Interim Results Part 3

RNS Number : 7273A

Old Mutual PLC

06 August 2008

 



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 31 December 2007
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  2007
Income/(expense)
Goodwill impairment and amortisation of non-covered business acquired intangible     assets	(5)	5	(11)
Profit on disposal of subsidiaries, associated undertakings and strategic     investments	62	7	25
Short-term fluctuations in investment returns (including economic assumption     changes) for the covered business	(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     operations	(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  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
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 31 December 2007
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 31 December 2007
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 31 December 2007
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 31 December 2007
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 31 December  2007
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 31 December 2007
	APE  Margin %	PVNBP  Margin %	APE  Margin %	PVNBP  Margin %
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  Margin %	PVNBP  Margin %	APE  Margin %	PVNBP  Margin %
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  Margin %	PVNBP  Margin %	APE  Margin %	PVNBP  Margin %
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 31 December 2007
Europe covered business	APE  Margin %	PVNBP  Margin %
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 in-force business	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

 

END

 

 

IR DBGDIRBGGGIU