Presentation

Old Mutual PLC 20 June 2005 Old Mutual plc Presentation to investors and analysts on European Embedded Value Old Mutual plc ('the Group') is today briefing analysts and investors on the key impacts resulting from its adoption of the European Embedded Value ('EEV') principles for the enhancement of embedded value reporting and disclosure. In summary, the overall adjusted embedded value of the Group has increased marginally as at 31 December 2004. The adjusted net worth increases by GBP141 million, in respect of the non-life businesses, reflecting changes arising from the adoption of IFRS. The Value of in-force business decreases by GBP116 million reflecting the application of the EEV principles, in respect of the life businesses. These changes equate to a net increase of GBP25 million or 0.5% in the embedded value of the group as at 31 December 2004. The briefing this afternoon focuses on these changes with particular emphasis on the Group's approach to the allowance for risk - a key requirement within the EEV principles. The briefing will take the form of a telephone dial-in call starting at 3pm UK time (4pm SA time, 10am Eastern US time). The slide presentation to be used on the call will be available to download on the website http://www.oldmutual.com from 12pm UK time on Monday. The call details are as follows: SA: Toll-free 0800 994 090 UK: Toll-free 0800 953 1444 US: Toll-free 1866 220 1452 A copy of the restatement of embedded value supplementary information for the year ended 31 December 2004, for the six months ended 30 June 2004 and for the year ended 31 December 2003 is attached. A recording will be available for 14 days following the analyst dial-in on the 20th. The details are as follows: Encore Replay Access Number: 6992561 #, UK Dial In Number: 0845 245 5205, Std International Number +44 (0) 1452 55 00 00. 20 June 2005 ENQUIRIES: Old Mutual plc UK Investor Relations: Malcolm Bell + 44 (0) 20 7002 7166 Media Relations: Miranda Bellord + 44 (0) 20 7002 7133 Old Mutual plc SA Investor Relations: Deward Serfontein +27 (0) 21 509 8709 Media Relations: Nad Pillay +27 (0) 21 504 8026 For further information about Old Mutual plc visit www.oldmutual.com Old Mutual plc RESTATEMENT OF EMBEDDED VALUE SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 UNDER THE EUROPEAN EMBEDDED VALUE PRINCIPLES ('EEV') 20 JUNE 2005 EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 INDEX 1. INTRODUCTION ........................................................... 2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS........................................................... 3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE ................. 4. COMPONENTS OF GROUP EMBEDDED VALUE .................................. 5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE ADJUSTED EMBEDDED VALUE ............................................ 6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS ................ 7. METHODOLOGY.......................................................... 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS .................. 9. VALUE OF NEW BUSINESS (after tax) .................................. 10. PRODUCT ANALYSIS OF NEW COVERED BUSINESS PREMIUMS .................. 11. ASSUMPTIONS ........................................................ 12. ALTERNATIVE ASSUMPTIONS ............................................. 13. AUDITORS' REPORT..................................................... EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 1. INTRODUCTION The European Embedded Value (EEV) Principles were published in May 2004 by the CFO Forum, a group representing the Chief Financial Officers of major European insurers. The EEV Principles provide a framework intended to improve comparability and transparency in embedded value reporting across Europe. Old Mutual plc has decided to adopt the EEV Principles in respect of its financial year ending 31 December 2005 and to re-state financial information for the full year 2004 and the six months to 30 June 2004. The restatements are dealt with in this document. The restatements additionally detail sensitivities of the embedded value of the covered business to several key factors. The Achieved Profits basis of reporting previously adopted by Old Mutual already complied with the majority of the EEV Principles. A key requirement of the EEV Principles, and the major driver of changes, was the inclusion of an appropriate allowance for the aggregate risk in the covered business (i.e. the long-term life business in the primary financial statements, which includes the healthcare business). Risk is allowed for through the level and cost of required capital, explicit time-value (stochastic) reserves to cover the cost of financial options and guarantees and the risk discount rate. The level of required capital for the covered business reflects the level of capital considered by the Directors to be appropriate to manage the business allowing for local or group statutory requirements, capital allocated in terms of our internal capital management and the level of capital required by rating agencies in respect of our North American business in order to maintain our desired credit rating. At 31 December 2004, the levels of required capital were equivalent to 157% and 282% of the minimum local statutory requirements for Africa and North America respectively. Allowance has been made for the cost (intrinsic value) of financial options and guarantees to policyholders in the local statutory reserves according to local requirements. In South Africa an investment guarantee reserve on a stochastic basis is included in the local statutory reserves. A deduction from the value of the in-force business has been made to allow for the time-value (stochastic) cost of policyholder financial options and guarantees, to the extent that this is not already included in the statutory reserves. At 31 December 2004 this deduction amounted to GBP74m. Having determined the level and cost of required capital and the shareholders' cost of financial options and guarantees, the risk discount rate is the lever to ensure that appropriate allowance is made for all the risks in the business. Old Mutual, advised by the actuarial consultants Tillinghast, decided to adopt a bottom-up market consistent approach for setting its risk discount rates. Under a market consistent valuation, each cash flow is valued on a basis consistent with the way the market values such cash flows. Thus, risk-free cash flows are discounted at a risk-free rate and equity cash-flows at an equity rate. Allowance is made for non-market risks in the best-estimate assumptions and frictional cost of capital. Separate risk discount rates have been calculated for each of the geographic life businesses. The risk margins for the African and North American covered businesses are 2.3% p.a., and 3.2% p.a. respectively. The EEV Principles require best-estimate assumptions, consistency between assumptions and active review. The outcome of a review of the economic assumptions was to increase the gross of tax equity risk premium in South Africa from 2% p.a. to 3.5% p.a. to better recognise the level of historical equity risk premiums and the future growth prospects of the economy there. Following a review of expense assumptions in our North American business, a higher allocation has been made to maintenance expenses. The expense assumptions in respect of our South African business now also include an annual allowance for one-off project costs. GBP6.6m of our unallocated head-office expenses have been allocated to the covered business and included in the value of in-force calculations for South Africa and North America. To clarify terminology, the embedded value of the covered business is the sum of the shareholders' net worth in respect of the covered business, and the value of the in-force covered business. The group embedded value includes the value of all other business at the book value detailed in the primary financial statements, on an IFRS basis. The adjusted embedded value, a measure used by management to assess the shareholders' interest in the value of the group, includes the group's listed banking and general insurance subsidiaries at market value as well as the value of own shares held in policyholders' funds. A comparison of the adjusted embedded value on an achieved profits basis with that on an EEV basis and a table detailing the impact of the EEV Principles and IFRS on the adjusted embedded value are set out below. The overall impact on adjusted embedded value at 31 December 2004 is a 0.5% increase from 139.1p to 139.7p. The value of the in-force business, which is affected by the allowance for risk and inclusion of a proportion of unallocated head-office expenses, reduces by 7%. The adjusted net worth increases by 4%, as a result of the impact of the adoption of IFRS on our non-life businesses. The changes that have principally caused this increase are the change to dividend recognition and the change in goodwill amortisation in respect of the asset management businesses. The adjusted operating profit for 2004 has increased by 3% (2% reduction, in respect of the covered business), with the return on adjusted embedded value (ROEV) increasing from 19.4% to 19.9%. The most significant items affecting the operating profit of the covered business resulted from the effect of the increase of the equity risk premium on the expected return on capital in South Africa, and the lower value of new business in North America. A reconciliation of the value of new business and new business margins showing the impact of moving from the achieved profits basis to the EEV basis is also detailed below. The total value of new business has reduced by 15%, with the new business margin on an APE basis reducing from 23% to 18%. The most significant factor impacting the value of new business is the allowance for risk. 1. INTRODUCTION continued Adjusted embedded value on both the achieved profits and EEV basis GBPm At 31 December 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,525 2,911 Equity shareholders' funds 3,245 3,264 Statutory solvency adjustments: North America (716) (577) United Kingdom (19) (7) Africa - 216 South Africa discounting CGT adjustment 15 15 Value of in-force business 1,592 1,476 Value of in-force business before items 1,871 1,918 listed below Cost of capital (279) (368) Additional cost of financial options and - (74) guarantees Minority interest in value of in-force (2) (2) business Achieved profits equity shareholders' funds/ 4,115 4,385 EEV Group embedded value Pro-forma adjustment to bring Group investments to market value Achieved profits / EEV equity shareholders' 4,115 4,385 funds Adjustment to bring listed subsidiaries to 876 631 market value Adjustment to market value of own shares 368 368 held in policyholders' funds Adjusted embedded value 5,359 5,384 pence Adjusted embedded value per share 139.1 139.7 Number of shares (millions) 3,854 3,854 At 30 June 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,294 2,573 Equity shareholders' funds 2,741 2,796 Statutory solvency adjustments: North America (433) (370) United Kingdom (18) (13) Africa - 156 South Africa discounting CGT adjustment 4 4 Value of in-force business 1,288 1,231 Value of in-force business before items 1,466 1,482 listed below Cost of capital (178) (185) Additional cost of financial options and - (66) guarantees Minority interest in value of in-force (2) (2) business Achieved profits equity shareholders' funds/ 3,580 3,802 EEV Group embedded value Pro-forma adjustment to bring Group investments to market value Achieved profits / EEV equity shareholders' 3,580 3,802 funds Adjustment to bring listed subsidiaries to 488 272 market value Adjustment to market value of own shares 312 312 held in policyholders' funds Adjusted embedded value 4,380 4,386 pence Adjusted embedded value per share 113.8 114.0 Number of shares (millions) 3,849 3,849 At 1 January 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,178 2,409 Equity shareholders' funds 2,754 2,670 Statutory solvency adjustments: North America (566) (408) United Kingdom (17) (9) Africa - 149 South Africa discounting CGT adjustment 7 7 Value of in-force business 1,276 1,234 Value of in-force business before items 1,450 1,464 listed below Cost of capital (174) (172) Additional cost of financial options and - (58) guarantees Minority interest in value of in-force (2) (2) business Achieved profits equity shareholders' funds/ 3,452 3,641 EEV Group embedded value Pro-forma adjustment to bring Group investments to market value Achieved profits / EEV equity shareholders' 3,452 3,641 funds Adjustment to bring listed subsidiaries to 288 190 market value Adjustment to market value of own shares 275 275 held in policyholders' funds Adjusted embedded value 4,015 4,106 pence Adjusted embedded value per share 104.6 107.0 Number of shares (millions) 3,837 3,837 1. INTRODUCTION continued Impact of EEV Principles on the adjusted embedded value At 31 December 2004 Africa North UK & ROW Total GBPm America Value of in-force life business (achieved profits) * 1,050 512 28 1,590 Impact of changes in the amount of and cost of required capital (113) (49) (3) (165) Additional time-value cost of financial options and guarantees (49) (25) (74) Impact of change in the risk discount rate and economic assumptions 138 24 162 Impact of extending the covered business to include Healthcare 14 14 Impact of reallocation of head office and other expenses (35) (18) (53) Value of in-force covered business (EEV) 1,005 444 25 1,474 Adjusted net worth (achieved profits) 2,525 Adjustments in respect of listed subsidiaries and own shares ** 1,244 IFRS impact on non-life businesses 141 Adjusted embedded value (EEV) 5,384 At 30 June 2004 Africa North UK & ROW Total GBPm America Value of in-force life business (achieved profits) * 846 415 28 1,289 Impact of changes in the amount of and cost of required capital (53) (43) (3) (99) Additional time-value cost of financial options and guarantees (44) (22) (66) Impact of change in the risk discount rate and economic assumptions 128 21 149 Impact of extending the covered business to include Healthcare 9 9 Impact of reallocation of head office and other expenses (34) (19) (53) Value of in-force covered business (EEV) 852 352 25 1,229 Adjusted net worth (achieved profits) 2,294 Adjustments in respect of listed subsidiaries and own shares ** 800 IFRS impact on non-life businesses 63 Adjusted embedded value (EEV) 4,386 At 1 January 2004 Africa North UK & ROW Total GBPm America Value of in-force life business (achieved profits) * 853 393 28 1,274 Impact of changes in the amount of and cost of required capital (66) (34) (3) (103) Additional time-value cost of financial options and guarantees (40) (18) (58) Impact of change in the risk discount rate and economic assumptions 149 18 167 Impact of extending the covered business to include Healthcare 6 6 Impact of reallocation of head office and other expenses (35) (19) (54) Value of in-force covered business (EEV) 867 340 25 1,232 Adjusted net worth (achieved profits) ** 2,178 Adjustments in respect of listed subsidiaries and own shares ** 563 IFRS impact on non-life businesses 133 Adjusted embedded value (EEV) 4,106 * Net of minority interests ** The adjustments in respect of listed subsidiaries and own shares comprise the Achieved Profits market value uplift in respect of the Group's listed Banking and General insurance subsidiaries and the market value of own shares held in policyholders' funds. 1. INTRODUCTION continued Impact of EEV Principles on the adjusted operating profit before tax in respect of the covered business Year to 31 December 2004 Africa North UK & Total America ROW GBPm Adjusted operating profit (achieved 640 104 5 749 profits) Impact on: Value of new business (3) (24) - (27) Experience variances - - - - Operating assumption changes 16 - 16 Other (1) (3) (1) (5) Adjusted operating profit (EEV) 652 77 4 733 Six months to 30 June 2004 Africa North UK & Total America ROW GBPm Adjusted operating profit (achieved 257 69 0 326 profits) Impact on: Value of new business 3 (13) - (10) Experience variances 18 - - 18 Operating assumption changes - - - - Other 3 (3) - 0 Adjusted operating profit (EEV) 281 53 0 334 Impact of EEV Principles on the value of new business after tax Year to 31 December 2004 Africa North UK & Total America ROW GBPm Value of new business after tax 66 62 (1) 127 (achieved profits) Impact of change in the risk discount 3 4 - 7 rate and economic assumptions Impact of changes in the cost of (7) (15) - (22) required capital Additional time-value reserves for (1) (7) - (8) policyholder options and guarantees Impact of extending the covered 4 - - 4 business to include Healthcare Expenses (1) 1 - Value of new business after tax (EEV) 64 45 (1) 108 New business APE (achieved profits) 258 274 14 546 Add: Healthcare 41 - - 41 New business APE (EEV) 299 274 14 587 Present value of new business 1,910 2,433 127 4,470 premiums (EEV) New business margins after tax % APE Margin (achieved profits) 26% 23% (7%) 23% APE Margin (EEV) 21% 16% (7%) 18% PVNBP Margin (EEV) 3.4% 1.8% (0.8%) 2.4% Six months to 30 June 2004 Africa North UK & Total America ROW GBPm Value of new business after tax 24 30 (1) 53 (achieved profits) Impact of change in the risk discount 2 2 - 4 rate and economic assumptions Impact of changes in the cost of (2) (9) - (11) required capital Additional time-value reserves for (3) - (3) policyholder options and guarantees Impact of extending the covered 3 - - 3 business to include Healthcare Expenses (1) 1 - Value of new business after tax (EEV) 26 21 (1) 46 New business APE (achieved profits) 117 138 6 261 Add: Healthcare 23 - - 23 New business APE (EEV) 140 138 6 284 Present value of new business 863 1,249 55 2,167 premiums (EEV) New business margins after tax % APE Margin (achieved profits) 20% 22% (17%) 20% APE Margin (EEV) 19% 15% (17%) 16% PVNBP Margin (EEV) 3.0% 1.7% (1.8%) 2.1% 2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS Year to 31 Six months to December 2004 30 June 2004 GBPm GBPm Africa Covered business 652 281 Asset management 54 22 Banking 241 54 General insurance 101 52 1,048 409 North America Covered business 77 53 Asset management 87 47 164 100 United Kingdom & Rest of World Covered business 4 - Asset management (12) 7 Banking - 11 (8) 18 Other shareholders' net expenses (65) (30) Adjusted operating profit* 1,139 497 Goodwill amortisation and impairments (33) (33) (Loss)/profit on disposal of subsidiaries (27) 12 Short term fluctuations in investment return (including economic assumption changes) Covered business 189 (118) Other 39 (16) Other covered business changes ** (148) (98) Income from hedging activities that do not qualify for hedge accounting 31 5 Investment return adjustment for own shares held in policyholders' funds (94) (22) Fines and penalties (49) (49) Operating profit before tax and minority interests 1,047 178 Income tax expenses (291) (53) Profit on ordinary activities after tax 756 125 Minority interests - ordinary shares (74) (24) - preferred securities (59) (27) Profit for the financial period attributable to equity holders 623 74 2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS continued The adjusted operating profit on an after- tax and minority interests basis is determined as follows: Year to 31 Six months to December 2004 30 June 2004 GBPm GBPm Adjusted operating profit * 1,139 497 Tax on adjusted operating profit (235) (133) 904 364 Minority interests - ordinary shares (94) (36) - preferred securities (59) (27) Adjusted operating profit after tax and minority interests 751 301 Embedded value earnings attributable to equity shareholders Year to 31 Six months to December 2004 30 June 2004 Earnings per share pence Adjusted operating earnings per share * 20.1 8.1 Basic earnings per share 18.2 2.2 Adjusted weighted average number of shares - millions 3,738 3,735 Weighted average number of shares - millions 3,422 3,419 Year to 31 Six months to December 2004 30 June 2004 GBPm GBPm Adjusted operating profit for the covered business * 733 334 Africa 652 281 North America 77 53 United Kingdom & Rest of World 4 - Tax on adjusted operating profit for the covered business 203 101 Africa 180 85 North America 23 16 United Kingdom & Rest of World - - Adjusted operating profit after tax for the covered business * 530 233 Africa 472 196 North America 54 37 United Kingdom & Rest of World 4 - Reconciliation of tax on adjusted operating profit Tax on adjusted operating profit for the covered business 203 101 Tax on adjusted operating profit for other business 32 32 Tax on adjusted operating profit 235 133 *For life assurance and general insurance business, EEV adjusted operating profit is based on the expected investment return and includes investment returns on own shares held within policyholders' funds. For all businesses, adjusted operating profit excludes impairments, fines and penalties, income from hedging activities that do not qualify for hedge accounting, and (loss)/profit on disposal of subsidiaries. Adjusted operating earnings per share are similarly based, but are stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders' funds. ** Refer to analysis of covered business embedded value results in Section 8. All segmental analysis within this Summary Consolidated Income Statement has been prepared on a gross of inter- segment transaction basis. 3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE Year to 31 Six months to December 2004 30 June 2004 GBPm GBPm Group embedded value at the beginning of the year 3,641 3,641 Profit for the financial period 623 74 Foreign exchange movements 116 171 Dividends paid (166) (106) Purchase/Sale of treasury shares 25 (5) Exercise of share options 15 8 Fair Value gains/(losses) 64 40 Fair Value equity settled share options 3 1 Shadow accounting (9) - Cash flow hedge amortisation (4) (2) Aggregate tax effect of items taken directly to or transferred into equity - (6) Other 77 (14) Net increase in Group embedded value 744 161 Group embedded value at the end of the period 4,385 3,802 4. COMPONENTS OF GROUP EMBEDDED VALUE At 31 December At 30 June 2004 2004 GBPm GBPm Shareholders' adjusted net worth 2,911 2,573 Equity shareholders' funds 3,264 2,796 Adjustment to include African life subsidiaries on a statutory 216 156 solvency basis Adjustment to include North American life subsidiaries on a (577) (370) statutory solvency basis Adjustment to include UK & Rest of World life subsidiaries on (7) (13) a statutory solvency basis Adjustment for discounting CGT 15 4 Value of in-force business 1,474 1,229 Value of in-force business before items listed below 1,918 1,482 Additional time-value reserves for financial options and (74) (66) guarantees Cost of required capital (368) (185) Minority interest in value of in-force business (2) (2) Group embedded value 4,385 3,802 Pro-forma adjustments to bring Group investments to market value Group embedded value 4,385 3,802 Adjustment to bring listed subsidiaries to market value 631 272 Adjustment for market value of own shares held in policyholders' 368 312 funds Adjusted embedded value 5,384 4,386 p p Adjusted embedded value per share 139.7 114.0 Return on adjusted embedded value (ROEV) % p.a. 19.9% 16.2% Number of shares in issue at the end of the period including own shares held in policyholders' funds - millions 3,854 3,849 The ROEV is calculated as the adjusted operating profit after tax and minorities of GBP751m (GBP301m) together with an expected equity return on the pro-forma adjustment of GBP62m (GBP28m)divided by the opening adjusted embedded value increased/(reduced) by the weighted value of any capital raised/(dividends paid). 5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE ADJUSTED EMBEDDED VALUE At 31 December 2004 At 30 June 2004 GBPm GBPm Embedded value of the Covered Business 3,555 2,944 Adjusted net worth 2,081 1,715 Value of in-force business * 1,474 1,229 Adjusted Net Worth Asset Management Businesses 990 969 Africa 101 132 North America 889 837 United Kingdom & Rest of World - - Market value Banking 1,442 1,102 Africa 1,442 1,102 United Kingdom & Rest of World - - Market value General Insurance Africa 486 405 Net other businesses 95 81 Preferred securities (385) (405) Debt (799) (710) Rand denominated (60) (59) USD denominated (687) (651) GBP denominated (52) - Adjusted embedded value 5,384 4,386 * Net of minority interests. The shareholders' adjusted net worth includes goodwill relating to the North American subsidiaries of GBP59 million (June 2004: GBP62 million). 6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS At 31 December 2004 At 30 June 2004 GBPm GBPm Embedded value of the covered business 3,555 2,944 Adjusted net worth 2,081 1,715 Value of in-force business 1,474 1,229 Africa Adjusted net worth 1,537 1,224 Required capital (equivalent to 157% of Statutory 1,595 1,480 minimum capital at 31 December 2004) Free surplus (58) (256) Value of in-force business 1,005 852 Value of in-force business before items listed below 1,341 1,011 Additional time-value reserves for financial options and (49) (44) guarantees * Cost of required capital (287) (115) North America Adjusted net worth 515 468 Required capital (equivalent to 282% of Statutory 451 406 minimum capital at 31 December 2004) Free surplus 64 62 Value of in-force business 444 352 Value of in-force business before items listed below 547 441 Additional time-value reserves for financial options and (25) (22) guarantees Cost of required capital (78) (67) United Kingdom and Rest of World Adjusted net worth 29 23 Required capital 10 10 Free surplus 19 13 Value of in-force business 25 25 Value of in-force business before items listed below 28 28 Additional time-value reserves for financial options and - - guarantees Cost of required capital (3) (3) * These time-value reserves in respect of financial options and guarantees are in addition to those already held within the policyholder liabilities. The required capital at 1 January 2004 in respect of the African, North American and UK & ROW covered business was GBP1,608m (equivalent to 157% of the Statutory minimum capital),GBP391m (equivalent to 256% of the Statutory minimum capital) and GBP10m respectively. 7. METHODOLOGY Basis of preparation This supplementary information has been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European Chief Financial Officers' Forum. The Group has replaced the Achieved Profits basis with the EEV basis for the covered business, and figures for 31 December 2004 and 30 June 2004 have been restated accordingly. Covered business is currently defined as the long-term business in the primary financial statements. This business covers life assurance, long-term healthcare and accident insurance, savings, pensions and annuity business written by the life assurance subsidiaries. The results of Group companies providing administration and distribution services have been included to the extent that they relate to the covered business. The results do not include services provided by Group investment management companies. Unallocated Group holding company expenses have been included to the extent that they relate to the covered business. The Group has prepared the consolidated EEV supplementary information at 31 December 2004, in accordance with the EEV Principles ('the preliminary supplementary information') as set out on pages 1 to 29 to establish the EEV financial position and results of operations of the Group necessary to provide the comparative supplementary information expected to be included in the Group's EEV supplementary information for the year to 31 December 2005. The preliminary supplementary information should be read in conjunction with the Group's preliminary IFRS information contained within its press release dated 3 May 2005. The preliminary IFRS financial information is based on the UK GAAP financial statements approved by the Board on 28 February 2005, and adjusted to comply with IFRS. In accordance with IFRS 1 there have been no adjustments to the estimates made at the time of the preparation of the UK GAAP financial statements. The Board acknowledges its responsibility for the preparation of the preliminary supplementary information which has been prepared in accordance with the EEV Principles using the approaches expected to be adopted when the Board prepares the Group's first set of EEV supplementary information for the year to 31 December 2005. The Board delegated approval of the preliminary supplementary information to its Actuarial Review Committee, which approved the preliminary supplementary information on 17 June 2005. The preliminary supplementary information may require adjustment before its inclusion as comparative information in the EEV supplementary information in the Group's EEV supplementary information for the year to 31 December 2005. This is because of the continuing work of the IASB and possible amendments to the interpretative guidance and the Group's accounting policies. Any such changes or adjustments would affect only the non-covered business, as the treatment of covered business is governed by the EEV Principles. The treatment within this supplementary information of all business other than the covered business is unchanged from the primary financial statements on an IFRS basis. Under the EEV methodology, profit is recognised as it is earned over the life of products defined within the covered business. The embedded value of the covered business is the sum of the shareholders' net worth in respect of the covered business, and the value of the in-force covered business. The group embedded value includes the value of all other business at the book value detailed in the primary financial statements on an IFRS basis. The adjusted embedded value, a measure used by management to assess the shareholders' interest in the value of the Group, includes the Group's listed banking and general insurance subsidiaries at market value as well as the value of own shares held in policyholders' funds. The net worth of the covered business is the market value of shareholders' assets held in respect of the covered business, and consists of the required capital and free surplus. The level of required capital of the covered business reflects the level of capital considered by the Directors to be appropriate to manage the business allowing for minimum local or Group statutory requirements (or equivalent where there is no local requirement), our internal assessment of the market, insurance and operational risk inherent in the underlying products and the level of capital required by rating agencies in respect of our North American business in order to maintain the desired credit rating. The level of required capital is on average equivalent to 157%, and 282% of the minimum local statutory requirements in Africa and North America respectively at 31 December 2004. The free surplus comprises the market value of assets allocated to the covered business in excess of the required capital. The required capital in respect of the South African 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 value of in-force covered business is the present value at the appropriate risk discount rate (which incorporates a risk margin) of the statutory distributable profits to shareholders projected to arise from the in-force covered business on a best-estimate basis, less a deduction for the cost of holding the required level of capital. Statutory distributable profit arises from the difference between amounts charged to policyholders for guarantees, expenses and insurance and the actual experience of these items, together with the investment return earned on shareholders' assets. Allowance has been made for the cost (intrinsic value) of financial options and guarantees to policyholders in the local statutory reserves according to local requirements. In South Africa an investment guarantee reserve on a stochastic basis is included in the local statutory reserves. A deduction from the value of in-force business has been made to allow for the impact of future variability of investment returns on the cost of policyholder financial options and guarantees (time- value) to the extent that it is not already included in the statutory reserves. This time value has been determined using stochastic modelling techniques and 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. In the generated economic scenarios allowance is made, where appropriate, for the effect of management and or policyholder actions in different circumstances. The risk margin in each geography above the risk-free rates for the African and North American life covered businesses were 2.3%p.a. and 3.2%p.a. respectively. The Directors believe that the embedded value of the covered business is broadly market-consistent. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS (after tax) Year to 31 December 2004 GBPm Total covered business Adjusted Value of Total net worth in-force Embedded value of the covered business 1,832 1,232 3,064 at the beginning of the year New business contribution (103) 211 108 Expected return on existing business - - 148 148 return on VIF Expected return on existing business - 194 (194) - transfer to net worth Experience variances 13 35 48 Operating assumption changes 15 48 63 Expected return on adjusted net worth 163 - 163 Adjusted operating profit after tax 282 248 530 Investment return variances on value of 30 25 55 in-force Investment return variances on adjusted 72 - 72 net worth Economic assumption changes - 51 51 Effect of changes in and cost of required - (143) (143) capital Profit after tax 384 181 565 Exchange rate movements 104 61 165 Capital injected to covered business 164 - 164 Amounts released from covered business (122) - (122) Transfer from covered business to other (281) - (281) segments * Embedded value of the covered business 2,081 1,474 3,555 at the end of the period Six months to 30 June 2004 GBPm Total covered business Adjusted Value of Total net worth in-force Embedded value of the covered business 1,832 1,232 3,064 at the beginning of the year New business contribution (47) 93 46 Expected return on existing business - - 73 73 return on VIF Expected return on existing business - 126 (126) - transfer to net worth Experience variances 25 14 39 Operating assumption changes - (6) (6) Expected return on adjusted net worth 81 - 81 Adjusted operating profit after tax 185 48 233 Investment return variances on value of 3 (28) (25) in-force Investment return variances on adjusted (66) - (66) net worth Economic assumption changes - (61) (61) Effect of changes in and cost of required - - - capital Profit after tax 122 (41) 81 Exchange rate movements 53 38 91 Capital injected to covered business 9 - 9 Amounts released from covered business (30) - (30) Transfer from covered business to other (271) - (271) segments * Embedded value of the covered business 1,715 1,229 2,944 at the end of the period * The transfer from covered business to other segments includes the purchase of additional shares in Nedbank Group Limited and Mutual & Federal Insurance Company Limited, as well as head office expenses. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULT (after tax) continued Year to 31 December 2004 GBPm Adjusted Value of in-force Africa covered business net worth Individual Group Total Embedded value of the covered business at the beginning of the 1,355 512 355 2,222 year New business contribution (16) 66 14 64 Expected return on existing business 68 50 118 - return on VIF Expected return on existing business 147 (102) (45) - - transfer to adjusted net worth Experience variances 75 9 (19) 65 Operating assumption changes 10 70 (1) 79 Expected return on adjusted net 146 - - 146 worth Adjusted operating profit after tax 362 111 (1) 472 Investment return variances on value 6 16 13 35 of in-force Investment return variances on 78 - - 78 adjusted net worth Economic assumption changes - 41 10 51 Effect of changes in and cost of - (63) (80) (143) required capital Profit after tax 446 105 (58) 493 Exchange rate movements 140 59 32 231 Capital injected to covered business - - - - Amounts released from covered (122) - - (122) business Transfer from covered business to (282) - - (282) other segments * Embedded value of the covered 1,537 676 329 2,542 business at the end of the period Six months to 30 June 2004 GBPm Adjusted Value of in-force Africa covered business net worth Individual Group Total Embedded value of the covered business at the beginning of the 1,355 512 355 2,222 year New business contribution (8) 26 8 26 Expected return on existing business - 32 24 56 - return on VIF Expected return on existing business 70 (49) (21) - - transfer to adjusted net worth Experience variances 28 1 11 40 Operating assumption changes - 1 - 1 Expected return on adjusted net 73 - - 73 worth Adjusted operating profit after tax 163 11 22 196 Investment return variances on value 3 (8) (27) (32) of in-force Investment return variances on (56) - - (56) adjusted net worth Economic assumption changes - (35) (22) (57) Effect of changes in and cost of - - - - required capital Profit after tax 110 (32) (27) 51 Exchange rate movements 61 26 18 105 Capital injected to covered business - - - - Amounts released from covered (30) - - (30) business Transfer from covered business to (272) - - (272) other segments * Embedded value of the covered 1,224 506 346 2,076 business at the end of the period * The transfer from covered business to other segments includes the purchase of additional shares in Nedbank Group Limited and Mutual & Federal Insurance Company Limited, as well as head office expenses. The effect of changes in and cost of required capital for Africa reflects changes in the amount of required capital required and in the mix of assets backing the capital. The African operating assumption changes include (a) an increase in the value of in-force business resulting from an increase in discretionary mortality margins in the Financial Soundness Valuation (FSV), which arose as a result of a reduction in Individual Business mortality assumptions, reflecting positive experience variances, (b) the inclusion of sources of profit not previously valued and, (c) other changes to valuation methodology and assumptions. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS (after tax) continued Year to 31 December 2004 GBPm North America covered business Adjusted Value of Total net worth in-force Embedded value of the covered 454 340 794 business at the beginning of the year New business contribution (86) 131 45 Expected return on existing business - 28 28 - return on VIF Expected return on existing business 44 (44) - - transfer to adjusted net worth Experience variances (58) 43 (15) Operating assumption changes - (20) (20) Expected return on adjusted net 16 - 16 worth Adjusted operating profit after tax (84) 138 54 Investment return variances on value of 22 (4) 18 in-force Investment return variances on (6) - (6) adjusted net worth Economic assumption changes - - - Profit after tax (68) 134 66 Exchange rate movements (36) (30) (66) Capital injected to covered business 164 - 164 Transfer from covered business to other 1 - 1 segments Embedded value of the covered 515 444 959 business at the end of the period Six months to 30 June 2004 GBPm North America covered business Adjusted Value of Total net worth in-force Embedded value of the covered 454 340 794 business at the beginning of the year New business contribution (39) 60 21 Expected return on existing business - 16 16 - return on VIF Expected return on existing business 54 (54) - - transfer to adjusted net worth Experience variances (1) - (1) Operating assumption changes - (7) (7) Expected return on adjusted net 8 - 8 worth Adjusted operating profit after tax 22 15 37 Investment return variances on value of - 7 7 in-force Investment return variances on (10) - (10) adjusted net worth Economic assumption changes - (4) (4) Profit after tax 12 18 30 Exchange rate movements (8) (6) (14) Capital injected to covered business 9 - 9 Transfer from covered business to other 1 - 1 segments Embedded value of the covered 468 352 820 business at the end of the period The segmental results of North America include the operating profit generated by Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the North American life companies, and OMNIA Life (Bermuda) Limited. During 2004, all of the deferred annuity business reinsured with OMRe was recaptured by the North American Life companies. The effect of this recapture is included within the experience variances. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS (after tax) continued Year to 31 December 2004 GBPm United Kingdom & Rest of World covered Adjusted Value of Total business net worth in-force Embedded value of the covered business at the beginning of the year 23 25 48 New business contribution (1) - (1) Expected return on existing business - 2 2 - return on VIF Expected return on existing business 3 ( 3) - - transfer to adjusted net worth Experience variances (4) 2 (2) Operating assumption changes 5 (1) 4 Expected return on adjusted net 1 - 1 worth Adjusted operating profit after tax 4 - 4 Investment return variances on value of 2 - 2 in-force Profit after tax 6 - 6 Embedded value of the covered 29 25 54 business at the end of the period Six months to 30 June 2004 GBPm United Kingdom & Rest of World covered Adjusted Value of Total business net worth in-force Embedded value of the covered business at the beginning of the year 23 25 48 New business contribution - (1) (1) Expected return on existing business - 1 1 - return on VIF Expected return on existing business 2 ( 2) - - transfer to adjusted net worth Experience variances (2) 2 - Operating assumption changes - - - Expected return on adjusted net - - - worth Adjusted operating profit after tax - - - Investment return variances on value of - - - in-force Profit after tax - - - Embedded value of the covered 23 25 48 business at the end of the period 9. VALUE OF NEW BUSINESS (after tax) The tables below set out a geographical analysis of the value of new business (VNB) for the year to 31 December 2004 and the six months to 30 June 2004. Annual Premium Equivalent (APE) is calculated as recurring premiums plus 10% of single premiums. New business profitability is measured by both the ratio of the VNB to the APE as well as the Present Value of new business premiums (PVNBP), and shown under 'Margin' below. PVNBP is defined as the present value of regular premiums plus single premiums for any given year. It is calculated using the same assumptions as for the new business contribution. There are no equivalent figures on an achieved profits basis. Individual Group business business Africa Year to 31 December 2004 Recurring premiums 164 58 222 Single premiums 556 214 770 Annual premium equivalent 220 79 299 Present value of future new business 1,384 526 1,910 premiums Value of new business after tax and cost 51 13 64 of required capital APE Margin 23% 16% 21% PVNBP Margin 3.7% 2.5% 3.4% Six months to 30 June 2004 Recurring premiums 73 32 105 Single premiums 260 90 350 Annual premium equivalent 99 41 140 Present value of future new business 617 246 863 premiums Value of new business after tax and cost 17 9 26 of required capital APE Margin 17% 22% 19% PVNBP Margin 2.8% 3.7% 3.0% North UK & GBPm America ROW Total Year to 31 December 2004 Recurring premiums 58 1 281 Single premiums 2,157 125 3,052 Annual premium equivalent 274 14 587 Present value of future new business 2,433 127 4,470 premiums Value of new business after tax and cost 45 (1) 108 of required capital APE Margin 16% (7%) 18% PVNBP Margin 1.8% (0.8%) 2.4% Six months to 30 June 2004 Recurring premiums 25 1 131 Single premiums 1,127 53 1,530 Annual premium equivalent 138 6 284 Present value of future new business 1,249 55 2,167 premiums Value of new business after tax and cost 21 (1) 46 of required capital APE Margin 15% (17%) 16% PVNBP Margin 1.7% (1.8%) 2.1% The new business shown for 31 December 2004 for African Group recurring premium business includes bulk new business into existing schemes, with value of new business of GBP1m after tax and APE of GBP3m. The value of new individual unit trust and some Group market-linked business written by the life companies is excluded, as the profits on this business arise in the asset management subsidiaries. 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 premiums shown for North America exclude reinsurance ceded externally. 9. VALUE OF NEW BUSINESS (after tax) continued A reconciliation of the new business premiums shown in the notes to the financial statements to those shown above, for the year to 31 December 2004 and six months to June 2004, is set out below. Year to 31 December Six months to 30 June 2004 2004 GBPm GBPm Recurring Single Recurring Single premiums premiums premiums premiums New business premiums in the notes to the financial 213 2,149 95 1,073 statements Add: Healthcare business 41 - 23 - Other Investment contracts 27 1,240 13 628 Less: North America reinsurance ceded externally - (12) - (4) Group market-linked business not valued - (238) - (127) Unit trust business not valued - (87) - (40) New business premiums as per European Embedded Value supplementary 281 3,052 131 1,530 statements 10. PRODUCT ANALYSIS OF NEW COVERED BUSINESS PREMIUMS Year to 31 Six months to December 2004 30 June 2004 GBPm GBPm Africa Recurring Single Recurring Single Total business 222 770 105 350 Individual business 164 556 73 260 Saving 53 406 25 192 Protection 57 7 22 4 Annuity - 142 - 64 Group Schemes 54 1 26 - Group business 58 214 32 90 Saving 5 181 2 77 Protection 12 - 7 - Annuity - 33 - 13 Healthcare 41 - 23 - Total business * 222 770 105 350 Individual business 164 556 73 260 Insurance contracts 89 145 40 62 Investment contracts with discretionary 48 22 21 11 participating features Other investment contracts 27 389 12 187 Group business 58 214 32 90 Insurance contracts 52 31 29 13 Investment contracts with discretionary 6 105 3 52 participating features Other investment contracts - 78 - 25 Year to Six months to 31 December 2004 30 June 2004 GBPm GBPm North America Recurring Single Recurring Single Total business 58 2,157 25 1,127 Fixed deferred annuity - 239 - 120 Equity-indexed annuity - 1,157 - 549 Variable annuity - 213 - 99 Life 58 - 25 - Immediate annuity - 442 - 274 Other (corporate) - 106 - 85 Total business * 58 2,157 25 1,127 Insurance contracts 58 1,808 25 928 Investment contracts with discretionary - - - - participating features Other investment contracts - 349 - 199 10. PRODUCT ANALYSIS OF NEW COVERED BUSINESS PREMIUMS continued Year to Six months to 31 December 2004 30 June 2004 GBPm GBPm United Kingdom & Rest of World Recurring Single Recurring Single Total business 1 125 1 53 Saving 1 125 1 53 Protection - - - - Total business * 1 125 1 53 Insurance contracts - - - - Investment contracts with discretionary participating - - - - features Other investment contracts 1 125 1 53 * The classification of insurance contracts, investment contracts with discretionary participating features and other investment contracts is in accordance with the IFRS definitions. All categories of business (i.e. insurance and investment) are subject to EEV accounting. 11. ASSUMPTIONS The principal assumptions used in the calculation of the value of in-force business and the value of new business are set out below. The assumptions are best-estimate and actively reviewed. â€¢ The pre-tax investment and economic assumptions used for the African and North American businesses are set out below. We have used a bottom-up market consistent methodology to calculate the risk discount rates in all other territories. At 31 December At 30 June At 1 January 2004 2004 2004 Africa Risk-free rate (10 year Government bond) 8.3% 10.4% 9.4% Cash return 6.3% 8.4% 7.4% Equity return 11.8% 13.9% 12.9% Property return 9.8% 11.9% 10.9% Inflation 5.3% 7.4% 6.4% Risk discount rate 10.6% 12.7% 11.7% Risk margin 2.3% 2.3% 2.3% North America Risk free rate (10 year Government bond) 4.3% 4.6% 4.3% Inflation 3.0% 3.0% 3.0% New money yield assumed 5.1% 6.4% 6.0% Net portfolio earned rate 5.9% 6.2% 6.4% Risk discount rate 7.5% 7.8% 7.5% Risk margin 3.2% 3.2% 3.2% â€¢ The pre-tax investment and economic assumptions are updated every six months to reflect the economic conditions prevailing on the valuation date. Risk-free rates have a duration similar to that of the underlying liabilities. Equity and property risk premiums incorporate both historical relationships and the Directors' view of future projected returns in each geography. â€¢ The risk margins have been calculated using a bottom-up market consistent approach,and reflect the distinctive risks of the products in the respective business units.The lower risk margin in the African business reflects the lower volatility of the profit stream relative to the equity market. The relatively higher risk margin in the North American business recognises the credit and asset-liability matching risk inherent in the business. â€¢ Where applicable, rates of future bonuses or crediting rates have been set at levels consistent with the investment return assumptions. Projected company taxation is based on the current tax basis that applies in each country. â€¢ For the South African business, full allowance has been made for Secondary Tax on Companies (STC) that may be payable. Account has been taken of the impact of CGT in South Africa. It has been assumed that 10% of the equity portfolio (excluding group subsidiaries) will be traded each year. For North America full allowance has been made for existing tax attributes of the companies, including the use of existing carry-forwards and preferred tax credit investments. For the purposes of the summary income statement the adjusted operating profit for the covered business has been grossed up for tax. The tax rates used were the effective corporation tax rates of 37.8% for South Africa and 30% for North America and 0% for the UK and Rest of World, except for the investment return on South African capital, for which the attributed tax was derived from the primary accounts. â€¢ Both operating profit and new business are calculated on closing assumptions. â€¢ For the African business, the required capital is calculated independently in each of the major business units. The non-investment items are based on a multiple of the non-investment components of the local Statutory Capital Adequacy Requirements set out in PGN104 issued by the Actuarial Society of South Africa (ASSA). The investment item is based on internal models developed for capital allocation and pricing purposes. The models project assets and liabilities for the business forward for 10 years using stochastically determined investment returns on a realistic basis. Bonus rates and adjustments to non-vested bonuses are determined using a consistent formula based on a weighted average of past returns and the level of the Bonus Smoothing Account (BSA) at the time. To the extent that the BSA falls to lower than normally allowable minimum levels, the shareholder is considered to be required to provide support to the business, and the capital requirement is based on the discounted value of the maximum shareholder support in the 99th worst percentile case. The required capital is invested in local equities, and local and international cash. The asset allocation as at 31 December 2004 is 57%, 20% and 23% respectively. â€¢ For the North American business, the required capital is based on the multiple of the local Risk Based Capital (RBC) requirement that management deems necessary to maintain the desired credit rating for the company in question. The multiples vary by company from 200% to 300% and average 282% as at 31 December 2004. The required capital for OMNIA (Bermuda) Limited and Old Mutual Reassurance (Ireland) Limited in Ireland is based on the United Kingdom Financial Services Authority statutory requirements to ensure that the Group maintains adequate solvency capital in terms of the European Union Financial Groups Directive. The required capital is invested in short-dated fixed interest assets. â€¢ The required capital of Old Mutual International, based in Guernsey, is set at some 1% of funds under management, a level considered by the Directors to be appropriate to manage the business. The required capital is invested in short-dated fixed interest assets. â€¢ The assumed future mortality, morbidity and voluntary discontinuance rates have been based as far as possible on analyses of recent operating experience. Allowance has been made where appropriate for the effect of expected AIDS-related claims. â€¢ The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new business and the maintenance of business in-force. The annual review of the expenses in the North American Life company has resulted in a higher allocation of expenses to the in-force business. The future expenses attributable to life assurance business include 19% of the Group holding company expenses, with 14% allocated to Africa and 5% allocated to North America. 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. â€¢ No allowance has been made for future productivity improvements in the expense assumptions. â€¢ No development expenses have been excluded from the calculations and no material allowance has been made for future development expenses. â€¢ Future investment expenses are based on the current scales of fees payable by the life assurance companies to the asset management subsidiaries. To the extent that these fees include profit margins for the asset management subsidiaries, these margins have not been included in the value of in-force business or the value of new business. â€¢ The effect of increases in premiums over the period for policies in-force has been included in the value of in-force business only where such increases are associated with indexation arrangements. Other increases in premiums of existing policies are included in the value of new business. 11. ASSUMPTIONS continued â€¢ New schemes written on which recurring single premiums are expected to be received on a regular basis are treated as new business. The annualised premium is recognised as recurring premium new business at inception of the scheme and is determined by annualising the actual premiums received during the year in question. Subsequent recurring single premiums received in future years are not treated as new business, as these have already been provided for in calculating the value of in-force business. â€¢ The value of new business has been accumulated to the period end. â€¢ The sensitivity of the value of in-force and value of new business to changes in the central risk discount rate and economic assumptions are set out in section 11. â€¢ The principal exchange rates used to translate the operating results of key foreign business segments to Sterling are: Rand US$ Year to Six months to Year to Six months to 31 December 30 June 31 December 30 June 2004 2004 2004 2004 Profit and loss account (average rate) 11.7986 12.1544 1.8327 1.8222 Balance sheet (closing rate) 10.8482 11.3037 1.9158 1.8144 Balance sheet (opening rate) 11.9367 11.9367 1.7833 1.7833 â€¢ The time value of the financial options and guarantees in the African businesses have been valued using a random walk, log-normal, 'real world' stochastic asset model that is consistent with the applicable professional guidance notes issued by the Actuarial Society of South Africa (ASSA). The time-value reserves relate mainly to the guarantees detailed below: Individual business - A closed block of unit-linked and with-profit business has an underlying minimum growth rate guarantee (4.28% p.a. for life and endowment business and 4.78% p.a. for retirement annuity business) applicable when calculating death, disability and maturity claims. - A small block of with-profit business guarantees minimum values to the policyholder at a point in time, generally 5 years from inception. If the guarantee is not exercised, another guarantee may be set. - A small block of with-profit savings business in Group Schemes that has death guarantees of premiums (net of fees) plus 4.25% p.a. investment return. - Retirement annuities sold prior to June 1997 contain guaranteed annuity options, whereby the policyholder has an option to exchange full retirement proceeds for a minimum level of annuity income at maturity. - In addition, with-profits business has vested bonus guarantees at certain future dates which operate in conjunction with the options and guarantees set out above. Group business - There is a significant pre-retirement savings with-profit portfolio. Vested bonuses affect the calculation of benefit payments when a member exits from the scheme as the face value is paid out. If a scheme terminates, the lower of face and market value is paid out and the vested bonuses are not guaranteed. - A significant with-profit annuity in payment portfolio guarantees annuity payments once declared for the life-time of the annuitant. 11. ASSUMPTIONS continued The mean returns and standard deviations of the asset classes incorporated in the stochastic asset model as at 31 December 2004 are detailed below. Correlations between asset classes have been based on an internal assessment of historical relationships. Mean return * Standard deviation ** Equity 11.8% 22% Property 9.8% 15% Fixed interest (20 year) 8.3% 13% Cash 6.3% 3% * Means have been calculated by accumulating a unit investment for the required period in each scenario, averaging the accumulation across all scenarios, and converting the result to an equivalent annual rate (by taking the nth root of the average accumulation minus 1). ** Standard deviations have been calculated by accumulating returns for the required period in each scenario, taking the natural log of the result, calculating the variance of this statistic, dividing by the projection period (n years) and taking the square root. This makes the result comparable to implied volatilities quoted in investment markets. â€¢ The time-value of the financial options and guarantees in the North American businesses have been valued using the generalised 'real world' stochastic variance model with mean reversion that was developed by the National Association of Insurance Commissioners (NAIC), based on a study of interest rates during the period 1951 to 1995. The model assumes that the absolute difference between short and long term rates is normally distributed. In addition for its Equity Index Annuity products a set of stochastic equity scenarios with a mean return of 8.9% and a standard deviation of 16%, is used to project policyholder returns (as governed by product features). The time value reserves relate mainly to the guarantees detailed below: - Crediting rates declared for the fixed deferred annuity block of business vest fully. They are subject to a minimum crediting rate which is specified in the contract. Minimum surrender values are determined by this rate. - Equity indexed annuities offer minimum crediting rates on the fixed portion of the product, minimum surrender values based on this and credit equity participation annually as a percentage of equity growth subject to a maximum. This equity participation, which is subject to a minimum of 0% therefore vests annually. - The variable annuities offered to off-shore customers through OMNIA Life Bermuda can offer minimum death benefit guarantees. Death benefits are subject to a minimum of the sum invested or value at any anniversary date if greater. A small proportion of variable annuity clients elect a minimum guaranteed account value on maturity. - The universal life policies specify a minimum crediting rate to accumulate account balances. - All deferred annuities offer a guaranteed annuitisation option on maturity. The rates are set conservatively and typically have very low utilisation as customers in the United States value the choice inherent in a lump sum payment. The reserves for financial options and guarantees assume that the low historical take-up rates of around 1% p.a will continue into the future, and are therefore insignificant. - Certain of the universal life contracts contain a feature that guarantees that the contract will continue, even if values would otherwise be insufficient, provided the customer has paid at least a stated amount of premium. 11. ASSUMPTIONS continued The mean Treasury interest rates and standard deviations of the Treasuries along the yield curve as at 31 December 2004 are detailed below. The mean-reversion to higher future interest rates inherent in the model is consistent with current forward rates. The interest rate scenarios generated by the model range from 0% to 20%. Treasuries Mean interest rate* Standard deviation ** 6 months 4.7% 2.8% 1 year 5.0% 2.8% 5 year 5.5% 2.5% 10 year 5.8% 2.4% 20 year 6.0% 2.3% * Means have been calculated as the annualised arithmetic average return across all simulations for each duration. ** Standard deviations relate to the change in yield. 12. ALTERNATIVE ASSUMPTIONS The tables below for South Africa and North America show the sensitivity of the embedded value, value of in-force at 31 December 2004 and the value of new business for the year to 31 December 2004 to changes in key assumptions. All calculations include the impact on the time-value reserves necessary for policyholder financial options and guarantees. For each sensitivity illustrated, all other assumptions have been left unchanged. At 31 December 2004 GBPm Embedded Value of in-force Value of new value business business Africa Central assumptions 2,542 1,005 64 Value before cost of required capital 1,292 78 Cost of required capital (287) (14) Effect of: Central discount rate +1% 2,378 841 54 Value before cost of required capital 1,219 72 Cost of required capital (378) (18) Central discount rate -1% 2,721 1,184 76 Value before cost of required capital 1,371 85 Cost of required capital (187) (9) Required capital equal to the minimum statutory requirements 2,631 1,094 71 Value before cost of required capital 1,292 78 Cost of required capital (198) (7) Increasing the pre-tax investment return assumptions by 1% with bonus rate and discount rate changing commensurately 2,542 1,005 61 Value before cost of required capital 1,301 75 Cost of required capital (296) (14) Decreasing the pre-tax investment return assumptions by 1% with bonus rate and discount rate changing commensurately 2,512 975 68 Value before cost of required capital 1,254 82 Cost of required capital (279) (14) Equity market values increasing by 10% 2,659 1,035 - Equity market values decreasing by 10% 2,425 976 - Voluntary discontinuance rates increasing by 10% 2,518 981 58 Maintenance expense levels increasing by 10% with no 2,469 932 59 corresponding increase in policy charges Increasing the expense inflation assumption by 1% with no 2,510 973 62 corresponding increase in policy charges Mortality and morbidity assumptions for assurances increasing by 2,429 892 52 10%, and mortality assumptions for annuities decreasing by 10% with no corresponding increase in policy charges For value of new business, acquisition expenses other than - - 60 commission and commission-related expenses, increasing by 10% with no corresponding increase in policy charges 12. ALTERNATIVE ASSUMPTIONS continued At 31 December 2004 GBPm Embedded Value of in-force Value of new value business business North America 959 444 45 Central assumptions 522 70 Value before cost of required capital (78) (25) Cost of required capital Effect of : Central discount rate +1% 926 411 38 Value before cost of required capital 502 67 Cost of required capital (91) (29) Central discount rate -1% 989 474 51 Value before cost of required capital 538 71 Cost of solvency capital (64) (20) Required capital equal to the minimum statutory requirements 1,007 492 60 Value before cost of required capital 522 70 Cost of required capital (30) (10) Increasing the pre-tax investment return assumptions by 1% with credited rate and discount rate changing commensurately with no corresponding increase in policy charges 955 440 42 Value before cost of required capital 518 67 Cost of required capital (78) (25) Decreasing the pre-tax investment return assumptions by 1% with credited rate and discount rate changing commensurately with no corresponding increase in policy charges 962 447 46 Value before cost of required capital 525 71 Cost of required capital (78) (25) Contraction in corporate bond spreads of 10bps 934 419 - Voluntary discontinuance rates increasing by 10% 912 397 38 Maintenance expense levels increasing by 10% with no 938 423 43 corresponding increase in policy charges Increasing the expense inflation assumption by 1% with no 957 442 44 corresponding increase in policy charges Mortality and morbidity assumptions for assurances increasing 955 440 43 by 10%, and mortality assumptions for annuities decreasing by 10% with no corresponding increase in policy charges For value of new business, acquisition expenses other than - - 42 commission and commission-related expenses, increasing by 10% with no corresponding increase in policy charges 13. AUDITORS' REPORT Special Purpose Audit Report of KPMG Audit Plc to Old Mutual Plc on its European Embedded Value ('EEV') Supplementary Information. In accordance with the terms of our engagement letter we have audited the EEV supplementary information of Old Mutual Plc ('the Company') as at 31 December 2004, set out on pages 1 to 29. As described in the basis of preparation on page 13 the EEV supplementary information has been prepared in accordance with the European Embedded Value Principles issued in May 2004 by the European CFO Forum ('the EEV Principles'). Respective responsibilities of directors and KPMG Audit Plc As described on page 13, the directors of the Company have accepted responsibility for the preparation of the EEV supplementary information in accordance with the EEV Principles. It has been prepared as part of the Company's conversion of its supplementary information, previously prepared in accordance with the guidance issued in December 2001 by the Association of British Insurers entitled 'Supplementary Reporting for Long Term Insurance Business (the Achieved Profits Method)' ('on the Achieved Profits basis') to an EEV basis. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as to whether the EEV supplementary information has been properly prepared, in all material respects, in accordance with the basis of preparation set out in the methodology section on pages 13 to 14 of the EEV supplementary information. We also report to you if, in our opinion, we have not received all the information and explanations we require for our audit. Our report has been prepared for the Company solely in connection with the Company's conversion of its supplementary information, previously prepared on the Achieved Profits basis, to an EEV basis. We read the other information accompanying the EEV supplementary information and consider whether it is consistent with the EEV supplementary information. We consider the implications for our report if we become aware of any apparent mis-statements or material inconsistencies with the EEV supplementary information. Our report was designed to meet the agreed requirements of the Company determined by the Company's needs at the time. Our report should not therefore be regarded as suitable to be used or relied on by any party wishing to acquire rights against us other than the Company for any purpose or in any context. Any party other than the Company who chooses to rely on our report (or any part of it) will do so at its own risk. To the fullest extent permitted by law, KPMG Audit Plc will accept no responsibility or liability in respect of our report to any other party. Basis of audit opinion We conducted our audit having regard to Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the EEV supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the EEV supplementary information, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the EEV supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the EEV supplementary information. Emphasis of matters Without qualifying our opinion,we draw your attention to the following matters: â€¢ The basis of preparation note to the EEV supplementary information explains why the accompanying EEV supplementary information may require adjustment before its inclusion as comparative information in the EEV supplementary information in the Group's first annual report that contains supplementary information prepared on an EEV basis for the year ending 31 December 2005. â€¢ As described in the basis of preparation note to the EEV supplementary information, as part of its conversion from the Achieved Profits basis to an EEV basis, the Company has prepared the EEV supplementary information for the year ended 31 December 2004 to establish the financial position and results of operations of the Company necessary to provide the comparative supplementary information expected to be included in the Company's first complete set of EEV supplementary information to be included in the annual report for the year ending 31 December 2005. â€¢ As explained in the basis of preparation, in accordance with IFRS 1, First Time Adoption of International Financial Reporting Standards, in arriving at the underlying preliminary IFRS financial information which forms the starting point for the EEV supplementary information, no adjustments have been made for any changes in estimates made at the time of approval of the UK GAAP statutory financial statements on which the preliminary IFRS financial information is based, Opinion In our opinion, the accompanying EEV supplementary information for the year ended 31 December 2004 has been properly prepared, in all material respects, in accordance with the basis of preparation set out in the methodology section on pages 13 to 14, which describes how the EEV Principles has been applied. KPMG Audit Plc Chartered Accountants London 20 June 2005 This information is provided by RNS The company news service from the London Stock Exchange

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