax attributable to ordinary equity holders |
|
|
£m |
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 Restated |
Year ended |
|
|
Adjusted operating profit before tax |
937 |
746 |
1,532 |
|
Tax on adjusted operating profit |
(243) |
(165) |
(366) |
|
Adjusted operating profit after tax from continuing operations |
694 |
581 |
1,166 |
|
Adjusted operating profit after tax from discontinued operations |
23 |
26 |
61 |
|
Adjusted operating profit after tax |
717 |
607 |
1,227 |
|
Minority interests |
|
|
|
|
Continuing ordinary shares |
(115) |
(106) |
(225) |
|
Discontinued ordinary shares |
(7) |
(8) |
(20) |
|
Preferred securities |
(26) |
(24) |
(50) |
|
Adjusted operating profit after tax attributable to ordinary equity holders |
569 |
469 |
932 |
|
Adjusted operating earnings per share |
|
|
|
|
Based on adjusted operating profit from continuing operations (pence) |
10.5 |
8.3 |
16.5 |
|
Based on adjusted operating profit from discontinued operations (pence) |
0.3 |
0.4 |
0.7 |
|
Adjusted operating earnings per share* (pence) |
10.8 |
8.7 |
17.2 |
|
Basic EEV earnings per share |
|
|
|
|
Based on EEV profit from continuing operations (pence) |
4.1 |
12.4 |
21.5 |
|
Based on EEV profit from discontinued operations (pence) |
0.2 |
0.5 |
0.8 |
|
Basic EEV earnings per ordinary share (pence) |
4.3 |
12.9 |
22.3 |
|
|
|
|
|
|
Adjusted weighted average number of shares - millions |
5,245 |
5,407 |
5,411 |
|
Weighted average number of shares - millions |
5,010 |
5,172 |
5,176 |
Adjusted operating profit of the covered business
|
|
|
|
|
|
Adjusted operating profit for the covered business |
563 |
389 |
758 |
|
South Africa |
224 |
267 |
345 |
|
United States |
(6) |
(54) |
63 |
|
Europe |
345 |
176 |
350 |
|
Tax on adjusted operating profit for the covered business |
165 |
75 |
154 |
|
South Africa |
54 |
75 |
75 |
|
United States |
30 |
(18) |
21 |
|
Europe |
81 |
18 |
58 |
|
Adjusted operating profit after tax for the covered business |
398 |
314 |
604 |
|
South Africa |
170 |
192 |
270 |
|
United States |
(36) |
(36) |
42 |
|
Europe |
264 |
158 |
292 |
|
Tax on adjusted operating profit comprises |
|
|
|
|
Covered business |
165 |
75 |
154 |
|
Other business |
78 |
90 |
212 |
|
Tax on adjusted operating profit |
243 |
165 |
366 |
* Adjusted operating earnings per share is calculated on the same basis as adjusted operating profit, but is stated after tax and minority interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders' funds and Black Economic Empowerment trusts.
Notes to the European embedded value basis supplementary information
For the six months ended 30 June 2008
1 Basis of preparation
This supplementary information has been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European CFO Forum and the additional EEV guidance issued in October 2005. The directors acknowledge their responsibility for the preparation of this supplementary information.
The results for the six months ended 30 June 2008 and the position at that date (other than where stated) have been prepared on the same basis as that used in the 31 December 2007 EEV supplementary statements.
2 Adjustments applied in determining adjusted operating profit
|
Analysis of adjusting items |
|
|
£m |
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 Restated |
Year ended 31 December |
|
|
Income/(expense) |
|
|
|
|
Goodwill impairment and amortisation of non-covered business acquired intangible |
(5) |
5 |
(11) |
|
Profit on disposal of subsidiaries, associated undertakings and strategic |
62 |
7 |
25 |
|
Short-term fluctuations in investment returns (including economic assumption |
(679) |
151 |
206 |
|
Cost of capital methodology and modelling changes |
(1) |
3 |
14 |
|
Material revision to actuarial models |
- |
- |
- |
|
Dividends declared to holders of perpetual preferred callable securities |
22 |
22 |
40 |
|
Closure of unclaimed share trusts |
- |
(12) |
1 |
|
US Asset Management equity plans and minority holders |
5 |
- |
11 |
|
Fair value gains on Group debt instruments |
40 |
- |
29 |
|
Adjusting items |
(556) |
176 |
315 |
3 Reconciliation of movements in Group embedded value
|
|
|
|
£m |
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 |
Year ended 31 December 2007 |
|
|
Group embedded value at beginning of the period |
7,869 |
7,117 |
7,117 |
|
Opening adjustments |
|
(67) |
(67) |
|
Restated Group embedded value at beginning of the period |
7,869 |
7,050 |
7,050 |
|
Change in equity arising in the period |
|
|
|
|
Fair value gains/(losses) |
(2) |
2 |
21 |
|
Net investment hedge |
(5) |
31 |
(13) |
|
Currency translation differences/exchange differences on translating foreign |
(414) |
(212) |
116 |
|
Aggregate tax effects of items taken directly to or transferred from equity |
6 |
2 |
13 |
|
Other movements |
(48) |
60 |
29 |
|
Net income recognised directly into equity |
(463) |
(117) |
166 |
|
Profit for the period |
216 |
667 |
1,155 |
|
Total recognised income and expense for the period |
(247) |
550 |
1,321 |
|
Dividend for the period |
(249) |
(220) |
(373) |
|
Share buy back |
(174) |
- |
(177) |
|
Net issue of ordinary share capital by the Company |
4 |
- |
3 |
|
Exercise of share options |
3 |
3 |
9 |
|
Fair value equity settled share options |
17 |
18 |
36 |
|
Group embedded value at end of the period |
7,223 |
7,401 |
7,869 |
4 Components of Group embedded value
|
|
|
|
£m |
|
At 30 June 2008 |
At 30 June 2007 |
At 31 December 2007 |
|
|
Adjusted net worth attributable to ordinary equity holders of the parent |
3,106 |
3,106 |
3,431 |
|
Equity |
7,802 |
7,359 |
7,961 |
|
Adjustment to include long-term business on a statutory solvency basis: |
|
|
|
|
South Africa |
141 |
142 |
147 |
|
United States |
(527) |
(665) |
(621) |
|
Europe |
(2,584) |
(2,411) |
(2,581) |
|
Adjustment for market value of life funds' investments in Group equity and debt instruments held in life funds |
230 |
491 |
428 |
|
Adjustment to remove perpetual preferred callable securities and accrued dividends |
(688) |
(688) |
(688) |
|
Adjustment to exclude acquisition goodwill from the covered business: |
|
|
|
|
United States |
(57) |
(56) |
(60) |
|
Europe |
(1,211) |
(1,066) |
(1,155) |
|
Value of in-force business |
4,117 |
4,295 |
4,438 |
|
Value of in-force business before items listed below |
4,565 |
4,712 |
4,872 |
|
Additional time-value of financial options and guarantees |
(50) |
(49) |
(50) |
|
Cost of required capital |
(392) |
(342) |
(378) |
|
Minority interest in value of in-force |
(6) |
(26) |
(6) |
|
|
|
|
|
|
Group embedded value |
7,223 |
7,401 |
7,869 |
|
Group embedded value per share (pence) |
136.9 |
134.5 |
145.6 |
|
Return on Group embedded value (ROEV) per annum |
14.0% |
14.5% |
13.2% |
|
Number of shares in issue - millions |
5,275 |
5,505 |
5,405 |
The adjustments to include long-term business on a statutory solvency basis reflect the difference between the net worth of each business on the statutory basis (as required by the local regulator) and their portion of the Group's consolidated equity shareholders' funds. In South Africa, these values exclude items that are eliminated or shown separately on consolidation (such as Nedbank, Mutual & Federal and inter company loans). For some European territories this adjustment excludes the write-off of deferred acquisition costs, which remain part of adjusted net worth for EEV purposes.
The ROEV is calculated as the adjusted operating profit after tax and minority interests of £569 million (six months ended 30 June 2007: £469 million, year ended 31 December 2007: £932 million) divided by the opening group embedded value. The operating assumption changes of £33 million (six months ended 30 June 2007: £84 million) are not annualised.
The impact of marking all debt to market value is an increase of £241 million, i.e. 4.6p per share (six months ended 30 June 2007: £122 million, i.e. 2.2p per share, year ended 31 December 2007: £120 million, i.e. 2.2p per share).
5. Components of adjusted Group embedded value
|
|
|
|
£m |
|
At 30 June 2008 |
At 30 June 2007 |
At 31 December 2007 |
|
|
Pro forma adjustments to bring Group investments to market value |
|
|
|
|
Group embedded value |
7,223 |
7,401 |
7,869 |
|
Adjustment to bring listed subsidiaries to market value |
111 |
1,163 |
1,163 |
|
South Africa banking business |
25 |
951 |
957 |
|
South Africa general insurance business |
86 |
212 |
206 |
|
Adjustment for present value of Black Economic Empowerment scheme deferred consideration |
135 |
179 |
179 |
|
Adjustment for value of own shares in ESOP schemes* |
83 |
153 |
158 |
|
Adjusted Group embedded value |
7,552 |
8,896 |
9,369 |
|
Adjusted Group embedded value per share (pence) |
143.2 |
161.6 |
173.3 |
|
Number of shares in issue - millions |
5,275 |
5,505 |
5,405 |
* Includes adjustment for value of excess own shares in employee share scheme trusts.
6 Reconciliation of Group embedded value of the covered business to the adjusted Group embedded value
|
|
|
|
£m |
|
At 30 June 2008 |
At 30 June 2007 |
At 31 December 2007 |
|
|
Embedded value of the covered business |
6,153 |
6,820 |
6,861 |
|
Adjusted net worth* |
2,036 |
2,525 |
2,423 |
|
Value of in-force business** |
4,117 |
4,295 |
4,438 |
|
Adjusted net worth of the asset management business |
1,705 |
1,556 |
1,637 |
|
South Africa |
233 |
205 |
232 |
|
United States |
1,297 |
1,209 |
1,245 |
|
Europe |
175 |
142 |
160 |
|
Value of the banking business |
1,666 |
2,443 |
2,716 |
|
South Africa (market value) |
1,435 |
2,178 |
2,411 |
|
Europe (adjusted net worth) |
231 |
265 |
305 |
|
Market value of the general insurance business |
|
|
|
|
South Africa |
268 |
420 |
405 |
|
Net other business |
14 |
(78) |
(35) |
|
Adjustment for present value of Black Economic Empowerment scheme deferred consideration |
135 |
179 |
179 |
|
Adjustment for value of own shares in ESOP schemes |
83 |
153 |
158 |
|
Perpetual preferred securities (US$ denominated) |
(458) |
(458) |
(458) |
|
Perpetual preferred callable securities |
(688) |
(688) |
(688) |
|
GBP denominated |
(350) |
(350) |
(350) |
|
Euro denominated |
(338) |
(338) |
(338) |
|
Debt |
(1,326) |
(1,451) |
(1,406) |
|
Rand denominated |
(193) |
(212) |
(221) |
|
USD denominated |
(482) |
(496) |
(408) |
|
GBP denominated |
(323) |
(325) |
(272) |
|
SEK denominated |
(328) |
(418) |
(505) |
|
|
|
|
|
|
Adjusted Group embedded value |
7,552 |
8,896 |
9,369 |
* Adjusted net worth is after the elimination of inter company loans.
** Net of minority interests.
7 Components of embedded value of the covered business
|
|
|
|
£m |
|
At 30 June 2008 |
At 30 June 2007 |
At |
|
|
Embedded value of the covered business |
6,153 |
6,820 |
6,861 |
|
Adjusted net worth |
2,036 |
2,525 |
2,423 |
|
Value of in-force business |
4,117 |
4,295 |
4,438 |
|
South Africa |
|
|
|
|
Adjusted net worth |
1,203 |
1,600 |
1,470 |
|
Required capital |
1,040 |
1,131 |
1,159 |
|
Free surplus |
163 |
469 |
311 |
|
Value of in-force business |
988 |
1,178 |
1,207 |
|
Value of in-force business before items listed below |
1,168 |
1,350 |
1,392 |
|
Additional time-value of financial options and guarantees |
- |
- |
- |
|
Cost of required capital |
(174) |
(167) |
(179) |
|
Minority interest in value of in-force |
(6) |
(5) |
(6) |
|
United States |
|
|
|
|
Adjusted net worth |
340 |
442 |
505 |
|
Required capital |
434 |
429 |
424 |
|
Free surplus * |
(94) |
13 |
81 |
|
Value of in-force business |
451 |
584 |
564 |
|
Value of in-force business before items listed below |
613 |
710 |
703 |
|
Additional time-value of financial options and guarantees |
(48) |
(48) |
(48) |
|
Cost of required capital |
(114) |
(78) |
(91) |
|
Europe |
|
|
|
|
Adjusted net worth |
493 |
483 |
448 |
|
Required capital |
342 |
330 |
324 |
|
Free surplus |
151 |
153 |
124 |
|
Value of in-force business |
2,678 |
2,533 |
2,667 |
|
Value of in-force business before items listed below |
2,784 |
2,653 |
2,777 |
|
Additional time-value of financial options and guarantees |
(2) |
(1) |
(2) |
|
Cost of required capital |
(104) |
(98) |
(108) |
|
Minority interest in value of in-force |
- |
(21) |
- |
|
|
|
|
|
* Capital of £45 million was transferred to Old Mutual Bermuda on 31 July 2008. A further amount of £105 million was transferred on 5 August 2008.
Adjusted net worth of the covered business excludes acquired intangibles and goodwill.
8 Analysis of covered business embedded value results (after tax)
|
|
|
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
||||
|
|
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
Embedded value of the covered business at beginning of the period |
1,907 |
516 |
2,423 |
4,438 |
6,861 |
|
Opening fair value adjustments |
- |
- |
- |
- |
- |
|
|
1,907 |
516 |
2,423 |
4,438 |
6,861 |
|
New business contribution |
100 |
(299) |
(199) |
311 |
112 |
|
Expected return on existing business return on value of in-force |
- |
- |
- |
189 |
189 |
|
Expected return on existing business transfer to net worth |
- |
385 |
385 |
(385) |
- |
|
Expected release of required capital transfer to free surplus |
(108) |
108 |
- |
- |
- |
|
Experience variances |
24 |
(72) |
(48) |
33 |
(15) |
|
Operating assumption changes |
- |
(47) |
(47) |
80 |
33 |
|
Recalibration of risk-margins |
- |
- |
- |
- |
- |
|
Expected return on adjusted net worth |
42 |
37 |
79 |
- |
79 |
|
Adjusted operating profit after tax |
58 |
112 |
170 |
228 |
398 |
|
Investment return variances on in-force business |
(17) |
23 |
6 |
(387) |
(381) |
|
Investment return variances on adjusted net worth |
- |
50 |
50 |
- |
50 |
|
Effect of economic assumption changes |
- |
(17) |
(17) |
(119) |
(136) |
|
Methodology changes impacting cost of required capital |
2 |
(2) |
- |
(1) |
(1) |
|
Profit after tax |
43 |
166 |
209 |
(279) |
(70) |
|
Exchange rate movements |
(134) |
(37) |
(171) |
(41) |
(212) |
|
Change in minority interest |
- |
- |
- |
(1) |
(1) |
|
Net transfers from covered business |
- |
(425) |
(425) |
- |
(425) |
|
Embedded value of the covered business at end of the period |
1,816 |
220 |
2,036 |
4,117 |
6,153 |
|
|
|
|
|
|
|
|
£m |
|
6 months ended 30 June 2007 * |
Year ended |
||||||
|
Adjusted net worth |
Value of in-force |
Total |
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
2,281 |
4,172 |
6,453 |
|
|
2,281 |
4,172 |
6,453 |
|
(181) |
114 |
(67) |
|
|
(181) |
114 |
(67) |
|
2,100 |
4,286 |
6,386 |
1,903 |
197 |
2,100 |
4,286 |
6,386 |
|
(203) |
327 |
124 |
193 |
(601) |
(408) |
674 |
266 |
|
- |
178 |
178 |
- |
- |
- |
351 |
351 |
|
369 |
(369) |
- |
- |
685 |
685 |
(685) |
- |
|
- |
- |
- |
(226) |
226 |
- |
- |
- |
|
(24) |
48 |
24 |
36 |
60 |
96 |
(111) |
(15) |
|
13 |
(97) |
(84) |
4 |
(20) |
(16) |
(102) |
(118) |
|
- |
- |
- |
- |
- |
- |
(15) |
(15) |
|
72 |
- |
72 |
116 |
19 |
135 |
- |
135 |
|
227 |
87 |
314 |
123 |
369 |
492 |
112 |
604 |
|
6 |
94 |
100 |
2 |
25 |
27 |
(1) |
26 |
|
148 |
- |
148 |
(27) |
229 |
202 |
- |
202 |
|
(5) |
(97) |
(102) |
15 |
(17) |
(2) |
(80) |
(82) |
|
- |
3 |
3 |
(117) |
117 |
- |
13 |
13 |
|
376 |
87 |
463 |
(4) |
723 |
719 |
44 |
763 |
|
(59) |
(81) |
(140) |
10 |
5 |
15 |
85 |
100 |
|
(2) |
3 |
1 |
(2) |
3 |
1 |
23 |
24 |
|
110 |
- |
110 |
- |
(412) |
(412) |
- |
(412) |
|
2,525 |
4,295 |
6,820 |
1,907 |
516 |
2,423 |
4,438 |
6,861 |
* No reconciliation of the Required capital and Free surplus for the six months ended 30 June 2007 is available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
South Africa covered business
|
|
|
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
||||
|
|
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
Embedded value of the covered business at beginning of the period |
1,159 |
311 |
1,470 |
1,207 |
2,677 |
|
New business contribution |
33 |
(44) |
(11) |
36 |
25 |
|
Expected return on existing business return on value of in-force |
- |
- |
- |
67 |
67 |
|
Expected return on existing business transfer to net worth |
- |
88 |
88 |
(88) |
- |
|
Expected release of required capital transfer to free surplus |
(54) |
54 |
- |
- |
- |
|
Experience variances |
- |
11 |
11 |
(5) |
6 |
|
Operating assumption changes |
- |
2 |
2 |
13 |
15 |
|
Recalibration of risk-margins |
- |
- |
- |
- |
- |
|
Expected return on adjusted net worth |
44 |
13 |
57 |
- |
57 |
|
Adjusted operating profit after tax |
23 |
124 |
147 |
23 |
170 |
|
Investment return variances on in-force business |
2 |
(4) |
(2) |
(57) |
(59) |
|
Investment return variances on adjusted net worth |
- |
133 |
133 |
- |
133 |
|
Effect of economic assumption changes |
- |
(15) |
(15) |
(33) |
(48) |
|
Methodology changes impacting cost of required capital |
3 |
(3) |
- |
(1) |
(1) |
|
Profit after tax |
28 |
235 |
263 |
(68) |
195 |
|
Exchange rate movements |
(147) |
(36) |
(183) |
(150) |
(333) |
|
Change in minority interest |
- |
- |
- |
(1) |
(1) |
|
Net transfers from covered business |
- |
(347) |
(347) |
- |
(347) |
|
Embedded value of the covered business at end of the period |
1,040 |
163 |
1,203 |
988 |
2,191 |
|
Return on embedded value (ROEV)% |
|
|
|
|
13.5% |
Experience variances were positively impacted by higher risk profits and one-off tax profits offset by switches to lower margin absolute growth portfolios in the Corporate segment and adverse retention in the retail businesses as a result of the tougher economic environment.
The main operating assumption changes are a reduction in the corporate tax rate from 29 per cent to 28 per cent slightly offset by some small corrections in valuation methodology.
The net transfers from covered business for the six months ended 30 June 2008 mainly include special and normal dividend payments (net of dividends received from Nedbank and Mutual & Federal), tax on the special dividend, the purchase of additional shares in Nedbank, as well as head office expenses.
The embedded value for South Africa is after the adjustment for market value of life funds' investments in Group equity and debt instruments.
Return on embedded value is the annualised adjusted operating profit after tax divided by opening embedded value in local currency. The operating assumption changes are not annualized.
|
|
|
|
|
|
|
|
£m |
|
6 months ended 30 June 2007 * |
Year ended |
||||||
|
Adjusted net worth |
Value of in-force |
Total |
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
1,408 |
1,160 |
2,568 |
1,249 |
159 |
1,408 |
1,160 |
2,568 |
|
(9) |
36 |
27 |
67 |
(78) |
(11) |
72 |
61 |
|
- |
65 |
65 |
- |
- |
- |
133 |
133 |
|
87 |
(87) |
- |
- |
172 |
172 |
(172) |
- |
|
- |
- |
- |
(93) |
93 |
- |
- |
- |
|
10 |
21 |
31 |
(33) |
33 |
- |
(15) |
(15) |
|
(4) |
18 |
14 |
- |
(22) |
(22) |
1 |
(21) |
|
- |
- |
- |
- |
- |
- |
- |
- |
|
55 |
- |
55 |
99 |
13 |
112 |
- |
112 |
|
139 |
53 |
192 |
40 |
211 |
251 |
19 |
270 |
|
9 |
31 |
40 |
(3) |
22 |
19 |
41 |
60 |
|
145 |
- |
145 |
- |
225 |
225 |
- |
225 |
|
(4) |
(32) |
(36) |
(13) |
11 |
(2) |
(39) |
(41) |
|
- |
7 |
7 |
(117) |
117 |
- |
19 |
19 |
|
289 |
59 |
348 |
(93) |
586 |
493 |
40 |
533 |
|
(50) |
(41) |
(91) |
3 |
6 |
9 |
8 |
17 |
|
(2) |
. - |
(2) |
- |
(3) |
(3) |
(1) |
(4) |
|
(45) |
- |
(45) |
- |
(437) |
(437) |
- |
(437) |
|
1,600 |
1,178 |
2,778 |
1,159 |
311 |
1,470 |
1,207 |
2,677 |
|
|
|
14.8% |
|
|
|
|
10.8% |
* No reconciliation of the Required capital and Free surplus for the six months ended 30 June 2007 is available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
United States covered business
|
|
|
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
||||
|
|
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
Embedded value of the covered business at beginning of the period |
424 |
81 |
505 |
564 |
1,069 |
|
New business contribution |
57 |
(64) |
(7) |
33 |
26 |
|
Expected return on existing business return on value of in-force |
- |
- |
- |
27 |
27 |
|
Expected return on existing business transfer to net worth |
- |
49 |
49 |
(49) |
- |
|
Expected release of required capital transfer to free surplus |
(52) |
52 |
- |
- |
- |
|
Experience variances |
- |
(85) |
(85) |
48 |
(37) |
|
Operating assumption changes |
- |
(50) |
(50) |
(9) |
(59) |
|
Recalibration of risk-margins |
- |
- |
- |
- |
- |
|
Expected return on adjusted net worth |
- |
7 |
7 |
- |
7 |
|
Adjusted operating profit after tax |
5 |
(91) |
(86) |
50 |
(36) |
|
Investment return variances on in-force business |
- |
- |
- |
(96) |
(96) |
|
Investment return variances on adjusted net worth |
- |
(81) |
(81) |
- |
(81) |
|
Effect of economic assumption changes |
- |
- |
- |
(64) |
(64) |
|
Material revision to actuarial models |
- |
- |
- |
- |
- |
|
Methodology changes impacting cost of required capital |
- |
- |
- |
- |
- |
|
Profit after tax |
5 |
(172) |
(167) |
(110) |
(277) |
|
Exchange rate movements |
5 |
(4) |
1 |
(3) |
(2) |
|
Net transfers to covered business |
- |
1 |
1 |
- |
1 |
|
Embedded value of the covered business at end of the period |
434 |
(94) |
340 |
451 |
791 |
|
Return on embedded value (ROEV)% |
|
|
|
|
(1.3%) |
The segment results of United States include Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States life companies, and Old Mutual (Bermuda) Limited.
Capital of £45 million was transferred to Old Mutual Bermuda on 31 July 2008. A further amount of £105 million was transferred on 5 August 2008.
The experience variances were largely driven by a one-off tax loss that arose in Old Mutual (Bermuda) Limited.
The main operating assumption changes related to an additional provision made in respect of investment volatility on guaranteed products. Several changes were made to the economic assumptions due to the current adverse investment environment: the credit default assumption was increased by 4 basis points, and the risk discount rate was increased from 7.4 per cent to 8.4 per cent to allow for an additional risk margin.
Return on embedded value is the annualised adjusted operating profit after tax divided by opening embedded value in local currency. The operating assumption changes are not annualised.
|
|
|
|
|
|
|
|
£m |
|
6 months ended 30 June 2007 * |
Year ended |
||||||
|
Adjusted net worth |
Value of in-force |
Total |
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
454 |
690 |
1,144 |
390 |
64 |
454 |
690 |
1,144 |
|
(28) |
56 |
28 |
108 |
(193) |
(85) |
157 |
72 |
|
- |
32 |
32 |
- |
- |
- |
61 |
61 |
|
65 |
(65) |
- |
- |
98 |
98 |
(98) |
- |
|
- |
- |
- |
(120) |
120 |
- |
- |
- |
|
(53) |
33 |
(20) |
46 |
10 |
56 |
(81) |
(25) |
|
17 |
(98) |
(81) |
23 |
4 |
27 |
(104) |
(77) |
|
- |
- |
- |
- |
- |
- |
- |
- |
|
5 |
- |
5 |
9 |
2 |
11 |
- |
11 |
|
6 |
(42) |
(36) |
66 |
41 |
107 |
(65) |
42 |
|
- |
(9) |
(9) |
- |
- |
- |
(36) |
(36) |
|
(6) |
- |
(6) |
(27) |
(6) |
(33) |
- |
(33) |
|
- |
(35) |
(35) |
- |
- |
- |
(11) |
(11) |
|
- |
- |
- |
- |
- |
- |
- |
- |
|
- |
(4) |
(4) |
- |
- |
- |
(4) |
(4) |
|
- |
(90) |
(90) |
39 |
35 |
74 |
(116) |
(42) |
|
(11) |
(16) |
(27) |
(5) |
- |
(5) |
(10) |
(15) |
|
(1) |
- |
(1) |
- |
(18) |
(18) |
- |
(18) |
|
442 |
584 |
1,026 |
424 |
81 |
505 |
564 |
1,069 |
|
|
|
0.9% |
|
|
|
|
3.8% |
* No reconciliation of the Required capital and Free surplus for the six months ended 30 June 2007 is available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
8 Analysis of covered business embedded value results (after tax) continued
Europe covered business
|
|
|
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
||||
|
|
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
Embedded value of the covered business at beginning of the period |
324 |
124 |
448 |
2,667 |
3,115 |
|
Opening fair value adjustments for Skandia |
- |
- |
- |
- |
- |
|
|
324 |
124 |
448 |
2,667 |
3,115 |
|
New business contribution |
10 |
(191) |
(181) |
242 |
61 |
|
Expected return on existing business return on value of in-force |
- |
- |
- |
95 |
95 |
|
Expected return on existing business transfer to net worth |
- |
248 |
248 |
(248) |
- |
|
Expected release of required capital transfer to free surplus |
(2) |
2 |
- |
- |
- |
|
Experience variances |
24 |
2 |
26 |
(10) |
16 |
|
Operating assumption changes |
- |
1 |
1 |
76 |
77 |
|
Recalibration of risk-margins |
- |
- |
- |
- |
- |
|
Expected return on adjusted net worth |
(2) |
17 |
15 |
- |
15 |
|
Adjusted operating profit after tax |
30 |
79 |
109 |
155 |
264 |
|
Investment return variances on in-force business |
(19) |
27 |
8 |
(234) |
(226) |
|
Investment return variances on adjusted net worth |
- |
(2) |
(2) |
- |
(2) |
|
Effect of economic assumption changes |
- |
(2) |
(2) |
(22) |
(24) |
|
Methodology changes impacting cost of required capital |
(1) |
1 |
- |
- |
- |
|
Profit after tax |
10 |
103 |
113 |
(101) |
12 |
|
Exchange rate movements |
8 |
3 |
11 |
112 |
123 |
|
Minority interest |
- |
- |
- |
- |
- |
|
Net transfers to covered business |
- |
(79) |
(79) |
- |
(79) |
|
Embedded value of the covered business at end of the period |
342 |
151 |
493 |
2,678 |
3,171 |
|
Return on embedded value (ROEV)% |
|
|
|
|
14.5% |
The segmental results of Europe include the Skandia Life companies in the United Kingdom, Nordic region, Europe and Latin America.
The experience variances mainly arose from a higher level of fee income than that assumed and a contribution from profits not valued, which was partially offset by negative persistency variances.
The main operating assumption changes are the introduction of modelling of currency spread transactional revenue, recognition of trail commission and changes to the recognition of fee income. The transfers from covered business include internal financing arrangements and allocation of head office expenses.
Return on embedded value is the annualised adjusted operating profit after tax divided by opening embedded value. The operating assumption changes are not annualised.
|
|
|
|
|
|
|
|
£m |
|
6 months ended 30 June 2007 * |
Year ended |
||||||
|
Adjusted net worth |
Value of in-force |
Total |
Required capital |
Free surplus |
Adjusted net worth |
Value of in-force |
Total |
|
419 |
2,321 |
2,740 |
|
|
419 |
2,321 |
2,740 |
|
(181) |
114 |
(67) |
|
|
(181) |
114 |
(67) |
|
238 |
2,435 |
2,673 |
264 |
(26) |
238 |
2,435 |
2,673 |
|
(166) |
235 |
69 |
18 |
(330) |
(312) |
445 |
133 |
|
- |
81 |
81 |
- |
- |
- |
157 |
157 |
|
217 |
(217) |
- |
- |
415 |
415 |
(415) |
- |
|
- |
- |
- |
(13) |
13 |
- |
- |
- |
|
19 |
(6) |
13 |
23 |
17 |
40 |
(15) |
25 |
|
- |
(17) |
(17) |
(19) |
(2) |
(21) |
1 |
(20) |
|
- |
- |
- |
- |
- |
- |
(15) |
(15) |
|
12 |
- |
12 |
8 |
4 |
12 |
- |
12 |
|
82 |
76 |
158 |
17 |
117 |
134 |
158 |
292 |
|
(3) |
72 |
69 |
5 |
3 |
8 |
(6) |
2 |
|
9 |
- |
9 |
- |
10 |
10 |
- |
10 |
|
(1) |
(30) |
(31) |
29 |
(29) |
_ |
(30) |
(30) |
|
- |
- |
- |
- |
- |
- |
(1) |
(1) |
|
87 |
118 |
205 |
51 |
101 |
152 |
121 |
273 |
|
2 |
(23) |
(21) |
12 |
(1) |
11 |
87 |
98 |
|
- |
3 |
3 |
(3) |
7 |
4 |
24 |
28 |
|
156 |
- |
156 |
- |
43 |
43 |
- |
43 |
|
483 |
2,533 |
3,016 |
324 |
124 |
448 |
2,667 |
3,115 |
|
|
|
12.3% |
|
|
|
|
10.9% |
* No reconciliation of the Required capital and Free surplus for the six months ended 30 June 2007 is available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
9 Value of new business (after tax)
The tables below set out the geographic analysis of the value of new business (VNB) after tax. Annual premium equivalent (APE) is calculated as recurring premiums plus 10 per cent of single premiums. New business profitability is measured by both the ratio of the VNB to the APE as well as to the present value of new business premiums (PVNBP), and shown under APE margin and PVNBP margin below. PVNBP is defined as the present value of regular premiums plus single premiums for any given period and is calculated on the same assumptions as for the value of new business contribution.
|
|
|
|
£m |
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 |
Year ended |
|
|
Recurring premiums |
|
|
|
|
South Africa |
109 |
113 |
237 |
|
United States |
18 |
22 |
39 |
|
Europe |
248 |
199 |
415 |
|
|
375 |
334 |
691 |
|
Single premiums |
|
|
|
|
South Africa |
592 |
466 |
1,115 |
|
United States |
1,575 |
1,238 |
2,962 |
|
Europe |
2,808 |
3,548 |
6,607 |
|
|
4,975 |
5,252 |
10,684 |
|
APE |
|
|
|
|
South Africa |
168 |
159 |
348 |
|
United States |
175 |
146 |
335 |
|
Europe |
529 |
554 |
1,077 |
|
|
872 |
859 |
1,760 |
|
PVNBP |
|
|
|
|
South Africa |
1,150 |
1,039 |
2,323 |
|
United States |
1,661 |
1,351 |
3,150 |
|
Europe |
3,857 |
4,453 |
8,405 |
|
|
6,668 |
6,843 |
13,878 |
|
VNB |
|
|
|
|
South Africa |
25 |
27 |
61 |
|
United States |
26 |
28 |
72 |
|
Europe |
61 |
69 |
133 |
|
|
112 |
124 |
266 |
|
APE margin |
|
|
|
|
South Africa |
15% |
17% |
18% |
|
United States |
15% |
19% |
21% |
|
Europe |
12% |
13% |
12% |
|
|
13% |
14% |
15% |
|
PVNBP margin |
|
|
|
|
South Africa |
2.2% |
2.6% |
2.7% |
|
United States |
1.6% |
2.1% |
2.3% |
|
Europe |
1.6% |
1.6% |
1.6% |
|
|
1.7% |
1.8% |
1.9% |
9 Value of new business (after tax) continued
The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the South Africa long-term business, which amounted to £145 million (six months ended 30 June 2007: £173 million, year ended 31 December 2007: £435 million) for the six months ended 30 June 2008, is excluded as the profits on this business arise in the asset management business. The value of new business 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 institutional investment platform pensions business written in the United Kingdom, the gross premium of which amounted to £155 million (six months ended 30 June 2007: £71 million, year ended 31 December 2007: £165 million) for the six months ended 30 June 2008, is excluded as this is more appropriately classified as mutual fund business.
10 Product analysis of new covered business premiums
|
|
|
|
|
|
|
£m
|
||||
|
|
6 months ended
30 June
2008
|
6 months ended
30 June
2007
|
Year ended
31 December 2007
|
|||||||
|
South Africa product analysis
|
Recurring
|
Single
|
Recurring
|
Single
|
Recurring
|
Single
|
||||
|
Total business
|
109
|
592
|
113
|
466
|
237
|
1,115
|
||||
|
Individual business
|
96
|
332
|
99
|
296
|
208
|
641
|
||||
|
Savings
|
24
|
253
|
25
|
220
|
50
|
494
|
||||
|
Protection
|
33
|
2
|
37
|
3
|
77
|
5
|
||||
|
Annuity
|
–
|
76
|
–
|
72
|
–
|
141
|
||||
|
Retail mass market
|
39
|
1
|
37
|
1
|
81
|
1
|
||||
|
Group business
|
13
|
260
|
14
|
170
|
29
|
474
|
||||
|
Savings
|
3
|
206
|
1
|
130
|
5
|
394
|
||||
|
Protection
|
5
|
1
|
5
|
1
|
11
|
1
|
||||
|
Annuity
|
–
|
53
|
–
|
39
|
–
|
79
|
||||
|
Healthcare
|
5
|
–
|
8
|
–
|
13
|
–
|
||||
|
South Africa contract analysis
|
|
|
|
|
|
|
||||
|
Total business *
|
109
|
592
|
113
|
466
|
237
|
1,115
|
||||
|
Individual business
|
96
|
332
|
99
|
296
|
208
|
641
|
||||
|
Insurance contracts
|
56
|
76
|
57
|
67
|
123
|
132
|
||||
|
Investment contracts with discretionary participating features
|
21
|
25
|
22
|
16
|
44
|
35
|
||||
|
Other investment contracts
|
19
|
231
|
20
|
213
|
41
|
474
|
||||
|
Group business
|
13
|
260
|
14
|
170
|
29
|
474
|
||||
|
Insurance contracts
|
10
|
48
|
13
|
40
|
24
|
80
|
||||
|
Investment contracts with discretionary participating features
|
3
|
82
|
1
|
50
|
5
|
160
|
||||
|
Other investment contracts
|
–
|
130
|
–
|
80
|
–
|
234
|
||||
|
United States product analysis
|
|
|
|
|
|
|
||||
|
Total business
|
18
|
1,575
|
22
|
1,238
|
39
|
2,962
|
||||
|
Fixed deferred annuity
|
–
|
94
|
–
|
20
|
–
|
97
|
||||
|
Fixed indexed annuity
|
–
|
342
|
–
|
535
|
–
|
960
|
||||
|
Variable annuity
|
–
|
1,066
|
–
|
620
|
–
|
1,757
|
||||
|
Life
|
18
|
8
|
22
|
–
|
39
|
18
|
||||
|
Immediate annuity
|
–
|
65
|
–
|
63
|
–
|
130
|
||||
|
United States contract analysis
|
|
|
|
|
|
|
||||
|
Total business *
|
18
|
1,575
|
22
|
1,238
|
39
|
2,962
|
||||
|
Insurance contracts
|
18
|
1,447
|
22
|
1,155
|
39
|
2,790
|
||||
|
Other investment contracts
|
–
|
128
|
–
|
83
|
–
|
172
|
||||
|
|
|
|
|
|
|
|
||||
10 Product analysis of new covered business premiums continued
|
|
|
|
|
|
£m |
|
|
|
6 months ended 30 June 2008 |
6 months ended 30 June 2007 |
Year ended 31 December 2007 |
|||
|
|
||||||
|
Europe product analysis |
Recurring |
Single |
Recurring |
Single |
Recurring |
Single |
|
Total business |
248 |
2,808 |
198 |
3,548 |
415 |
6,607 |
|
Unit-linked assurance |
248 |
2,807 |
197 |
3,546 |
413 |
6,601 |
|
Life |
- |
1 |
1 |
2 |
2 |
6 |
|
|
|
|
|
|
|
|
* Within the preceding contract analysis the classification of insurance contracts, investment contracts with discretionary participating features and other investment contracts is in accordance with the primary financial statements definitions. All categories of business are subject to EEV accounting.
11 Drivers of new business value
|
Total covered business |
|
|
|
£m |
|
|
6 months ended 30 June 2008 |
|
Year ended |
|||
|
APE |
PVNBP |
APE |
PVNBP |
||
|
Margin at the end of the comparative period |
14.0 |
1.8 |
16.2 |
2.1 |
|
|
Change in volume |
+0.8 |
+0.2 |
(0.7) |
(0.1) |
|
|
Change in product mix |
(0.8) |
(0.1) |
(0.4) |
(0.1) |
|
|
Change in country mix |
(0.1) |
- |
+0.6 |
+0.1 |
|
|
Change in operating assumptions |
(0.8) |
(0.1) |
(0.4) |
- |
|
|
Change in economic assumptions |
(0.6) |
(0.1) |
+0.2 |
- |
|
|
Exchange rate movements |
+0.5 |
- |
(0.3) |
(0.1) |
|
|
Margin at the end of the period |
13.0 |
1.7 |
15.2 |
1.9 |
|
|
|
|
|
|
|
|
|
|
APE |
PVNBP |
APE |
PVNBP |
|
South Africa covered business |
||||
|
Margin at the end of the comparative period |
16.6 |
2.6 |
18.7 |
2.8 |
|
Change in volume |
+0.7 |
- |
+0.6 |
+0.2 |
|
Change in product mix |
(0.4) |
(0.1) |
+0.4 |
- |
|
Change in operating assumptions |
(1.2) |
(0.2) |
(2.1) |
(0.3) |
|
Change in economic assumptions |
(0.7) |
(0.1) |
- |
- |
|
Margin at the end of the period |
15.0 |
2.2 |
17.6 |
2.7 |
The APE and PVNBP per cent margin changes are calculated in local currency.
|
|
APE |
PVNBP |
APE |
PVNBP |
|
United States covered business |
||||
|
Margin at the end of the comparative period |
19.1 |
2.1 |
18.3 |
2.0 |
|
Change in volume |
+0.1 |
(0.1) |
- |
(0.2) |
|
Change in product mix |
+0.2 |
+0.1 |
+3.1 |
+0.5 |
|
Change in operating assumptions |
(4.3) |
(0.5) |
- |
- |
|
Margin at the end of the period |
15.1 |
1.6 |
21.4 |
2.3 |
The APE and PVNBP per cent margin changes are calculated in local currency.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six months ended 30 June 2007 are available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
11 Drivers of new business value continued
|
|
|
|
|
£m |
||
|
|
6 months ended 30 June 2008 |
|
Year ended |
|||
|
Europe covered business |
APE |
PVNBP |
|
|
||
|
Margin at the end of the comparative period |
12.6 |
1.6 |
15.5 |
1.8 |
||
|
Opening adjustment |
- |
- |
(0.6) |
(0.1) |
||
|
Adjusted prior year |
12.6 |
1.6 |
14.9 |
1.7 |
||
|
Change in volume |
- |
+0.2 |
(2.5) |
(0.2) |
||
|
Change in product mix |
(1.2) |
(0.2) |
(1.7) |
(0.2) |
||
|
Change in country mix |
(0.2) |
- |
+0.9 |
+0.1 |
||
|
Change in operating assumptions |
+0.5 |
+0.1 |
+0.1 |
+0.1 |
||
|
Change in economic assumptions |
(0.8) |
(0.1) |
+0.3 |
- |
||
|
Exchange rate movements |
+0.8 |
- |
+0.3 |
+0.1 |
||
|
Margin at the end of the period |
11.7 |
1.6 |
12.3 |
1.6 |
||
The 2007 opening new business margins in Nordic have been restated to incorporate the impact of the Liv-Link agreement negotiated in 2007.
APE and PVNBP per cent margin changes are calculated in Sterling.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six months ended 30 June 2007 are available as the enhanced disclosure was introduced for the first time as at 31 December 2007.
12 Assumptions
Introduction
The principal assumptions used in the calculation of the value of in-force business and VNB are set out below. The assumptions are best estimate and actively reviewed.
> Adjusted operating profit is calculated on closing operating assumptions and opening economic assumptions.
> The effect of increases in premiums over the period for policies in-force 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.
> 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.
> The value of new business has been based on opening economic assumptions and closing operating assumptions accumulated to the period end.
> The sensitivity of the value of in-force and value of new business to changes in the risk discount rate is set out in note 13.
Economic assumptions
The pre-tax investment and economic assumptions are updated every six months to reflect the economic conditions prevailing on the valuation date. Risk-free rates have a duration similar to that of the underlying liabilities. Equity and property risk premiums incorporate both historical relationships and the directors' view of future projected returns in each geography.
> The risk-margins reflect the distinctive risks of the products in the respective business units. These risk-margins do not include the risk associated with financial options and guarantees. The risk-margins were recalibrated as at 31 December 2007. The risk-margin for the United States business was increased by 100 basis points as at 30 June 2008 to allow for the volatility inherent in the business.
> Where applicable, rates of future bonuses or crediting rates 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 Africa business projected taxation is based on the current tax basis that applies in each country. Full allowance has been made for secondary tax on companies (STC) at a rate of 10 per cent that may be payable in South Africa. Full account has been taken of the impact of capital gains tax. It has been assumed that 10 per cent of the equity portfolio (excluding Group subsidiaries) will be traded each year. The effective tax rate was 33 per cent for South Africa and 0 per cent for Namibia, except for the investment return on capital for which the attributed tax was derived from the primary accounts.
> 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. The effective rate was 33 per cent.
> For the Europe businesses, projected tax is based on the current tax rate that applies in each country. In Sweden, no allowance has been made for additional tax on dividends remitted to the UK. Tax has however been allowed for on dividends to be remitted to the UK from the Isle of Man. The effective tax rates for Nordic, United Kingdom and the balance of Europe were a range of 2 per cent to 28 per cent, 12 per cent to 28 per cent and a range of 19 per cent to 49 per cent.
12 Assumptions continued
Economic assumptions continued
|
South Africa |
At 30 June 2008 |
At 30 June 2007 |
At 31 December 2007 |
|
|
Risk-free rate (10 year Government bond) |
11.0% |
8.6% |
8.5% |
|
|
Cash return |
9.0% |
6.6% |
6.5% |
|
|
Equity return |
14.5% |
12.1% |
12.0% |
|
|
Property return |
12.5% |
10.1% |
10.0% |
|
|
Expense inflation |
8.0% |
5.6% |
5.5% |
|
|
Traditional embedded value risk discount rate1 |
13.7% |
11.4% |
11.2% |
|
|
Risk-free rate |
11.0% |
8.6% |
8.5% |
|
|
Risk-margin2 |
2.1% |
2.0% |
2.1% |
|
|
Cost of financial options and guarantees3 |
- |
- |
- |
|
|
Cost of required capital in excess of statutory minimum4 |
0.6% |
0.8% |
0.6% |
|
|
United States |
|
|
|
|
|
Risk-free rate (10 year Treasury yield) |
4.0% |
4.9% |
4.0% |
|
|
Expense inflation |
3.0% |
3.0% |
3.0% |
|
|
New money yield assumed* |
5.3% |
6.8% |
5.8% |
|
|
Net portfolio earned rate |
6.1% |
5.8% |
6.0% |
|
|
Traditional embedded value risk discount rate1 |
10.3% |
10.0% |
9.3% |
|
|
Risk-free rate |
4.0% |
4.9% |
4.0% |
|
|
Risk-margin2 |
4.4% |
3.0% |
3.4% |
|
|
Cost of financial options and guarantees3 |
0.9% |
1.0% |
0.9% |
|
|
Cost of required capital in excess of statutory minimum4 |
1.0% |
1.1% |
1.0% |
|
* The new money yield assumed in the first two months was 6.2 per cent.
1 This is the risk discount rate that would be applicable on a traditional embedded value basis if the calculations did not allow for the time-value of options and guarantees and required capital in excess of the statutory minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial options and guarantees and for the required capital in excess of statutory minimum. The risk-margin in the United States was increased by 100 basis points to allow for the volatility inherent in the business.
3 This is the time-value of financial options and guarantees not allowed for in statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the statutory minimum.
12 Assumptions continued
Economic assumptions continued
|
Europe |
At 30 June 2008 |
At 30 June 2007 |
At 31 December 2007 |
|
United Kingdom |
|
|
|
|
Risk-free rate (10 year Government bond) |
5.2% |
5.5% |
4.6% |
|
Cash return |
4.2% |
3.7% |
3.6% |
|
Equity return |
8.1% |
8.4% |
7.5% |
|
Property return |
6.6% |
7.0% |
6.6% |
|
Expense inflation |
5.3% |
4.7% |
4.6% |
|
Traditional embedded value risk discount rate1 |
7.9% |
8.0% |
7.6% |
|
Risk-free rate |
5.2% |
5.5% |
4.6% |
|
Risk-margin2 |
2.2% |
2.1% |
2.2% |
|
Cost of financial options and guarantees3 |
- |
- |
- |
|
Cost of required capital in excess of statutory minimum4 |
0.5% |
0.4% |
0.8% |
|
Sweden |
|
|
|
|
Risk-free rate (10 year Government bond) |
4.5% |
4.5% |
4.4% |
|
Cash return |
3.5% |
3.5% |
3.4% |
|
Equity return |
7.5% |
7.5% |
7.4% |
|
Property return |
6.0% |
7.0% |
5.9% |
|
Expense inflation |
3.7% |
3.3% |
3.6% |
|
Traditional embedded value risk discount rate1 |
7.9% |
7.5% |
7.7% |
|
Risk-free rate |
4.5% |
4.4% |
4.4% |
|
Risk-margin2 |
3.4% |
3.1% |
3.4% |
|
Cost of financial options and guarantees3 |
- |
- |
- |
|
Cost of required capital in excess of statutory minimum4 |
- |
- |
- |
|
Rest of Europe |
|
|
|
|
Risk-free rate (10 year Government bond) |
3.3%-6.1% |
3.2%-5.5% |
3.1%-5.7% |
|
Cash return |
2.3%-5.1% |
2.2%-4.5% |
2.1%-4.7% |
|
Equity return |
6.3%-9.1% |
6.2%-7.8% |
6.1%-8.7% |
|
Property return |
4.8%-7.6% |
4.7%-7.0% |
4.6%-7.2% |
|
Expense inflation |
2.5%-3.0% |
2.5%-3.0% |
2.5%-5.0% |
|
Traditional embedded value risk discount rate1 |
4.0%-8.1% |
4.6%-7.8% |
4.0%-7.7% |
|
Risk-free rate |
3.3%-6.1% |
3.2%-5.5% |
3.1%-5.5% |
|
Risk-margin |
0.9%-2.9% |
1.4%-3.0% |
0.9%-2.9% |
|
Cost of financial options and guarantees3 |
- |
- |
- |
|
Cost of required capital in excess of statutory minimum4 |
0.0%-3.0% |
0.0%-3.0% |
0.0%-3.0% |
1 This is the risk discount rate that would be applicable on a traditional embedded value basis if the calculations did not allow for the time-value of options and guarantees and required capital in excess of the statutory minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial options and guarantees and for the required capital in excess of statutory minimum.
3 This is the time-value of financial options and guarantees not allowed for in statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the statutory minimum.
12 Assumptions continued
Non-economic assumptions
> 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. The future expenses attributable to life assurance business include 36 per cent of the Group holding company expenses, with 14 per cent allocated to South Africa, 4 per cent allocated to United States and 18 per cent allocated to Europe.
> The allocation of these expenses aligns to the proportion that the management expenses incurred by the business bears to the total management expenses incurred in the Group.
> No allowance has been made for future productivity improvements in the expense assumptions.
> Future investment expenses are 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.
> The embedded value makes no provision for future development costs. However, provision is included within certain business units for project costs where these are known with sufficient certainty.
Required capital
> For the South Africa business, the required capital is calculated for each of the major business units. The non-investment items are based on a multiple of the non-investment components of the local Statutory Capital Adequacy Requirements set out in PGN104 issued by the Actuarial Society of South Africa (ASSA). The investment item is based on internal models developed for capital allocation and pricing purposes. The models project assets and liabilities for the business forward for 10 years using stochastically determined investment returns on a realistic basis. Bonus rates and adjustments to non-vested bonuses are determined using a consistent formula based on a weighted average of past returns and the level of the Bonus Smoothing Account (BSA) at the time. To the extent that the BSA falls to lower than normally allowable minimum levels, the shareholder is considered to be required to provide support to the business. The capital requirement, based on the discounted value of the maximum shareholder support required, is determined using a conditional tail expectation at the 97.5 percentile level. The required capital is invested in local equities, local cash and international cash. The asset allocation as at 30 June 2008 is 60, 33 and 7 per cent (six months ended 30 June 2007: 60, 33 and 7 per cent, 31 December 2007: 60, 33 and 7 per cent) respectively. In aggregate required capital is subject to a minimum of 130 per cent of the statutory capital requirement. The level of required capital was 136 per cent of the minimum statutory requirements as at 30 June 2008 (six months ended 30 June 2007: 137 per cent, 31 December 2007: 134 per cent).
> For the United States business, the required capital is based on the multiple of the local Risk Based Capital (RBC) requirement that management deems necessary to maintain the desired credit rating for the company in question. The multiple is 300 per cent (six months ended 30 June 2007: 260 per cent, 31 December 2007: 296 per cent) as at 30 June 2008. The required capital for Old Mutual (Bermuda) Limited is based on the level of capital considered by management appropriate to manage the business, which is calculated as 125 per cent of United States RBC calculated on local reserves, subject to a minimum of local statutory requirements. The required capital for Old Mutual Reassurance (Ireland) Limited is based on the level of capital considered by management appropriate to manage the business which is based on 125 per cent of the new Irish Capital Requirements. The required capital for the United States business is invested in fixed interest assets.
12 Assumptions continued
Required capital continued
> For the Europe businesses the required capital reflects the level of capital considered by management appropriate to manage the business, allowing for local minimum statutory requirements. In certain regions, for example Nordic, statutory capital is partially covered by the deferred acquisition costs which are implicitly included in the value of in-force business rather than the adjusted net worth. The required capital is invested in short and medium-term fixed interest assets. The required capital as a per cent of minimum statutory capital is 180 per cent for the United Kingdom, 73 per cent for Nordic, 200 per cent for the Isle of Man and ranging from 0 per cent to 139 per cent for the balance of Europe.
13 Sensitivity tests
The tables below for South Africa, United States and Europe show the sensitivity of the value of in-force at 30 June 2008 and the value of new business for the period ended 30 June 2008 to changes in the discount rate.
|
|
30 June 2008 |
£m |
|
Value of |
Value of new business |
|
|
|
||
|
South Africa |
|
|
|
Central assumptions |
988 |
25 |
|
Effect of: |
|
|
|
Central discount rate increasing by 1 per cent |
869 |
20 |
|
|
|
|
|
United States |
|
|
|
Central assumptions |
451 |
26 |
|
Effect of: |
|
|
|
Central discount rate increasing by 1 per cent |
404 |
21 |
|
|
|
|
|
Europe |
|
|
|
Central assumptions |
2,678 |
61 |
|
Effect of: |
|
|
|
Central discount rate increasing by 1 per cent |
2,510 |
49 |
|
|
|
|
APPENDIX 1
Please see attached link to view appendix
http://www.rns-pdf.londonstockexchange.com/rns/7273A_-2008-8-5.pdf
This information is provided by RNS
Latest directors dealings
- 12 minutes ago City of London Investment Group
- 19 minutes ago BioPharma Credit
- 23 minutes ago BioPharma Credit
- 24 minutes ago Diageo
- 29 minutes ago Barr (A.G.)