Interim Results - Part 3

Old Mutual PLC 5 September 2000 Part 3 OLD MUTUAL PLC Embedded value information 1 Embedded value The embedded value of old Mutual plc at 30 June 2000 is set out below, together with the corresponding position at 31 December 1999. £m Rm At 30 At 31 At 30 At 31 June December June December 2000 1999 2000 1999 Adjusted net worth 4,450 4,608 45,737 45,791 Equity shareholders' 3,361 3,513 34,540 34,907 funds Excess of market value 1,108 1,114 11,388 11,069 of listed subsidiaries over their net asset value Adjustment to include (19) (19) (191) (185) UK and offshore life subsidiaries on a statutory solvency basis Value of in-force 764 806 7,846 8,003 business Value of in-force 840 884 8,628 8,781 business before cost of solvency capital Cost of solvency (76) (78) (782) (778) capital Embedded value 5,214 5,414 53,583 53,794 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 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 non-acquired asset management subsidiaries (including asset management business written through the life assurance companies), nor of any other non-life business of the Group. The adjusted net worth includes goodwill in respect of acquired businesses. No account has been taken of the proposed capital gains tax to be introduced in South Africa with effect from 1 April 2001. The South African tax authorities have so far only issued a discussion document setting out initial proposals, and it was therefore considered premature to adjust the embedded value to include the possible impact of capital gains tax at this stage. The table below sets out a geographical analysis of the value of in- force business at 30 June 2000 and 31 December 1999. £m Rm At 30 At 31 At 30 At 31 June December June December 2000 1999 2000 1999 South Africa 650 687 6,686 6,830 Individual Business 424 448 4,362 4,455 Group business 226 239 2,324 2,375 Rest of World 114 119 1,160 1,173 Value of in-force 764 806 7,846 8,003 business The assumption used to calculate the embedded value are set out in section 4. OLD MUTUAL PLC Embedded value information (cont'd) 2. Embedded value profits Embedded value profits represent the change in embedded value over the period, adjusted for any capital raised and dividends proposed. After- tax embedded value profits for the six months to 30 June 2000 are set out below, together with the corresponding figures for the six months to 30 June 1999 and the 12 months to 31 December 1999. £m Rm 6 6 Year to 6 6 Year to months months 31 months months 31 to 30 to 30 December to 30 to 30 December June June 1999 June June 1999 2000 1999 2000 1999 Embedded value at 5,214 4,692 5,414 53,583 44,600 53,794 end of period Embedded value at beginning of 5,414 3,086 3,086 53,794 30,174 30,174 period Increase in (200) 1,606 2,328 (211) 14,426 23,620 embedded value Less capital - 404 963 - 3,954 9,309 raised Self-investment - 404 404 - 3,954 3,954 transaction Capital raised at - - 559 - - 5,355 listing Plus dividends 55 - 69 569 - 680 proposed Embedded value (145) 1,202 1,434 358 10,472 14,991 profits The components of the embedded value profits are set out below: £m Rm 6 6 Year to 6 6 Year to months months 31 months months 31 to 30 to 30 December to 30 to 30 December June June 1999 June June 1999 2000 1999 2000 1999 Profit from new 26 13 75 272 132 741 business Point of sale 25 13 69 259 124 678 Expected return to 1 - 6 13 8 63 end of period Expected return 70 70 160 728 688 1,581 Experience 27 3 13 280 32 129 variances Profit before 123 86 248 1,280 852 2,451 investment effects and non-operating items Investment (22) 90 99 (228) 880 972 variances Investment return (38) 942 1,331 (388) 9,262 13,118 on adjusted net worth Impact of 2000 SA - - (121) - - (1,190) tax change Non-operating - (52) (64) - (516) (636) items Sale of OMLA - - (12) - - (118) Additional pensions mis-selling - (52) (52) - (516) (518) provisions Exchange rate (208) 136 (59) (306) (6) 276 movements Embedded value (145) 1,202 1,434 358 10,472 14,991 profits OLD MUTUAL PLC Embedded value information (cont'd) 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. New business profits for the six months ended 30 June 1999 and the year ended 31 December 1999 are based on the South African tax basis that applied up to 31 December 1999, and are therefore not directly comparable to the corresponding figures for the six months to 30 June 2000. New business profits for the year ended 31 December 1999 restated on the new tax basis (effective 1 January 2000) are set out in section 3 below. 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 period and adding back the expected cost of solvency capital over the period. Experience variances are caused by differences between the actual experience in the period and the assumption used to calculate the value at the start of the period, as well as changes in assumptions regarding future experience. 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, together with changes in future investment return and discount rate assumptions. Investment return on adjusted net worth represents the actual investment return earned on the shareholder portfolio investments (which includes the return on the market value of the shareholders' investments in Nedcor, Mutual & Federal and Nedcor Investment Bank), as well as the profits arising from other non-life businesses within the group. The basis of taxation of life assurance companies in South Africa changed with effect from 1 January 2000, although the impact was included in the value of in-force as at 31 December 1999. The result for the half year ended 30 June 2000 however do not include the impact of the proposed introduction of capital gains tax in South Africa with effect from 1 April 2001. 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 tables below set out a geographical analysis of the value of new business for the six months to 30 June 2000, six months to 30 June 1999 and the 12 months to 31 December 1999. New business profitability (as measured by the ratio of the value of new business to the equivalent annual premium) is also shown. Equivalent annual premium (EAP) is calculated as recurring premiums (RP) plus one tenth of single premiums (SP). 6 months to 30 June 6 months to 30 June 2000 2000 £m Rm RP SP EAP VNB* Margin RP SP EAP VNB* South Africa 86 564 142 23 16% 884 5,825 1,467 234 Individual 65 395 104 9 9% 670 4,075 1,078 91 Business Group Business 21 169 38 14 37% 214 1,750 389 143 Rest of World 11 98 21 2 12% 113 1,014 214 25 Value at point 97 662 163 25 15% 997 6,839 1,681 259 of sale Expected return 1 13 to end of period Value at end of period 97 662 163 26 16% 997 6,839 1,681 272 * Value of new business net of cost of solvency capital of £2m (R23m) 6 months to 30 June 6 month to 30 June 2000 2000 £m Rm RP SP EAP VNB* Margin RP SP EAP VNB* South Africa 81 496 131 11 8% 794 4,877 1,282 106 Individual 74 370 111 5 4% 724 3,635 1,088 48 Business Group Business 7 126 20 6 30% 70 1,242 194 58 Rest of World 11 96 21 2 9% 114 943 208 18 Value at point 92 592 152 13 8% 908 5,820 1,490 124 of sale Expected return - 8 to end of period Value at end 92 592 152 13 9% 908 5,820 1,490 132 of period * Value of new business net cost of solvency capital of £2m (R15) OLD MUTUAL PLC Embedded value information (cont'd) 3. Value of new business continued 12 months to 31 Dec 12 months to 31 Dec 1999 1999 £m Rm RP SP EAP VNB* Margin RP SP EAP VNB* South Africa 162 1,043 266 47 18% 1,597 10,280 2,625 467 Individual Business 141 697 211 25 12% 1,390 6,873 2,077 248 (new tax basis) Group Business 21 346 55 22 40% 207 3,407 548 219 (excl free shares) Rest of World 36 172 53 7 13% 355 1,696 525 67 Value at point of sale 198 1,215 319 54 17% 1,952 11,976 3,150 534 (adjusted) Expected return to end 6 63 of period Adjusted 198 1,215 319 60 19% 1,952 11,976 3,150 597 value at end of period SA Individual (tax change) 8 - 73 SA Group 175 18 7 41% 1,727 172 71 (free shares) Value at end 198 1,390 337 75 22% 1,952 13,703 3,322 741 of period * Value of new business net of cost of solvency capital of £7m (R65m) The tax change in respect of individual business in South Africa reflects the impact of the new tax basis effective 1 January 2000. The value of new group business for the year to 31 December 1999 includes an amount of £7.2 million (R71 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 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. 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 show in note 6(b) to the financial statements to those shown above is set out below. £m Rm Recurring Single Recurring Single premiums premiums premiums premiums New business premiums in note 120 803 1,238 8,299 6(b) to the financial statements Less: - Group market-linked business (1) (130) (12) (1,348) not valued - Unit trust business not valued - (68) - (703) - New business premiums arising (22) - (229) - from indexation Plus transfer of maturing - 57 - 591 policies to Investment Frontiers New business premiums on 97 662 997 6,839 embedded value basis The assumptions used to calculate the value of new business are set out in section 4. OLD MUTUAL PLC Embedded value information (cont'd) 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 30 June 31 December 30 June 2000 1999 1999 Fixed Interest Return 14.5% 14.0% 15.5% Equity & Property Return 17.5% 17.0% 18.5% Inflation 10.5% 10.0% 11.5% Risk Discount Rate 18.5% 18.0% 19.5% 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 investment return assumptions. * For in-force business, projected company taxation is based on the new tax basis that applies to South African life assurers, and includes full allowance for secondary taxation on companies payable in South Africa. No account has been taken of possible capital gains tax that may be payable in future. * 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. * 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 levels as at 31 December 1999, and projected forward with expense inflation to 30 June 2000. Expense savings arising from Project 500 that have occurred during the period have therefore not been taken into account - these will be reflected in the next valuation in December. 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 30 June 2000 and 31 December 1999 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 and Sterling were carried out at the following rates: Exchange rates Rand per Sterling At 30 June 2000 10.2767 At 31 December 1999 9.9364 6 months to 30 June 2000 10.3330 (average) 6 months to 30 June 1999 9.8305 (average) 12 months to 31 December 1999 9.8588 (average) OLD MUTUAL PLC Embedded value information (cont'd) 5. Alternative assumptions The discount rate appropriate to an investor will depend on the investor's own requirements, tax position and perception of the risks associated with the realisation of the future profits. To illustrate the effect of using different discount rates, the table below shows the embedded value of Old Mutual plc at 30 June 2000 at alternative discount rates. In determining the values at different discount rates, all other assumptions have been left unchanged. £m Rm Value Value Value at Value Value Value at at at at at Central Central Central Central Central Central Discount Discount Discoun Discount Discount Discount Rate -1% Rate Rate +1% Rate -1% Rate Rate +1% Adjusted net 4,450 4,450 4,450 45,737 45,737 45,737 worth Value of in- 882 764 658 9,072 7,846 6,763 force business Value before 883 840 800 9,082 8,628 8,224 costs of capital Cost of (1) (76) (142) (10) (782) (1,461) solvency capital Embedded value 5,332 5,214 5,108 54,809 53,583 52,500 The table below sets out the value of new life assurance business for the six months to 30 June 2000 at alternative discount rates. £m Rm Value Value Value Value Value Value at at at at at 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 29 27 25 304 282 261 cost of capital Cost of - (2) (4) - (23) (43) solvency capital Value of new business at 29 25 21 304 259 218 point of sale 6. External review The Group's embedded value 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 six months to 30 June 2000.

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