Part 3 - Prelims MCEV

RNS Number : 2784O

Old Mutual PLC

04 March 2009

 



Old Mutual Market Consistent Embedded Value basis supplementary information

For the year ended 31 December 2008

	£m
Statement of earnings on a Group Market Consistent Embedded Value basis	Year ended 31 December 2008	Year ended 31 December 2007
Europe Covered business	505	372
Asset management	(13)	26
Banking	23	14
	515	412
South Africa Covered business	463	359
Asset management	102	98
Banking	545	622
General insurance	76	89
	1,186	1,168
United States Covered business	(644)	37
Asset management	97	162
	(547)	199
Other   Covered business	-	-
Asset management	(17)	2
	(17)	2
Finance costs	(140)	(119)
Other shareholders' expenses	(19)	(31)
Adjusted operating Group MCEV earnings before tax*	978	1,631
Adjusting items**	(2,037)	21
Total Group MCEV earnings for the financial year before tax	(1,059)	1,652
Income tax attributable to shareholders	13	(423)
Total Group MCEV earnings after tax for the financial year	(1,046)	1,229
Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent	(1,284)	952
Minority interests Ordinary shares	184	227
Preferred securities	54	50
Total Group MCEV earnings after tax for the financial year	(1,046)	1,229

*For long-term business and general insurance businesses, adjusted operating MCEV earnings is based on short-term and long-term investment returns respectively, 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 MCEV earnings 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. 

**The breakdown of the adjusting items is detailed in Note 5

	£m
Total Group MCEV earnings per share	Year ended 31 December 2008	Year ended 31 December 2007
Basic total Group MCEV earnings per ordinary share	(25.7)	18.4
Weighted average number of shares - millions	4,995	5,176
Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders
Adjusted operating Group MCEV earnings before tax	978	1,631
Tax on adjusted operating Group MCEV earnings	(135)	(414)
Adjusted operating Group MCEV earnings after tax	843	1,217
Minority interests
Ordinary shares	(214)	(245)
Preferred securities	(54)	(50)
Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders	575	922
Adjusted operating Group MCEV earnings per share* (pence)	11.0	17.0
Adjusted weighted average number of shares - millions	5,230	5,411

*    Adjusted operating Group MCEV earnings per share is calculated on the same basis as adjusted operating Group MCEV earnings, 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.

Reconciliation of movements in Group Market Consistent Embedded Value (Group MCEV) (after tax)						£m
	Year ended 31 December 2008					Year ended 31 December  2007
	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Opening Group MCEV*	6,349	1,010	7,359	6,145	594	6,739
Adjusted operating MCEV earnings	133	442	575	591	331	922
Non-operating MCEV earnings	(2,270)	411	(1,859)	(77)	107	30
Total Group MCEV earnings	(2,137)	853	(1,284)	514	438	952
Other movements in IFRS net equity	(29)	(784)	(813)	(310)	(22)	(332)
Closing Group MCEV	4,183	1,079	5,262	6,349	1,010	7,359

* The Opening Group MCEV for the year ended 31 December 2007 is gross of minority interest of £29m in Skandia. During 2007 all minority interests were purchased.

Components of Group Market Consistent Embedded Value (Group MCEV)	£m
	At 31 December 2008		At 31December 2007
Adjusted net worth attributable to ordinary equity holders of the parent	3,462		3,431
Equity	7,737		7,961
Adjustment to include long-term business on a statutory solvency basis: Europe	(2,749)		(2,581)
South Africa	137		147
United States	151		(621)
Adjustment for market value of life funds' investments in Group equity and debt instruments held in life funds	173		428
Adjustment to remove perpetual preferred callable securities and accrued dividends	(688)		(688)
Adjustment to exclude acquisition goodwill from the covered business: Europe	(1,299)		(1,155)
United States	-		(60)
Value of in-force business	1,800		3,928
Present value of future profits	2,580		4,583
Additional time value of financial options and guarantees	(261)		(199)
Frictional costs	(148)		(192)
Cost of residual non-hedgeable risks	(371)		(264)
Group MCEV	5,262	7,359
Group MCEV value per share (pence)	99.7	136.2
Return on Group MCEV (RoEV) per annum	7.8%	13.7%
Number of shares in issue at the end of the period less treasury shares - millions	5,277	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 intercompany loans). For some European territories the value excludes the write-off of deferred acquisition costs which remain part of adjusted net worth for MCEV purposes.

The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and minority interests of £575 million (year ended 31 December 2007: £922 million) divided by the opening Group MCEV.

Components of adjusted Group Market Consistent Embedded Value (Group MCEV)	£m
	At 31 December 2008		At 31 December 2007
Pro forma adjustments to bring Group investments to market value Group MCEV	5,262		7,359
Adjustment to bring listed subsidiaries to market value	68		1,162
South Africa banking business	41		956
South Africa general insurance business	27		206
Adjustment for value of own shares in ESOP schemes*	63		158
Adjustment for present value of Black Economic Empowerment scheme deferred consideration	169		191
Adjustment to bring external debt to market value	645		120
Adjusted Group MCEV	6,207		8,990
Adjusted Group MCEV per share (pence)	117.6		166.3
Number of shares in issue at the end of the period less treasury shares - millions	5,277		5,405

*    Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2007 and 31 December 2008 is due to the reduction in the Old Mutual plc share price over the year.

Notes to the Old Mutual Market Consistent Embedded Value basis supplementary information

For the year ended 31 December 2008

1 Basis of preparation

The Old Mutual Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 80 to 126 as 'MCEV') adopts Market Consistent Embedded Value Principles issued in June 2008 by the CFO Forum ('the Principles') as the basis for the methodology used in preparing the supplementary information. The Principles have been fully complied with for all businesses as at 31 December 2008, with the exception of the use of an adjusted risk free rate due to current market conditions for US Life Onshore business. The Group has replaced the European Embedded Value ('EEV') basis with the MCEV basis for the covered business and figures for 31 December 2007 have been restated accordingly, and complies fully with all of the Principles. 

The Principles were designed during a period of relatively stable market conditions and their application could, in turbulent markets, lead to misleading results. In December 2008 the CFO Forum announced that they are reviewing the Principles and guidance of the application of these Principles to address the notion of market consistency in the current dislocated market conditions. The particular areas under review include implied volatilities, the cost of residual non-hedgeable risks, the use of swap rates as a proxy for risk free reference rates and the effect of liquidity premia. In respect of the 31 December 2008 disclosure, Old Mutual has made an adjustment to the risk free rate used in determining the value of the US Life Onshore business, to take account of the liquidity component of corporate bond spreads that is evident in the market as at 31 December 2008. The Directors consider this adjustment to be necessary so as to ensure a meaningful basis of reporting the value of the Group's life and related businesses. The 31 December 2008 MCEV disclosure in respect of all other business units complies fully with the Principles. 

The detailed methodology and assumptions made in presenting this supplementary information, including the US adjusted risk free rate for 31 December 2008, are set out in notes 2 and 3. 

This supplementary information provides details on the methodology, assumptions and results of the MCEV for the Old Mutual Group and includes conversion of comparative supplementary information for 2007, previously prepared on the EEV basis, to a MCEV basis.

Throughout the supplementary information the following terminology is used to distinguish between the terms 'MCEV', 'Group MCEV' and 'adjusted Group MCEV':

• MCEV is a measure of the consolidated value of shareholders' interests in the covered business and consists of the sum of the shareholders' adjusted net worth in respect of the covered business and the value of the in-force covered business. 

• Group MCEV is a measure of the consolidated value of shareholders' interests in covered and non-covered business and therefore includes the value of all non-covered business at the unadjusted IFRS net asset value detailed in the primary financial statements.

• The adjusted Group MCEV, a measure used by the directors to assess the shareholders' interest in the value of the Group, includes the impact of marking all debt to market value, the market value of the Group's listed banking and general insurance subsidiaries as well as marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE schemes') to market.

The major change in Old Mutual's overall approach for deriving its MCEV compared to the approach adopted for EEV is the allowance for risk. Under MCEV a bottom-up allowance is made for financial risks (in particular, asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets and financial options and guarantees are valued using market consistent models calibrated to observable market prices) and an explicit allowance is made for the cost of residual non-hedgeable risks in the covered business. In contrast, under EEV a top-down allowance was made for all risks by means of the risk margin included in the single risk discount rate applicable for each geography and the value placed on the time value of financial options and guarantees. The MCEV methodology therefore makes a more granular allowance for the differences in the risk profile of different blocks of business than the EEV methodology. 

Further detailed commentary of the key changes from an EEV to MCEV methodology and the impact of the transition from EEV to MCEV reporting on results for the financial year ended 31 December 2007 are provided in notes 12 to 18.

2 Methodology

Introduction

MCEV represents the present value of shareholders' interests in the earnings distributable from assets allocated to the in-force covered business after sufficient allowance for the aggregate risks in the covered business and is measured in a way that is consistent with the value that would normally be placed on the cash flows generated by these assets and liabilities in a deep and liquid market. MCEV is therefore a risk-adjusted measure to the extent that financial risk is reflected through the use of market consistent techniques in the valuation of both assets and distributable earnings and a transparent explicit allowance is made for non-financial risks.

The MCEV consists of the sum of the following components:

• Adjusted net worth, which excludes acquired intangibles and goodwill, consisting of:

  • Free surplus allocated to the covered business

  • Required capital to support the covered business

• Value of in-force covered business (VIF)

The adjusted net worth of the covered business is the market value of shareholders' assets held in respect of the covered business after allowance for the liabilities of the in-force covered business which are dictated by local regulatory reserving requirements.

MCEV is calculated net of minority shareholder interests and excludes the value of future new business.

Coverage

Covered business includes, where material, any contracts that are regarded by local insurance supervisors as long-term life insurance business. This generally means that covered business includes all product lines where the profits are included in the IFRS long-term business profits in the primary Financial Statements.

For the South African business, healthcare administration business is no longer recognised as part of the VIF or value of new business of covered business as previously reported under EEV. 

Some types of business are legally written by a life Company, but under IFRS this business is classified as asset management because 'long-term business' only serves as a wrapper. This business continues to be excluded from covered business, for example:

• New institutional investment platform pensions business written in the United Kingdom as it is more appropriately classified as mutual fund business; and

• Individual unit trusts and some group market-linked business written by the asset management Companies in South Africa through the life Company as profits from this business arise in the asset management Companies.

The treatment within this supplementary information of all business other than the covered business is the same as in the primary financial statements, except for the adjusted Group MCEV which includes the impact of marking all debt to market value, the market value of the Group's listed banking and general insurance subsidiaries as well as marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE schemes') to market.

Free surplus

Free surplus is the market value of any assets allocated to, but not required to support, the covered in-force business. It is determined as the market value of any excess assets attributed to the covered business but not backing the regulatory liabilities, less the required capital to support the covered business.

Required capital

Required capital is the market value of assets that are attributed to support the covered business, over and above that required to back statutory liabilities for covered business, whose distribution to shareholders is restricted. The following capital measures are considered in determining the required capital held for covered business so that it reflects the level of capital considered by the directors to be appropriate to manage the business:

• Economic capital;

• Regulatory capital (i.e. the level of solvency capital at which the local regulators are empowered to take action) with appropriate deductions being made for any implicit items that are not allowed by local regulators;

• Capital required by rating agencies in respect of our North American business in order to maintain our desired credit rating; and

• Any other required capital definition to meet internal management objectives.

Economic capital for the covered business is based upon our own internal assessment of risks inherent in the underlying business. It measures capital requirements on an economic balance sheet, with MCEV as the available capital, consistent with a 99.93 per cent confidence level over a one-year time horizon. 

For Europe and South Africa capital determined with reference to internal management objectives is the most onerous and is the capital measure used, whereas in the United States the required capital is based on the amount that management deems necessary to maintain the desired credit rating for the Company. The required capital in respect of the South Africa covered business is partially covered by the market value of the Group's investments in banking and general insurance in South Africa. On consolidation these investments are shown separately.

The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements.

£m	Total	Europe	South Africa	United States
31 December 2008
Required capital (a)	2,025	371	1,070	584
Regulatory capital (b)	1,293	229	819	245
Ratio (a/b)	1.6	1.6	1.3	2.4
31 December 2007
Required capital (a)	1,906	323	1,159	424
Regulatory capital (b)	1,257	226	866	165
Ratio (a/b)	1.5	1.4	1.3	2.6

VIF

Under the MCEV methodology, VIF consists of the following components:

• Present value of future profits (PVFP) from in-force covered business; less

• Time value of financial options and guarantees; less

• Frictional costs of required capital; less

• Cost of residual non-hedgeable risks

Projected liabilities and cash flows are calculated net of outward risk reinsurance with allowance for default risk of reinsurance counterparties where material.

PVFP

The PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that are expected to emerge from the in-force covered business, including the value of renewals of in-force business, on a best estimate basis where assumed earned rates of return and discount rates are equal to the risk free reference rates. It therefore represents a deterministic certainty equivalent valuation of future distributable earnings. The certainty equivalent valuation approach is described in more detail in note 4. Any limitations on distribution of such earnings due to statutory or internal capital requirements are taken into account separately in the calculation of frictional costs of required capital.

PVFP captures the intrinsic and time value of financial options and guarantees on in-force covered business which are included in the local statutory reserves according to local requirements, but excludes any additional allowance for the time value of financial options and guarantees. 

Financial options and guarantees

Allowance is made in the MCEV for the potential impact of variability of investment returns (i.e. asymmetric impact) on future shareholder cash flows of policyholder financial options and guarantees within the in-force covered business.

The time value of financial options and guarantees describes that part of the value of financial options and guarantees that arises from the variability of future investment returns on assets to the extent that it is not already included in the statutory reserves. The calculations are based on market consistent stochastic modelling techniques where the actual assets held at the valuation date are used as the starting point for the valuation of such financial options and guarantees. Projected cash flows are valued using economic assumptions such that they are valued in line with the price of similar cash flows that are traded in the capital markets. The time value represents the difference between the average value of shareholder cash flows under many generated economic scenarios and the deterministic shareholder value under the best estimate assumptions for the equivalent business. Closed form solutions are also applied in Europe provided the nature of any guarantees is not complex.

The time value of financial options and guarantees also includes allowance for potential burn-through costs on participating business, i.e. the extent to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal capital management requirements or the extent to which reserves are inadequate to cover severely adverse experience.

In the generated economic scenarios allowance is made, where appropriate, for the effect of dynamic management and / or policyholder actions in different circumstances:

• Management has some discretion in managing exposure to financial options and guarantees, particularly within participating business. Such dynamic management actions are reflected in the valuation of financial options and guarantees provided that such discretion is consistent with established and justifiable practice taking into account policyholders' reasonable expectations (e.g. with due consideration of the PPFM for South African business), subject to any contractual guarantees and regulatory or legal constraints and has been passed through an appropriate approval process by the local Executive team and, where applicable, the Board. Assumptions that depend on the market performance (such as crediting rates or bonus rates) are set relative to the risk free reference rates (subject to contractual guarantees) and assuming that all market participants are subjected to the same market conditions.

• Where credible evidence exists that persistency rates are linked to economic scenarios, allowance is made for dynamic policyholder behaviour in response to changes in economic conditions.

• Modelled dynamic management and policyholders' actions include the following:

  • Changes in future bonus and crediting rates subject to contractual guarantees, including removing all or part of previously declared non-vested bonuses where circumstances warrant such action;

  • Dynamic persistency rates for the United States business and dynamic guaranteed annuity option take-up rates for the South African business driven by changes in economic conditions and management actions.

  • Changes in surrender values; and

  • Option take-up rates vary stochastically for the South African business to the extent that the value of those options change in different economic conditions.

In determining the time value of financial options and guarantees at least 1,000 simulations are run to gain comfort that a reasonable degree of convergence of results has been obtained. Where deemed appropriate, the number of simulations is increased to reduce sampling error. 

Europe

Whilst certain products within the European businesses provide financial options and guarantees, these are immaterial due to the predominantly unit-linked nature of the business.

South Africa

The time value of the financial options and guarantees mainly relates to maturity guarantees and guaranteed annuity options. 

As required by the applicable Actuarial Society of South Africa guidance note, the time value of the financial options and guarantees included in the statutory reserves in the South African businesses as at 31 December 2008 has been valued using a risk-neutral market consistent asset model, and is referred to as an investment guarantee reserve. This reserve includes a discretionary margin as defined by local guidelines to allow for the sensitivity of the reserve to interest rate movements. This discretionary margin is valued in the VIF. 

United States

The time value of the financial options and guarantees mainly relates to minimum crediting (bonus) and growth rates. 

Frictional costs of required capital

From the shareholders' viewpoint there is a cost due to restrictions on the distribution of required capital that is locked in the Company. Where material, an allowance has been made for the frictional costs in respect of the taxation on investment return (income and capital gains) and investment costs on the assets backing the required capital for covered business. The allowance for taxation is based on the taxation rates applicable to investment earnings on assets backing the required capital, although such tax rates are reduced, where applicable, to allow for interest paid on debt which is used to partly finance the required capital.

The run-off pattern of the required capital is projected on an approximate basis over the lifetime of the underlying risks in line with drivers of the capital requirement. The same drivers are used to split the total required capital between existing business and new business.

Cost of residual non-hedgeable risks

Sufficient allowance for most financial risks has been made in the PVFP and the time value of financial options and guarantees by using techniques that are similar to the approach used by capital markets. In addition the modelling of some non-hedgeable non-financial risks is incorporated as part of the calculation of the PVFP (e.g. to the extent that expected operational losses are incorporated in the maintenance expense assumptions) or the time value of financial options and guarantees (e.g. dynamic policyholder behaviour such as the interaction of the investment scenario and the persistency rates).

All residual non-financial risks (e.g. liability risks such as mortality, longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk) for which no or insufficient allowance is made in the PVFP or time value of financial options and guarantees, together with hedge risk and credit spread risk in the United States, are considered within the allowance for the cost of residual non-hedgeable risks. 

An allowance is made in the cost of residual non-hedgeable risks to reflect uncertainty in the best estimate of shareholder cash flows as a result of both symmetric and asymmetric non-hedgeable risks since these risks can not be hedged in deep and liquid capital markets and are managed, inter alia, by holding risk capital. Considering the Group as a whole, most residual non-hedgeable risks have a symmetric impact on shareholder value with the exception of operational risk.

The cost of residual non-hedgeable risks is calculated using a cost of capital approach, i.e. it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until run-off of the liabilities. The capital charge in each year is the product of the projected expected non-hedgeable risk capital held after allowance for some diversification benefits and the cost of capital rate. The cost of capital rate therefore represents the return above the risk free reference rates that the market is deemed to demand for providing this capital.

The residual non-hedgeable risk capital measure is determined using an internal economic capital model based on appropriate shock scenarios consistent with a 99.5 per cent confidence level over a one-year time horizon. The internal economic capital model makes allowance for certain management actions, such as reductions in bonus and crediting rates, where deemed appropriate.

The following allowance is made for diversification benefits in determining the residual non-hedgeable risk capital at a business unit level:

• Diversification benefits within the non-hedgeable risks of the covered business are allowed for.

• No allowance is made for diversification benefits between hedgeable and non-hedgeable risks of the covered business.

• No allowance is made for diversification benefits between covered and non-covered business.

The table below shows the amounts of diversified economic capital held in respect of residual non-hedgeable risks.

£m	Total	Europe	South Africa	United States
31 December 2008
Non-hedgeable risk capital	2,003	720	457	826
31 December 2007
Non-hedgeable risk capital	1,535	714	461	360

A weighted average cost of capital rate of 2.0 per cent has been applied to residual symmetric and asymmetric non-hedgeable risks at a business unit level over the life of the contracts. This translates into an equivalent cost of capital rate of approximately 3.25 per cent being applied to the group diversified capital required in respect of such non-hedgeable risks.

Participating business

For participating business in South Africa and the United States, the method of valuation makes assumptions about future bonus or crediting rates and the determination of profit allocation between policyholders and shareholders. These assumptions are made on a basis consistent with other projection assumptions, especially the projected future investment returns, established Company practice (with due consideration of the PPFM for South African business), past external communication, any payout smoothing strategy, local market practice, regulatory/contractual restrictions and bonus participation rules.

Where current benefit levels are higher than can be supported by the existing fund assets together with projected investment returns, a downward 'glide path' is projected in benefit levels so that the fund would be exhausted on payment of the last benefit.

Spread-based products

A market consistent valuation of spread-based products (such as fixed indexed annuities in the United States, where investment returns are earned at one rate and policyholders' accounts are credited at a different rate with the difference referred to as 'spread') is dependent on the extent that management discretion can target a shareholder profit margin and the decision rules that management would follow in respect of crediting or bonus rates in any particular stochastic scenario.

Where guaranteed terms are offered at outset of a contract that dictate the payments to policyholders throughout the term of the contract, these payments are valued using the certainty equivalent valuation technique. These products, for example immediate annuities in payment, may therefore show a loss at point of sale under MCEV as investment margins are not anticipated while currently pricing practice does anticipate these margins. If returns in excess of the risk free reference rates actually emerge in the future, these will be recognised in the MCEV earnings as they arise.

For business where the crediting (bonus) rate is set in advance, crediting rates are set by considering management's target shareholder margins throughout the contract lifetime (subject to any guarantees). Projected crediting rates are set equal to the risk free reference rate less the anticipated margin to cover profit and expenses (subject to any policyholder guarantees eroding the shareholder margins). However, during the period following the valuation date the existing crediting rate is applied until the next point at which it can be varied. Given the guarantees included within such products (including consideration of a 0 per cent floor for crediting rates), stochastic modelling is used to value such contracts.

Valuation of assets and treatment of unrealised losses

The market values of assets, where quoted, are based on the bid price on the reporting date. Unquoted assets are valued according to IFRS and marked to model. 

No smoothing of market values or unrealised gains/losses is applied.

Asset mix

PVFP and the time value of financial options and guarantees are calculated using assets projected on the actual asset allocation of the policyholder funds at the reporting date. However, if the current asset mix is materially different to the long-term strategic asset allocation as a result of market movements, projected assets are assumed to revert to the long-term strategic asset allocation in the short to medium term as appropriate.

Defined benefit pension scheme

Where a defined benefit pension scheme within the covered business is in surplus or deficit, the employer pension fund expense assumptions incorporated within the VIF allow appropriately for the expected release of surplus or funding of the deficit.

Look through principle

PVFP and value of new business cash flow projections look through and include the profits/losses of owned service companies, e.g. distribution and administration, related to the management of the covered business. Any profit margins that are included in investment management fees payable by the life assurance companies to the asset management subsidiaries have not been included in the value of in-force business or the value of new business on the grounds of materiality and because a significant proportion of these profits arise from performance-based fees.

Taxation

In valuing shareholders' cash flows, allowance is made in the cash flow projections for taxes in the relevant jurisdiction affecting the covered business. Tax assumptions are based on best estimate assumptions, applying current local corporate tax legislation and practice together with known future changes and taking credit for any deferred tax assets.

No allowance is made for any further additional tax that would be incurred on the remittance of dividends from the life subsidiaries to Old Mutual plc, apart from the South African business where 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 and the impact of capital gains tax. Furthermore, for the South African business it has been assumed that a reasonable proportion of the shareholder fund equity portfolio (excluding Group subsidiaries) will be traded each year. In Europe tax has been allowed for on dividends to be remitted to Skandia UK from the Isle of Man. 

The value of any deferred tax assets is only recognised in the MCEV in so far as those tax assets are expected to be utilised in future by offsetting it against expected tax liabilities that are generated on expected profits emerging from in-force business. Since projected investment returns are based on the risk free reference rates, MCEV may therefore understate the true economic value of such deferred tax assets.

New business and renewals

The market consistent value of new business (VNB) measures the value of the future profits expected to emerge from all new business sold, and in some cases increases to existing contracts, during the reporting period after allowance for the time value of financial options and guarantees, frictional costs and the cost of residual non-hedgeable risks associated with writing the new business.

VNB includes contractual renewal of premiums and recurring single premiums, where the level of premium is pre-defined and is reasonably predictable, and changes to existing contracts where these are not variations allowed for in the PVFP. Non-contractual increments are treated similarly where the volume of such increments is reasonably predictable or likely (e.g. where premiums are expected to increase in line with salary or price inflation).

Any variations in premiums on renewal of in-force business from that previously anticipated including deviations in non-contractual increases, deviations in recurrent single premiums and re-pricing of premiums for in-force business are treated as experience variances on in-force business and not as new business.

VNB is calculated as follows:

• Using economic assumptions at the start of the reporting period.

• Using demographic and operating assumptions at the end of the reporting period.

• At point of sale and rolled forward to the end of the reporting period.

• Generally using a standalone approach unless a marginal approach would better reflect the additional value to shareholders created through the activity of writing new business. 

• Expense allowances include all acquisition expenses, including any acquisition expense overruns.

• Net of tax, reinsurance and minority interests.

• No attribution of any investment and operating variances to VNB.

New business margins are disclosed as:

• The ratio of VNB to the present value of new business premiums (PVNBP); and

• The ratio of VNB to annual premium equivalent (APE), where APE is calculated as recurring premiums plus 10 per cent of single premiums.

PVNBP is calculated at point of sale using premiums before reinsurance and applying a valuation approach that is consistent with the calculation of VNB.

Analysis of MCEV earnings

An analysis of MCEV earnings provides a reconciliation of the MCEV for covered business at the beginning of the reporting period and the MCEV for covered business at the end of the reporting period on a net of taxation basis.

Operating MCEV earnings are generated by the value of new business sold during the reporting period, the expected existing business contribution, operating experience variances, operating assumption changes and other operating variances:

• The value of new business includes the impact of new business strain on free surplus that arises, amongst other things, from the impact of initial expenses and additional required capital that should be held in respect of such new business.

• The expected existing business contribution is determined by projecting both actual assets and actual liabilities (including assets backing the free surplus and required capital) from the start of the reporting period to the end of the reporting period using expected real-world earned rates of return. The expected existing business contribution is presented in two components:

  • Expected earnings on free surplus and required capital and the expected change in VIF assuming that the assets earn the beginning of period risk free reference rates; and

  • Additional expected earnings on free surplus and required capital and the additional expected change in VIF as a result of real-world expected earned rates of return on assets in excess of beginning of period risk free reference rates.

• Transfers from VIF and required capital to free surplus includes the release of required capital and modelled profits from VIF into free surplus in respect of business that was in-force at the beginning of the reporting period, although the movement does not contribute to a change in the MCEV.

• Operating experience variances reflect the impact of deviations of the actual operational experience during the reporting period from the expected operational experience. It is analysed before operating assumption changes, i.e. such variances are assessed against opening operating assumptions, and reflects the total impact of in-force and new business variances. 

• Operating assumption changes incorporate the impact of changes to operating assumptions from those assumed at the beginning of the reporting period to those assumed at the end of the reporting period. As VNB is calculated using operating assumptions at the end of the reporting period, this impact only relates to the value of in-force business at the end of the reporting period. 

• Other operating variances include model improvements, changes in methodology and the impact of certain management actions, such as a change in the asset allocation backing required capital.

Total MCEV earnings also include economic variances and other non-operating variances:

• Economic variances incorporate the impact of changes in economic assumptions from the beginning of the reporting period to the end of the reporting period as well as the impact on earnings resulting from actual returns on assets being different to the expected returns on those assets as reflected in the expected existing business contribution. It therefore also includes the impact of economic variances in the reporting period on projected future earnings.

• Other non-operating variances include the impact of changes in mandatory local regulations and changes in taxation.

An analysis of MCEV earnings requires closing adjustments in respect of exchange rate movements and capital transfers such as those in respect of payment of dividends and acquiring/divesting businesses.

Return on MCEV for covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in local currency, except for total covered business where the calculations are performed in Sterling.

Analysis of Group MCEV earnings

Presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the unadjusted IFRS net asset value. A mark to market adjustment is therefore not performed for external borrowings and other items not on a mark to market basis under IFRS relating to non-covered business.

3 Assumptions

Non-economic assumptions

The appropriate non-economic projection assumptions for future experience (e.g. mortality, persistency and expenses) are determined using best estimate assumptions of each component of future cash flows, are specific to the entity concerned and has regard to past, current and expected future experience (e.g. longevity improvements and AIDS-related claims) as derived from both entity specific and industry data where deemed appropriate. Material assumptions are actively reviewed by means of detailed experience investigations and updated, as deemed appropriate, at least annually.

These assumptions are based on the covered business being part of a going concern, although favourable changes in maintenance expenses such as productivity improvements are generally not included beyond what has been achieved by the end of the reporting period. The only exception is in respect of the United States business which is currently undergoing a major restructuring and cost-cutting exercise. The expense assumption used in the calculation of MCEV takes into account cost reductions already achieved in the first quarter of 2009, but not any of the additional planned cost reductions.  

The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business, maintenance of in-force business (including investment management expenses) and development projects.

• All expected maintenance expense overruns affecting the covered business are allowed for in the calculations.

• Unallocated Group holding Company expenses have been included to the extent that they relate to the covered business. The future expenses attributable to life assurance business include 35 per cent of the Group holding Company expenses, with 14 per cent allocated to South Africa, 4 per cent allocated to United States and 17 per cent allocated to Europe (31 December 2007: 37 per cent of the Group holding Company expenses, with 15 per cent allocated to South Africa, 5 per cent allocated to United States and 17 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.

• The MCEV normally only makes provision for future development costs and one-off exceptional expenses (such as those incurred on the integration of businesses following an acquisition and restructuring costs) to the extent that such project costs are known with sufficient certainty. However no such costs are allowed for as at 31 December 2008 (or 31 December 2007).

Legislative changes were introduced in Germany in 2008 specifying the proportion of miscellaneous profits to be shared with policyholders. According to the regulations, the revenue on in-force business can be reduced by various expense items, including those costs arising in respect of new business acquisition expenses in any year. To model this, Skandia Leben has adopted an approach consistent with German market practice. This approach is to set best estimate assumptions for the amount to be shared with policyholders in future years after allowing for the acquisition expenses in relation to the new business expected to be written over the next three years as per their business plan projections.

Economic assumptions

An active basis is applied to set pre-tax investment and economic assumptions to reflect the economic conditions prevailing on the reporting date. Economic assumptions are set consistently, for example future bonus or crediting rates are set at levels consistent with the investment return assumptions.

Under a market consistent valuation, economic assumptions are determined such that projected cash flows are valued in line with the prices of similar cash flows that are traded on the capital markets. Thus, risk free cash flows are discounted at a risk free reference rate and equity cash flows at an equity rate. In practice for the PVFP, where cash flows do not depend on or vary linearly with market movements, a certainty equivalent method is used which assumes that actual assets held earn, before tax and investment management expenses, risk free reference rates and all the cash flows are discounted using risk free reference rates which are gross of tax and investment management expenses. The deterministic certainty equivalent method is purely a valuation technique and over time the expectation is still that risk premiums will be earned on assets such as equities and corporate bonds.

Risk free reference rates and inflation

The risk free reference rates, reinvestment rates and discount rates are determined with reference to the swap yield curve appropriate to the currency of the cash flows. For Europe the swap yield curve is obtained from a number of sources including Bloomberg, Nordea Bank and Reuters. For the South African and United States businesses, the swap yield curve is sourced from the third party market consistent asset model that is used to generate the economic scenarios that are required to value the time value of financial options and guarantees.  

No adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity adjustment to the United States Life onshore business at 31 December 2008. Any other risk premiums are recognised within the MCEV as and when they are earned.

  3 Assumptions 

Following a review of a wide range of market data and literature, such as, the Barriet+Hibbert calibration of US corporate bond spreads at 31 December 2008, it is the directors' view that the significant widening of corporate bond spreads during the recent financial market turmoil is partly a function of an increased liquidity premium rather than only heightened default risk and that returns in excess of swap rates can be achieved, rather than entire corporate bond spreads being lost to worsening default experience. For the United States onshore business we considered the currency, credit quality and duration of our actual corporate bond portfolio and derived adjusted risk 

free reference rates at 31 December 2008 by adding 300bps of liquidity premium to swap rates used for setting investment return and discounting assumptions (31 December 2007: no liquidity adjustment was applied as we did not anticipate at that time the extent to which the bond markets would become even further dislocated). This adjustment reflects the liquidity premium component in corporate bond spreads over swap rates that we expect to earn on our portfolio. We believe that the difference between market yields on our United States onshore bond portfolio and the adjusted risk free reference rate still provides an adequate implied margin for defaults. 

No liquidity adjustment is applied to risk free reference rates for other geographies or for Old Mutual Bermuda because:

• the nature and management of the products sold onshore in the United States is materially different to those sold elsewhere in the Group, with greater opportunity for managing assets in such a manner as to realise liquidity premiums by holding corporate bonds to maturity;

• the widening of corporate bond spreads has been more pronounced in the United States compared to other geographies; and

• it is the only geography with a significant concentration of investments in the corporate bond market.

At those durations where swap yields are not available, e.g. due to a lack of a sufficiently liquid or deep swap market, the swap curve is extended using appropriate interpolation and extrapolation techniques.

Consumer price inflation assumptions are determined as those implied by index-linked government stocks or real swap yields if a liquid market of sufficient size exists. In other markets, the consumer price inflation assumptions are modelled considering a reasonable spread compared to swap rates. However, where modelling system capabilities are restricted, consumer price inflation is set as a flat assumption. Other types of inflation such as expense inflation are derived on a consistent basis and, where deemed appropriate, include a percentage addition to the consumer price inflation rate as life Company expenses for example include a large element of salary related expenses.

The risk free reference spot yields (inclusive of any applicable liquidity adjustments) and expense inflation rates at various terms for each of the significant geographies are provided in the table below. The risk free reference spot yield curve has been derived from mid swap rates at the reporting date.

Risk free reference spot yields	1 year	5 years	10 years	20 years
31 December 2008
GBP	2.0%	3.1%	3.4%	3.5%
EUR	2.4%	3.3%	3.8%	3.9%
USD*	4.3%	5.1%	5.6%	5.8%
ZAR	9.3%	8.0%	7.8%	6.7%
SEK	1.8%	2.9%	3.2%	3.2%
31 December 2007
GBP	5.5%	5.1%	5.0%	4.8%
EUR	4.6%	4.6%	4.7%	5.0%
USD	4.2%	4.2%	4.7%	4.9%
ZAR	11.5%	10.1%	9.1%	8.1%
SEK	4.7%	4.8%	4.9%	4.9%

Expense inflation	1 year	5 years	10 years	20 years
31 December 2008
GBP	0.1%	1.5%	2.8%	4.1%
EUR	2.0%-3.0%	2.0%-3.0%	2.0%-3.0%	2.0%-3.0%
USD	3.0%	3.0%	3.0%	3.0%
ZAR	6.1%	5.4%	5.5%	4.6%
SEK	0.2%	1.0%	1.8%	2.1%
31 December 2007
GBP	3.8%	3.6%	4.1%	4.5%
EUR	2.5%-3.0%	2.5%-3.0%	2.5%-3.0%	2.5%-3.0%
USD	3.0%	3.0%	3.0%	3.0%
ZAR	7.7%	7.1%	6.5%	5.8%
SEK	3.6%	3.4%	3.5%	3.6%

* After 300 bps adjustment to the risk free rate to recognise the liquidity premium

Volatilities and correlations

Where cash flows contain financial options and guarantees such that they do not move linearly with market movements, asset cash flows are projected and all cash flows discounted using risk-neutral stochastic models. These models project the assets and liabilities using a distribution of asset returns where all asset types, on average, earn the same risk free reference rate. 

Apart from the risk free reference yields specified above, other key economic assumptions for the calibration of economic scenarios include the implied volatilities for each asset class and correlations between different asset classes. The volatility assumptions for the calibration of economic scenarios that are used in the stochastic models are, where possible, based on those implied from appropriate derivative prices (such as equity options in respect of guarantees that are dependent on changes in equity markets or swaptions in respect of guarantees that are dependent on changes in interest rates) as observed on the valuation date. However, historic implied and historic observed volatilities of the underlying instruments and expert opinion are considered where there are concerns over the depth or liquidity of the market, e.g. volatilities for property returns. Where strict adherence to the above is not possible, for example where markets only exist at short durations such as the equity option market in South Africa, interpolation or extrapolation techniques are used to derive volatility assumptions for the full term structure of the liabilities. Correlation assumptions between asset classes that are used in stochastic models are based on an assessment of historic relationships. Where historic data is used in setting volatility or correlation assumptions, a suitable time period is considered for analysing historic data including consideration of the appropriateness of historical data where economic conditions were materially different to current conditions.

For the South African stochastic models, due to the immateriality of corporate bond and property holdings, corporate bonds are assumed to yield the same returns as equivalent long-term government bonds and property is assumed to be invested 50 per cent in local equities and 50 per cent in long-term government bonds. 

The at-the-money annualised asset volatility assumptions of the asset classes incorporated in the stochastic models are detailed below. 

ZAR volatilities	Option term
	1 year	5 years	10 years	20 years
31 December 2008
1 year swap	30.8%	35.1%	32.9%	25.4%
5 year swap	32.9%	33.6%	30.2%	22.5%
10 year swap	30.8%	30.3%	25.9%	18.7%
20 year swap	26.9%	25.1%	19.8%	13.9%
Equity (total return index)*	37.6%	31.6%	29.2%	28.1%
Property (total return index)	23.2%	19.0%	15.6%	15.4%
31 December 2007
1 year swap	14.9%	14.5%	13.6%	13.3%
5 year swap	14.5%	14.1%	13.2%	12.9%
10 year swap	14.3%	13.7%	12.8%	12.5%
20 year swap	14.0%	13.1%	12.1%	11.7%
Equity (total return index)*	24.4%	24.4%	25.4%	26.0%
Property (total return index)	14.8%	13.5%	13.7%	13.6%

*    Due to limited liquidity in the ZAR equity option market, the market consistent asset model has been calibrated by extrapolating equity option implied volatility data beyond a term of 3 years.

USD volatilities	Option term
	1 year	5 years	10 years	20 years
31 December 2008*
1 year swap	44.9%	23.9%	18.3%	16.1%
5 year swap	34.1%	22.8%	17.9%	16.0%
10 year swap	27.7%	21.2%	17.1%	15.4%
20 year swap	24.7%	20.1%	16.3%	14.5%
31 December 2007
1 year swap	35.0%	26.9%	22.2%	19.8%
5 year swap	20.6%	18.7%	17.4%	15.8%
10 year swap	16.1%	15.4%	14.7%	13.3%
20 year swap	14.8%	14.1%	13.5%	12.4%

* Due to limited liquidity in the USD swap market, the market consistent asset model has been calibrated by reference to volatility data as at 31 September 2008.

International equity volatilities (Old Mutual Bermuda)*	Option term
	1 year	5 years	10 years	20 years
31 December 2008
SPX	38%	35%	27%	27%
RTY	46%	45%	34%	34%
TPX	41%	39%	31%	31%
HSCEI	57%	51%	43%	43%
TWSE	36%	34%	30%	30%
KOSP12	42%	43%	36%	36%
NIFTY	39%	33%	31%	31%
SX5E	38%	37%	31%	31%
UKX	37%	36%	28%	28%
BCAI	4%	4%	4%	4%
31 December 2007
SPX	22%	24%	10%	18%
RTY	28%	10%	12%	18%
TPX	21%	22%	10%	17%
HSCEI	40%	30%	10%	27%
IBOV	35%	28%	10%	24%
FTSE	21%	26%	10%	18%
SBBIG	4%	4%	4%	4%

*Note that due to improvements in fund mapping during 2008, some different indices are referenced at 31 December 2008 than those referenced at 31 December 2007

Exchange rates

All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in Note 2 of the IFRS statements.

Expected asset returns in excess of the risk free reference rates

The expected asset returns in excess of the risk free reference rates have no bearing on the calculated MCEV other than the calculation of the expected existing business contribution in the analysis of MCEV earnings. Such real-world economic assumptions are determined with reference to one-year forward risk free reference rates applicable to the currency of the liabilities at the start of the reporting period. All other economic assumptions, for example future bonus or crediting rates, are set at levels consistent with the real-world investment return assumptions.

Equity and property risk premiums incorporate both historical relationships and the directors' view of future projected returns in each geography. Pre-tax real-world economic assumptions are determined as follows:

• The equity risk premium is 3.5 per cent for Africa and 3 per cent for Europe and the United States.

• The cash return equals the risk free reference rate less a deduction of 2 per cent for Africa and 1 per cent for Europe and the United States.

• The corporate bond return is based on actual corporate bond spreads on the reporting date less an allowance for defaults.

• The property risk premium is 2.5 per cent in Africa and 2 per cent in Europe.

Tax

The effective tax rates for Nordic, United Kingdom and the balance of Europe were a range of 2 to 28 per cent (2007: 2 to 28 per cent), 29 per cent (2007: 28 per cent) and a range of 8 to 31 per cent (2007: 14 to 30 per cent) respectively.

The effective tax rate was 33 per cent for South Africa (2007: 34 per cent) and 0 per cent for Namibia (2007: 0 per cent), except for the investment return on capital for which the attributed tax was derived from the primary accounts.

For the United States the effective rate was under 1 per cent.

	£m
4 (i) Adjusted Group Market Consistent Embedded Value presented per business line	Year ended 31 December 2008		Year ended 31 December 2007
MCEV of the covered business	4,183		6,349
Adjusted net worth*	2,383		2,421
Value of in–force business**	1,800		3,928
Adjusted net worth of the asset management businesses	1,577		1,637
Europe	98		160
South Africa	292		232
United States	1,187		1,245
Value of the banking business	1,976		2,716
Europe (adjusted net worth)	285		305
South Africa (market value)	1,691		2,411
Market value of the general insurance business South Africa	219		405
Net other business	(161)		(35)
Adjustment for present value of Black Economic Empowerment scheme deferred consideration	169		191
Adjustment for value of own shares in ESOP schemes***	63		158
Perpetual preferred securities (US$ denominated)	(203)		(378)
Perpetual preferred callable securities	(304)		(652)
GBP denominated	(174)		(328)
Euro denominated	(130)		(324)
Debt	(1,312)		(1,401)
Rand denominated	(213)		(215)
USD denominated	(537)		(408)
GBP denominated	(191)		(272)
SEK denominated	(252)		(506)
Euro denominated	(119)		–
Adjusted Group MCEV	6,207		8,990

*      Adjusted net worth is after the elimination of intercompany loans.

**     Net of minority interests.

***    Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2007 and 31 December 2008 is due to the
        reduction in the Old Mutual plc share price. 

	£m
4 (ii) Adjusted operating MCEV earnings for the covered business	At 31 December 2008		At  31 December  2007
Adjusted operating MCEV earnings before tax for the covered business*	324		768
UK	333		288
Nordic	164		83
Europe and Latin America	8		1
OMSA	441		355
Rest of Africa	22		4
United States	(644)		37
Tax on adjusted operating MCEV earnings for the covered business	191		177
UK	98		82
Nordic	15		17
Europe and Latin America	4		(6)
OMSA	116		78
Rest of Africa	-		­-
United States	(42)		6
Adjusted operating MCEV earnings after tax for the covered business	133		591
UK	235		206
Nordic	149		66
Europe and Latin America	4		7
OMSA	325		277
Rest of Africa	22		4
United States	(602)		31
Tax on adjusted operating MCEV earnings comprises
Tax on adjusted operating MCEV earnings for the covered business	191		177
Tax on adjusted operating MCEV earnings for other business	(56)		237
Tax on adjusted operating MCEV earnings	135		414

* Adjusted operating MCEV earnings before tax are derived by grossing up each of the components of the earnings after tax at the expected tax rates.

	£m
4 (iii) Components of Market Consistent Embedded Value of the covered business	At 31 December 2008	At    31 December    2007
MCEV of the covered business	4,183	6,349
Adjusted net worth	2,383		2,421
Value of in-force business	1,800		3,928
UK Adjusted net worth	278	276
Free surplus	121		89
Required capital	157		187
Value of in-force business	1,393	1,255
Present value of future profits	1,439		1,305
Additional time value of financial options and guarantees	-		-
Frictional costs	(7)		(10)
Cost of non-hedgeable risks	(39)		(40)
Nordic Adjusted net worth	163	122
Free surplus	58		47
Required capital	105		75
Value of in-force business***	882	992
Present value of future profits	943		1,058
Additional time value of financial options and guarantees	-		-
Frictional costs	(8)		(9)
Cost of non-hedgeable risks	(53)		(57)
Europe and Latin America Adjusted net worth	126	50
Free surplus	17		(11)
Required capital	109		61
Value of in-force business	587	522
Present value of future profits	659		574
Additional time value of financial options and guarantees	(13)		(1)
Frictional costs	(13)		(10)
Cost of residual non-hedgeable risks	(46)		(41)
OMSA Adjusted net worth*	905	1,392
Free surplus	(128)		266
Required capital	1,033		1,126
Value of in-force business	1,040	1,154
Present value of future profits	1,228		1,344
Additional time value of financial options and guarantees	-		-
Frictional costs**	(113)		(122)
Cost of residual non-hedgeable risks	(75)		(68)
Rest of Africa Adjusted net worth	70	76
Free surplus	33		43
Required capital	37		33
Value of in-force business	48	48
Present value of future profits	57		55
Additional time value of financial options and guarantees	-		-
Frictional costs	(4)		(2)
Cost of residual non-hedgeable risks	(5)		(5)
United States Adjusted net worth	841	505
Free surplus	257		81
Required capital	584		424
Value of in-force business	(2,150)	(43)
Present value of future profits	(1,746)		246
Additional time value of financial options and guarantees	(248)		(198)
Frictional costs	(3)		(38)
Cost of residual non-hedgeable risks	(153)		(53)

 

 

*       The required capital in respect of OMSA is partially covered by the market value of the Group’s investments in banking and general insurance in South Africa. On consolidation these investments are shown separately.

**     For the South African business there has been a material change in the asset allocation of assets backing required capital from 31 December 2007 to 31 December 2008. As at 31 December 2008, significantly fewer assets are held in equities and more in cash compared to 31 December 2007.

***    The defined benefit plan funds allocated to the Nordic covered business are currently showing an aggregate surplus of £45m on an IAS 19 basis. This amount has not been incorporated within the VIF by allowing for the expected release of surplus, nor has it been allowed within the ANW of the business.

For the United States, the material decrease in frictional costs from £38 million as at 31 December 2007 to £3 million as at 31 December 2008 reflects the changed tax position of the business between these two reporting dates on a market consistent basis. The fact that there are greater losses projected on an MCEV basis at 31 December 2008 compared to 31 December 2007 (mainly due to lower risk free reference rates) means that future income on the capital required to back the business is to a large extent not subject to tax as such future income can be offset against current projected losses.

For the United States, the material increase in the cost of residual non-hedgeable risks from £53 million as at 31 December 2007 to £153 million as at 31 December 2008 results mainly from the introduction as at 31 December 2008 of an allowance for hedge risks on the Variable Annuity portfolio. This allowance was not backdated to 31 December 2007 as issues with the effectiveness of the hedging programme, which has improved in the second half of 2008, only emerged during 2008. The position at 31 December 2007 was restated based on the knowledge at the time, which included an expectation that the guarantee hedges would be more effective than actually experienced during 2008.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
Total covered business*	Year ended 31 December 2008					Year ended 31 December 2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV **	515	1,906	2,421	3,928	6,349	199	1,903	2,102	4,043	6,145
New business value	(608)	172	(436)	540	104	(588)	181	(407)	637	230
Expected existing business contribution (reference rate)	63	117	180	289	469	15	127	142	269	411
Expected existing business contribution (in excess of reference rate)	4	15	19	81	100	3	19	22	67	89
Transfers from VIF and required capital to free surplus	939	(189)	750	(750)	-	850	(201)	649	(649)	-
Experience variances	160	(75)	85	(250)	(165)	132	(29)	103	(119)	(16)
Assumption changes	(55)	-	(55)	(375)	(430)	26	(1)	25	(226)	(201)
Other operating variance	172	(156)	16	39	55	102	(121)	(19)	97	78
Operating MCEV earnings	675	(116)	559	(426)	133	540	(25)	515	76	591
Economic variances	(722)	5	(717)	(1,485)	(2,202)	190	13	203	(364)	(161)
Other non-operating variance	(111)	43	(68)	-	(68)	(5)	3	(2)	86	84
Total MCEV earnings	(158)	(68)	(226)	(1,911)	(2,137)	725	(9)	716	(202)	514
Closing adjustments	1	187	188	(217)	(29)	(409)	12	(397)	87	(310)
Capital and dividend flows	(22)	-	(22)	-	(22)	(412)	-	(412)	-	(412)
Foreign exchange variance	23	187	210	(217)	(7)	3	12	15	87	102
Closing MCEV	358	2,025	2,383	1,800	4,183	515	1,906	2,421	3,928	6,349
Return on MCEV (RoEV) % per annum					2.1%					9.6%

*    Note that results for the 'Rest of Africa' are included in the analysis of total covered business MCEV earnings, but that no separate analysis is shown for such business from a
     materiality perspective.

**  The opening MCEV for the year ended 31 December 2007 is gross of minority interest of £29m in Skandia. During 2007 all the minority shares were purchased.

Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in Sterling.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
UK covered business	Year ended 31 December  2008					Year ended 31 December  2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV	89	187	276	1,255	1,531	73	162	235	1,090	1,325
New business value	(189)	(1)	(190)	257	67	(190)	12	(178)	259	81
Expected existing business contribution (reference rate)	31	1	32	58	90	(2)	15	13	56	69
Expected existing business contribution (in excess of reference rate)	-	-	-	20	20	-	-	-	17	17
Transfers from VIF and required capital to free surplus	294	(15)	279	(279)	-	225	(5)	220	(220)	-
Experience variances	26	(10)	16	1	17	25	3	28	3	31
Assumption changes	(3)	-	(3)	59	56	(8)	(1)	(9)	17	8
Other operating variance	11	-	11	(26)	(15)	-	-	-	-	-
Operating MCEV earnings	170	(25)	145	90	235	50	24	74	132	206
Economic variances	(59)	(9)	(68)	51	(17)	1	-	1	5	6
Other non-operating variance	8	(1)	7	(10)	(3)	-	-	-	27	27
Total MCEV earnings	119	(35)	84	131	215	51	24	75	164	239
Closing adjustments	(87)	5	(82)	7	(75)	(35)	1	(34)	1	(33)
Capital and dividend flows	(82)	-	(82)	-	(82)	(35)	-	(35)	-	(35)
Foreign exchange variance	(5)	5	-	7	7	-	1	1	1	2
Closing MCEV	121	157	278	1,393	1,671	89	187	276	1,255	1,531
Return on MCEV (RoEV) % per annum					15.3%					15.5%

The 'expected existing business contribution (in excess of reference rate)' is not significant. This is reasonable for business comprised mostly of unit-linked products where most of the profits emanate from premium charges, acquisition charges and fund based fees. Such fees and charges are largely captured in the 'expected existing business contribution (reference rate)'.

The experience variances were driven by a higher level of fund rebate than that assumed, offset by a write-down of capitalised software costs.

The main operating assumption changes related to an increased recognition of fee income which was partly offset by a strengthening of expense assumptions. 

The other operating variances mainly reflect the impact of modelling and methodology improvements.

The capital and dividend flows consist mainly of dividends.

The other non-operating variance is due to the implementation of a new actuarial system. .

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Sterling.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
Nordic covered business	Year ended 31 December  2008					Year ended 31 December  2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV	47	75	122	992	1,114	(154)	46	(108)	971	863
New business value	(50)	3	(47)	79	32	(36)	2	(34)	57	23
Expected existing business contribution (reference rate)	2	2	4	50	54	1	1	2	39	41
Expected existing business contribution (in excess of reference rate)	-	-	-	23	23	-	-	-	21	21
Transfers from VIF and required capital to free surplus	85	1	86	(86)	-	67	2	69	(69)	-
Experience variances	10	18	28	(17)	11	(4)	20	16	4	20
Assumption changes	-	-	-	32	32	-	-	-	(39)	(39)
Other operating variance	(1)	-	(1)	(2)	(3)	(5)	5	-	-	-
Operating MCEV earnings	46	24	70	79	149	23	30	53	13	66
Economic variances	9	(20)	(11)	(296)	(307)	10	(5)	5	(35)	(30)
Other non-operating variance	(85)	19	(66)	(3)	(69)	-	-	-	1	1
Total MCEV earnings	(30)	23	(7)	(220)	(227)	33	25	58	(21)	37
Closing adjustments	41	7	48	110	158	168	4	172	42	214
Capital and dividend flows	31	-	31	-	31	165	-	165	-	165
Foreign exchange variance	10	7	17	110	127	3	4	7	42	49
Closing MCEV	58	105	163	882	1,045	47	75	122	992	1,114
Return on MCEV (RoEV) % per annum					12.9%					7.6%

The experience variances were largely driven by tax gains, a higher level of fee income than assumed and a contribution from profits from healthcare business which is not valued within the VIF. These were partially offset by one-off persistency effects due to a Swedish legislative change relating to the level of tax deductible savings contributions. 

The main operating assumption changes related to a release of reserves set up for costs in the corporate business partially offset by strengthened persistency assumptions.

The other non-operating variance is mainly driven by legacy issues, such as the settlement of the Skandia Liv-arbitration and strengthening of various legacy provisions.

The capital and dividend flows mainly represent dividends received, repayment of loans and settlement of the Liv-arbitration.

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Swedish Krona.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
Europe and Latin America covered business	Year ended 31 December  2008					Year ended 31 December  2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV	(11)	61	50	522	572	59	56	115	470	585
New business value	(108)	5	(103)	113	10	(103)	4	(99)	137	38
Expected existing business contribution (reference rate)	1	1	2	23	25	-	1	1	18	19
Expected existing business contribution (in excess of reference rate)	-	-	-	5	5	-	-	-	5	5
Transfers from VIF and required capital to free surplus	136	-	136	(136)	-	136	(3)	133	(133)	-
Experience variances	(5)	(6)	(11)	(10)	(21)	(2)	(4)	(6)	(1)	(7)
Assumption changes	-	-	-	(22)	(22)	-	-	-	(49)	(49)
Other operating variance	2	-	2	5	7	(5)	(6)	(11)	12	1
Operating MCEV earnings	26	-	26	(22)	4	26	(8)	18	(11)	7
Economic variances	11	(17)	(6)	(54)	(60)	(2)	3	1	(7)	(6)
Other non-operating variance	(34)	25	(9)	(5)	(14)	(1)	-	(1)	25	24
Total MCEV earnings	3	8	11	(81)	(70)	23	(5)	18	7	25
Closing adjustments	25	40	65	146	211	(93)	10	(83)	45	(38)
Capital and dividend flows	25	-	25	-	25	(88)	-	(88)	-	(88)
Foreign exchange variance	-	40	40	146	186	(5)	10	5	45	50
Closing MCEV	17	109	126	587	713	(11)	61	50	522	572
Return on MCEV (RoEV) % per annum					0.6%					1.5%

The experience variances are mainly driven by expense overruns offset by positive mortality and morbidity experience.

The main operating assumption changes related to strengthening of retention levels in Austria and revision of expense assumptions in Southern Europe and Italy.

The other non-operating variance is mainly due to legislative changes that have been introduced in Germany in 2008 which specifies the proportion of miscellaneous profits to be shared with policyholders.

The capital and dividend flows mainly represent capital injections into Southern Europe to support new business, dividends and repayments.

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Euro.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
OMSA covered business *	Year ended 31 December  2008					Year ended 31 December  2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV	266	1,126	1,392	1,154	2,546	112	1,212	1,324	1,089	2,413
New business value	(81)	68	(13)	67	54	(75)	63	(12)	62	50
Expected existing business contribution (reference rate)	23	98	121	142	263	9	92	101	131	232
Expected existing business contribution (in excess of reference rate)	3	14	17	13	30	2	17	19	8	27
Transfers from VIF and required capital to free surplus	286	(130)	156	(156)	-	296	(131)	165	(165)	-
Experience variances	13	(18)	(5)	(17)	(22)	33	(30)	3	(19)	(16)
Assumption changes	21	-	21	(18)	3	8	-	8	(33)	(25)
Other operating variance	161	(157)	4	(7)	(3)	95	(120)	(25)	34	9
Operating MCEV earnings	426	(125)	301	24	325	368	(109)	259	18	277
Economic variances	(139)	51	(88)	(135)	(223)	201	21	222	8	230
Other non-operating variance	-	-	-	18	18	(1)	-	(1)	33	32
Total MCEV earnings	287	(74)	213	(93)	120	568	(88)	480	59	539
Closing adjustments	(681)	(19)	(700)	(21)	(721)	(414)	2	(412)	6	(406)
Capital and dividend flows	(640)	-	(640)	-	(640)	(419)	-	(419)	-	(419)
Foreign exchange variance	(41)	(19)	(60)	(21)	(81)	5	2	7	6	13
Closing MCEV	(128)	1,033	905	1,040	1,945	266	1,126	1,392	1,154	2,546
Return on MCEV (RoEV) % per annum					14.4%					11.7%

* The MCEV for South Africa is presented after the adjustment for market value of life funds' investments in Group equity and debt instruments.

The experience variances were driven by negative persistency experience and one-off and special project costs which were partially offset by favourable mortality and disability experience and positive maintenance expense experience. 

The main operating assumption changes related to maintenance expense savings being reflected in the updated assumptions and the positive impact of changes in annuitant mortality assumptions which were offset by the negative impact of changes to persistency assumptions that have been reviewed in light of the recent adverse experience.

The other operating variances mainly include improvements in valuation models and methodology.

The other non-operating variances relate to reduction in the corporate tax rate from 29% to 28% and the impact of changing the asset allocation backing required capital.

The capital and dividend flows mainly include dividend payments (net of dividends received from Nedbank and Mutual & Federal) and increased investment in Old Mutual plc loan notes and the purchase of additional shares in Nedbank and Mutual & Federal. These capital flows arose from excess capital and did not adversely affect the solvency position of the South African life company.

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Rand.

4 (iv) Analysis of covered business MCEV earnings (after tax)						£m
United States covered business	Year ended 31 December 2008					Year ended 31 December 2007
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Opening MCEV	81	424	505	(43)	462	64	390	454	371	825
New business value	(177)	93	(84)	18	(66)	(181)	96	(85)	116	31
Expected existing business contribution (reference rate)	2	12	14	10	24	3	15	18	20	38
Expected existing business contribution (in excess of reference rate)	-	1	1	20	21	-	2	2	16	18
Transfers from VIF and required capital to free surplus	128	(41)	87	(87)	-	115	(59)	56	(56)	-
Experience variances	113	(58)	55	(206)	(151)	84	(15)	69	(99)	(30)
Assumption changes	(74)	-	(74)	(425)	(499)	26	-	26	(123)	(97)
Other operating variance	-	-	-	69	69	18	-	18	53	71
Operating MCEV earnings	(8)	7	(1)	(601)	(602)	65	39	104	(73)	31
Economic variances	(529)	-	(529)	(1,047)	(1,576)	(30)	-	(30)	(333)	(363)
Other non-operating variance	-	-	-	-	-	-	-	-	­-	-
Total MCEV earnings	(537)	7	(530)	(1,648)	(2,178)	35	39	74	(406)	(332)
Closing adjustments	713	153	866	(459)	407	(18)	(5)	(23)	(8)	(31)
Capital and dividend flows	651	-	651	-	651	(18)	-	(18)	-	(18)
Foreign exchange variance	62	153	215	(459)	(244)	-	(5)	(5)	(8)	(13)
Closing MCEV	257	584	841	(2,150)	(1,309)	81	424	505	(43)	462
Return on MCEV (RoEV) % per annum					-121.4%					4.1%

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.

The negative experience variances were largely driven by higher than expected lapses on the fixed deferred and indexed annuity products and by reinsurance deals which were priced to be broadly cost-neutral on a real-world basis. Other negative experience variances included lighter than expected mortality on the immediate annuity book and an expense overrun. There was an offsetting positive tax variance.

The main operating assumption changes related to a strengthening of mortality assumptions on part of the immediate annuity book, changes to variable annuity reserving and increased expense assumptions.

The capital and dividend flows were mainly due to capital injections from Old Mutual plc during the year.

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in US Dollar.

5 Adjustments applied in determining total Group MCEV earnings before tax					£m
	Year ended 31 December 2008				Year ended 31 December 2007
Analysis of adjusting items		Covered business  MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Income/(expense)
Goodwill impairment and amortisation of non-covered business acquired intangible assets and impact of acquisition accounting		-	(12)	(12)	-	(11)	(11)
Economic variances		(2,480)	(72)	(2,552)	(114)	(7)	(121)
Other non-operating variances		(79)	-	(79)	48	-	48
Acquired/divested business		-	53	53	(1)	25	24
Closure of unclaimed share trust		-	-	-	-	1	1
Dividends declared to holders of perpetual preferred callable securities		-	43	43	-	40	40
Adjusting items relating to US Asset Management equity plans and minority holders		-	7	7	-	11	11
Fair value gains on Group debt instruments		-	503	503	-	29	29
Adjusting items		(2,559)	522	(2,037)	(67)	88	21
6 Other movements in net equity impacting Group MCEV					£m
	Year ended 31 December 2008				Year ended 31 December 2007
	Covered business MCEV		Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Fair value gains/(losses)	-		-	-	-	21	21
Net investment hedge	-		(281)	(281)	-	(13)	(13)
Currency translation differences/exchange differences on translating foreign operations	(7)		59	52	102	18	120
Aggregate tax effects of items taken directly to or transferred from equity	-		(1)	(1)	-	13	13
Other movements	­-		(49)	(49)	-	29	29
Net income recognised directly into equity	(7)		(272)	(279)	102	68	170
Dividend for the year	(22)		(373)	(395)	(412)	39	(373)
Share buy back	-		(175)	(175)	-	(177)	(177)
Net issues of ordinary share capital by the Company	-		5	5	-	3	3
Exercise of share options	-		5	5	-	9	9
Fair value of equity settled share options	-		26	26	-	36	36
Other movements in net equity	(29)		(784)	(813)	(310)	(22)	(332)

7 Reconciliation of MCEV adjusted net worth to IFRS net asset value for the covered business

The table below provides a reconciliation of the MCEV adjusted net worth (ANW) to the IFRS net asset value (NAV) for the covered business. 

£m
	Year ended 31 December 2008
	Total	UK	Nordic	ELAM	OMSA	Rest of Africa	United States
IFRS net asset value*	5,907	2,064	1,323	1,228	536	66	690
Adjustment to include long-term business on a statutory solvency basis	(2,461)	(1,200)	(973)	(576)	133	4	151
Adjustment for market value of life funds' investments in Group equity and debt instruments	236	­-	-	-	236	-	-
Adjustments to exclude acquisition of goodwill from the covered business	(1,299)	(586)	(187)	(526)	-	-	-
MCEV adjusted net worth	2,383	278	163	126	905	70	841

£m
	Year ended 31 December 2007
	Total	UK	Nordic	ELAM	OMSA	Rest of Africa	United States
IFRS net asset value*	6,199	2,017	1,222	945	757	72	1,186
Adjustment to include long-term business on a statutory solvency basis	(3,055)	(1,160)	(931)	(490)	143	4	(621)
Adjustment for market value of life funds' investments in Group equity and debt instruments	492				492
Adjustments to exclude acquisition of goodwill from the covered business	(1,215)	(581)	(169)	(405)			(60)
MCEV adjusted net worth	2,421	276	122	50	1,392	76	505

* IFRS net asset value is after elimination of intercompany loans.

The adjustment to include long-term business on a statutory solvency basis includes the following:

• The excess of the IFRS amount of the deferred acquisition cost (DAC) and value of business acquired (VOBA) assets over the statutory levels included in the VIF.

• When projecting future profits on a statutory basis, the VIF includes the shareholders' value of unrealised capital gains. To the extent that assets in IFRS are valued at market and the market value is higher than the statutory book value, these profits have already been taken into account in the IFRS equity.

8 Value of new business (after tax)

The tables below set out the geographic analysis of the value of new business (VNB) after tax. New business profitability is measured by both the ratio of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under PVNBP margin and APE margin below. APE is calculated as recurring premiums plus 10 per cent of single premiums.

As mentioned earlier for the South African business, healthcare administration business is no longer recognised as part of the VNB of covered business as previously reported under EEV. A similar consideration applies to other new business measures such as PVNBP and APE.

£m
	Year ended 31 December 2008	Year ended 31 December 2007
Annualised recurring premiums
UK	202	186
Nordic	174	128
Europe and Latin America	100	102
OMSA	212	213
Rest of Africa	11	11
United States	33	39
732		679
Single premiums
UK	3,938	5,540
Nordic	384	193
Europe and Latin America	679	879
OMSA	1,248	1,073
Rest of Africa	51	43
United States	2,475	2,962
8,775		10,690
PVNBP
UK	4,902	6,311
Nordic	991	690
Europe and Latin America	1,238	1,494
OMSA	2,317	2,268
Rest of Africa	120	98
United States	2,694	3,185
12,262		14,046
PVNBP capitalisation factors*
UK	4.8	4.3
Nordic	3.5	3.9
Europe and Latin America	5.6	6.1
OMSA	5.1	5.6
Rest of Africa	6.0	5.0
United States	6.7	5.7
APE
UK	596	740
Nordic	213	147
Europe and Latin America	168	190
OMSA	336	321
Rest of Africa	17	15
United States	281	335
1,611		1,748
VNB
UK	67	81
Nordic	32	23
Europe and Latin America	10	38
OMSA	54	50
Rest of Africa	7	7
United States	(66)	31
104		230

8 Value of new business (after tax) 

£m

	Year ended 31 December 2008	Year ended 31 December 2007
PVNBP margin
UK	1.4%	1.3%
Nordic	3.3%	3.3%
Europe and Latin America	0.8%	2.6%
OMSA	2.3%	2.2%
Rest of Africa	5.8%	7.1%
United States	-2.4%	1.0%
0.8%		1.7%
APE margin
UK	11%	11%
Nordic	15%	16%
Europe and Latin America	6%	20%
OMSA	16%	15%
Rest of Africa	41%	47%
United States	-23%	9%
6%		13%

*    The PVNBP capitalisation factors are calculated as follows: (PVNBP - single premiums) / annualised recurring premiums

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 £458 million in the year ended 31 December 2008 (year ended 31 December 2007: £435 million), 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 £239 million for the year ended 31 December 2008 (year ended 31 December 2007: £165 million), is excluded as this is more appropriately classified as mutual fund business.

9 Product analysis of new covered business premiums

£m

UK	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	202	3,938		186	5,540
Unit-linked assurance	202	3,938		183	5,540
Life	-	-		3	-
					£m
Nordic	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	174	384		128	193
Unit-linked assurance	174	384		128	193
Life	-	-		-	-

					£m
Europe and Latin America	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	100	679		102	879
Unit-linked assurance	94	401		100	873
Life	6	278		2	6

£m
OMSA	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	212	1,248		213	1,073
Individual business	199	595		198	617
Savings	48	451		47	472
Protection	65	-		74	5
Annuity	-	143		-	139
Retail mass market	86	1		77	1
Group business	13	653		15	456
Savings	5	423		5	376
Protection	8	1		10	1
Annuity	-	229		-	79

  9 Product analysis of new covered business premiums 

£m
Rest of Africa	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	11	51		11	43
Individual business	10	27		10	25
Savings	3	26		3	23
Protection	3	-		3	-
Annuity	-	1		-	2
Retail mass market	4	-		4	-
Group business	1	24		1	18
Savings	1	21		1	18
Protection	-	-		-	-
Annuity	-	3		-	-

£m
United States	Recurring	Year ended 31 December 2008 Single		Recurring	Year ended 31 December 2007 Single
Total business	33	2,475		39	2,962
Fixed deferred annuity	-	327		-	97
Fixed indexed annuity	-	627		-	960
Variable annuity	-	1,339		-	1,757
Life	33	43		39	18
Immediate annuity	-	139		-	130

10 Drivers of new business value*
£m
Total covered business**			PVNBP Margin %	Year ended 31 December 2008 APE Margin %
Margin at the end of comparative period			1.7%	13.5%
Change in volume			0.1%	0.2%
Change in product mix			-0.2%	-1.8%
Change in country mix			0.0%	0.0%
Change in operating assumptions			-0.3%	-2.7%
Change in economic assumptions			-0.3%	-2.6%
Exchange rate movements			-0.2%	-0.5%
Margin at the end of the period			0.8%	6.1%
UK covered business***
Margin at the end of comparative period			1.3%	11.1%
Change in volume			0.0%	-0.5%
Change in product mix			0.0%	0.2%
Change in country mix			0.0%	0.0%
Change in operating assumptions			0.1%	1.0%
Change in economic assumptions			0.0%	-0.5%
Margin at the end of the period			1.4%	11.3%
Nordic covered business***
Margin at the end of comparative period			3.3%	15.7%
Change in volume			0.4%	2.9%
Change in product mix			0.2%	-0.2%
Change in country mix			0.0%	0.0%
Change in operating assumptions			-0.5%	-2.2%
Change in economic assumptions			-0.1%	-0.9%
Margin at the end of the period			3.3%	15.3%
ELAM covered business***
Margin at the end of comparative period			2.6%	20.4%
Change in volume			-0.7%	-5.2%
Change in product mix			-0.3%	-1.9%
Change in country mix			0.0%	-0.3%
Change in operating assumptions			-0.8%	-6.8%
Change in economic assumptions			0.0%	-0.2%
Margin at the end of the period			0.8%	6.0%
OMSA covered business***
Margin at the end of comparative period			2.2%	15.4%
Change in volume			0.2%	1.8%
Change in product mix			-0.1%	-0.7%
Change in country mix			0.0%	0.0%
Change in operating assumptions			0.1%	0.5%
Change in economic assumptions			-0.1%	-0.9%
Margin at the end of the period			2.3%	16.1%
United States covered business***
Margin at the end of comparative period			1.0%	9.4%
Change in volume			-0.2%	-2.1%
Change in product mix			-0.7%	-6.5%
Change in country mix			0.0%	0.0%
Change in operating assumptions			-1.3%	-12.7%
Change in economic assumptions			-1.2%	-11.5%
Margin at the end of the period			-2.4%	-23.4%

*    Prior year MCEV comparatives of drivers of new business value are not available as no restatement was performed for VNB and PVNBP in 2006. Also note that results for the 'Rest of Africa' are included in the drivers of new business value of total covered business, but that no separate analysis is shown for such business from a materiality perspective.

**    The PVNBP and APE per cent margin changes are calculated in Sterling.

        ***    The PVNBP and APE per cent margin changes are calculated in local currency.

11 Sensitivity tests

The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2008 and the value of new business for the year ended 31 December 2008 to changes in key assumptions. Note that no sensitivity results are shown for the 'Rest of Africa' from a materiality perspective.

For each sensitivity illustrated all other assumptions have been left unchanged except where they are directly affected by the revised conditions. Sensitivity scenarios therefore include consistent changes in cash flows directly affected by the changed assumption(s), for example future bonus participation in changed economic scenarios.

In some jurisdictions the reserving basis that underlies shareholder distributable cash flows is dynamic, and in theory some sensitivities could change not only future experience but also reserving levels. Modelling of dynamic reserves is extremely complex and the effect on value is second-order. Therefore, in performing the sensitivities, reserving bases have been kept constant whilst only varying future experience assumptions with similar considerations applying to required capital. However the sensitivities for South Africa in respect of an increase/decrease of all pre-tax investment and economic assumptions and an increase/decrease in equity and property market values allow for the change in the time value of financial options and guarantees that form part of the investment guarantee reserves.

The sensitivities for an increase/decrease in all pre-tax investment and economic assumptions (with credited rates and discount rates changing commensurately) are calculated in line with a parallel shift in risk free reference spot rates rather than risk free reference forward rates. However, the 1 per cent reduction is limited so that it does not lead to negative risk free reference rates.

The equity and property sensitivities make allowance for rebalancing of asset portfolios.

VNB sensitivities assume that the scenario arises immediately after point of sale of the contract. Therefore no allowance is made for the ability to re-price any contracts in the sensitivity scenarios, apart from the mortality sensitivities for the South African business where allowance is made for changes in the pricing basis for products with reviewable premiums.

	31 December 2008		£m
UK	MCEV	Value of in-force business	Value of new business
Central assumptions	1,671	1,393	67
Effect of:
Required capital equal to the minimum statutory requirement	1,674	1,396	67
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,633	1,364	61
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,712	1,426	74
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,720	1,442	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,623	1,345	-
10bps contraction on corporate bond spreads	1,671	1,393	-
25 per cent multiplicative increase in equity and property implied volatilities	1,671	1,393	67
25 per cent multiplicative increase in swaption implied volatilities	1,671	1,393	67
Voluntary discontinuance rates decreasing by 10 per cent	1,742	1,464	79
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	1,703	1,425	70
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	1,672	1,394	67
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	1,671	1,393	67
For value of new business, acquisition expenses other than commission and commission related   expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	60
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between    hedgeable and non-hedgeable risks for covered business	1,676	1,398	68
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent   confidence level which is targeted by an internal economic capital model	1,660	1,381	66

11 Sensitivity tests 

	31 December 2008		£m
Nordic	MCEV	Value of in-force business	Value of new business
Central assumptions	1,045	882	32
Effect of:
Required capital equal to the minimum statutory requirement	1,045	882	32
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,016	853	31
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,076	914	33
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,092	929	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	998	835	-
10bps contraction on corporate bond spreads	1,045	882	-
25 per cent multiplicative increase in equity and property implied volatilities	1,045	882	32
25 per cent multiplicative increase in swaption implied volatilities	1,045	882	32
Voluntary discontinuance rates decreasing by 10 per cent	1,077	914	40
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	1,081	918	35
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	1,048	885	33
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	1,045	882	32
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	31
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between   hedgeable and non-hedgeable risks for covered business	1,057	894	34
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent    confidence level which is targeted by an internal economic capital model	1,032	869	31

	31 December 2008		£m
Europe and Latin America	MCEV	Value of in-force business	Value of new business
Central assumptions	713	587	10
Effect of:
Required capital equal to the minimum statutory requirement	716	591	10
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	674	549	5
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	755	628	16
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	728	602	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	699	574	-
10bps contraction on corporate bond spreads	713	587	-
25 per cent multiplicative increase in equity and property implied volatilities	713	587	10
25 per cent multiplicative increase in swaption implied volatilities	707	581	10
Voluntary discontinuance rates decreasing by 10 per cent	733	607	13
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	741	615	13
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	716	590	10
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	713	587	10
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	7
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between    hedgeable and non-hedgeable risks for covered business	715	589	10
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent    confidence level which is targeted by an internal economic capital model	704	578	10

11 Sensitivity tests 

	31 December 2008		£m
OMSA	MCEV	Value of in-force business	Value of new business
Central assumptions	1,945	1,040	54
Effect of:
Required capital equal to the minimum statutory requirement	1,968	1,064	56
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,920	1,014	52
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,967	1,064	55
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	2,035	1,094	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,858	990	-
10bps contraction on corporate bond spreads	1,948	1,040	-
25 per cent multiplicative increase in equity and property implied volatilities	1,920	1,015	54
25 per cent multiplicative increase in swaption implied volatilities	1,919	1,015	54
Voluntary discontinuance rates decreasing by 10 per cent	1,975	1,071	63
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	2,020	1,115	60
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	2,007	1,102	61
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges*	1,932	1,027	54
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	48
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	1,968	1,063	56
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence level which is targeted by an internal economic capital model	1,927	1,023	53

* No impact on with-profit annuities as the mortality risk is borne by policyholders.

11 Sensitivity tests 

	31 December 2008		£m
United States	MCEV	Value of in-force business	Value of new business
Central assumptions	(1,309)	(2,150)	(66)
Effect of:
Required capital equal to the minimum statutory requirement	(1,308)	(2,148)	(66)
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	(1,177)	(2,017)	(36)
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	(1,494)	(2,335)	(128)
Increasing all pre-tax investment and economic assumptions by 3 per cent,
with credited rates and discount rates changing commensurately	(883)	(1,723)	41
Decreasing all pre-tax investment and economic assumptions by 3 per cent,
with credited rates and discount rates changing commensurately	(1,874)	(2,715)	(274)
Recognising the present value of an additional 1 per cent of credit and liquidity spreads on corporate bonds over and above the risk free reference rate over the lifetime of the liabilities
with credited rates and discount rates changing commensurately	(610)	(1,450)	(36)
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	(1,276)	(2,116)	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	(1,339)	(2,180)	-
10bps contraction on corporate bond spreads	(1,246)	(2,087)	-
25 per cent multiplicative increase in swaption implied volatilities	(1,698)	(2,539)	(87)
Voluntary discontinuance rates decreasing by 10 per cent	(1,217)	(2,058)	(62)
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	(1,289)	(2,129)	(63)
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	(1,298)	(2,139)	(64)
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	(1,329)	(2,169)	(66)
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	(72)
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between    hedgeable and non-hedgeable risks for covered business	(1,221)	(2,062)	(51)
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent    confidence level which is targeted by an internal economic capital model	(1,345)	(2,186)	(71)

11 Sensitivity tests 

The 2007 tables are as follows:

	31 December 2007		£m
UK	MCEV	Value of in-force business	Value of new business
Central assumptions	1,531	1,255	81
Effect of:
Required capital equal to the minimum statutory requirement	1,536	1,260	81
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,497	1,230	75
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,566	1,282	89
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,575	1,299	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,488	1,212	-
10bps contraction on corporate bond spreads	1,531	1,255	-
25 per cent multiplicative increase in equity and property implied volatilities	1,531	1,255	81
25 per cent multiplicative increase in swaption implied volatilities	1,531	1,255	81
Voluntary discontinuance rates decreasing by 10 per cent	1,587	1,311	96
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	1,556	1,280	84
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	1,532	1,256	82
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	1,531	1,255	81
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	­-	-	72
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	1,543	1,267	84
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence level which is targeted by an internal economic capital model	1,510	1,234	77

	31 December 2007		£m
Nordic	MCEV	Value of in-force business	Value of new business
Central assumptions	1,114	992	23
Effect of:
Required capital equal to the minimum statutory requirement	1,110	988	23
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,092	970	22
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	1,137	1,016	24
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,183	1,061	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	1,045	923	-
10bps contraction on corporate bond spreads	1,114	992	-
25 per cent multiplicative increase in equity and property implied volatilities	1,114	992	23
25 per cent multiplicative increase in swaption implied volatilities	1,114	992	23
Voluntary discontinuance rates decreasing by 10 per cent	1,142	1,020	29
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	1,145	1,023	25
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	1,116	994	23
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	1,114	992	23
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	22
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	1,131	1,009	24
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence level which is targeted by an internal economic capital model	1,100	978	22

	31 December 2007		£m
Europe and Latin America	MCEV	Value of in-force business	Value of new business
Central assumptions	572	522	38
Effect of:
Required capital equal to the minimum statutory requirement	571	521	38
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	546	497	33
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	598	547	43
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	588	538	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	556	507	-
10bps contraction on corporate bond spreads	572	522	-
25 per cent multiplicative increase in equity and property implied volatilities	572	522	38
25 per cent multiplicative increase in swaption implied volatilities	571	521	38
Voluntary discontinuance rates decreasing by 10 per cent	591	541	41
Maintenance expense levels decreasing by 10 per cent,	588	538	41
with no corresponding increase in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	574	524	38
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	572	522	38
For value of new business, acquisition expenses other than commission and commission related    expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	36
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable   and non-hedgeable risks for covered business	576	526	38
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence    level which is targeted by an internal economic capital model	562	512	37

	31 December 2007		£m
OMSA	MCEV	Value of in-force business	Value of new business
Central assumptions	2,546	1,154	50
Effect of:
Required capital equal to the minimum statutory requirement	2,575	1,182	52
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	2,522	1,127	48
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	2,568	1,178	50
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	2,693	1,210	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	2,398	1,096	-
10bps contraction on corporate bond spreads	2,549	1,154	-
25 per cent multiplicative increase in equity and property implied volatilities	2,526	1,134	50
25 per cent multiplicative increase in swaption implied volatilities	2,540	1,147	50
Voluntary discontinuance rates decreasing by 10 per cent	2,577	1,185	57
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	2,625	1,233	55
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	2,600	1,208	57
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges*	2,537	1,145	49
For value of new business, acquisition expenses other than commission and commission related    expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	44
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable   and non-hedgeable risks for covered business	2,567	1,175	51
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence level which is targeted by an internal economic capital model	2,530	1,138	48

*    No impact on with-profit annuities as the mortality risk is borne by policyholders.

11 Sensitivity tests
	31 December 2007		£m
United States	MCEV	Value of in-force business	Value of new business
Central assumptions	462	(43)	31
Effect of:
Required capital equal to the minimum statutory requirement	485	(20)	37
Increasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	253	(252)	52
Decreasing all pre-tax investment and economic assumptions by 1 per cent,
with credited rates and discount rates changing commensurately	580	75	2
Recognising the present value of an additional 1 per cent of credit and liquidity spreads on corporate    bonds over and above the risk free reference rate over the lifetime of the liabilities	754	(22)	52
with credited rates and discount rates changing commensurately	754	(22)	52
Equity and property market value increasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	463	(42)	-
Equity and property market value decreasing by 10 per cent,
with all pre-tax investment and economic assumptions unchanged	461	(44)	-
10bps contraction on corporate bond spreads	494	(11)	-
25 per cent multiplicative increase in swaption implied volatilities	406	(99)	(17)
Voluntary discontinuance rates decreasing by 10 per cent	536	31	56
Maintenance expense levels decreasing by 10 per cent,
with no corresponding increase in policy charges	465	(40)	35
Mortality and morbidity assumptions for assurances decreasing by 5 per cent,
with no corresponding increase in policy charges	464	(41)	32
Mortality assumption for annuities decreasing by 5 per cent,
with no corresponding increase in policy charges	447	(58)	23
For value of new business, acquisition expenses other than commission and commission related    expenses increasing by 10 per cent,
with no corresponding increase in policy charges	-	-	25
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable   and non-hedgeable risks for covered business	493	(12)	41
Economic capital for residual non-hedgeable risks calculated assuming a 99.93 per cent confidence   level which is targeted by an internal economic capital model	449	(56)	27

12 Key changes in MCEV methodology and assumptions

Notes 2 and 3 describe the methodology and assumptions used under the MCEV reporting framework. 

The major change in Old Mutual's overall approach for deriving its MCEV compared to the approach adopted for EEV is the allowance for risk. Under MCEV a bottom-up allowance is made for financial risks (in particular asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets and financial options and guarantees are valued using market consistent models calibrated to observable market prices) and an explicit allowance is made for the cost of residual non-hedgeable risks in the covered business. In contrast, under EEV a top-down allowance was made for all risks by means of the risk margin included in the single risk discount rate applicable for each geography and the value placed on the time value of financial options and guarantees. The MCEV methodology therefore makes a more granular allowance for the differences in the risk profile of different blocks of business than the EEV methodology. 

A summary of the key changes arising in the move from the EEV to MCEV reporting framework previously adopted is set out in the table below.

	EEV	MCEV
Overall allowance for risk	Risk discount rates are calibrated to produce EEV results which are equal to an Embedded Value that is approximated using bottom-up market consistent techniques that were considered acceptable market practice at the time of implementation of the EEV Principles in May 2005.	The aggregate allowance for risk across all businesses under EEV is not aligned with the requirements under the new MCEV Principles.
Economic assumptions	Investment return assumptions are set with reference to real-world assumptions, which include allowance for expected risk premiums on assets such as equities and corporate bonds, without directly adjusting for the risk inherent in these returns. A margin is added to the discount rate to reflect the risks within the business.	Both investment return and discount rate assumptions are set in relation to risk free reference rates, defined as swap yields. As a result of current dislocated markets, adjusted risk free reference rates for US onshore business include a liquidity adjustment at 31 December 2008 to reflect the large liquidity premium inherent in corporate bond spreads at that date. No up-front value is placed on any risk premiums in excess of the adjusted risk free reference rates. Such risk premiums are only recognised in MCEV reporting as and when they are earned.
Treatment of unrealised corporate bond gains/losses for US business	Any decrease/increase in credit spreads has a limited impact on Embedded Value as only the assets backing the adjusted net worth, which in the past were largely cash assets, are marked to market. For example, an increase in credit spreads would be modelled as follows: ·          On existing assets the only losses capitalised would be on realised losses on projected sale of assets. §          For new bond purchases credit is taken for the increased spread which is recognised as higher expected future income within VIF, offsetting some of the losses on the sale of existing assets.	All assets are marked to market. Since investment return assumptions are set with reference to swap rates, any increase in credit spreads will have a direct impact on the Embedded Value to the extent that such losses can not be passed onto policyholders through changes in future bonus / crediting rates (where these are set subject to contractual guarantees and taking into account competitive considerations and consequent lapse activity) over the remaining lifetime of the in-force policies.
Valuation of time value of financial options and guarantees	Not all stochastic models are required to be market consistent with real world stochastic models being used in the US.	MCEV reporting requires the use of market consistent stochastic models with volatility assumptions being set with reference to market implied volatilities, as derived from derivative quotes in the capital markets for the relevant term and instrument type.
Cost of capital vs. frictional costs	EEV includes allowance for the ‘cost of required capital’.	MCEV explicitly allows for frictional costs, defined as the tax and investment expenses associated with required capital.
Cost of residual non-hedgeable risks	No explicit allowance is made for such risks, although an implicit allowance is permitted in the risk discount rate for each geography.	Explicit allowance is made for the cost of these risks which represents a charge for the uncertainty arising in the best estimate of shareholder cash flows resulting from such residual non-hedgeable risks.
PVNBP	Under EEV the PVNBP is calculated by discounting the projected premiums using single risk discount rate applicable in each geography.	Discounting uses term dependent risk free reference rates. As risk discount rates used under EEV are on average greater than the risk free reference rates used under MCEV, MCEV provides an increase in PVNBP and a corresponding decrease in PVNBP margins (assuming all other things including VNB being equal).
Presentation of earnings	The EEV Principles do not prescribe the format of the presentation of earnings. The expected existing business contribution is calculated as the sum of the unwind of the VIF at the risk discount rate and the expected real world returns on the adjusted net worth.	MCEV Principles prescribe the formats for the presentations of analyses of MCEV earnings and Group MCEV earnings. The following material changes in the presentation of the analyses of MCEV earnings have been adopted: ·       MCEV calculates the expected existing business contribution byprojecting both actual assets and actual liabilities (including assets backing the free surplus and required capital) from the start of the reporting period to the end of the reporting period using expected real-world earned rates of returnfor the 1-year period. ·       Contrary to previous EEV treatment, the impact of changes in local regulations and taxation are excluded from operating MCEV earnings. ·       Changes and improvement to models and methodology are reflected as other operating variances rather than being included as part of operating assumption changes.
Sensitivities	EEV Principles prescribe less mandatory sensitivities than the MCEV Principles.	Apart from the mandatory sensitivities, a number of additional sensitivities are disclosed in order for users of the supplementary information to better understand the impact of adopting MCEV.
Adjusted Group MCEV	The treatment of all business other than the covered business is the same as in the primary financial statements.	Adjusted Group MCEV includes the impact of marking all Group debt to market value, the market value of the Group’s listed banking and general insurance subsidiaries as well as marking the value of deferred consideration due in respect of the Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to market.

13 Restatement of adjusted Group Embedded Value per share 

The table below provides a restatement of the adjusted Group Embedded Value per share as at 31 December 2007 from an EEV to MCEV basis.

	At  31 December  2007
Previously published adjusted Group EEV per share	173.3p
Change in Embedded Value of covered business as a consequence of the move to MCEV	-9.4p
Marking the present value of future BEE scheme deferred consideration to market	+0.2p
Adjustment to bring external debt to market value	+2.2p
Total impact	-7.0p
Adjusted Group MCEV per share	166.3p
Percentage impact	-4.2%

The change in the adjusted Group Embedded Value per share from 173.3p on an EEV basis to 166.3p on an MCEV basis is driven mainly by the change in the Embedded Value of the covered business which is analysed in detail in note 15.

14 Restatement of adjusted Group MCEV operating earnings per share 

The table below provides a restatement of the adjusted Group operating earnings per share for the year ended 31 December 2007 from an EEV to MCEV basis.

	Year ended  31 December  2007
Previously published adjusted Group EEV operating earnings per share	17.2p
Change in operating earnings of covered business as a consequence of the move to MCEV	-0.2p
Adjusted Group MCEV operating earnings per share	17.0p
Percentage impact	-1.2%

The conversion from EEV to MCEV reporting has no impact on the operating earnings of our non-life business and hence the small change in the adjusted Group operating earnings per share from 17.2p on an EEV basis to 17.0p on an MCEV basis is driven entirely by the change in the operating earnings of the covered business which is analysed in more detail in note 18.

15 Restatement of Embedded Value of covered business

The tables below reconcile the Embedded Value of the covered business as at 31 December 2007 and 31 December 2006 from the previously published EEV basis to the MCEV basis. The transition from the top-down real-world EEV approach to the bottom-up MCEV approach can be broken down into the following key steps: 

 

a.      Release of cost of required capital in published EEV – The cost of required capital under the previous EEV approach is released and this component of EEV is replaced by frictional costs (see step c) under the MCEV approach. This step increases the Embedded Value.

b.       Economic assumption changes incorporate a combination of the following:

·          Any risk margins in the single weighted average EEV discount rate for each of the geographies are removed and the EEV discount rates are replaced by term dependent risk free reference rates. This step increases the Embedded Value for profitable business as expected future profits are discounted at lower rates, and gives rise to a greater Embedded Value loss for loss making business, as a result of discounting losses at lower rates.

·          Any risk margins in real-world EEV investment return assumptions are removed and the real-world EEV investment return assumptions are replaced by term dependent risk free reference rates and thereby removing any capitalisation of investment risk margins. This step decreases the Embedded Value as expected future investment returns are projected at lower rates.

·          Other related model refinements including updating all stochastic models to be market consistent. For the United States business such model refinements also include a revision of assumptions for dynamic policyholder behaviour within the stochastic models to allow for lower average returns from risk-neutral market consistent scenarios compared to the scenarios in the real-world stochastic model that was used under EEV.

c.       Allowance for frictional costs – As mentioned in step (a) above, the cost of required capital under the previous EEV approach is released and replaced by an allowance for frictional costs under the MCEV approach. This step decreases the Embedded Value.

d.      Explicit allowance for cost of residual non-hedgeable risks – Previously under the EEV approach an implicit allowance was permitted for such risks in the determination of the risk discount rate for each geography. This step decreases the Embedded Value.

£m
In-force covered business	At 31 December  2007
	Total	UK	Nordic	ELAM	OMSA	Rest of Africa	United States
Previously published EEV	6,861	1,451	1,084	580	2,549	128	1,069
Release of cost of required capital in published EEV	377	50	27	30	175	4	91
Economic assumption changes	(433)	80	69	13	12	(1)	(607)
Allowance for frictional costs	(192)	(10)	(9)	(10)	(122)	(2)	(38)
Allowance for cost of residual non-hedgeable risks	(264)	(40)	(57)	(41)	(68)	(5)	(53)
Total impact	(512)	80	30	(8)	(3)	(4)	(607)
MCEV	6,349	1,531	1,114	572	2,546	124	462
Percentage impact	-7.5%	+5.5%	+2.8%	-1.4%	-0.1%	-3.1%	-56.8%

  15 Restatement of Embedded Value of covered business 

£m
In-force covered business	At 31 December  2006
	Total*	UK *	Nordic *	ELAM *	OMSA	Rest of Africa	United States*
Previously published EEV	6,413	1,255	846	600	2,433	135	1,144
Release of cost of required capital in published EEV	393	69	23	49	179	4	69
Economic assumption changes	(225)	50	56	(8)	-	2	(325)
Allowance for frictional costs	(186)	(14)	(8)	(9)	(129)	(2)	(24)
Allowance for cost of residual non-hedgeable risks	(250)	(35)	(54)	(47)	(70)	(5)	(39)
Total impact	(268)	70	17	(15)	(20)	(1)	(319)
MCEV	6,145	1,325	863	585	2,413	134	825
Percentage impact	-4.2%	+5.6%	+2.0%	-2.5%	-0.8%	-0.7%	-27.9%

* Gross of minority interests

The impact as at 31 December 2007 of moving from an EEV to an MCEV methodology is a reduction in Embedded Value of the covered business of 7.5 per cent (31 December 2006: 4.2 per cent) from £6,861 million to £6,349 million (31 December 2006: from £6,413 million to £6,145 million). Most of the reduction in Embedded Value is attributable to the United States business which decreased by -56.8 per cent at 31 December 2007 (31 December 2006: -27.9 per cent) from £1,069 million to £462 million (31 December 2006: from £1,144 million to £825 million).

The frictional costs calculated under MCEV are significantly less than the cost of required capital under EEV which reflects the difference between the risk discount rate in each geography, inclusive of an explicit risk margin, and the expected post-tax investment return on the assets backing the required capital. Under MCEV risks are modelled explicitly and the risk margin in each geography is not required.

The impact of the transition from EEV to MCEV also varies by product type. Under EEV a weighted average risk discount rate was applied to all products within a specific geography whereas under MCEV separate explicit allowances are made for financial and non-financial risks for each product.

• Risk products, for example term assurance, generally increase in value under MCEV compared to EEV. Product profitability is mainly driven by non-financial pricing margins which are discounted at lower risk free reference rates under MCEV.

• The impact on savings products, for example unit-linked policies, is broadly neutral as the reduced assumed future investment returns which are set in relation to risk free reference rates are largely offset by the increase in value due to the lower discount rates (which are also set in relation to risk free reference rates) that are applied to future cash flows.

• Products with a high proportion of financial risk, for example spread-based contracts such as immediate annuities where profitability relies on achieving a return in excess of the risk free reference rates to support the pricing bases, tend to reduce in value under MCEV. No risk premiums in excess of the risk free reference rates are recognised under MCEV until realised in a particular year, when it emerges as a combination of expected existing business contribution and economic variance in that year. In contrast EEV recognises the capitalised expected profits from taking on financial risk, i.e. capitalises returns on more risky assets, without necessarily making appropriate adjustments at a per product level for the fact that the returns under these assets have a greater degree of inherent risk.

Further commentary on the impact of moving from an EEV to an MCEV methodology for each geography, in particular for United States business, is provided below.

15 Restatement of Embedded Value of covered business 

Europe and Africa

Within the European and African businesses, the aggregate allowance for risk within the EEV and MCEV approaches is broadly aligned and hence relatively minor impacts are experienced on these businesses when moving from an EEV to an MCEV approach for valuing the covered business. 

United States

The aggregate allowance for risk under EEV was not aligned with the requirements under the new MCEV Principles and the major contributors are discussed below. 

      ·          Treatment of unrealised corporate bond losses

o         Under EEV any increase in credit spreads has a limited impact on Embedded Value as only the assets backing the adjusted net worth, which in the past were largely cash assets, are marked to market. This methodology is largely driven by the book-value accounting basis used for statutory reporting in the United States. Therefore on existing assets the only losses capitalised following an increase in credit spreads would be on realised losses on projected sale of assets. The EEV is only reduced to the extent that the losses realised in the projections are not passed on to policyholders by reducing future crediting / bonus rates (subject to contractual guarantees and competitive considerations that impact on policyholder persistency behaviour) over the remaining lifetime of the in-force policies. For new bond purchases credit is taken from the increased spread which is recognised as higher expected future income within VIF, offsetting some of the losses on existing assets.

o         However under MCEV all assets are marked to market and any increase in credit spreads will be fully recognised in the value of the asset portfolio. Since investment return assumptions are set with reference to swap rates under MCEV, in the modelling of future liability cash flows such losses can not necessarily be passed onto policyholders through changes in future crediting (bonus) rates, which are subject to contractual guarantees and constrained by competitive considerations, over the remaining lifetime of the in-force policies.

 

·          Pricing basis vs. MCEV basis

o         Many of the United States Life products are priced on the basis that a part of the spread between risk free or swap rates and corporate bonds will be passed onto policyholders in the form of better crediting (bonus) rates. The spread of corporate bond yields over risk free rates is assumed to consist of both a credit default component and a non-credit component. The credit default component compensates the holder of the instrument for the risk that the issuer may default. The non-credit related component, generally referred to as the liquidity premium, compensates the holder of the instrument for the fact that they may not be able to trade out of the instrument at their choosing.

o         For many of the products sold by the US business, profitability therefore depends on the spread, over risk free rates, earned on corporate bond assets. For such spread-based business, there is no recognition in the MCEV at 31 December 2007 or 31 December 2006 of any liquidity or credit risk premiums in excess of risk free reference rates until such profits have been realised. The earnings from corporate bond spreads in excess of the risk free reference rates, which had previously been capitalised at point of sale under EEV, are now only recognised as an additional source of earnings in each future time period as the margin over risk free reference rates is earned. Hence the timing of recognition of profits under EEV and MCEV for such business is materially different.

o         A similar issue occurs with the deferred tax assets currently held. As earnings are expected to emerge over time, it is anticipated that these assets could be utilised to offset future tax liabilities. However since in the current economic environment taxable profits are not projected in aggregate on an MCEV basis, these deferred tax assets are not recognised in the MCEV. Hence it is expected that the benefit of this asset will emerge over future periods as returns in excess of risk free reference rates are earned.

o         It is important to appreciate that the change in reporting basis does not change the underlying profitability of spread-based business, but merely the representation of profitability, particularly early in the life of such contracts.

 

·          Financial guarantees

o         To expand further on why the impact of the move to MCEV reporting is so marked on spread-based business, crediting (bonus) rates are generally set with anticipation of earning some risk premiums over and above the risk free reference rates. However this non-recognition of projected investment risk premiums under MCEV reporting can not necessarily be offset by reduced policyholder crediting rates as, once these crediting rates are locked in or guaranteed over a future period, they must be valued at that level. For example, for annuities in payment claim payments are locked in for the duration of the contract at a level which was priced taking into account the expected future corporate bond spreads to be earned. Hence an initial loss will be shown under MCEV as the annuity payments are larger than can be supported by risk free reference returns on the asset portfolio on a prospective basis, and the Embedded Value valuation assumes that none of these future margins are earned.

o         For other spread-based products (such as fixed indexed annuities where there is an accumulation phase), the loss of capitalised risk premiums upfront can be partially offset to the extent that crediting (bonus) rates are not fixed for the full term of the contract and that management can adjust future crediting rates relative to modelled investment returns – generally aiming to target a margin to cover profit and expenses. However future investment returns based on risk free reference rates are much lower than expected real-world returns, which means that any underlying guarantees in the policies (including any crediting rates that have been declared prospectively until the next reset date) are more likely to take effect in risk-neutral market consistent stochastic scenarios. There may thus be a shortfall of projected profits relative to profits that are expected to emerge on a real world pricing basis, which we refer to as ‘spread compression’. Additionally some of the deferred annuities still have crediting rates locked in for several years (e.g. Multi-Year Guaranteed Annuities).

o         Market volatility assumptions that are used to calculate the time value of financial options and guarantees under MCEV are higher than the long-term expected volatilities assumed under EEV. This has increased the time value of financial options and guarantees under MCEV.

 

·          Discounting of projected MCEV losses

o         Under MCEV reporting the discount rate is set in relation to risk free reference rates which are lower than the risk discount rates used under EEV reporting. In the instance where low risk free projected investment returns under MCEV lead to lower investment income, but overall still reflect profitable products, the discounting effect of using a lower rate tends to offset the removal of the risk premium in investment returns. However in instances where low risk free projected investment returns under MCEV lead to a projected loss on the business, the resulting losses are also discounted at a lower rate, which has the effect of increasing the present value of the projected future losses.

o         As a consequence, MCEV results at a time of very low risk free reference rates of return need to be carefully considered:

§          An increase in risk free yields can rapidly turn a market consistent VIF that is negative into a positive VIF if the risk free reference rate starts at a level below guaranteed crediting (bonus) rates and increases to one which leads to a surplus in investment income relative to crediting rates.

§          In the event that an increase in risk free reference rates does not fully cover the required guaranteed crediting rate, the resulting loss will still be smaller than the starting point, and the effect of discounting this at a higher rate could be that the VIF loss reduces substantially.

§          There is hence a severely ‘non-linear’ outcome when risk free reference rates are close to guaranteed crediting rates, with small changes in risk free rates (up or down) leading to large changes in VIF.

 

Considering the above, the more pronounced impact of the move from EEV to MCEV reporting at 31 December 2007 of -7.5 per cent compared to the impact at 31 December 2006 of -4.2 per cent results mainly from the following changes in economic conditions:

·          A widening of corporate bond spreads and reductions in market values of such assets - marking all assets to market value means that unrealised capital losses are no longer expected to remain largely unrealised even if portfolio cash flow matching means that those assets are held to maturity. Or practically, it is assumed that at 31 December 2007 a larger portion of corporate bond assets will default before maturity than assumed at 31 December 2006.

·          Reductions in risk free reference rates and as a consequence all guarantees being in the money to a greater extent.

·          An increase in implied market volatilities which are used to assess the time value of financial options and guarantees, relative to the real-world approach of using historic volatilities that was previously adopted under EEV.

In conclusion, compared to EEV reporting, MCEV reporting merely changes the timing of recognition of profits and not the ultimate profitability that will emerge on covered business. Over time it is therefore expected that risk premiums in excess of risk free reference rates will be realised and will contribute to MCEV earnings. 

16 Comparison of components of Embedded Value on EEV and MCEV bases 

The tables below provide a comparison of the components of Embedded Value of the covered business as at 31 December 2007 and 31 December 2006 between the previously published EEV basis and the MCEV basis. The change in MCEV to a bottom-up evaluation of the risks inherent in the business requires a change in the presentation of the components underlying the MCEV.

£m
In-force covered business	At 31 December  2007
	Total		UK		Nordic		ELAM		OMSA*		Rest of Africa		United States
Previously published EEV	6,861		1,451		1,084		580		2,549		128		1,069
Adjusted net worth	2,423		276		122		50		1,394		76		505
Free surplus	516		89		47		(12)		268		43		81
Required capital	1,907		187		75		62		1,126		33		424
Value of in-force business	4,438		1,175		962		530		1,155		52		564
Present value of future profits	4,864		1,225		989		561		1,330		56		703
Additional time value of financial options and guarantees	(49)		-		-		(1)		-		-		(48)
Cost of required capital	(377)		(50)		(27)		(30)		(175)		(4)		(91)
MCEV	6,349		1,531		1,114		572		2,546		124		462
Adjusted net worth	2,421		276		122		50		1,392		76		505
Free surplus*	515		89		47		(11)		266		43		81
Required capital	1,906		187		75		61		1,126		33		424
Value of in-force business	3,928		1,255		992		522		1,154		48		(43)
Present value of future profits	4,584		1,305		1,059		574		1,344		55		246
Additional time value of financial options and guarantees	(199)		-		-		(1)		-		-		(198)
Frictional costs	(193)		(10)		(10)		(10)		(122)		(2)		(38)
Cost of residual non-hedgeable risks	(264)		(40)		(57)		(41)		(68)		(5)		(53)

*    For the South African business, the value of the asset related to the deferred CGT liability recognised in the adjusted net worth was recalculated on a market consistent basis.

£m
In-force covered business	At 31 December  2006
	Total		UK*		Nordic*		ELAM*		OMSA**		Rest of Africa		United States
Previously published EEV	6,413		1,255		846		600		2,433		135		1,144
Adjusted net worth	2,104		235		(108)		115		1,326		82		454
Free surplus	202		73		(154)		59		115		45		64
Required capital	1,902		162		46		56		1,212		37		390
Value of in-force business	4,309		1,020		954		485		1,107		53		690
Present value of future profits	4,782		1,089		1,004		538		1,286		57		806
Additional time value of financial options and guarantees	(51)		-		-		(4)		-		-		(47)
Cost of required capital	(421)		(69)		(50)		(49)		(179)		(4)		(69)
MCEV	6,145		1,325		863		585		2,413		134		825
Adjusted net worth	2,102		235		(108)		115		1,324		82		454
Free surplus**	199		73		(154)		59		112		45		64
Required capital	1,903		162		46		56		1,212		37		390
Value of in-force business	4,043		1,090		971		470		1,089		52		371
Present value of future profits	4,644		1,139		1,033		531		1,333		60		548
Additional time value of financial options and guarantees	(165)		-		-		(5)		(45)		(1)		(114)
Frictional costs	(186)		(14)		(8)		(9)		(129)		(2)		(24)
Cost of residual non-hedgeable risks	(250)		(35)		(54)		(47)		(70)		(5)		(39)

*     Gross of minority interests.

**    For the South African business, the value of the asset related to the deferred CGT liability recognised in the adjusted net worth was recalculated on a market consistent basis.

17 Restatement of value of new business (after tax) of covered business

The table below reconciles the value of new business and new business margins for the year ended 31 December 2007 from the previously published EEV basis to the MCEV basis. The same steps have been applied in the reconciliations as for the total in-force covered business as set out in note 16.

£m
Value of new business	Year ended  31 December 2007
	Total	UK	Nordic	ELAM	OMSA*	Rest of Africa	United States
Previously published VNB under EEV basis	266	76	19	38	53	8	72
Release of cost of required capital in published EEV basis	32	2	2	3	11	0	14
Economic assumption changes	(9)	10	7	2	-	-	(28)
Allowance for frictional costs	(20)	0	(1)	(2)	(8)	0	(9)
Allowance for cost of residual non-hedgeable risks	(39)	(7)	(4)	(3)	(6)	(1)	(18)
Total impact	(36)	5	4	1	(4)	(1)	(41)
VNB on MCEV basis	230	81	23	38	50	7	31
Percentage impact	-13.6%	6.6%	21.1%	2.7%	-6.7%	-10.4%	-56.9%
EEV PVNBP	13,878	6,297	643	1,465	2,224	99	3,150
EEV APE	1,760	740	147	190	333	15	335
EEV PVNBP margin	1.9%	1.2%	2.9%	2.5%	2.4%	7.9%	2.3%
EEV APE margin	15%	10%	13%	20%	16%	51%	21%
MCEV PVNBP	14,046	6,311	690	1,494	2,268	98	3,185
MCEV APE	1,748	740	147	190	321	15	335
MCEV PVNBP margin	1.7%	1.3%	3.3%	2.6%	2.2%	7.1%	1.0%
MCEV APE margin	13%	11%	16%	20%	15%	47%	9%

*    Note that OMSA healthcare administration business was included in the EEV basis, but is excluded on an MCEV basis. 

The impact on VNB of the covered business written in 2007 due to moving from an EEV to MCEV basis is a decrease of 13.6 per cent from £266 million to £230 million. Most of the reduction is attributable to the United States business where VNB decreased by 56.9 per cent from £72 million to £31 million.

The EEV risk discount rate for each geography was calibrated for total in-force business and hence the EEV methodology did not make allowance for different levels of risk for different portfolios of asset and liability risks. The MCEV methodology makes a more granular allowance for the differences in the risk profile of different product lines and different generations of policies. The relative impacts on VNB of each of the steps outlined above therefore differ from the impacts on VIF as outlined in note 16 because the risk profiles of new business are different to the risk profiles of in-force business.

Also note that in calculating PVNBP, the projected premiums are discounted with risk free reference rates under MCEV rather the higher risk discount rate which is applicable in each geography under the previous EEV methodology. PVNBP under MCEV reporting is therefore greater than under EEV reporting with a corresponding decrease in PVNBP margins (assuming all other things including VNB being equal).

18 Restatement of Return on Embedded Value of covered business

Return on Embedded Value (RoEV) for covered business is calculated as the operating earnings after tax divided by opening Embedded Value in local currency. The table below provides summaries of the drivers in the change of RoEV for the year ended 2007 from the previously published EEV basis to the MCEV basis. For this purpose the impact on RoEV of the recalibration of risk margins under EEV has been treated as an assumption change.

No results are shown for the 'Rest of Africa' from a materiality perspective.

In-force covered business	Year ended  31 December  2007
	UK		Nordic		ELAM		OMSA		United  States
Previously published RoEV% on an EEV basis	17.2%		4.6%		6.1%		11.2%		3.8%
MCEV RoEV%	15.5%		7.6%		1.5%		11.7%		4.1%
Difference	-1.7%		3.1%		-4.6%		0.5%		0.3%
Drivers of change for the covered business:
New business value	0.0%		0.4%		0.4%		-0.2%			-2.5%
Expected existing business contribution	0.5%		-0.9%		-0.3%		1.2%			0.6%
Experience variances	0.5%		1.2%		0.3%		-0.6%			-1.5%
Assumption changes	-2.7%		2.4%		-5.2%		-0.3%			-5.2%
Other operating variances*	0.0%		0.0%		0.2%		0.4%			8.9%

*    Changes and improvement to models and methodology are reflected as other operating variances under MCEV rather than being included as part of assumption changes as treated under EEV.

The impact on VNB as a result of moving from an EEV to MCEV basis has been outlined in note 18. Other key drivers of the change in RoEV for each geography are discussed below.

UK and ELAM

As mentioned earlier in note 13, contrary to previous EEV treatment, the impact of changes in taxation under MCEV is excluded from operating earnings. Such reallocation of tax changes to non-operating variances is the major reason for the significantly reduced contribution of assumption changes. 

Nordic

The contribution from assumptions changes is impacted positively by treating the negative impact of the recalibration of risk margins under EEV as an assumption change. In addition the impact from the introduction of annuitisation of the corporate business is higher under MCEV than under EEV since the MCEV effects are discounted at risk free reference rates rather than the higher risk discount rate under EEV.

South Africa

The major reasons for the change in RoEV from an EEV to MCEV basis is the significantly higher expected existing business contribution. As mentioned earlier in note 4, the expected existing business contribution under MCEV is now derived with reference to the one-year forward risk free reference rate at the start of the reporting period as opposed to the 10-year government bond yield curve. The downwards sloping swap yield curve in South Africa therefore leads to a higher expected existing business contribution under MCEV. 

United States

The positive impact of model improvements and changes in methodology on an MCEV basis has been re-classified from assumption changes to other operating variances.

Going forward, rates of return on Embedded Value for the US should be higher than under EEV as the opening MCEV is starting from a much lower base value compared to EEV and, other things being equal, higher actual operating earnings will emerge than projected under MCEV at the valuation date as corporate bond credit spreads are realised and margins (such as the cost of residual non-hedgeable risks) are released.

  Shareholder information

Listings and shares in issue

The Company's shares are listed on the London, Malawi, Namibian and Zimbabwe Stock Exchanges and on the JSE Limited (JSE). The primary listing is on the London Stock Exchange and the other listings are all secondary listings. The Company's secondary listing on the Stockholm Stock Exchange ended on 7 September 2007, but the Company's shares may still be traded on the Xternal list of the Nordic Exchange in Stockholm. The ISIN number of the Company's shares is GB0007389926.

At 31 December 2008, the Company had 5,516,141,360 ordinary shares of 10p each in issue (31 December 2007: 5,510,272,537). 239,434,888 shares were held by the Company in treasury, at 31 December 2008 (31 December 2007: 97,074,907)

Websites

Further information on the Company can be found on the following websites:

www.oldmutual.com

www.oldmutual.co.za

 

END

 

 

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