Preliminary Results Part 3 MC

RNS Number : 4079I

Old Mutual PLC

11 March 2010

 



Group Market Consistent Embedded Value statement of earnings

For the year ended 31 December 2009

		£m
	Notes	Year ended 31 December 2009	Year ended 31 December 2008
Long Term Savings
Covered business		554	578
Asset management		26	42
Banking		16	23
		596	643
Nedbank
Banking		470	575
Mutual and Federal
General insurance		70	76
US Asset Management
Asset management		83	97
Other operating segments
Finance costs		(104)	(140)
Interest payable to non-core operations		(40)	-
Other shareholders' expenses		(69)	(19)
Adjusted operating Group MCEV earnings before tax from core operations		1,006	1,232
Bermuda non-core operations
Long term business		8	(254)
Adjusted operating Group MCEV earnings before tax*		1,014	978
Adjusting items	C1	913	(2,037)
Total Group MCEV earnings before tax for the financial year		1,927	(1,059)
Income tax attributable to shareholders		(145)	13
Total Group MCEV earnings after tax for the financial year		1,782	(1,046)
Total Group MCEV earnings for the financial year attributable to:
Equity holders of the parent		1,562	(1,284)
Non-controlling interests
Ordinary shares		156	184
Preferred securities		64	54
Total Group MCEV earnings after tax for the financial year		1,782	(1,046)
Basic total Group MCEV earnings per ordinary share (pence)		31.3	(25.7)
Weighted average number of shares - millions		4,994	4,995

*     For long-term business and general insurance businesses, adjusted operating MCEV earnings are based on short-term and long-term investment returns respectively, include investment returns on life funds' investments in Group equity and debt instruments, and are 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 non-controlling interests in accordance with IFRS. For all businesses, adjusted operating MCEV earnings exclude 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

Adjusted operating Group MCEV earnings per share

For the year ended 31 December 2009

		£m
	Notes	Year ended 31 December 2009	Year ended 31 December 2008
Adjusted operating Group MCEV earnings before tax		1,014	978
Tax on adjusted operating Group MCEV earnings	B2	(209)	(135)
Adjusted operating Group MCEV earnings after tax		805	843
Non-controlling interests
Ordinary shares		(179)	(214)
Preferred securities		(64)	(54)
Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders		562	575
Adjusted operating Group MCEV earnings from core operations		581	813
Adjusted operating Group MCEV earnings from non-core operations		(19)	(238)
Adjusted operating Group MCEV earnings per share from core operations		11.1	15.5
Adjusted operating Group MCEV earnings per share from non-core operations		(0.4)	(4.5)
Adjusted operating Group MCEV earnings per share* (pence)		10.7	11.0
Adjusted weighted average number of shares - millions		5,229	5,230

*     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 non-controlling 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.

Components of Group MCEV and adjusted Group MCEV

As at 31 December 2009

Components of Group MCEV			£m
	Notes	At 31 December 2009	At 31December 2008
Adjusted net worth attributable to ordinary equity holders of the parent		4,417	3,462
Equity		8,464	7,737
Adjustment to include long-term business on a statutory solvency basis:
Long Term Savings	C3	(2,626)	(2,244)
Bermuda	C3	(6)	(217)
Adjustment for market value of life funds' investments in Group equity and debt instruments held in life funds		268	173
Adjustment to remove perpetual preferred callable securities and accrued dividends		(688)	(688)
Adjustment to exclude acquisition goodwill from the covered business:
Long Term Savings	C3	(995)	(1,299)
Value of in-force business		3,212	1,800
Present value of future profits		4,255	2,580
Additional time value of financial options and guarantees		(416)	(261)
Frictional costs		(221)	(148)
Cost of residual non-hedgeable risks		(406)	(371)
Group MCEV		7,629	5,262
Group MCEV value per share (pence)		144.5	99.7
Return on Group MCEV (RoEV) per annum from core operations		11.1%	11.0%
Return on Group MCEV (RoEV) per annum from non-core operations		(0.4)%	(3.2)%
Return on Group MCEV (RoEV) per annum		10.7%	7.8%
Number of shares in issue at the end of the financial year less treasury shares - millions		5,279	5,277

The adjustments to include long-term business on a statutory solvency basis reflect the difference between the net worth of each business on the statutory basis (as required by the local regulator) and their portion of the Group's consolidated equity shareholders' funds. In South Africa, these values exclude items that are eliminated or shown separately on consolidation (such as Nedbank, Mutual & Federal and inter-company loans). For some European countries and US Life the value reflected in the adjustment to include long-term business on a statutory solvency basis includes the value of the deferred acquisition cost asset which is part of the equity.

The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £562 million (year ended 31 December 2008: £575 million) divided by the opening Group MCEV.

Components of Group MCEV and adjusted Group MCEV

As at 31 December 2009

Components of adjusted Group MCEV		£m
	Notes	At 31 December 2009	At 31 December 2008
Group MCEV		7,629	5,262
Pro forma adjustments to bring Group investments to market value
Adjustment to bring listed subsidiaries to market value		805	68
Nedbank		623	41
Mutual & Federal		182	27
Adjustment for value of own shares in ESOP schemes*		71	63
Adjustment for present value of Black Economic Empowerment scheme deferred consideration		221	169
Adjustment to bring external debt to market value		302	645
Adjusted Group MCEV	B1	9,028	6,207
Adjusted Group MCEV per share (pence)		171.0	117.6
Number of shares in issue at the end of the financial year less treasury shares - millions		5,279	5,277

*     Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2008 and 31 December 2009 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2009 and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the year.

Reconciliation of movements in Group MCEV (after tax)								£m
		Year ended 31 December 2009			Year ended 31 December 2008
	Notes	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Opening Group MCEV		4,183	1,079	5,262	6,349	1,010	7,359
Adjusted operating MCEV earnings		492	70	562	133	442	575
Non-operating MCEV earnings		1,191	(191)	1,000	(2,270)	411	(1,859)
Total Group MCEV earnings		1,683	(121)	1,562	(2,137)	853	(1,284)
Other movements in IFRS net equity	C2	161	644	805	(29)	(784)	(813)
Closing Group MCEV		6,027	1,602	7,629	4,183	1,079	5,262

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

A: MCEV policies

A1: Basis of preparation

The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 84 to 132 as 'MCEV') adopts Market Consistent Embedded Value Principles issued in June 2008 and updated in October 2009 by the CFO Forum ('the Principles') as the basis for the methodology used in preparing the supplementary information.

The CFO Forum announced changes to the MCEV Principles in October 2009 to reflect inter alia the inclusion of a liquidity premium. These changes affirm that the risk free reference rate to be applied under MCEV should include both the swap yield curve appropriate to the currency of the cash flows and a liquidity premium where appropriate. The CFO Forum is undertaking further work to develop more detailed application guidance.

The Principles have been fully complied with for all businesses as at 31 December 2009. The detailed methodology and assumptions made in presenting this supplementary information are set out in notes A2 and A3.

Where reference is made to 'Europe' only, this generally captures the Nordic, Retail Europe and Wealth Management businesses.

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. Non-covered business is valued at the IFRS net asset value detailed in the primary financial statements adjusted to eliminate inter-company loans.

The adjusted Group MCEV, a measure used by management 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, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE schemes') to market, as well as including the market value of excess own shares held in ESOP schemes.

A2: 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; and

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 non-controlling 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 assurance business, and other business, where material, directly related to such long-term life assurance business where the profits are included in the IFRS long-term business profits in the primary financial statements. For the OMSA business, following the sale of the remaining stake in Nedlife to Nedbank, Nedlife is excluded from covered business from 2009 onwards although it is still included in comparative results for prior periods.

Some types of business are legally written by a life company, but under IFRS are 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 unit trust 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, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa ('the BEE schemes') to market, as well as including the market value of excess own shares held in ESOP schemes.

Free surplus

Free surplus is the market value of any assets allocated to, but not required to support, the in-force covered 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 (ie the level of solvency capital which the local regulators require);

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

Any other required capital definition to meet internal management objectives.

Economic capital for the covered business is based upon Old Mutual's own internal assessment of risks inherent in the underlying business. It measures capital requirements on an economic statement of financial position, with MCEV as the available capital, consistent with a 99.93% confidence level over a one-year time horizon.

For Emerging Markets and Europe capital determined with reference to internal management objectives is the most onerous and is the capital measure used. For US Life the required capital is based on the amount that management deems necessary to maintain the desired credit rating for the Company, whilst for Bermuda the required capital is set with reference to internal management objectives.

The required capital in respect of OMSA's 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
	At 31 December 2009			At 31 December 2008
	Required capital (a)	Regulatory capital (b)	Ratio (a/b)	Required capital (a)	Regulatory capital (b)	Ratio (a/b)
Emerging Markets	1,225	930	1.3	1,075	820	1.3
Nordic*	104	92	1.1	105	66	1.6
Retail Europe**	32	52	0.6	64	46	1.4
Wealth Management	213	119	1.8	197	116	1.7
US Life***	462	193	2.4	550	211	2.6
Bermuda***	363	-	n/a	34	-	n/a
Total	2,399	1,386	1.7	2,025	1,259	1.6

*     There has been a large increase in the regulatory capital within the Nordic region due to the strong correlation with funds under management which have increased significantly.

**    Local regulators within many of the Retail Europe countries allow intangible assets to be included as admissible regulatory capital. In such cases the required capital reported for MCEV is net of these items, although each of the countries continues to be sufficiently capitalised on the local solvency basis. Skandia Leben in Germany is permitted under local regulations to include the unallocated policyholder profit sharing liability as admissible capital, leading to a large decrease in the required capital from 31 December 2008 to 31 December 2009.

***  The Bermudan regulator allows intangible assets to be included as admissible regulatory capital. The total regulatory capital for US Life and Bermuda at 31 December 2008 has been restated from £245 million to £211 million due to refinement of the calculation.

Notes to the MCEV basis supplementary information

As at 31 December 2009

Value of in-force covered business

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 (CNHR).

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

Present value of future profits

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 contractual renewal 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 A3. 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 (ie 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, ie 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 (eg with due consideration of the Principles and Practices of Financial Management, or 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 balances where circumstances warrant such action;

dynamic persistency rates for the US Life and Bermuda businesses, and dynamic guaranteed annuity option take-up rates for the South African business driven by changes in economic conditions and management actions; and

changes in surrender values.

In determining the time value of financial options and guarantees at least 1,000 simulations are run to ensure 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.

Emerging Markets

The financial options and guarantees mainly relate 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 Emerging Markets businesses as at 31 December 2009 has been valued using a risk-neutral market consistent asset model, and is referred to as the 'Investment Guarantee Reserve' (IGR). This reserve includes a discretionary margin as defined by local guidelines to allow for the sensitivity of the reserve to future interest rate movements. This discretionary margin is valued in the VIF.

US Life

The financial options and guarantees mainly relate to minimum crediting (bonus) rates.

Bermuda

The financial options and guarantees mainly relate to the guaranteed minimum accumulation benefits on Variable Annuity contracts.

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 partly to 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.

The allowance for frictional costs is independent of the allowance for the cost of residual non-hedgeable risks as described below.

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 type of approaches 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 (eg to the extent that expected operational losses are incorporated in the maintenance expense assumptions) or the time value of financial options and guarantees (eg dynamic policyholder behaviour such as the interaction of the investment scenario and the persistency rates).

Residual non-financial risks include, for example, liability risks such as mortality, longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk. All such risks for which no or insufficient allowance is made in the PVFP or time value of financial options and guarantees, together with some allowance for hedge risk and credit spread risk in the US Life and Bermudan businesses, are considered within the allowance for the CNHR.

An allowance is made in the CNHR 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 CNHR is calculated using a cost of capital approach, ie it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until the liabilities have run off. 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% 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.

Capital held in respect of non-hedgeable risks	£m
		At 31 December 2009	At 31 December 2008
Emerging Markets		606	457
Nordic		333	189
Retail Europe		143	145
Wealth Management		640	386
US Life*		661	513
Bermuda*		619	517
Total		3,002	2,207

*     The total capital held in respect of non-hedgeable risks for US Life and Bermuda at 31 December 2008 has been restated from £826 million to £1,030 million due to refinement of the calculation.

The economic capital included in the calculation of CNHR at 31 December 2008 was calculated with reference to the old European Embedded Value (EEV) methodology, whilst the economic capital included in the calculation of CNHR at 31 December 2009 was calculated with reference to the MCEV methodology. This has led to a step change in the calculation for all business units. To the extent that this change affected operating earnings, the impact is shown under 'other operating variance'.

In addition to the change in the underlying basis used for assessing economic capital from an EEV to MCEV basis, the increase in capital held in respect of CNHR for Europe from £720 million at 31 December 2008 to £1,116 million at 31 December 2009 is largely caused by an increase in the economic capital held for persistency risk in light of the turbulent economic market conditions and due to a change in methodology for waiver of premium products in Sweden to strengthen the economic capital held for morbidity risk.

A weighted average cost of capital rate of 2.0% has been applied to residual symmetric and asymmetric non-hedgeable capital at a business unit level over the life of the contracts. This translates into an equivalent cost of capital rate of approximately 2.6% being applied to the Group diversified capital required in respect of such non-hedgeable risks.

Participating business

For participating business in Emerging Markets, US Life and Bermuda, 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 risk free 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 policyholder 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 US Life and Bermuda, 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 rates 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% 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 in deep and liquid markets, 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

The time value of financial options and guarantees and PVFP (where relevant) are calculated with reference to assets that are projected using 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 on the liability basis that is used to determine future employer contributions, 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, eg 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) that may be payable in South Africa at a rate of 10% 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.

The value of deferred tax assets is partly recognised in the MCEV. Typically those tax assets are expected to be utilised in future by being offset against expected tax liabilities that are generated on expected profits emerging from in-force business. MCEV may therefore understate the true economic value of such deferred tax assets because it does not allow for future new business sales which could affect the utilisation of such 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 premium 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 (eg 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 or economic variances on in-force business and not as new business.

VNB is calculated as follows:

Economic assumptions at the start of the reporting period are used, except for OMSA's Non-Profit Annuities and Fixed Bond products and US Life products where point of sale assumptions are used (where applicable using economic assumptions at the middle of the reporting period as a proxy).

Demographic and operating assumptions at the end of the reporting period are used.

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 non-controlling 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% 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.

 

Notes to the MCEV basis supplementary information

As at 31 December 2009

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 is 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, ie 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 that was also in-force at the beginning 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 legislation.

An analysis of MCEV earnings requires non-operating 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 Wealth Management, Long Term Savings and total covered business where the calculations are performed in sterling.

The anticipated expected existing business contribution for the 12 months following the year ended 31 December 2009 (at the reference rate as well as in excess of the reference rate) is provided to assist users of the MCEV supplementary information in forecasting operating MCEV earnings. Note that the exchange rates that are used for such disclosure are the same rates that are used to translate current year earnings for comparability purposes. Therefore the ultimate expected existing business contribution for the financial year ending 31 December 2010 may differ from these results.

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.

Notes to the MCEV basis supplementary information

As at 31 December 2009

A3: Assumptions

Non-economic assumptions

The appropriate non-economic projection assumptions for future experience (eg mortality, persistency and expenses) are determined using best estimate assumptions of each component of future cash flows, are specific to the entity concerned and have regard to past, current and expected future experience where sufficient evidence exists (eg 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 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 long-term business include 33% of the Group holding Company expenses, with 16% allocated to Emerging Markets, 15% allocated to Europe and 2% allocated to US Life (31 December 2008: 35% of the Group holding Company expenses, with 14% allocated to Emerging Markets, 17% allocated to Europe and 4% allocated to US Life and Bermuda). 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 makes provision for future development costs and one-off exceptional expenses (such as those incurred on the integration of businesses following an acquisition, restructuring costs and costs related to Solvency II implementation) that relate to covered business to the extent that such project costs are known with sufficient certainty, based on three year business plans.

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. From 31 December 2008 Skandia Leben in Germany sets the best estimate assumptions for the amount to be shared with policyholders in future years after making an allowance for the acquisition expenses in relation to the new business expected to be written over the next three years. However note that, as previously mentioned, MCEV excludes the value of future new business.

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 (including any liquidity adjustment) and all the cash flows are discounted using risk free reference rates (including any liquidity adjustment) 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.

Notes to the MCEV basis supplementary information

As at 31 December 2009

Economic assumptions continued

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 Emerging Markets and United States businesses, the swap yield curve is sourced from a 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.

At 31 December 2009, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity adjustment to the US Life business and OMSA's Retail Affluent Immediate Annuity business. Any other risk premiums are recognised within the MCEV as and when they are earned.

A wide range of liquidity market data and literature was reviewed at 31 December 2009, such as the Barrie+Hibbert calibration of US corporate bond spreads using a structural Merton-style model which decomposes the yields of illiquid assets into their constituent parts and a comparison of the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises. It is the directors' view that a significant proportion of corporate bond spreads at 31 December 2009 is attributable to a liquidity premium rather than credit and 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 US Life business and OMSA's Retail Affluent Immediate Annuity business the currency, credit quality and duration of the actual corporate bond portfolios were considered and adjusted risk free reference rates were derived at 31 December 2009 by adding 100bps of liquidity premium for the US Life business (31 December 2008: 300bps) and adding 50bps of liquidity premium for OMSA's Retail Affluent Immediate Annuity business (31 December 2008: zero allowance) to the swap rates used for setting investment return and discounting assumptions. These adjustments reflect the liquidity premium component in corporate bond spreads over swap rates that is expected to be earned on the portfolios. Old Mutual believes that the differences between market yields on US Life's and OMSA's Retail Affluent bond portfolios and the adjusted risk free reference rates still provide adequate implied margins for default. No liquidity adjustment is applied for other regions in light of the pending liquidity premium application guidance from the CFO Forum.

When the liquidity premium adjustment was calibrated and introduced for US Life business at 31 December 2008, similar research was not yet concluded for South Africa to estimate the quantum of the liquidity premiums inherent in South African corporate bond spreads. In addition, the impact of a liquidity premium adjustment on US Life business was far more material than for OMSA's Retail Affluent Immediate Annuity business as the concentration of US Life's investments in the corporate bond market is far greater and the widening of corporate bond spreads has been more pronounced in the US compared to other regions. Hence the application of a liquidity premium adjustment was initially focussed on the US and an adjustment was only introduced for OMSA at 30 June 2009 for consistency in methodology.

At those durations where swap yields are not available, eg due to lack of a sufficiently liquid or deep swap market, the swap curve is extended using appropriate interpolation or 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 spread compared to swap rates. However, where modelling system capabilities are restricted (eg US Life), 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, for example as life company expenses include a large element of salary related expenses.

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

Economic assumptions continued

Risk free reference spot yields (excluding any applicable liquidity adjustments)					%
At 31 December 2009	GBP	EUR	USD	ZAR	SEK
1 year	0.9	1.3	0.7	7.3	0.8
5 years	4.7	2.8	3.0	8.9	2.9
10 years	4.8	3.6	3.5	9.2	3.7
20 years	4.0	4.1	4.0	8.2	4.1
At 31 December 2008
1 year	2.0	2.4	1.3	9.3	1.8
5 years	3.1	3.3	2.1	8.0	2.9
10 years	3.4	3.8	2.6	7.8	3.2
20 years	3.5	3.9	2.8	6.7	3.2

Expense inflation					%
At 31 December 2009	GBP	EUR	USD	ZAR	SEK
1 year	3.3	2.5-3.0	3.0	6.4	1.1
5 years	3.8	2.5-3.0	3.0	7.5	2.6
10 years	4.4	2.5-3.0	3.0	7.7	2.8
20 years	4.8	2.5-3.0	3.0	6.7	3.0
At 31 December 2008
1 year	0.1	2.0-3.0	3.0	6.1	0.2
5 years	1.5	2.0-3.0	3.0	5.4	1.0
10 years	2.8	2.0-3.0	3.0	5.5	1.8
20 years	4.1	2.0-3.0	3.0	4.6	2.1

Notes to the MCEV basis supplementary information

As at 31 December 2009

Economic assumptions continued

Volatilities and correlations

Where cash flows contain financial options and guarantees that 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 rates.

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 of investment returns 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 or swaptions in respect of guarantees that are dependent on changes in equity markets and interest rates respectively) 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, eg 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 Emerging Markets 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 earn a return equal to a portfolio that is invested 50% in local equities and 50% 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*						%
At 31 December 2009	1 year swap	5 year swap	10 year swap	20 year swap	Equity (total return index)	Property (total return index)
Option term
1 year	18.3	16.2	15.1	14.8	27.4	17.1
5 years	16.9	15.8	15.3	15.1	25.5	14.8
10 years	15.7	15.2	14.7	14.1	26.2	14.1
20 years	14.5	13.8	13.1	12.0	27.0	14.2
At 31 December 2008
1 year	30.8	32.9	30.8	26.9	37.6	23.2
5 years	35.1	33.6	30.3	25.1	31.6	19.0
10 years	32.9	30.2	25.9	19.8	29.2	15.6
20 years	25.4	22.5	18.7	13.9	28.1	15.4

*     Due to limited liquidity in the ZAR swaption and equity option market, the market consistent asset model has been calibrated by extrapolating swaption and equity option implied volatility data beyond terms of 2 years and 3 years respectively.

USD volatilities				%
At 31 December 2009	1 year swap	5 year swap	10 year swap	20 year swap
Option term
1 year	62.3	36.8	30.1	25.9
5 years	26.9	24.7	22.6	20.6
10 years	18.6	18.3	17.9	16.3
20 years	15.6	14.6	14.3	12.8
At 31 December 2008*
1 year	44.9	34.1	27.7	24.7
5 years	23.9	22.8	21.2	20.1
10 years	18.3	17.9	17.1	16.3
20 years	16.1	16.0	15.4	14.5

*     Due to limited liquidity in the USD swap market as at 31 December 2008, the market consistent asset model was calibrated by reference to volatility data as at 30 September 2008.

International equity volatilities (applicable to Old Mutual Bermuda)*							%
At 31 December 2009	SPX	RTY	TPX	HSCEI	TWSE	KOSP12	NIFTY	SX5E	UKX	BCAI
Option term
1 year	22.1	28.6	28.3	33.5	22.9	23.3	26.5	24.7	23.1	n/a
5 years	26.7	37.1	30.5	34.7	29.2	24.8	25.4	25.6	24.7	n/a
10 years	25.2	32.6	31.9	41.2	27.7	31.3	32.3	27.8	26.3	n/a
At 31 December 2008
1 year	38	46	41	57	36	42	39	38	37	4
5 years	35	45	39	51	34	43	33	37	36	4
10 years	27	34	31	43	30	36	31	31	28	4

International equity volatilities (applicable to Old Mutual Bermuda)*
					%
At 31 December 2009	EEM	USAgg	EUAgg	APAgg
Option term
1 year	31.6	4.5	12.0	11.6
5 years	29.9	4.5	12.0	11.6
10 years	38.0	4.5	12.0	11.6
At 31 December 2008
1 year	n/a	n/a	n/a	n/a
5 years	n/a	n/a	n/a	n/a
10 years	n/a	n/a	n/a	n/a

*     These volatilities, as represented by their Bloomberg codes, refer to price indices. Due to ongoing enhancements in the fund mapping process, the indices referenced will vary from period to period

Exchange rates

All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in Note C2 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. 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 region. Pre-tax real-world economic assumptions are determined as follows:

The equity risk premium is 3.5% for Africa and 3% for Europe and the United States.

The cash return equals the risk free reference rate less a deduction of 2% for Africa and 1% 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 1.5% in Africa and 2% in Europe.

Tax

The weighted average effective tax rates that apply to the cash flow projections within the VIF at 31 December 2009 are set out below:

OMSA - 33% (31 December 2008: 33%)

Namibia - 0% (31 December 2008: 0%)

Nordic - 4% (31 December 2008: 3%)

Retail Europe - 28% (31 December 2008: 28%)

Wealth Management - range of 4% to 21% (31 December 2008: 6% to 28%)

US Life - 5% (31 December 2008: 0%)

Bermuda - 10% (31 December 2008: 1%)

Notes to the MCEV basis supplementary information

As at 31 December 2009

B: Segment information

B1: Adjusted Group MCEV presented per business line

	£m
	At 31 December 2009	At  31 December 2008
MCEV of the covered business	6,027	4,183
Adjusted net worth*	2,815	2,383
Value of in-force business	3,212	1,800
Adjusted net worth of the asset management businesses	1,716	1,570
Emerging Markets	216	391
Nordic**	(75)	(218)
Retail Europe	12	6
Wealth Management	152	204
US Asset Management	1,411	1,187
Value of the banking business	2,948	1,976
Nordic (adjusted net worth)	314	285
Nedbank (market value)	2,634	1,691
Market value of the general insurance business
Mutual & Federal	448	219
Net other business	123	(154)
Adjustment for present value of Black Economic Empowerment scheme deferred consideration	221	169
Adjustment for value of own shares in ESOP schemes***	71	63
Perpetual preferred securities (US$ denominated)	(385)	(203)
Perpetual preferred callable securities	(477)	(304)
GBP denominated	(224)	(174)
Euro denominated	(253)	(130)
Debt	(1,664)	(1,312)
Rand denominated	(290)	(213)
USD denominated	(338)	(537)
GBP denominated	(759)	(191)
SEK denominated	(256)	(252)
Euro denominated	(21)	(119)
Adjusted Group MCEV	9,028	6,207

*     Adjusted net worth is after the elimination of inter-company loans.

**    Includes the adjusted net worth of Nordic holding companies that are classified as non-covered business, net of the holding companies investment in Group subsidiaries.

***  Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2008 and 31 December 2009 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2009 and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the year.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B2: Adjusted operating MCEV earnings for the covered business

	£m
	Year ended 31 December 2009	Year ended 31 December 2008
Adjusted operating MCEV earnings before tax for the covered business	562	324
Long Term Savings	554	578
Emerging Markets	272	460
Nordic	78	164
Retail Europe	(58)	19
Wealth Management	(40)	325
US Life	302	(390)
Bermuda	8	(254)
Tax on adjusted operating MCEV earnings for the covered business	(70)	(191)
Long Term Savings	(43)	(207)
Emerging Markets	(60)	(117)
Nordic	3	(15)
Retail Europe	14	(5)
Wealth Management	36	(96)
US Life	(36)	26
Bermuda	(27)	16
Adjusted operating MCEV earnings after tax for the covered business	492	133
Long Term Savings	511	371
Emerging Markets	212	343
Nordic	81	149
Retail Europe	(44)	14
Wealth Management	(4)	229
US Life	266	(364)
Bermuda	(19)	(238)
Tax on adjusted operating MCEV earnings comprises
Tax on adjusted operating MCEV earnings for the covered business	(70)	(191)
Tax on adjusted operating MCEV earnings for other business	(139)	56
Tax on adjusted operating MCEV earnings	(209)	(135)

B3: Components of MCEV of the covered business

	£m
	At 31 December 2009	At 31 December 2008
MCEV of the covered business	6,027	4,183
Adjusted net worth	2,815	2,383
Value of in-force business	3,212	1,800
Long Term Savings
Adjusted net worth	2,452	2,007
Free surplus	416	16
Required capital	2,036	1,991
Value of in-force business	3,377	2,225
Present value of future profits	4,156	2,878
Additional time value of financial options and guarantees	(220)	(204)
Frictional costs	(217)	(147)
Cost of residual non-hedgeable risks	(342)	(302)
Emerging Markets
Adjusted net worth*	1,305	983
Free surplus	80	(92)
Required capital	1,225	1,075
Value of in-force business	1,158	1,090
Present value of future profits	1,424	1,287
Additional time value of financial options and guarantees	-	-
Frictional costs**	(181)	(117)
Cost of residual non-hedgeable risks	(85)	(80)
Nordic
Adjusted net worth	195	163
Free surplus	91	58
Required capital	104	105
Value of in-force business	1,114	882
Present value of future profits	1,196	943
Additional time value of financial options and guarantees	-	-
Frictional costs	(11)	(8)
Cost of residual non-hedgeable risks	(71)	(53)
Retail Europe
Adjusted net worth	78	79
Free surplus	46	15
Required capital	32	64
Value of in-force business	453	517
Present value of future profits	507	582
Additional time value of financial options and guarantees	(6)	(12)
Frictional costs	(7)	(12)
Cost of residual non-hedgeable risks	(41)	(41)
Wealth Management
Adjusted net worth	376	317
Free surplus	163	120
Required capital	213	197
Value of in-force business	1,468	1,461
Present value of future profits	1,540	1,514
Additional time value of financial options and guarantees	(1)	-
Frictional costs	(12)	(8)
Cost of residual non-hedgeable risks	(59)	(45)

US Life
Adjusted net worth	498	465
Free surplus	36	(85)
Required capital	462	550
Value of in-force business	(816)	(1,725)
Present value of future profits	(511)	(1,448)
Additional time value of financial options and guarantees	(213)	(192)
Frictional costs	(6)	(2)
Cost of residual non-hedgeable risks	(86)	(83)
Bermuda
Adjusted net worth	363	376
Free surplus	-	342
Required capital	363	34
Value of in-force business	(165)	(425)
Present value of future profits	99	(298)
Additional time value of financial options and guarantees	(196)	(57)
Frictional costs	(4)	(1)
Cost of residual non-hedgeable risks	(64)	(69)

*     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 OMSA business there has been a material change in the asset allocation of assets backing the Capital Adequacy Requirement (capital definition to meet internal management objectives) from 31 December 2008 to 31 December 2009. As at 31 December 2009 the asset allocation is 75% cash/25% equity compared to 60% cash/40% equity at 31 December 2008. This resulted in a decrease in the Capital Adequacy Requirement, but an increase in frictional tax costs as interest bearing assets are subjected to higher tax rates than equities.            

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B4: Analysis of covered business MCEV earnings (after tax)

	£m
Total covered business	Year ended 31 December 2009					Year ended 31 December 2008
	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	358	2,025	2,383	1,800	4,183	515	1,906	2,421	3,928	6,349
New business value	(473)	170	(303)	470	167	(608)	172	(436)	540	104
Expected existing business contribution (reference rate)	7	114	121	142	263	63	117	180	289	469
Expected existing business contribution (in excess of reference rate)	32	6	38	355	393	4	15	19	81	100
Transfers from VIF and required capital to free surplus	813	(244)	569	(569)	-	939	(189)	750	(750)	-
Experience variances	54	(111)	(57)	(120)	(177)	160	(75)	85	(250)	(165)
Assumption changes	(3)	(22)	(25)	(258)	(283)	(55)	-	(55)	(375)	(430)
Other operating variance	(191)	301	110	19	129	172	(156)	16	39	55
Operating MCEV earnings	239	214	453	39	492	675	(116)	559	(426)	133
Economic variances	(29)	93	64	940	1,004	(722)	5	(717)	(1,485)	(2,202)
Other non-operating variance	39	(20)	19	168	187	(111)	43	(68)	-	(68)
Total MCEV earnings	249	287	536	1,147	1,683	(158)	(68)	(226)	(1,911)	(2,137)
Closing adjustments	(191)	87	(104)	265	161	1	187	188	(217)	(29)
Capital and dividend flows	(189)	(1)	(190)	-	(190)	(22)	-	(22)	-	(22)
Foreign exchange variance	(15)	85	70	289	359	23	187	210	(217)	(7)
MCEV of acquired/sold business	13	3	16	(24)	(8)	-	-	-	-	-
Closing MCEV	416	2,399	2,815	3,212	6,027	358	2,025	2,383	1,800	4,183
Return on MCEV (RoEV)% per annum					11.8%					2.1%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			(57)	(120)	(177)
Persistency			(87)	(72)	(159)
Risk			31	17	48
Expenses			(49)	13	(36)
Other			48	(78)	(30)
Assumption changes			(25)	(258)	(283)
Persistency			(29)	(210)	(239)
Risk			30	64	94
Expenses			10	(190)	(180)
Other			(36)	78	42

	£m
Total covered business	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	14	78	92	170	262
Expected existing business contribution (in excess of reference rate)	1	25	26	163	189

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
Long Term Savings (LTS)	Year ended 31 December 2009					Year ended 31 December 2008
	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	16	1,991	2,007	2,225	4,232	494	1,873	2,367	3,869	6,236
New business value	(473)	170	(303)	470	167	(567)	162	(405)	563	158
Expected existing business contribution (reference rate)	2	113	115	146	261	62	116	178	281	459
Expected existing business contribution (in excess of reference rate)	(1)	6	5	316	321	4	15	19	70	89
Transfers from VIF and required capital to free surplus	818	(240)	578	(578)	-	917	(187)	730	(730)	-
Experience variances	126	(111)	15	(99)	(84)	162	(58)	104	(277)	(173)
Assumption changes	33	(22)	11	(212)	(201)	13	-	13	(278)	(265)
Other operating variance	154	(44)	110	(63)	47	172	(156)	16	87	103
Operating MCEV earnings	659	(128)	531	(20)	511	763	(108)	655	(284)	371
Economic variances	(131)	93	(38)	773	735	(460)	5	(455)	(1,227)	(1,682)
Other non-operating variance	39	(20)	19	168	187	(111)	43	(68)	-	(68)
Total MCEV earnings	567	(55)	512	921	1,433	192	(60)	132	(1,511)	(1,379)
Closing adjustments	(167)	100	(67)	231	164	(670)	178	(492)	(133)	(625)
Capital and dividend flows	(189)	(1)	(190)	-	(190)	(618)	-	(618)	-	(618)
Foreign exchange variance	9	98	107	255	362	(52)	178	126	(133)	(7)
MCEV of acquired/sold business	13	3	16	(24)	(8)	-	-	-	-	-
Closing MCEV	416	2,036	2,452	3,377	5,829	16	1,991	2,007	2,225	4,232
Return on MCEV (RoEV)% per annum					12.1%					5.9%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			15	(99)	(84)
Persistency			(35)	(59)	(94)
Risk			31	17	48
Expenses			(39)	12	(27)
Other			58	(69)	(11)
Assumption changes			11	(212)	(201)
Persistency			(29)	(145)	(174)
Risk			30	64	94
Expenses			10	(161)	(151)
Other			-	30	30

	£m
Long Term Savings (LTS)	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	14	75	89	161	250
Expected existing business contribution (in excess of reference rate)	1	(3)	(2)	131	129

Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.

 

B4: Analysis of covered business MCEV earnings (after tax) continued             

										£m
Emerging Markets*	Year ended 31 December 2009					Year ended 31 December 2008
	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	(92)	1,075	983	1,090	2,073	315	1,160	1,475	1,204	2,679
New business value	(136)	110	(26)	91	65	(86)	72	(14)	75	61
Expected existing business contribution (reference rate)	(7)	85	78	129	207	27	101	128	148	276
Expected existing business contribution (in excess of reference rate)	-	5	5	16	21	4	14	18	13	31
Transfers from VIF and required capital to free surplus	314	(146)	168	(168)	-	296	(134)	162	(162)	-
Experience variances	(9)	(9)	(18)	(35)	(53)	13	(19)	(6)	(18)	(24)
Assumption changes	40	(29)	11	(90)	(79)	22	-	22	(20)	2
Other operating variance	46	(27)	19	32	51	160	(156)	4	(7)	(3)
Operating MCEV earnings	248	(11)	237	(25)	212	436	(122)	314	29	343
Economic variances	54	1	55	(39)	16	(154)	51	(103)	(139)	(242)
Other non-operating variance	-	-	-	-	-	(1)	-	(1)	17	16
Total MCEV earnings	302	(10)	292	(64)	228	281	(71)	210	(93)	117
Closing adjustments	(130)	160	30	132	162	(688)	(14)	(702)	(21)	(723)
Capital and dividend flows	(146)	(3)	(149)	-	(149)	(645)	-	(645)	-	(645)
Foreign exchange variance	3	160	163	156	319	(43)	(14)	(57)	(21)	(78)
MCEV of acquired/sold business	13	3	16	(24)	(8)	-	-	-	-	-
Closing MCEV	80	1,225	1,305	1,158	2,463	(92)	1,075	983	1,090	2,073
Return on MCEV (RoEV)% per annum					9.8%					14.4%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			(18)	(35)	(53)
Persistency			(9)	(44)	(53)
Risk			16	-	16
Expenses			(30)	11	(19)
Other			5	(2)	3
Assumption changes			11	(90)	(79)
Persistency			(29)	(55)	(84)
Risk			30	20	50
Expenses			10	(55)	(45)
Other			-	-	-

	£m
Emerging Markets	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	5	63	68	104	172
Expected existing business contribution (in excess of reference rate)	-	(3)	(3)	14	11

*     The MCEV for Emerging Markets is presented after the adjustment for market value of life fund investments in Group equity and debt instruments.

The decrease in 'expected existing business contribution (reference rate)' from 2008 to 2009 is mainly attributable to a lower one-year swap rate at 31 December 2008 (9.3%) compared to 31 December 2007 (11.5%) and a lower opening MCEV.

Adverse persistency experience resulted from the tough economic conditions during 2009. Expense experience losses are mainly attributable to one-off project expenditure. These adverse experience variances were partially offset by favourable Retail Mass mortality and longevity experience.

Operating assumption changes were implemented to strengthen persistency assumptions, part of which are temporary short-term changes, and to capitalise special project expenditure. These changes were partially offset by positive mortality assumption changes due to continued improvement in Retail Mass mortality experience.

The other operating variances mainly relate to management actions and various methodology changes and error corrections. The management actions include a reduction in the rate of future cover increases on certain risk products in the Retail Mass segment to achieve better alignment between the cost of providing benefits and the value of the corresponding premium increase, offset by a reduction in the equity allocation of shareholder assets which resulted in an increase in frictional tax costs as interest bearing assets are subjected to higher tax rates than equities.

The positive economic variances were caused by investment returns on policyholder and shareholders funds being greater than expected and the introduction of a liquidity premium for Retail Affluent Immediate Annuity business. This was partially offset by economic assumption changes (mainly an increase in medium- to long-term swap yields).

The capital and dividend flows mainly consist of dividends paid that were partly offset by inter-company dividends received.

Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in rand (including conversion of results for Mexico to rand).

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
Nordic	Year ended 31 December 2009					Year ended 31 December 2008
	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	58	105	163	882	1,045	47	75	122	992	1,114
New business value	(57)	6	(51)	95	44	(50)	3	(47)	79	32
Expected existing business contribution (reference rate)	4	-	4	18	22	2	2	4	50	54
Expected existing business contribution (in excess of reference rate)	-	-	-	14	14	-	-	-	23	23
Transfers from VIF and required capital to free surplus	81	(17)	64	(64)	-	85	1	86	(86)	-
Experience variances	28	(7)	21	10	31	10	18	28	(17)	11
Assumption changes	3	-	3	(30)	(27)	-	-	-	32	32
Other operating variance	-	-	-	(3)	(3)	(1)	-	(1)	(2)	(3)
Operating MCEV earnings	59	(18)	41	40	81	46	24	70	79	149
Economic variances	(5)	17	12	192	204	9	(20)	(11)	(296)	(307)
Other non-operating variance	18	-	18	1	19	(85)	19	(66)	(3)	(69)
Total MCEV earnings	72	(1)	71	233	304	(30)	23	(7)	(220)	(227)
Closing adjustments	(39)	-	(39)	(1)	(40)	41	7	48	110	158
Capital and dividend flows	(37)	-	(37)	-	(37)	31	-	31	-	31
Foreign exchange variance	(2)	-	(2)	(1)	(3)	10	7	17	110	127
Closing MCEV	91	104	195	1,114	1,309	58	105	163	882	1,045
Return on MCEV (RoEV)% per annum					8.1%					12.9%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			21	10	31
Persistency			(2)	5	3
Risk			6	(1)	5
Expenses			3	(1)	2
Other			14	7	21
Assumption changes			3	(30)	(27)
Persistency			-	(29)	(29)
Risk			-	19	19
Expenses			-	(18)	(18)
Other			3	(2)	1

	£m
Nordic	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	1	-	1	15	16
Expected existing business contribution (in excess of reference rate)	-	-	-	24	24

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 positive experience variances were largely caused by lower than expected tax payments and higher than expected fee income. In addition, there were maintenance expense underruns in the Swedish unit-linked business. There were no one-off expense variances.

Operating assumption changes were made to recognise one-off developmental project costs and lower mortality experience mainly on drawdown annuity products. In addition changes were made to persistency assumptions, despite overall positive persistency experience during the year, to allow further for higher transfer rates given the change on 1 May 2008 in Swedish legislation to reinstate pension transfer rights.

The economic variances are mainly due to the positive effect of market movements on funds under management.

The other non-operating variance mainly results from a release of provisions following the favourable resolution of certain longstanding litigation matters.

The capital and dividend flows mainly represent dividends, repayment of loans and capital injections.

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
Retail Europe	Year ended 31 December 2009					Year ended 31 December 2008
	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	15	64	79	517	596	16	38	54	444	498
New business value	(74)	1	(73)	68	(5)	(80)	1	(79)	89	10
Expected existing business contribution (reference rate)	1	-	1	10	11	-	1	1	20	21
Expected existing business contribution (in excess of reference rate)	-	-	-	3	3	-	-	-	4	4
Transfers from VIF and required capital to free surplus	97	7	104	(104)	-	111	2	113	(113)	-
Experience variances	(20)	1	(19)	(4)	(23)	(1)	-	(1)	(12)	(13)
Assumption changes	-	-	-	(26)	(26)	-	-	-	(13)	(13)
Other operating variance	18	(19)	(1)	(3)	(4)	-	-	-	5	5
Operating MCEV earnings	22	(10)	12	(56)	(44)	30	4	34	(20)	14
Economic variances	(1)	4	3	26	29	10	(12)	(2)	(30)	(32)
Other non-operating variance	20	(20)	-	3	3	(17)	12	(5)	(4)	(9)
Total MCEV earnings	41	(26)	15	(27)	(12)	23	4	27	(54)	(27)
Closing adjustments	(10)	(6)	(16)	(37)	(53)	(24)	22	(2)	127	125
Capital and dividend flows	(10)	(3)	(13)	-	(13)	(25)	-	(25)	-	(25)
Foreign exchange variance	-	(3)	(3)	(37)	(40)	1	22	23	127	150
Closing MCEV	46	32	78	453	531	15	64	79	517	596
Return on MCEV (RoEV)% per annum					(7.9)%					2.6%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			(19)	(4)	(23)
Persistency			(1)	(1)	(2)
Risk			3	1	4
Expenses			(5)	-	(5)
Other			(16)	(4)	(20)
Assumption changes			-	(26)	(26)
Persistency			-	2	2
Risk			-	1	1
Expenses			-	(22)	(22)
Other			-	(7)	(7)

	£m
Retail Europe	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	-	-	-	8	8
Expected existing business contribution (in excess of reference rate)	-	-	-	3	3

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)'.

Experience variances are mainly due to higher than anticipated profit sharing on participating contracts in Germany in 2009 as a result of lower than expected new business volumes as well as the settlement of profit sharing liabilities relating to the years 2005-2008. There were no one-off expense variances. Mortality and morbidity experience was positive across all Retail Europe countries.

Operating assumption changes were made to recognise one-off developmental project costs and to make allowance for planned short-term expense overruns relative to long-term maintenance expense assumptions. In addition, although a change in methodology was made in 2008 to recognise profit sharing in Germany, this allowance has been revised upwards given the adverse experience in 2009.

The economic variances are mainly due to the positive effect of market movements on funds under management.

The capital and dividend flows mainly represent dividends, repayment of loans and capital injections.

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
Wealth Management	Year ended 31 December 2009					Year ended 31 December 2008
	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	120	197	317	1,461	1,778	56	209	265	1,331	1,596
New business value	(171)	12	(159)	208	49	(215)	3	(212)	279	67
Expected existing business contribution (reference rate)	7	7	14	34	48	32	1	33	61	94
Expected existing business contribution (in excess of reference rate)	(1)	-	(1)	26	25	-	-	-	21	21
Transfers from VIF and required capital to free surplus	274	(30)	244	(244)	-	319	(17)	302	(302)	-
Experience variances	(10)	7	(3)	(35)	(38)	25	(16)	9	3	12
Assumption changes	(10)	7	(3)	(96)	(99)	(3)	-	(3)	51	48
Other operating variance	90	2	92	(81)	11	13	-	13	(26)	(13)
Operating MCEV earnings	179	5	184	(188)	(4)	171	(29)	142	87	229
Economic variances	2	12	14	38	52	(58)	(14)	(72)	27	(45)
Other non-operating variance	1	-	1	164	165	(8)	12	4	(10)	(6)
Total MCEV earnings	182	17	199	14	213	105	(31)	74	104	178
Closing adjustments	(139)	(1)	(140)	(7)	(147)	(41)	19	(22)	26	4
Capital and dividend flows	(142)	5	(137)	-	(137)	(34)	-	(34)	-	(34)
Foreign exchange variance	3	(6)	(3)	(7)	(10)	(7)	19	12	26	38
Closing MCEV	163	213	376	1,468	1,844	120	197	317	1,461	1,778
Return on MCEV (RoEV)% per annum					(0.3)%					14.3%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			(3)	(35)	(38)
Persistency			(6)	(39)	(45)
Risk			6	-	6
Expenses			(24)	2	(22)
Other			21	2	23
Assumption changes			(3)	(96)	(99)
Persistency			-	(81)	(81)
Risk			-	12	12
Expenses			-	(66)	(66)
Other			(3)	39	36

	£m
Wealth Management	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	8	3	11	18	29
Expected existing business contribution (in excess of reference rate)	1	-	1	11	12

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)'.

Adverse persistency and expense variances were partially offset by positive risk and other variances. Approximately £9 million of the expense variance relates to development and restructuring costs. The 'other' variances include fee income being higher than expected and a tax variance on the transfer from VIF to adjusted net worth arising through the removal of dividend tax in respect of Skandia International.

Operating assumption changes were made to strengthen persistency and expense assumptions. The expense assumption changes are largely caused by capitalisation of development expenditure that is expected to arise through the restructure of Wealth Management and other one-off developmental projects. The 'other' operating assumption change reflects increased recognition of fee income in the United Kingdom in light of the positive experience.

The other operating variances reflect the impact of modelling and methodology changes and the impact of the Munich Re treaty that was effected by Skandia International to finance new business strain and repay internal loans.

The economic variances were driven by market and exchange rate movements.

The other non-operating variance relates to the effect on VIF of the removal of dividend tax in Skandia International as dividends received by United Kingdom companies from overseas trading subsidiaries are now exempt from United Kingdom corporation tax.

The capital and dividend flows mainly represent dividends, repayments of loans and capital injections.

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
US Life	Year ended 31 December 2009						Year ended 31 December 2008
	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	(85)	550	465	(1,725)		(1,260)	60	391	451	(102)	349
New business value	(35)	41	6	8		14	(136)	83	(53)	41	(12)
Expected existing business contribution (reference rate)	(3)	21	18	(45)		(27)	1	11	12	2	14
Expected existing business contribution (in excess of reference rate)	-	1	1	257		258	-	1	1	9	10
Transfers from VIF and required capital to free surplus	52	(54)	(2)	2		-	106	(39)	67	(67)	-
Experience variances	137	(103)	34	(35)		(1)	115	(41)	74	(233)	(159)
Assumption changes	-	-	-	30		30	(6)	-	(6)	(328)	(334)
Other operating variance	-	-	-	(8)		(8)	-	-	-	117	117
Operating MCEV earnings	151	(94)	57	209		266	80	15	95	(459)	(364)
Economic variances	(181)	59	(122)	556		434	(267)	-	(267)	(789)	(1,056)
Other non-operating variance	-	-	-	-		-	-	-	-	-	-
Total MCEV earnings	(30)	(35)	(65)	765		700	(187)	15	(172)	(1,248)	(1,420)
Closing adjustments	151	(53)	98	144		242	42	144	186	(375)	(189)
Capital and dividend flows	146	-	146	-		146	55	-	55	-	55
Foreign exchange variance	5	(53)	(48)	144		96	(13)	144	131	(375)	(244)
Closing MCEV	36	462	498	(816)		(318)	(85)	550	465	(1,725)	(1,260)
Return on MCEV (RoEV)% per annum					22.7%						(97.6)%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			34	(35)	(1)
Persistency			(17)	20	3
Risk			-	17	17
Expenses			17	-	17
Other			34	(72)	(38)
Assumption changes			-	30	30
Persistency			-	18	18
Risk			-	12	12
Expenses			-	-	-
Other			-	-	-

	£m
US Life	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	-	9	9	16	25
Expected existing business contribution (in excess of reference rate)	-	-	-	79	79

The segment results of US Life include allowance for Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States Life Companies.

The operating MCEV earnings were largely caused by the expected existing business contribution (in excess of reference rate), i.e. by the corporate bond spread that is expected to be earned over and above the adjusted risk-free reference rate (inclusive of the liquidity premium adjustment).

The experience variances were largely caused by positive mortality variance, from the immediate annuity business, and expense variance, which was positive relative to the additional provision set up at the end of 2008 based on the overruns at the time. These were partially offset by an overall increase in guarantee costs relative to expectations. Persistency experience was roughly neutral. There were no large one-off items of expense variance.

The operating assumption changes consisted of changes to the persistency assumptions on the Fixed Indexed Annuity (FIA) business and the slight weakening of mortality assumptions on the Single Premium Immediate Annuity (SPIA) business to align with IFRS assumptions.

The other operating variances include a refinement in the calculation of the time value of financial options and guarantees, changes to the methodology for calculating the non-hedgeable risk capital and a model revision in respect of the dynamic lapse methodology.

The economic variances were largely driven by the reduction in corporate bond spreads during 2009.

The capital and dividend flows were due to a capital injection made in February 2009.

Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollars.

B4: Analysis of covered business MCEV earnings (after tax) continued

	£m
Bermuda	Year ended 31 December 2009						Year ended 31 December 2008
	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	342	34	376	(425)		(49)	21	33	54	59	113
New business value	-	-	-	-		-	(41)	10	(31)	(23)	(54)
Expected existing business contribution (reference rate)	5	1	6	(4)		2	1	1	2	8	10
Expected existing business contribution (in excess of reference rate)	33	-	33	39		72	-	-	-	11	11
Transfers from VIF and required capital to free surplus	(5)	(4)	(9)	9		-	22	(2)	20	(20)	-
Experience variances	(72)	-	(72)	(21)		(93)	(2)	(17)	(19)	27	8
Assumption changes	(36)	-	(36)	(46)		(82)	(68)	-	(68)	(97)	(165)
Other operating variance	(345)	345	-	82		82	-	-	-	(48)	(48)
Operating MCEV earnings	(420)	342	(78)	59		(19)	(88)	(8)	(96)	(142)	(238)
Economic variances	102	-	102	167		269	(262)	-	(262)	(258)	(520)
Other non-operating variance	-	-	-	-		-	-	-	-	-	-
Total MCEV earnings	(318)	342	24	226		250	(350)	(8)	(358)	(400)	(758)
Closing adjustments	(24)	(13)	(37)	34		(3)	671	9	680	(84)	596
Capital and dividend flows	-	-	-	-		-	596	-	596	-	596
Foreign exchange variance	(24)	(13)	(37)	34		(3)	75	9	84	(84)	-
Closing MCEV	-	363	363	(165)		198	342	34	376	(425)	(49)
Return on MCEV (RoEV)% per annum					(41.0)%						(195.3)%

					£m
			Adjusted net worth	Value of  in-force	MCEV
Experience variances			(72)	(21)	(93)
Persistency			(52)	(13)	(65)
Risk			-	-	-
Expenses			(10)	1	(9)
Other			(10)	(9)	(19)
Assumption changes			(36)	(46)	(82)
Persistency			-	(65)	(65)
Risk			-	-	-
Expenses			-	(29)	(29)
Other			(36)	48	12

	£m
Bermuda	Year ended 31 December 2010
	Free surplus	Required capital	Adjusted net worth	Value of  in-force	MCEV
Expected existing business contribution (reference rate)	-	3	3	9	12
Expected existing business contribution (in excess of reference rate)	-	28	28	32	60

The experience variances were largely caused by adverse persistency experience, with fewer surrenders than expected on Variable Annuity contracts with heavily in-the-money guarantees, an increase in the cost of non-hedgeable risks and a negative expense variance. There were no large one-off items of expense variance.

The operating assumptions changes consisted of a strengthening of the persistency assumptions on the Variable Annuity business with guaranteed rider benefits, a strengthening of expense assumptions in light of this year's adverse expense experience, and some changes to guarantee cost assumptions. There were no large one-off expense items.

The other operating variance includes a positive variance due to an amendment of a DAC write-down made in the previous reporting period, a refinement in the calculation of the time value of financial options and guarantees, changes to the methodology for calculation of the non-hedgeable risk capital and improvements to the modelling of guarantee costs.

The economic variances were largely driven by the recovery in equity markets during the period and the increase in the US swap yield curve.

The increase in required capital to equal the full adjusted net worth as at 31 December 2009 is as a result of a more conservative view, relative to 31 December 2008, of the level of capital considered by the directors to be appropriate to manage the business.

Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollars.

C: Other key performance information

C1 Adjustments applied in determining total Group MCEV earnings before tax

	£m
	Year ended 31 December 2009			Year ended 31 December 2008
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	-	65	65	-	(12)	(12)
Economic variances	1,108	(10)	1,098	(2,480)	(72)	(2,552)
Other non-operating variances	18	-	18	(79)	-	(79)
Acquired/divested business	-	(48)	(48)	-	53	53
Closure of unclaimed share trust	-	-	-	-	-	-
Dividends declared to holders of perpetual preferred callable securities	-	45	45	-	43	43
Adjusting items relating to US Asset Management equity plans and non-controlling interests	-	(1)	(1)	-	7	7
Fair value gains on Group debt instruments	-	(264)	(264)	-	503	503
Adjusting items	1,126	(213)	913	(2,559)	522	(2,037)

C2: Other movements in IFRS net equity impacting Group MCEV

	£m
	Year ended 31 December 2009			Year ended 31 December 2008
	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Fair value gains/(losses)	-	2	2	-	-	-
Net investment hedge	-	(41)	(41)	-	(281)	(281)
Currency translation differences/exchange differences on translating foreign operations	359	197	556	(7)	59	52
Aggregate tax effects of items taken directly to or transferred from equity	-	13	13	-	(1)	(1)
Correction to transfers*	-	316	316
Other movements	(8)	(7)	(15)	--	(49)	(49)
Net income recognised directly into equity	351	480	831	(7)	(272)	(279)
Capital and dividend flows for the year	(190)	145	(45)	(22)	(373)	(395)
Share buy back	-	-	-	-	(175)	(175)
Net issues of ordinary share capital by the Company	-	2	2	-	5	5
Exercise of share options	-	3	3	-	5	5
Change in share based payment reserve	-	14	14	-	26	26
Other movements in net equity	161	644	805	(29)	(784)	(813)

*     Refinement arising from allocation of assets between covered and non-covered business at December 2008

C3: 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
At 31 December 2009	Total	Long Term Savings	Emerging Markets	Nordic	Retail Europe	Wealth Management	US Life	Bermuda
IFRS net asset value*	6,103	5,734	821	1,222	664	2,141	886	369
Adjustment to include long-term business on a statutory solvency basis	(2,632)	(2,626)	153	(841)	(382)	(1,168)	(388)	(6)
Inclusion of Group equity and debt instruments held in life funds	339	339	339	-	-	-	-	-
Goodwill	(995)	(995)	(8)	(186)	(204)	(597)	-	-
Adjusted net worth attributable to ordinary equity holders of the parent	2,815	2,452	1,305	195	78	376	498	363

£m
At 31 December 2008	Total	Long Term Savings	Emerging Markets	Nordic	Retail Europe	Wealth Management	US Life	Bermuda
IFRS net asset value*	5,907	5,314	620	1,323	934	2,340	97	593
Adjustment to include long-term business on a statutory solvency basis	(2,461)	(2,244)	136	(973)	(435)	(1,340)	368	(217)
Inclusion of Group equity and debt instruments held in life funds	236	236	236	-	-	-	-	-
Goodwill	(1,299)	(1,299)	(9)	(187)	(420)	(683)	-	-
Adjusted net worth attributable to ordinary equity holders of the parent	2,383	2,007	983	163	79	317	465	376

*     IFRS net asset value is after elimination of inter-company 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.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

C4: Value of new business (after tax)

The tables below set out the regional 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% of single premiums.

As mentioned earlier for the OMSA business, Nedlife is not recognised as part of the VNB of covered business in 2009. A similar consideration applies to other new business measures such as PVNBP and APE in order to provide a better indication of future expected 'normalised' earnings. However note that in the tables below Nedlife is still incorporated in the comparative results for the year ended 31 December 2008.

		£m
	Year ended 31 December 2009	Year ended 31 December 2008
Annualised recurring premiums
Long Term Savings (LTS)	699	732
Emerging Markets	249	230
Nordic	183	174
Retail Europe	62	84
Wealth Management	191	211
US Life	14	33
Bermuda	-	-
	699	732
Single premiums
Long Term Savings (LTS)	6,806	7,327
Emerging Markets	1,437	1,321
Nordic	527	384
Retail Europe	53	75
Wealth Management	4,240	4,520
US Life	549	1,027
Bermuda	15	1,448
	6,821	8,775
PVNBP
Long Term Savings (LTS)	10,202	10,814
Emerging Markets	2,834	2,482
Nordic	1,150	991
Retail Europe	537	555
Wealth Management	5,042	5,540
US Life	639	1,246
Bermuda	15	1,448
	10,217	12,262
PVNBP capitalisation factors*
Long Term Savings (LTS)	4.9	4.8
Emerging Markets	5.6	5.0
Nordic	3.4	3.5
Retail Europe	7.8	5.7
Wealth Management	4.2	4.8
US Life	6.6	6.7
Bermuda	n/a	n/a
APE
Long Term Savings (LTS)	1,380	1,466
Emerging Markets	393	362
Nordic	235	213
Retail Europe	67	91
Wealth Management	617	664
US Life	68	136
Bermuda	1	145
	1,381	1,611
VNB
Long Term Savings (LTS)	167	158
Emerging Markets**	65	61
Nordic	44	32
Retail Europe	(5)	10
Wealth Management	49	67
US Life	14	(12)
Bermuda	-	(54)
	167	104
PVNBP margin
Long Term Savings (LTS)	1.6%	1.5%
Emerging Markets***	2.3%	2.5%
Nordic	3.8%	3.3%
Retail Europe	(1.0)%	1.8%
Wealth Management	1.0%	1.2%
US Life	2.2%	(0.9)%
	1.6%	0.8%
APE margin
Long Term Savings (LTS)	12%	11%
Emerging Markets****	16%	17%
Nordic	19%	15%
Retail Europe	(8)%	11%
Wealth Management	8%	10%
US Life	20%	(8)%
	12%	6%

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

**    The comparative result excluding Nedlife is £53m for the year ended 31 December 2008.

*** The comparative result excluding Nedlife is 2.2% for the year ended 31 December 2008.

****           The comparative result excluding Nedlife is 16% for the year ended 31 December 2008.

The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the Emerging Markets long-term business 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 Wealth Management is excluded as this is more appropriately classified as unit trust business.

		£m
Gross premium excluded from value of new business	Year ended  31 December 2009	Year ended 31 December 2008
Emerging Markets*	1,625	458
Wealth Management	153	239

*     New business premiums not valued are higher than in 2008, mainly because single premium new business figures include inflows relating to in-force business following OMSA's acquisition of Future Growth and Acsis Life.

Notes to the MCEV basis supplementary information

As at 31 December 2009

C5: Product analysis of new covered business premiums

				£m
Emerging Markets	Recurring	Year ended 31 December 2009 Single	Recurring	Year ended 31 December 2008 Single
Total business	249	1,437	230	1,321
Individual business	220	716	216	644
Savings	50	539	58	481
Protection	56	21	68	18
Annuity	-	155	-	144
Retail mass market	114	1	90	1
Group business	29	721	14	677
Savings	13	564	6	444
Protection	16	-	8	1
Annuity	-	157	-	232

				£m
Nordic	Recurring	Year ended 31 December 2009 Single	Recurring	Year ended 31 December 2008 Single
Unit-linked assurance	183	527	174	384

				£m
Retail Europe	Recurring	Year ended 31 December 2009 Single	Recurring	Year ended 31 December 2008 Single
Unit-linked assurance	62	53	84	75

				£m
Wealth Management	Recurring	Year ended 31 December 2009 Single	Recurring	Year ended 31 December 2008 Single
Total business	191	4,240	211	4,520
Unit-linked assurance	187	4,039	205	4,260
Life	4	201	6	260

				£m
US Life	Recurring	Year ended 31 December 2009 Single	Recurring	Year ended 31 December 2008 Single
Total business	14	549	33	1,027
Fixed deferred annuity	-	30	-	228
Fixed indexed annuity	-	383	-	611
Variable annuity	-	-	-	6
Life	14	13	33	43
Immediate annuity	-	123	-	139

Notes to the MCEV basis supplementary information

As at 31 December 2009

D: Other income statement notes

D1: Drivers of new business value for covered business

PVNBP Margin		%
Total covered business*	Year ended 31 December 2009	Year ended 31 December 2008
Margin at the end of comparative period	0.8	1.7
Change in volume	0.8	0.1
Change in product mix	-	(0.2)
Change in country mix	-	-
Change in operating assumptions	0.1	(0.3)
Change in economic assumptions	-	(0.3)
Change in tax/regulation	0.1	-
Exchange rate movements	(0.2)	(0.2)
Margin at the end of the period	1.6	0.8
Long Term Savings
Margin at the end of comparative period	1.5	1.6
Change in volume	(0.1)	0.1
Change in product mix	-	-
Change in country mix	-	-
Change in operating assumptions	0.1	0.1
Change in economic assumptions	-	(0.2)
Change in tax/regulation	0.1	-
Exchange rate movements	-	(0.1)
Margin at the end of the period	1.6	1.5
Emerging Markets**
Margin at the end of comparative period	2.5	2.4
Opening adjustment to the margin at the end of the comparative period for the removal of Nedlife	(0.3)	-
Adjusted margin at the end of the comparative period	2.2	2.4
Change in volume	(0.1)	0.2
Change in product mix	(0.2)	(0.1)
Change in country mix	-	-
Change in operating assumptions	0.4	0.1
Change in economic assumptions	-	(0.1)
Margin at the end of the period	2.3	2.5
Nordic***
Margin at the end of comparative period	3.3	3.3
Change in volume	(0.1)	0.4
Change in product mix	-	0.2
Change in country mix	-	-
Change in operating assumptions	0.4	(0.5)
Change in economic assumptions	0.2	(0.1)
Margin at the end of the period	3.8	3.3
Retail Europe****
Margin at the end of comparative period	1.8	5.2
Change in volume	(2.1)	(1.1)
Change in product mix	(0.8)	(0.5)
Change in country mix	(0.1)	(0.1)
Change in operating assumptions	0.5	(1.6)
Change in economic assumptions	(0.3)	(0.1)
Margin at the end of the period	(1.0)	1.8
Wealth Management*
Margin at the end of comparative period	1.2	1.2
Change in volume	(0.2)	-
Change in product mix	-	-
Change in country mix	-	-
Change in operating assumptions	(0.2)	0.1
Change in economic assumptions	-	(0.1)
Change in tax/regulation	0.2	-
Margin at the end of the period	1.0	1.2
US Life*****
Margin at the end of comparative period	(0.9)	(0.5)
Change in volume	-	-
Change in product mix	1.5	(0.4)
Change in country mix	-	-
Change in operating assumptions	-	1.9
Change in economic assumptions	1.6	(1.9)
Margin at the end of the period	2.2	(0.9)

*     The PVNBP margin changes are calculated in sterling.

**    The PVNBP margin changes are calculated in rand, and exclude Nedlife for the comparative year ending 31 December 2008.

***  The PVNBP margin changes are calculated in krona.

**** The PVNBP margin changes are calculated in euro.

*****The PVNBP margin changes are calculated in dollars.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009 continued

E1: Sensitivity tests

The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2009 and the value of new business for the year ended 31 December 2009 to changes in key assumptions.

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, an increase/decrease in equity and property market values and increases in equity, property and swaption implied volatilities allow for the change in the time value of financial options and guarantees that form part of the IGR.

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% 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.

Total covered business

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	6,027	3,212	167
Effect of:
Required capital equal to the minimum statutory requirement	6,076	3,262	172
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	5,746	2,865	161
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	6,346	3,589	167
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately	6,080	3,266	169
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	6,401	3,447	179
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	5,671	2,996	157
50bps contraction on corporate bond spreads	6,360	3,530	167
25% multiplicative increase in equity and property implied volatilities	5,929	3,190	167
25% multiplicative increase in swaption implied volatilities	5,906	3,092	161
Voluntary discontinuance rates decreasing by 10%	6,211	3,492	209
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	6,269	3,454	188
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	6,166	3,351	185
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	5,989	3,175	167
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	150
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	153
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	6,160	3,345	173
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	5,932	3,118	161

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

Emerging Markets

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	2,463	1,158	65
Effect of:
Required capital equal to the minimum statutory requirement	2,506	1,201	68
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	2,432	1,125	61
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	2,483	1,179	67
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately	2,470	1,165	66
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	2,567	1,225	66
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	2,358	1,090	63
50bps contraction on corporate bond spreads	2,478	1,157	65
25% multiplicative increase in equity and property implied volatilities	2,440	1,135	65
25% multiplicative increase in swaption implied volatilities	2,456	1,150	65
Voluntary discontinuance rates decreasing by 10%	2,507	1,202	82
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	2,564	1,258	72
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	2,536	1,231	74
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges*	2,451	1,145	64
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	57
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	60
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	2,482	1,176	66
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	2,444	1,138	63

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

Nordic

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	1,309	1,114	44
Effect of:
Required capital equal to the minimum statutory requirement	1,309	1,114	44
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	1,284	1,088	43
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	1,336	1,141	45
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	1,389	1,194	48
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	1,228	1,033	40
50bps contraction on corporate bond spreads	1,309	1,114	44
25% multiplicative increase in equity and property implied volatilities	1,309	1,114	44
25% multiplicative increase in swaption implied volatilities	1,309	1,114	44
Voluntary discontinuance rates decreasing by 10%	1,348	1,153	52
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	1,345	1,150	46
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	1,310	1,115	44
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	1,307	1,112	44
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	42
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	47
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	1,324	1,129	45
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	1,294	1,099	43

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

Retail Europe

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	531	453	(5)
Effect of:
Required capital equal to the minimum statutory requirement	528	451	(5)
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	513	436	(8)
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	549	471	(3)
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	541	463	(5)
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	521	444	(5)
50bps contraction on corporate bond spreads	531	453	(5)
25% multiplicative increase in equity and property implied volatilities	531	453	(5)
25% multiplicative increase in swaption implied volatilities	522	444	(5)
Voluntary discontinuance rates decreasing by 10%	545	468	(4)
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	553	476	(3)
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	534	456	(5)
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	531	453	(5)
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	(8)
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	(4)
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	535	458	(5)
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	525	447	(6)

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

Wealth Management

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	1,844	1,468	49
Effect of:
Required capital equal to the minimum statutory requirement	1,848	1,472	49
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	1,820	1,460	46
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	1,916	1,521	54
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	1,900	1,524	56
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	1,810	1,434	46
50bps contraction on corporate bond spreads	1,844	1,468	49
25% multiplicative increase in equity and property implied volatilities	1,844	1,468	49
25% multiplicative increase in swaption implied volatilities	1,844	1,468	49
Voluntary discontinuance rates decreasing by 10%	1,932	1,556	64
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	1,906	1,530	59
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	1,889	1,513	57
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	1,844	1,468	49
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	47
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	54
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	1,853	1,477	51
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	1,826	1,450	48

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

US Life

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	(318)	(816)	14
Effect of:
Required capital equal to the minimum statutory requirement	(315)	(813)	14
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	(575)	(1,073)	20
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	(67)	(565)	3
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately	(271)	(769)	15
Recognising the present value of an additional 50% of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately*	(90)	(588)	20
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	(318)	(816)	14
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	(318)	(816)	14
50bps contraction on corporate bond spreads	(12)	(510)	14
25% multiplicative increase in swaption implied volatilities	(420)	(918)	8
Voluntary discontinuance rates decreasing by 10%	(290)	(788)	16
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	(302)	(800)	14
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	(302)	(800)	15
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	(342)	(840)	14
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	12
Value of new business calculated on economic assumptions at the end of reporting period	n/a	n/a	(4)
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	(269)	(767)	16
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	(338)	(836)	13

*     At 31 December 2009 the size of the base liquidity premium adjustment for US Life business of 100bps is greater than the base liquidity premium adjustment for OMSA's Retail Affluent Immediate Annuity business of 50bps. Therefore in addition to the 10bps liquidity spread sensitivity, that is also shown for Emerging Markets, a sensitivity was calculated to illustrate the impact of an additional 50% of liquidity spreads for US Life business.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2009

Bermuda

			£m
At 31 December 2009	MCEV	Value of in-force business	Value of new business
Central assumptions	198	(165)	-
Effect of:
Required capital equal to the minimum statutory requirement	202	(163)	-
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	272	(171)	-
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	130	(158)	-
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	322	(143)	-
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	72	(188)	-
50bps contraction on corporate bond spreads	210	(153)	-
25% multiplicative increase in equity and property implied volatilities	123	(164)	-
25% multiplicative increase in swaption implied volatilities	196	(167)	-
Voluntary discontinuance rates decreasing by 10%	170	(97)	-
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	203	(159)	-
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	199	(163)	-
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	198	(165)	-
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	235	(128)	-
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	183	(179)	-

Total covered business			£m
At 31 December 2008	MCEV	Value of in-force business	Value of new business
Central assumptions	4,183	1,800	104
Effect of:
Required capital equal to the minimum statutory requirement	4,182	1,836	108
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	4,185	1,810	121
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately	4,134	1,745	58
Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged	4,421	2,000	n/a
Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged	3,953	1,610	n/a
10bps contraction on corporate bond spreads	4,249	1,864	n/a
25% multiplicative increase in equity and property implied volatilities	5,466	3,924	171
25% multiplicative increase in swaption implied volatilities	3,755	1,373	84
Voluntary discontinuance rates decreasing by 10%	4,429	2,047	140
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges	4,379	1,997	122
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges	4,267	1,885	115
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges	4,150	1,768	104
For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges	n/a	n/a	81
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business	4,315	1,933	123
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model	4,095	1,713	96

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.

Websites

Further information on the Company can be found on the following

websites:

www.oldmutual.com

www.oldmutual.co.za

 

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