Preliminary Results - Part 3 MCEV

RNS Number : 9672Y

Old Mutual PLC

01 March 2013

 



Adjusted Group MCEV by line of business
At 31 December 2012
			£m
	Notes	At 31 December 2012	At 31 December 2011
MCEV of the core covered business (Long-Term Savings)	B3	5,740	5,713
Adjusted net worth1		2,284	2,204
Value of in-force business		3,456	3,509
MCEV of the non-core covered business (Bermuda)	B3	625	66
Adjusted net worth		680	187
Value of in-force business		(55)	(121)
MCEV of the discontinued covered business (Nordic)²	B3	-	1,433
Adjusted net worth		-	285
Value of in-force business		-	1,148
Adjusted net worth of asset management and other businesses		1,772	1,955
Emerging Markets		444	499
Old Mutual Wealth		225	179
US Asset Management		1,103	1,270
Nordic2		-	7
Value of the banking business		3,574	3,286
Nedbank (market value)		3,527	2,935
Emerging Markets (adjusted net worth)		47	29
Nordic (adjusted net worth)²		-	322
Value of the general insurance business
Mutual & Federal (adjusted net worth)		261	294
Net other business3		45	175
Adjustment for present value of Black Economic Empowerment   scheme deferred consideration		245	270
Adjustment for value of own shares in ESOP schemes4		126	117
Market value of perpetual preferred securities5		-	(465)
Market value of perpetual preferred callable securities		(686)	(605)
Market value of subordinated debt		(921)	(1,445)
Adjusted Group MCEV		10,781	10,794
Adjusted Group MCEV per share (pence)		220.3	194.1
Number of shares in issue at the end of the financial period less treasury   shares - millions6		4,893	5,562
1 Adjusted net worth is after the elimination of inter-company loans.
2 The sale of the Nordic business unit was completed on 21 March 2012.
3 Includes any other business that is not included within the main lines of business, largely Old Mutual parent company IFRS equity net of Group adjustments, consolidation adjustments in respect of intercompany transactions and debt and Bermuda asset management.
4 Includes adjustment for value of excess own shares in employee share scheme trusts.
5 On 24 September 2012, the Group repaid the US$750 million cumulative preference securities at their nominal value.
6 The Group cancelled 239 million treasury shares on 13 January 2012. As part of the disposal of the Nordic business unit, a seven for eight share consolidation was proposed and approved. For adjusted Group MCEV per share, the weighted average number of shares is effective from 23 April 2012.

Adjusted operating Group MCEV statement of earnings
For the year ended 31 December 2012
			£m
	Notes	Year ended 31 December 2012	Year ended 31 December 2011
Long-Term Savings
Covered business	B2	454	714
Asset management and other business		125	123
Banking		15	15
		594	852
Nedbank
Banking		828	755
Mutual & Federal
General insurance		43	89
US Asset Management
Asset management		91	67
Other operating segments
Finance costs1		(148)	(155)
Corporate costs2		(40)	(43)
Other shareholders' income/(expenses)		-	(18)
Adjusted operating Group MCEV earnings before tax from core operations		1,368	1,547
1 This includes interest payable from Old Mutual plc to non-core operations of £18 million for the year ended 31 December 2012 (December 2011: £27 million).
2 Central costs of £14 million are allocated to the covered business and provisioned in the VIF (December 2011: £14 million). Hence net corporate costs under MCEV of £40 million (December 2011: £43 million) differ from the IFRS amount of £54 million (December 2011: £57 million).

Significant corporate activities and business changes

Disposal of Nordic business

As previously reported, the Group had agreed at 31 December 2011 to dispose of its life assurance, asset management and banking operations in Sweden, Denmark and Norway to Skandia Liv. Following final regulatory approval, on 8 March 2012 and subsequent shareholder approval, the sale was completed on 21 March 2012. The MCEV earnings of the Nordic business have been categorised as discontinued within the MCEV results and the comparative information has been restated where applicable to reflect this. Nordic has been treated as non-modelled for 2012 reporting purposes with earnings for the period to 21 March 2012 reported on an IFRS basis.

The transaction has resulted in an uplift of £201 million to the adjusted Group MCEV, based on the differences between the purchase price of £2,118 million, the removal of the MCEV balances for the Nordic business unit (VIF: £1,148 million, ANW: £286 million and other non-covered business: £330 million) and further IFRS adjustments of £153 million.

Reporting of Retail Europe within Old Mutual Wealth

On 24 January 2012 the Group announced that it will combine its Old Mutual Wealth Continental Europe business (France and Italy) with the Skandia Retail Europe business unit (Germany, Austria, Poland and Switzerland), for reporting purposes only. As a result the Retail Europe segment is reported as part of the Old Mutual Wealth segment for the year ended 31 December 2012. The comparative information for the year ended 31 December 2011 has been reclassified where applicable to reflect this.

Further, in September 2012, the Group announced the merger of the Skandia businesses (Skandia UK, Skandia International, Old Mutual Global Investors and the Skandia European businesses outside of the Nordic region) into a single business called Old Mutual Wealth.

Bermuda capital resources and requirements

The Bermuda Monetary Authority (BMA) enacted its new Class E Prudential rules in December 2011. In July 2012, it was agreed with the BMA that the Bermuda business should now directly hold capital resources comparable to those we expect to be required under Solvency II, as calculated by the Group's existing internal capital model, which were previously held centrally. The capital requirements have been kept constant since July 2012.

In order to address the increased capital requirements, an injection of £352 million into Old Mutual Bermuda was made on 23rd July 2012, comprising of £154 million plc loan notes, the  transfer of ownership of seed capital in the US asset management business of £161 million and an injection of £37 million cash to purchase US treasuries. 

Adjusted operating Group MCEV earnings per share
For the year ended 31 December 2012
					£m
Year ended 31 December 2012	Notes	Core continuing operations	Non-core continuing operations	Discontinued operations	Total
Adjusted operating Group MCEV earnings before tax		1,368	99	28	1,495
Covered business	B2	454	99	18	571
Other business		914	-	10	924
Tax on adjusted operating Group MCEV earnings		(376)	-	(3)	(379)
Covered business	B2	(118)	-	-	(118)
Other business		(258)	-	(3)	(261)
Adjusted operating Group MCEV earnings after tax		992	99	25	1,116
Non-controlling interests
Ordinary shares		(277)	-	-	(277)
Preferred securities		(50)	-	-	(50)
Adjusted operating MCEV earnings after tax attributable to    equity holders		665	99	25	789
Adjusted operating Group MCEV earnings per share1		13.2	2.0	0.5	15.7
Adjusted weighted average number of shares - millions					5,029
	£m
Year ended 31 December 2011	Notes	Core continuing operations	Non-core continuing operations	Discontinued operations	Total
Adjusted operating Group MCEV earnings before tax		1,547	48	173	1,768
Covered business	B2	714	48	156	918
Other business		833	-	17	850
Tax on adjusted operating Group MCEV earnings		(364)	(1)	(31)	(396)
Covered business	B2	(162)	(1)	(28)	(191)
Other business		(202)	-	(3)	(205)
Adjusted operating Group MCEV earnings after tax		1,183	47	142	1,372
Non-controlling interests
Ordinary shares		(255)	-	-	(255)
Preferred securities		(62)	-	-	(62)
Adjusted operating MCEV earnings after tax attributable to    equity holders		866	47	142	1,055
Adjusted operating Group MCEV earnings per share1		15.9	0.9	2.6	19.4
Adjusted weighted average number of shares - millions					5,435
1 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.

Group market consistent embedded value statement of earnings
For the year ended 31 December 2012
			£m
	Notes	Year ended 31 December 2012	Year ended 31 December 2011
Adjusted operating Group MCEV earnings before tax from core operations		1,368	1,547
Adjusted operating Group MCEV earnings before tax from Bermuda non-core operations		99	48
Adjusted operating Group MCEV earnings before tax from continuing operations1		1,467	1,595
Adjusting items from continuing operations	C2	486	(437)
Total Group MCEV earnings before tax from continuing operations		1,953	1,158
Income tax attributable to shareholders		(490)	(168)
Total Group MCEV earnings after tax from continuing operations		1,463	990
Total Group MCEV earnings after tax from discontinued operations		600	(15)
MCEV earnings after tax from discontinued operations2		6	(15)
Group MCEV uplift from sale of Nordic		201	-
Other Group adjustments related to the Nordic disposal3		393	-
Total Group MCEV earnings after tax for the financial year		2,063	975
Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent		1,749	674
Non-controlling interests
Ordinary shares		264	239
Preferred securities		50	62
Total Group MCEV earnings after tax for the financial year		2,063	975
Basic total Group MCEV earnings per ordinary share (pence)		36.7	13.1
Weighted average number of shares - millions		4,768	5,136
1 For long-term business and general insurance businesses, adjusted operating Group MCEV earnings are based on long-term and short-term investment returns respectively, include investment returns on life fund 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, option revaluations related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, profit/(loss) on acquisition/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 instruments.
2 For Nordic, these are composed of earnings before tax of £28 million (December 2011: £173 million), adjusting items of £(20) million (December 2011: £(161) million) and tax of £(2) million (December 2011: £(27) million).
3 Included in Other Group adjustments related to the Nordic disposal, is £350 million related to the realisation of foreign exchange reserve on disposal. This was previously included in equity translation reserves.

Reconciliation of movements in Group and Adjusted Group MCEV (after tax)
							£m
		Year ended 31 December 2012			Year ended 31 December 2011
	Notes	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Opening Group MCEV		7,212	2,516	9,728	7,515	2,386	9,901
Adjusted operating MCEV earnings	B4	453	336	789	727	328	1,055
Non-operating MCEV earnings		473	487	960	(331)	(50)	(381)
Total Group MCEV earnings		926	823	1,749	396	278	674
Other movements in IFRS net equity	C3	(1,773)	(512)	(2,285)	(699)	(148)	(847)
Closing Group MCEV		6,365	2,827	9,192	7,212	2,516	9,728
Adjustments to bring Group investments    to market value	B1	-	1,589	1,589	-	1,066	1,066
Adjusted Group MCEV		6,365	4,416	10,781	7,212	3,582	10,794

A: MCEV policies

A1: Basis of preparation

The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 88 to 111 as 'MCEV') adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008) 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 Principles have been materially complied with for all businesses at 31 December 2012. The detailed methodology and assumptions made in presenting this supplementary information are set out in notes A2 and A3.

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

n 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.

n 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.

n 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 subsidiary, 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

(a) 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:

n 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.

n Value of in-force covered business (VIF).

The adjusted net worth is the market value of shareholders' assets held in respect of the covered business after allowance for the liabilities 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.

(b) 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 life businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe, and where the covered business is not material, the treatment within this supplementary information is the same as in the primary financial statements (i.e. expected future profits for this business is not capitalised for MCEV reporting purposes).

For December 2011 comparatives, the covered business does not include any business written in Skandia Liv, a mutual life insurance company then part of the Group.

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:

n New institutional investment platform pensions business written in the United Kingdom as it is more appropriately classified as unit trust business; and

n 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 and asset administration companies.

The treatment within this supplementary information of all business other than the covered business is the same as in the primary financial statements. The adjusted Group MCEV includes the impact of marking all debt to market value, the market value of the Group's listed banking subsidiary, 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.

(c) 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.

 (d) Required capital

Required capital is the market value of assets that is 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:

n Economic capital;

n Regulatory capital (i.e. the level of solvency capital which the local regulators require);

n Capital required by rating agencies in order to maintain the desired credit rating; and

n 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 a basis consistent with a 99.93% confidence level over a one-year time horizon.

For Emerging Markets and Old Mutual Wealth capital determined with reference to internal management objectives is the most onerous and is the capital measure used, whilst for Nordic the regulatory capital requirement was the most onerous in 31 December 2011 comparatives. For Bermuda the required capital is equal to regulatory capital, which is a change from December 2011, where internal capital (i.e. the adjusted net worth) was used.

The required capital in respect of OMLAC(SA)'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 2012			At 31 December 2011
	Notes	Required capital (a)	Regulatory capital (b)	Ratio (a/b)	Required capital (a)	Regulatory capital (b)	Ratio (a/b)
Emerging Markets	B3	1,312	923	1.4	1,368	1,012	1.4
Old Mutual Wealth1	B3	294	212	1.4	314	241	1.3
Bermuda2	B3	433	433	1.0	187	77	2.4
Nordic	B3	n/a	n/a	n/a	127	127	1.0
Total		2,039	1,568	1.3	1,996	1,457	1.4
1 Local regulators within many of the Old Mutual Wealth 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.
2 During December 2011, the BMA insurance (Prudential Standards) (Class E Solvency Requirements) Rules 2011 were formally signed into Bermudan law. The regulations allow for a transition period for the new capital requirement (50% for financial year 2011). The required capital calculated on this statutory basis was approximately £77 million at 31 December 2011. In July 2012 it was agreed with the BMA that Bermuda business should hold capital resources of £433 million, comparable to those expected to be required under Solvency II, as calculated by the Group's existing internal capital model. The capital requirement is held at a fixed amount between statutory filing dates and the July 2012 requirement has therefore been kept constant for 31 December 2012.

(e) Value of in-force covered business

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

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

n Time value of financial options and guarantees; less

n Frictional costs of required capital; less

n 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.

(f) 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. This is also known as a deterministic certainty equivalent valuation of future distributable earnings, and 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.

A: MCEV policies continued

A2: Methodology continued

 (g) Financial options and guarantees

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

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

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

n Management has some discretion in managing exposure to financial options and guarantees, particularly within participating business. Such dynamic management actions are reflected in the valuation of financial options and guarantees provided that such discretion is consistent with established and justifiable practice taking into account policyholders' reasonable expectations (e.g. with due consideration of the 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 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.

n 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.

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

-      changes in future bonus 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 Bermuda business, 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 an appropriate number of simulations are run to ensure that a reasonable degree of convergence of results has been obtained.

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 2012 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 market movements, including interest rates, equity levels and the volatility implicit in the pricing of derivative instruments in these markets. This discretionary margin is valued in the VIF.

Bermuda

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

(h) 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 entities within the Group. 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.

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

For Bermuda, in addition to the allowance for residual non-hedgeable risks, CNHR includes an allowance for hedge ineffectiveness risk and credit spread risk, which are not modelled in the PVFP or TVOG calculations.

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 cannot 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, i.e. commensurate upside and downside impacts, with the exception of operational risk.

The CNHR is calculated using a cost of capital approach, i.e. it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until 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 charge. The cost of capital charge 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 capital model based on appropriate shock scenarios consistent with a 99.5% confidence level over a one-year time horizon, using the same approach when calculating economic capital at a 99.93% confidence level. The internal capital model makes allowance for certain management actions, such as reductions in bonus rates, where deemed appropriate. The residual non-hedgeable risk capital makes an allowance for non-linearities between financial and non-hedgeable risks.

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

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

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

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

A cost of capital charge 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 rate is derived by considering a market based view of required return on equity for the covered business, and then deducting risk-free investment returns, frictional costs and an allowance for franchise value. This translates into an equivalent cost of capital rate of approximately 2.4% being applied to the Group diversified capital required in respect of such non-hedgeable risks.

(j) Participating business

For participating business in Emerging Markets and Bermuda, the method of valuation makes assumptions about future bonus 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.

 (k) 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.

(l) 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.

 (m) Consolidation adjustments

The MCEV result split by business unit takes account of both sides of any loan arrangements between Group companies, with the Group effect included in net other business.

(n) Look through principle

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

(o) 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.

A: MCEV policies continued

A2: Methodology continued

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.

United Kingdom

The Emergency Budget that was held in June 2010 stated that the UK's mainstream corporation tax rate would be reduced from its current level of 28% down to 24% in annual 1% steps. Following that, there were further announcements for additional reductions (down to 22%), and accelerations of these reductions. The reduction to 25%, effective from April 2012, has been allowed for in the December 2011 results. The December 2012 results allow for an additional 1% reduction to 24%, effective from April 2012 and the further 1% reduction to 23%, effective from April 2013. This additional 2% reduction amounts to £8million in the December 2012 results. The impact of the remaining reduction from 23% down to 21%, applicable from April 2014, is expected to be £7 million.

South Africa

A new dividend withholding tax system (replacing the current Secondary Tax on Companies (STC) system) was introduced in South Africa effective from 1 April 2012. This was reflected in the results at 31 December 2011, i.e. no allowance was made for future dividend withholding tax in the MCEV, with the exception of dividend witholding tax on the remittance of dividends to Old Mutual plc, as the actual level of taxation would depend on the legal status of each shareholder.

Allowance has now been made for dividend withholding tax on dividends earned in the policyholder funds as well as allowing for the increase in capital gains tax in policyholder funds.The average effective tax rate remains unchanged at 28%.

(p) Value of debt

Senior and subordinated debt securities are marked to market value (for IFRS reporting, debt is valued at either book value or fair value).

The IFRS value of total debt is £1,570 million (31 December 2011: £2,539 million) and MCEV value is £1,607million (31 December 2011: £2,515 million). $750m perpetual preferred securities were repaid in 2012.

Where either the principal or the coupon of the debt security has been swapped into an alternate currency, the mark to market value of these derivative instruments of £96 million (31 December 2011: £86 million) has not been included in the value of debt; however, it is included in the Net Other Business value of £45 million (31 December 2011: £175 million) (Adjusted Group MCEV by line of business). Further information relating to the debt securities can be found in Note E1 in the Notes to the Consolidated Financial Statements.

 (q) 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 from 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 (e.g. where premiums are expected to increase in line with salary or price inflation).

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

VNB is calculated as follows:

n Economic assumptions at the start of the reporting period are used, except for OMLAC(SA)'s Non-Profit Annuities products where point of sale assumptions are used.

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

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

n Generally using a stand-alone approach unless a marginal approach would better reflect the additional value to shareholders created through the activity of writing new business.

n Expense allowances include all acquisition expenses, including any acquisition expense overruns. Strategic business development expenses are excluded.

n Net of tax, reinsurance and non-controlling interests.

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

New business margins are disclosed as:

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

n The ratio of VNB to annual premium equivalent (APE), where APE is calculated as annualised 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.

(r) 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:

n 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.

n 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 as well as the deterministic release of the time value of options and guarantees, frictional costs and CNHR; 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.

n 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.

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

n 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.

n 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.

n 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 (for example, different opening and closing interest rates and equity volatility, increases in equity market values during the 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 legislative changes in taxation.

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 Old Mutual Wealth, core covered business 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 2012 (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 for comparability against current year earnings, the average exchange rates over 2012 are used. Therefore the expected existing business contribution for the financial year ending 31 December 2013 ultimately reflected in the 2013 financial statements may differ from these results.

(s) Group MCEV presentation

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, with the exception of US Asset Management that is valued at IFRS NAV, allowing for the value of the loan note held with Old Mutual plc.  A mark to market adjustment is not performed for external borrowings and other items not on a mark to market basis under IFRS relating to non-covered business.

A3: Assumptions

Non-economic assumptions

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

These assumptions are based on the covered business being part of a going concern, although favourable changes in maintenance expenses such as productivity improvements are generally not included beyond what has been achieved by the end of the reporting period, apart from certain development expenses (described below). Expense assumptions for run-off businesses consider cost reductions in future in line with management actions that would be taken as in-force volumes decrease.

A: MCEV policies continued

A3: Assumptions continued

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.

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

n The MCEV makes provision for future development costs and one-off expenses relating to covered business that are known with sufficient certainty, based on three year business plans. The provision is reduced to the extent that projects have associated benefits that are directly quantifiable and are considered to emerge within a reasonable timeframe (e.g. over the business plan period).

n Unallocated Group holding company expenses have been included to the extent that they are allocated to the covered business. The table below shows the future expenses attributable to the long-term business. The allocation of these expenses is based on the proportion that the management expenses incurred by the covered businesses bears to the total management expenses incurred by the Group.

In line with legislation in Germany, a specified proportion of miscellaneous profits is shared with policyholders. The revenue on in-force business can be reduced by various expense items incurred in any year. As such, in the 31 December 2011 VIF calculation, Skandia Leben (Germany) made allowance for the acquisition expenses in relation to the new business written over the next three years when setting the best estimate assumptions for the profit to be shared with policyholders in future years. As the business has been placed in run-off during 2012, acquisition expenses have not been incorporated into profit sharing assumptions as at 31 December 2012.

Proportion of Group holding company expenses attributable to long-term business			%
		At 31 December 2012	At 31 December 2011
Emerging Markets		18	17
Old Mutual Wealth		9	8
Bermuda1		n/a	n/a
Nordic		n/a	3
Total		27	28
1 Based on materiality, no Group holding expenses are allocated to Bermuda.

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 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.

(a) 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 Bloomberg. For Bermuda 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. For Emerging Markets the swap yield curve is sourced internally (using market data provided by the Bond Exchange of South Africa) and it is checked for reasonability relative to the Bloomberg swap yield curve.

At 31 December 2012, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity premium adjustment to OMLAC(SA)'s Immediate Annuity business and Fixed Bond businesses. A liquidity premium adjustment is applied to OMLAC(SA)'s Fixed Bond business as OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in excess of the risk free rate and the duration of the asset portfolio and the liability duration are a good match (meaning the asset portfolio is held to maturity). Cash flows on this product are also predictable and the company has adequate liquidity to withstand a substantial increase in lapses at all durations without having to sell bonds which further strengthens the case for applying a liquidity premium.

It is the directors' view that a proportion of non-government bond spreads at 31 December 2012 is attributable to a liquidity premium rather than only to credit and default allowances and that returns in excess of swap rates can be achieved, rather than entire spreads being lost to worsening default experience. For OMLAC(SA)'s Immediate Annuity business the currency, credit quality and duration of the actual bond portfolios were considered and adjusted risk free reference rates were derived at 31 December 2012 by adding 50bps of liquidity premium for this business (2011: 50bps) to the swap rates used for setting investment return and discounting assumptions. For OMLAC(SA)'s Fixed Bond products 45 bps of liquidity premium was added to the swap rates (2011: 50bps). These adjustments reflect the liquidity premium component in non-government bond spreads over swap rates that is expected to be earned on the portfolios. In deriving the liquidity premia at 31 December 2012, we compared the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises.

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

The risk free reference spot yields (excluding any applicable liquidity adjustments) 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.

Expense inflation rates have been derived by comparing real rates of return against nominal risk free rates for each territory, with adjustments for higher business unit specific inflation where applicable.

Risk free reference spot yields (excluding any applicable liquidity adjustments)
					%
	GBP	EUR	USD	ZAR	SEK
At 31 December 2012
1 year	0.7	0.3	0.3	5.1	n/a
5 years	1.0	0.8	0.9	6.0	n/a
10 years	1.9	1.6	1.9	7.1	n/a
20 years	2.9	2.2	2.8	7.5	n/a
At 31 December 2011
1 year	1.4	1.4	0.7	5.7	2.1
5 years	1.6	1.7	1.2	7.1	2.3
10 years	2.4	2.4	2.1	8.1	2.5
20 years	3.0	2.7	2.6	8.1	2.1

(b) 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 are 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. For Bermuda, implied volatilities and correlations are determined for each global equity and bond index modelled.         

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. Where strict adherence to the above is not possible, for example where markets only exist at short durations such as the swaption market in South Africa, interpolation or extrapolation techniques, and where appropriate, historical data 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.

(c) Exchange rates

All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in Note A1 of the Consolidated Financial Statements.

(d) 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 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 over the analysis period. Pre-tax real-world economic assumptions are determined as follows:

n The equity risk premium is 3.7% for Africa (2011: 3.5%) and 3% for Europe.

n The cash return equals the one year risk free reference rate for all regions.

n The property risk premium is 1.5% in Africa and 2% in Europe.

n Returns on corporate bonds reference actual yields from assets held.

n No risk premium is assumed for Bermuda's Variable Annuity policyholder asset portfolios.

B: Segment information
B1: Components of Group MCEV and Adjusted Group MCEV
			£m
	Notes	At 31 December 2012	At 31 December 2011
Adjusted net worth attributable to ordinary equity holders of the parent		5,791	5,193
Equity		7,833	8,488
Adjustment to IFRS net asset value	C4	(1,360)	(2,607)
Adjustment to remove perpetual preferred callable securities		(682)	(688)
Value of in-force business	B3	3,401	4,535
Present value of future profits		3,946	5,248
Additional time value of financial options and guarantees		(53)	(136)
Frictional costs		(221)	(243)
Cost of residual non-hedgeable risks		(271)	(334)
Group MCEV		9,192	9,728
Adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value		1,255	655
Adjustment for value of own shares in ESOP schemes1		126	117
Adjustment for present value of Black Economic Empowerment scheme deferred consideration		245	270
Adjustment to bring external debt to market value		(37)	24
Adjusted Group MCEV		10,781	10,794
Group MCEV value per share (pence)		187.9	174.9
Adjusted Group MCEV per share (pence)		220.3	194.1
Number of shares in issue at the end of the financial period less   treasury shares - millions		4,893	5,562
Return on Group MCEV (ROEV) per annum from core operations		6.8%	8.8%
Return on Group MCEV (ROEV) per annum from continuing non-core operations		1.0%	0.5%
Return on Group MCEV (ROEV) per annum from discontinued operations		0.3%	1.4%
Return on Group MCEV (ROEV2) per annum		8.1%	10.7%
1 Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2011 and 31 December 2012 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants during the period and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the financial period.
2 The ROEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £789 million (December 2011: £1,055 million) divided by the opening Group MCEV.

B: Segment information continued
B2: Adjusted operating MCEV earnings for the covered business
	£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Adjusted operating Group MCEV earnings before tax	571	454	459	(5)	99	18
Tax on adjusted operating Group MCEV earnings	(118)	(118)	(131)	13	-	-
Adjusted operating Group MCEV earnings after tax	453	336	328	8	99	18
	£m
Year ended 31 December 2011	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Adjusted operating Group MCEV earnings before tax	918	714	468	246	48	156
Tax on adjusted operating Group MCEV earnings	(191)	(162)	(119)	(43)	(1)	(28)
Adjusted operating Group MCEV earnings after tax	727	552	349	203	47	128

B3: Components of MCEV of the covered business
	£m
At 31 December 2012	Total covered business	Core covered business	Emerging Markets1	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Adjusted net worth	2,964	2,284	1,818	466	680	-
Free surplus	925	678	506	172	247	-
Required capital	2,039	1,606	1,312	294	433	-
Value of in-force	3,401	3,456	1,478	1,978	(55)	-
Present value of future profits	3,946	3,950	1,828	2,122	(4)	-
Additional time value of financial options and guarantees	(53)	(14)	-	(14)	(39)	-
Frictional costs	(221)	(220)	(207)	(13)	(1)	-
Cost of residual non-hedgeable risks	(271)	(260)	(143)	(117)	(11)	-
MCEV	6,365	5,740	3,296	2,444	625	-
	£m
At 31 December 2011	Total covered business	Core covered business	Emerging Markets1	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Adjusted net worth	2,676	2,204	1,768	436	187	285
Free surplus	680	522	400	122	-	158
Required capital	1,996	1,682	1,368	314	187	127
Value of in-force	4,536	3,509	1,399	2,110	(121)	1,148
Present value of future profits	5,248	4,001	1,740	2,261	36	1,211
Additional time value of financial options and guarantees	(136)	(14)	-	(14)	(122)	-
Frictional costs	(243)	(236)	(218)	(18)	(2)	(5)
Cost of residual non-hedgeable risks	(333)	(242)	(123)	(119)	(33)	(58)
MCEV	7,212	5,713	3,167	2,546	66	1,433
1 The required capital in respect of Emerging Markets 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.

B4: Analysis of covered business MCEV earnings (after tax)
										£m
Total covered business	Year ended 31 December 2012					Year ended 31 December 2011
	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	680	1,996	2,676	4,536	7,212	507	2,844	3,351	4,164	7,515
New business value	(293)	163	(130)	327	197	(444)	187	(257)	490	233
Expected existing business    contribution (reference rate)	20	71	91	156	247	17	65	82	179	261
Expected existing business    contribution (in excess of    reference rate)	3	29	32	49	81	7	34	41	87	128
Transfers from VIF and    required capital to free    surplus	695	(216)	479	(479)	-	943	(236)	707	(707)	-
Experience variances	(14)	17	3	6	9	10	30	40	111	151
Assumption changes	34	(7)	27	7	34	23	4	27	1	28
Other operating variance	(26)	18	(8)	(107)	(115)	188	(205)	(17)	(57)	(74)
Operating MCEV earnings	419	75	494	(41)	453	744	(121)	623	104	727
Economic variances	258	3	261	259	520	(221)	(22)	(243)	(214)	(457)
Other non-operating variance	(284)	240	(44)	(3)	(47)	32	1	33	93	126
Total MCEV earnings	393	318	711	215	926	555	(142)	413	(17)	396
Closing adjustments	(148)	(275)	(423)	(1,350)	(1,773)	(382)	(706)	(1,088)	389	(699)
Capital and dividend flows	26	(3)	23	1	24	(243)	55	(188)	-	(188)
Foreign exchange variance	(54)	(145)	(199)	(139)	(338)	(75)	(312)	(387)	(306)	(693)
MCEV of sold business	(120)	(127)	(247)	(1,212)	(1,459)	(64)	(449)	(513)	695	182
Closing MCEV	925	2,039	2,964	3,401	6,365	680	1,996	2,676	4,536	7,212
Return on MCEV (RoEV)% per annum					6.3%					9.7%
Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
						£m
		Year ended 31 December 2012						Year ended 31 December 2011
			Adjusted net worth	Value of in-force	MCEV			Adjusted net worth	Value of in-force	MCEV
Experience Variances			3	6	9			40	111	151
Persistency			51	10	61			20	84	104
Risk			52	-	52			43	4	47
Expenses			(91)	11	(80)			(44)	13	(31)
Other			(9)	(15)	(24)			21	10	31
Assumption changes			27	7	34			27	1	28
Persistency			12	(25)	(13)			21	40	61
Risk			13	37	50			-	8	8
Expenses			12	(3)	9			(7)	(99)	(106)
Other			(10)	(2)	(12)			13	52	65
						£m
						Year ended 31 December 2013
						Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)						17	55	72	143	215
Expected existing business contribution (in excess of reference rate)						5	25	30	45	75

B5: Analysis per business unit
						£m
	Year ended 31 December 2012
	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Opening MCEV	7,212	5,713	3,167	2,546	66	1,433
New business value	197	197	135	62	-	-
Expected existing business contribution (reference rate)	247	239	193	46	8	-
Expected existing business contribution (in excess of reference rate)	81	55	32	23	26	-
Experience variances	9	(48)	(29)	(19)	39	18
Assumption changes	34	5	34	(29)	29	-
Other operating variance	(115)	(112)	(37)	(75)	(3)	-
Operating MCEV earnings	453	336	328	8	99	18
Economic variances	520	403	281	122	117	-
Other non-operating variance	(47)	(29)	(26)	(3)	-	(18)
Total MCEV earnings	926	710	583	127	216	-
Closing adjustments	(1,773)	(683)	(454)	(229)	343	(1,433)
Capital and dividend flows	24	(336)	(147)	(189)	360	-
Foreign exchange variance	(338)	(322)	(307)	(15)	(17)	1
MCEV of acquired/sold business	(1,459)	(25)	-	(25)	-	(1,434)
Closing MCEV	6,365	5,740	3,296	2,444	625	-
Return on MCEV (RoEV)% per annum	6.3%	5.9%	10.7%	0.3%	154.0%	1.3%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from total covered and core covered business, which are calculated in sterling. Discontinued covered business relates to Nordic.
Transfers from VIF and required capital to free surplus						£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Transfer from value of in-force	(479)	(540)	(220)	(320)	61	-
Transfer from required capital	(216)	(190)	(153)	(37)	(26)	-
Transfer to free surplus	695	730	373	357	(35)	-
						£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business
Experience variances	9	(48)	(29)	(19)	39	18
Persistency	61	22	(1)	23	39	-
Risk	52	52	46	6	-	-
Expenses	(80)	(82)	(41)	(41)	2	-
Other	(24)	(40)	(33)	(7)	(2)	18
Assumption changes	34	5	34	(29)	29	-
Persistency	(13)	(32)	(6)	(26)	19	-
Risk	50	50	49	1	-	-
Expenses	9	(11)	(9)	(2)	20	-
Other	(12)	(2)	-	(2)	(10)	-

B5: Analysis per business unit
						£m
	Year ended 31 December 2011
	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued  covered business
Opening MCEV	7,515	5,913	3,313	2,600	287	1,315
New business value	233	177	99	78	-	56
Expected existing business contribution (reference rate)	261	211	174	37	8	42
Expected existing business contribution (in excess of reference rate)	128	57	30	27	38	33
Experience variances	151	130	102	28	24	(3)
Assumption changes	28	40	6	34	(8)	(4)
Other operating variance	(74)	(63)	(62)	(1)	(15)	4
Operating MCEV earnings	727	552	349	203	47	128
Economic variances	(457)	(7)	32	(39)	(261)	(189)
Other non-operating variance	126	89	93	(4)	-	37
Total MCEV earnings	396	634	474	160	(214)	(24)
Closing adjustments	(699)	(834)	(620)	(214)	(7)	142
Capital and dividend flows	(188)	(177)	12	(189)	-	(11)
Foreign exchange variance	(693)	(657)	(632)	(25)	(7)	(29)
MCEV of acquired/sold       business	182	-	-	-	-	182
Closing MCEV	7,212	5,713	3,167	2,546	66	1,433
Return on MCEV (RoEV)% per annum	9.7%	9.3%	11.9%	7.8%	17.0%	8.5%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from total covered and core covered business, which are calculated in sterling. Discontinued covered business RoEV relates to Nordic.
Transfers from VIF and required capital to free surplus						£m
Year ended 31 December 2011	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued  covered business
Transfer from value of in-force	(707)	(569)	(209)	(360)	(9)	(129)
Transfer from required capital	(236)	(179)	(150)	(29)	(57)	-
Transfer to free surplus	943	748	359	389	66	129
						£m
Year ended 31 December 2011	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued  covered business
Experience Variances	151	130	102	28	24	(3)
Persistency	104	79	56	23	22	3
Risk	47	46	38	8	-	1
Expenses	(31)	(24)	(9)	(15)	3	(10)
Other	31	29	17	12	(1)	3
Assumption changes	28	40	6	34	(8)	(4)
Persistency	61	47	55	(8)	20	(6)
Risk	8	8	-	8	-	-
Expenses	(106)	(80)	(49)	(31)	(26)	-
Other	65	65	-	65	(2)	2

Results highlights

Core covered business

n Strong value of new business growth in Emerging Markets due to good volumes and an improvement in the mix of business leading to higher margins.

n A significant portion of expense losses include one-off non-development costs of £(44) million incurred in Emerging Markets and Old Mutual Wealth.

n Favourable equity and bond market performance has led to positive economic variances in Emerging Markets and Old Mutual Wealth.

n The 10% depreciation of the Rand against Sterling over 2012 has led to foreign exchange translation losses in MCEV closing adjustments.

n A significant portion of the continental European business has now closed to new business, with resulting changes to expense, lapse and profit sharing assumptions (German PHP business) reducing the MCEV now recognised for these businesses.

Non-core covered business (Old Mutual Bermuda)

n Very favourable persistency experience on the Bermuda Variable Annuity book of business, leading to positive assumption changes.

n Capital has been transferred to Old Mutual Bermuda to meet the enhanced capital requirements of the Bermuda Monetary Authority (BMA).

n The expiration of the 5-year guarantees, higher than expected lapses, lapse assumption changes and favourable market performance has led to a significant reduction in Variable Annuity guarantee reserves.

New business

Emerging Markets: VNB increased by 36% due to higher volumes and margins (mix of business, repricing of certain products and favourable assumption changes), partially offset by the Rand depreciation over 2012. There have been strong recurring premium sales in Mass Foundation Cluster and single premium annuity sales in Corporate Segment. However, covered single premium savings sales in Retail Affluent and Corporate Segment have lagged in 2012 although non-covered single premium savings sales have improved significantly.

Old Mutual Wealth: Following the cessation of significant parts of uneconomic product lines as a result of business restructuring initiatives, there have been lower covered sales in the UK. International sales were affected by regulatory changes that were overcome in the fourth quarter of 2012.

Transfers from the value of in-force business

Old Mutual Wealth: Lower expected transfers in 2012 are mainly as a result of the run-off of closed books and the sale of the Finnish business.

Non-core covered (Old Mutual Bermuda): The large negative expected transfer in 2012 is a result of the anticipated loss in fee income from the significant number of Variable Annuity surrenders post the 5-year guarantee top-up point and the anticipated amortisation of Deferred Acquisition Costs resulting from the business run-off.

Experience variances and operating assumption changes

Emerging Markets:  Positive risk experience from Retail Affluent and Mass Foundation Cluster products continued in 2012, with positive assumption changes of £49 million reflecting some of this experience. Other experience losses mainly relate to higher than anticipated taxation in 2012. Experience variances also include an investment of £18 million in the development of our franchise in African countries and Mexico, as well as the development cost of new strategic capabilities, and also expenses of a one off nature (including IT project expenditure) of £28 million.

Old Mutual Wealth: The positive persistency experience is mainly a result of a lower than anticipated number of surrenders in the UK Legacy savings business in the run-up to the Retail Distribution Review (RDR). Negative persistency assumption changes relate mainly to a reduction in anticipated lapses on protection products at later durations of £(11) million and the anticipated increase in surrenders of products in Germany and Austria of £(7)million, consistent with recent experience. Expense losses include one-off restructuring costs of £16 million as well as investments of £19 million in development initiatives in Platform and International businesses.

Non-core covered (Old Mutual Bermuda): Positive persistency profits reflect better than expected 5-year anniversary surrender experience on Variable Annuity products. Non-Hong Kong Universal Guarantee Option (UGO) business experienced a 79% surrender rate and the Hong Kong UGO business experienced a 63% lapse rate since these businesses entered the top-up period. In light of this experience, surrender assumptions have been increased for policies that are yet to reach their 5-year anniversary (£20 million impact). Positive expense assumption changes of £19 million reflect reduced aggregate expenses needed to meet the remaining obligations of the business. Other assumption changes of £(10) million mainly driven by a reduction in rebate income as underlying client portfolios reach sub-scale levels.

Discontinued (Nordic):  Experience variances reflect accrued IFRS profits during the year prior to the sale of the business.

Other operating variances

Emerging Markets: Other operating variances mainly reflect the impact of a management decision to utilise the future profit stream arising from unclaimed benefits to fund an advisor training academy, and to enhance the surrender values on old generation reversionary bonus policies.

Old Mutual Wealth: Other operating variances include the £(73) million impact of the management action to place the German and Austrian businesses into run-off. Setting expense assumptions on a run-off basis for these businesses reduced MCEV by £(26) million and a change in profit sharing assumptions for the German PHP business reduced MCEV by £(47)million. Variances also include the release of development provisions of £17 million (change in methodology to recognise project benefits as well as costs where benefits are directly quantifiable and emerge within a reasonable timeframe) and CNHR modelling changes.

Economic variances

Emerging Markets: Significant positive economic variances have emerged from better than expected investment returns (favourable equity, bond  and credit market performance), together withthe reduction in the swap yield curve, which has increased the VIF.

Old Mutual Wealth: Significantly positive economic variances have emerged from better than expected policyholder fund performance over 2012 due to better than expected equity and bond market returns.

Non-core covered (Old Mutual Bermuda):The positive variance resulting in significantly lower Variable Annuity guarantee reserves, is mainly due to positive equity market performance, and reduced volatilities, partially offset by lower short-to-medium term interest rates.

Other non-operating variances

Emerging Markets: Other non-operating variances consist mainly of modelling changes to incorporate the new South African dividend withholding tax regime, and higher capital gains tax, in the calculation of policyholder investment returns in MCEV models.

Closing adjustments

Emerging Markets: Capital and dividend flows include the net impact of dividends paid of £(130) million, the purchase of Africa operations from Old Mutual plc of £(92) million, the transfer of net asset value of the Zimbabwe and Namibian holding companies from non-covered business of £135 million and the Zimbabwe indigenisation costs of £(34) million. The negative foreign exchange variance reflects the 10% depreciation of the rand over the period (GBP/ZAR exchange rate increased from 12.56 at 31 December 2011 to 13.77 at 31 December 2012).

Old Mutual Wealth: Closing adjustments include the impact of the sale of the Finnish business £(25) million.

Non-core covered (Old Mutual Bermuda): The positive capital and dividend flows of £360 million, include £352 million relating to the transfer of capital to this business (in the form of additional Old Mutual plc loan notes and other assets) to enable it to meet the new enhanced capital requirements of the Bermuda Monetary Authority (BMA).

C: Other key performance information

C1: 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. Old Mutual Bermuda is excluded from the tables below as it is closed to new business.

Year ended 31 December 2012								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors1	APE	VNB	PVNBP margin	APE margin
Core covered business	517	5,953	8,665	5.2	1,112	197	2.3%	18%
Emerging Markets	370	1,321	3,331	5.4	502	135	4.1%	27%
Old Mutual Wealth	147	4,632	5,334	4.8	610	62	1.2%	10%
Discontinued covered business	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a
Total covered business	517	5,953	8,665	5.2	1,112	197	2.3%	18%
Year ended 31 December 2011								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors1	APE	VNB	PVNBP margin	APE margin
Core covered business	569	6,211	9,113	5.1	1,189	177	1.9%	15%
Emerging Markets	363	1,441	3,295	5.1	506	99	3.0%	20%
Old Mutual Wealth	206	4,770	5,818	5.1	683	78	1.3%	11%
Discontinued covered business	153	753	1,347	3.9	229	56	4.2%	25%
Total covered business	722	6,964	10,460	4.8	1,418	233	2.2%	16%
1 The PVNBP capitalisation factors are calculated as follows: (PVNBP - single premiums)/annualised recurring premiums.

The VNB for Old Mutual Wealth in December 2012 has been calculated after the reallocation of certain development costs from acquisition expenses to expense variances. If December 2011 VNB was calculated on the same basis, it would have been £85 million.

Additional new business written in the Group:

The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the Emerging Markets long-term business of £1,093 million (2011: £884 million) is excluded as the profits on this business arise in the asset management business. The value of new business also excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of in-force business.

The value of new institutional investment platform pensions business written in Old Mutual Wealth of £736 million (2011: £704 million) is excluded as this is more appropriately classified as unit trust business.

New business single premiums of £37 million (2011: £31 million), annualised recurring premiums of £17 million (2011: £14 million), and APE of £21 million (2011: £17 million), in respect of the life business in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe have been excluded from the above tables, as no value of new business and PVNBP calculations have been performed for these businesses.

C2: Adjustments applied in determining total Group MCEV earnings before tax
						£m
	Year ended 31 December 2012			Year ended 31 December 2011
	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	-	(7)	(7)	-	(283)	(283)
Economic variances	657	(25)	632	(554)	(28)	(582)
Other non-operating variances	(56)	-	(56)	22	-	22
Acquired/divested business1	-	(12)	(12)	-	182	182
Other Group adjustments related to Nordic disposal	(14)	414	400	-	-	-
Adjusted Group MCEV uplift from sale of Nordic	-	201	201	-	-	-
Dividends declared to holders of perpetual preferred    callable securities	-	42	42	-	44	44
Premium paid on early repayment of senior debt	-	(71)	(71)	-	-	-
Adjusting items relating to US Asset Management    equity plans and non-controlling interests	-	(5)	(5)	-	(3)	(3)
Fair value (losses)/gains on Group debt instruments	-	(57)	(57)	-	22	22
Adjusting items	587	480	1,067	(532)	(66)	(598)
Adjusting items from continuing operations	605	(119)	486	(378)	(59)	(437)
Adjusting items from discontinued operations	(18)	599	581	(154)	(7)	(161)
Total MCEV adjusting items	587	480	1,067	(532)	(66)	(598)
1 In December 2011, this related to the non-covered businesses in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe that were included for the first time.
C3: Other movements in IFRS net equity impacting Group MCEV						£m
	Year ended 31 December 2012			Year ended 31 December 2011
	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Fair value movements1	-	(328)	(328)	-	24	24
Net investment hedge	-	160	160	-	28	28
Currency translation differences/exchange   differences on translating foreign operations	(338)	(677)	(1,015)	(693)	(498)	(1,191)
Aggregate tax effects of items taken directly to or    transferred from equity	-	9	9	-	11	11
Other movements2	(1,459)	1,459	-	182	128	310
Net income recognised directly into equity	(1,797)	623	(1,174)	(511)	(307)	(818)
Capital and dividend flows for the year3	24	(1,238)	(1,214)	(257)	(8)	(265)
Inclusion of other African life businesses	-	-	-	69	-	69
Net purchase of treasury shares	-	8	8	-	(17)	(17)
Shares issued in lieu of cash dividends	-	-	-	-	124	124
Other shares issued	-	33	33	-	10	10
Change in share based payment reserve	-	62	62	-	50	50
Other movements in net equity	(1,773)	(512)	(2,285)	(699)	(148)	(847)
1 Included in the fair value movements is the realisation of foreign exchange reserve on the Nordic disposal of £(350) million and other fair value movements of £22 million.
2 The December 2012 amount relates to the transfer of Nordic covered MCEV balance on disposal and the sale of Finnish branch in Old Mutual Wealth. December 2011 reflects movements in respect of the disposal of US Life.
3 December 2012 capital and dividend flows from the covered business include the purchase of the Rest of Africa businesses by Emerging Markets from Old Mutual plc and the capital injection of £352 million into Old Mutual Bermuda. The special dividend of £915 million, paid on 7 June 2012 is included in non-covered business.

C: Other key performance information continued
C4: 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 2012	Total covered business	Long Term Savings	Emerging Markets	Old Mutual Wealth	Bermuda	Nordic
IFRS net asset value1	4,288	3,580	1,275	2,305	708	-
Adjustment to include long-term business on a   statutory solvency basis	(926)	(898)	187	(1,085)	(28)	-
Inclusion of Group equity and debt instruments   held in life funds2	367	367	364	3	-	-
Goodwill	(765)	(765)	(8)	(757)	-	-
Adjusted net worth attributable to ordinary   equity holders of the parent	2,964	2,284	1,818	466	680	-
	£m
At 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Old Mutual Wealth	Bermuda	Nordic
IFRS net asset value1	5,214	3,744	1,230	2,514	201	1,269
Adjustment to include long-term business on a   statutory solvency basis	(1,905)	(1,108)	182	(1,290)	(14)	(783)
Inclusion of Group equity and debt instruments   held in life funds2	365	365	365	-	-	-
Goodwill	(998)	(797)	(9)	(788)	-	(201)
Adjusted net worth attributable to ordinary   equity holders of the parent	2,676	2,204	1,768	436	187	285
1 IFRS net asset value is after elimination of inter-company loans.
2 A further £(36) million (2011: £(69) million) relates to the non-covered business. This brings the total adjustment to IFRS net asset value to £1,360 million (2011: £2,607 million).

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 shareholder funds. In South Africa, these values exclude items that are eliminated or shown separately on consolidation (such as Nedbank and inter-company loans). For some European countries 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 adjustment to include long-term business on a statutory solvency basis includes the following:

n 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 with the exception of the Bermuda business where DAC is an admissible asset under local statutory basis.

n 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. For Bermuda business, VIF reflects the impact of amortising DAC allowed under the ANW at 31 December 2011. DAC has been completely written off at 31 December 2012.

D1: Sensitivity tests

The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2012 and the value of new business for the year ended 31 December 2012 to the following:

n Economic assumptions 100 bps increase/decrease: Increasing/decreasing all pre-tax investment and economic assumptions (projected investment returns and inflation) by 100 bps, with credited rates and discount rates changing commensurately.

n Equity/property market value 10% increase/decrease: Equity and property market value increasing/decreasing by 10%, with all pre-tax investment and economic assumptions unchanged.

n 10bps increase of liquidity spreads: 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.

n 25% increase in equity/property and swaption implied volatilities: 25% multiplicative increase in implied volatilities.

n VNB 10% increase in acquisition expenses: 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 VNB on closing economic assumptions: Value of new business calculated on economic assumptions at the end of reporting period.

n NHR capital diversification: Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business.

n 99.93% confidence level NHR capital: Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model.

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 for non-linked business (including non-linked reserves for linked business) 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 Investment Guarantee Reserves(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.

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.

At 31 December 2011, Nordic was included in all sensitivities.

D1: Sensitivity tests continued
Sensitivity tests: MCEV
	£m
	At 31 December 2012					At 31 December 2011
	MCEV	Value of in-force business	Value of new business			MCEV	Value of in-force business	Value of new business
Central assumptions	6,365	3,401	197			7,212	4,536	233
MCEV, VIF & VNB given changes in:
Economic assumption 100 bps increase	6,253	3,285	180			7,103	4,384	215
Economic assumption 100 bps decrease	6,471	3,505	215			7,315	4,673	250
Equity/property market value 10% increase	6,647	3,632	206			7,585	4,790	244
Equity/property market value 10% decrease	6,169	3,248	192			6,869	4,283	223
10bps increase of liquidity spreads	6,374	3,410	198			7,221	4,545	234
50bps contraction on corporate bond spreads	6,380	3,402	197			7,232	4,540	233
25% increase in equity/property implied volatilities	6,311	3,358	197			7,124	4,513	232
25% increase in swaption implied volatilities	6,353	3,389	197			7,198	4,521	233
10% decrease in discontinuance rates	6,519	3,568	237			7,405	4,749	280
10% decrease in maintenance expense	6,580	3,616	216			7,471	4,795	255
5% decrease in mortality/morbidity rates	6,495	3,531	214			7,333	4,657	247
5% decrease in annuitant mortality assumption	6,358	3,394	197			7,190	4,514	233
Minimum capital requirement	6,421	3,457	202			7,267	4,590	238
NHR capital diversification	6,408	3,444	201			7,282	4,606	239
99.93% confidence level NHR capital	6,306	3,342	192			7,155	4,478	227

 

END

 

 

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