Preliminary Results 2011 - Part 3 MCEV

RNS Number : 0192Z

Old Mutual PLC

09 March 2012

Index to the MCEV statements

For the year ended 31 December 2011

Adjusted Group MCEV by line of Business 82

Group Market Consistent Embedded Value statement of earnings 83

Commentary on key changes in the MCEV 2011 primary statements compared to 2010 83

Adjusted Operating Group MCEV Earnings per share 84

Notes to the Market Consistent Embedded Value basis supplementary information

A: MCEV policies 86

B: Segment information 100

C: Other key performance information 116

D: Sensitivity tests 120

E: Disposal of Nordic businesses 123

Adjusted group mcev by line of business

At 31 December 2011

			£m
	Notes	At 31 December 2011	At 31 December 2010
MCEV of the core covered business (Long Term Savings)	B3	5,713	5,913
Adjusted net worth*		2,204	2,228
Value of in-force business		3,509	3,685
MCEV of the non-core covered business (Bermuda)	B3	66	287
Adjusted net worth		187	403
Value of in-force business		(121)	(116)
MCEV of the discontinued covered business (Nordic and US Life)	B3	1,433	1,315
Adjusted net worth		285	720
Value of in-force business		1,148	595

Adjusted net worth of asset management and other businesses		1,955	1,939
Emerging Markets		499	289
Retail Europe		14	14
Wealth Management		165	171
US Asset Management		1,270	1,461
Nordic**		7	4

Value of the banking business		3,286	3,603
Nedbank (market value)		2,935	3,275
Emerging Markets (adjusted net worth)		29	-
Nordic (adjusted net worth)		322	328

Value of the general insurance business
Mutual & Federal (adjusted net worth)		294	409

Net other business***		175	42
Adjustment for present value of Black Economic Empowerment scheme deferred consideration****		270	266
Adjustment for value of own shares in ESOP schemes*****		117	85

Market value of perpetual preferred securities	A2(r)	(465)	(449)
Market value of perpetual preferred callable securities	A2(r)	(605)	(598)
Market value of subordinated debt	A2(r)	(1,445)	(1,782)
Adjusted Group MCEV		10,794	11,030

Adjusted Group MCEV per share (pence)		194.1	202.2
Number of shares in issue at the end of the financial period less treasury shares - millions******		5,562	5,456

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

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

*** Includes 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.

**** The effect of the acquisition of the minority interest in Mutual & Federal during 2010 has been included in this adjustment for the first time during 2011

***** Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2010 and 31 December 2011 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2011 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. The effect of the acquisition of the minority interest in Mutual & Federal during 2010 has been included in this adjustment for the first time during 2011.

****** The 239 million treasury shares were cancelled on 13 January 2012.

Group Market Consistent Embedded Value statement of earnings

For the year ended 31 December 2011

		£m
	Notes	Year ended 31 December 2011	Year ended 31 December 2010
Long Term Savings
Covered business	B2	714	640
Asset management and other business		123	124
Banking		15	-
		852	764
Nedbank
Banking		755	601
Mutual & Federal
General insurance		89	103
US Asset Management
Asset management		67	72
Other operating segments
Finance costs*		(155)	(183)
Corporate costs **		(43)	(46)
Other shareholders' (expenses) / income		(18)	4
Adjusted operating Group MCEV earnings before tax from core operations		1,547	1,315

* This includes interest payable from Old Mutual plc to non-core operations of £27 million for the year ended 31 December 2011 (2010: £55 million).

** Central costs of £14 million are allocated to the covered business and provisioned in the VIF (2010: £14 million) hence corporate costs under MCEV of £43 million differ from the IFRS amount of £57 million (2010: £60 million)

COMMENTARY ON KEY CHANGES IN THE MCEV 2011 PRIMARY STATEMENTS COMPARED TO 2010

Bermuda reduction in MCEV

The closing MCEV balance reduced considerably as a result of unfavourable market impacts on the Variable Annuity Guaranteed Minimum Accumulation Benefit (GMAB) reserves.

Treatment of Nordic

On 15 December 2011, the Company announced that it had entered into an agreement to sell the assets and liabilities of its Nordic business unit to Skandia Liv for the sum of SEK 22.5 billion (£2.1 billion). This transaction is still subject to shareholder approval. The Nordic business unit has been classified as discontinued for IFRS reporting purposes, but continues to be included with full disclosure in the covered business for MCEV reporting purposes.

Net other business

The material components include the increased dividends paid to Group from business units and Group proceeds from the disposal of US Life, a reduced book value of debt component (due to repayment of debt) and intercompany loan movements.

Inclusion of other African businesses

The life businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe do not calculate an embedded value, however they are included in the MCEV of the covered business (within Emerging Markets) at their IFRS NAV at 31 December 2011. The impact of these results on the Emerging Markets MCEV is noted in B4: Analysis of covered business MCEV earnings. The asset management and Zimbabwean banking businesses are included within the Group MCEV at the IFRS NAV. The inclusion of the new African businesses increased the Adjusted Group MCEV by £203 million at 31 December 2011.

US Asset Management

Consistent with the Consolidated Financial Statements Note A1, comparative information in respect of the operating earnings and the value at period end has been revised in accordance with changes to presentation made in the current year. This has resulted in corresponding equal and opposite revisions to the 'Other shareholder expenses' and 'Net other business'. The closing value has reduced significantly compared to prior year due to the goodwill write down of £264 million. See Note A2 (1) to the Consolidated Financial Statements.

Adjusted operating Group MCEV earnings per share

For the year ended 31 December 2011

				£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 share*		15.9	0.9	2.6	19.4
Adjusted weighted average number of shares - millions					5,435

				£m
Year ended 31 December 2010	Notes	Core continuing operations	Non-core continuing operations	Discontinued operations	Total
Adjusted operating Group MCEV earnings before tax		1,315	(28)	132	1,419
Covered business	B2	640	(28)	113	725
Other business		675	-	19	694
Tax on adjusted operating Group MCEV earnings		(288)	4	(26)	(310)
Covered business	B2	(118)	4	(21)	(135)
Other business		(170)	-	(5)	(175)

Adjusted operating Group MCEV earnings after tax		1,027	(24)	106	1,109
Non-controlling interests
Ordinary shares		(217)	-	-	(217)
Preferred securities		(62)	-	-	(62)
Adjusted operating MCEV earnings after tax attributable to equity holders		748	(24)	106	830
Adjusted operating Group MCEV earnings per share*		13.9	(0.4)	2.0	15.5
Adjusted weighted average number of shares - millions					5,359

* 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 2011

		£m
	Notes	Year ended 31 December 2011	Year ended 31 December 2010
Adjusted operating Group MCEV earnings before tax from core operations		1,547	1,315
Adjusted operating Group MCEV earnings before tax from Bermuda non-core operations	B2	48	(28)
Adjusted operating Group MCEV earnings before tax from continuing operations*		1,595	1,287
Adjusting items from continuing operations	C3	(437)	395
Total Group MCEV earnings before tax from continuing operations		1,158	1,682
Income tax attributable to shareholders		(168)	(387)
Total Group MCEV earnings after tax from continuing operations		990	1,295
Total Group MCEV earnings after tax from discontinued operations**
Nordic		(15)	165
US Life	A4	-	227
Total Group MCEV earnings after tax for the financial period		975	1,687

Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent		674	1,429
Non-controlling interests
Ordinary shares		239	196
Preferred securities		62	62
Total Group MCEV earnings after tax for the financial period		975	1,687
Basic total Group MCEV earnings per ordinary share (pence)		13.1	28.2
Weighted average number of shares - millions		5,136	5,064

* 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.

** For Nordic, these are composed of earnings before tax of £173 million (2010: £84 million), adjusting items of £(161) million (2010: £104 million) and tax of £(27) million (2010: £(23) million). For US Life, these are composed of earnings before tax of £48 million, adjusting items of £180 million and tax of £(1) million for the year ended 31 December 2010. Further detail relating to adjusting items can be found in section C3.

Reconciliation of movements in Group and Adjusted Group MCEV (after tax)								£m
		Year ended 31 December 2011			Year ended 31 December 2010
	Notes	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Opening Group MCEV		7,515	2,386	9,901	6,027	1,602	7,629
Adjusted operating MCEV earnings	B4	727	328	1,055	590	240	830
Non-operating MCEV earnings		(331)	(50)	(381)	786	(187)	599
Total Group MCEV earnings		396	278	674	1,376	53	1,429
Other movements in IFRS net equity	C4	(699)	(148)	(847)	112	731	843
Closing Group MCEV		7,212	2,516	9,728	7,515	2,386	9,901
Adjustments to bring Group investments to market value	B1	-	1,066	1,066	-	1,129	1,129
Adjusted Group MCEV		7,212	3,582	10,794	7,515	3,515	11,030

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies

A1: Basis of preparation

The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 82 to 123 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 CFO Forum is undertaking further work to develop more detailed application guidance.

The Principles have been fully complied with for all businesses as at 31 December 2011. The detailed methodology and assumptions made in presenting this supplementary information are set out in notes A2 and A3. Any reference made to US Life relates only to methodology applied at 31 December 2010.

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

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

· Group MCEV is a measure of the consolidated value of shareholders' interests in covered and non-covered business. Non-covered business is valued at the IFRS net asset value detailed in the primary financial statements adjusted to eliminate inter-company loans.

· The adjusted Group MCEV, a measure used by management to assess the shareholders' interest in the value of the Group, includes the impact of marking all debt to market value, the market value of the Group's listed banking 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:

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

- free surplus allocated to the covered business; and

- required capital to support the covered business.

· Value of in-force covered business (VIF)

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

MCEV is calculated net of non-controlling shareholder interests and excludes the value of future new business.

(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).

The covered business does not include any business written in Skandia Liv. Skandia Liv is a mutual life insurance company within the Group. All assets and liabilities are wholly attributable to the policyholders of the mutual company.

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

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

· Individual unit trusts and some group market-linked business written by the asset management companies in South Africa through the life company as profits from this business arise in the asset management 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, except for USAM where the value includes the allowance for the loan note from plc. 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:

· Economic capital;

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

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

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

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

For Emerging Markets, Retail Europe and Wealth Management 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 is the most onerous. For US Life, the required capital was based on the amount that management deemed necessary to maintain the desired credit rating for the Company, whilst for Bermuda the required capital is set with reference to internal management objectives, i.e. the adjusted net worth.

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 2011			At 31 December 2010
		Notes	Required capital (a)	Regulatory capital (b)	Ratio (a/b)	Required capital (a)	Regulatory capital (b)	Ratio (a/b)
Emerging Markets*		B3	1,368	1,012	1.4	1,498	1,153	1.3
Retail Europe**		B3	52	77	0.7	62	85	0.7
Wealth Management		B3	262	164	1.6	278	162	1.7
Bermuda***		B3	187	77	2.4	403	-	n/a
Nordic		B3	127	127	1.0	135	135	1.0
US Life		B3	n/a	n/a	n/a	468	196	2.4
Total			1,996	1,457	1.4	2,844	1,731	1.6

* The required capital and regulatory capital relating to the life businesses in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe is included in the 31 December 2011 results for Emerging Markets.

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

*** 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 three-year transition period for the new capital requirement (50% for financial year 2011, 75% for financial year 2012, 100% for financial year 2013). The required capital calculated on this statutory basis is approximately $120 million at 31 December 2011. We continue to calculate the required capital as the adjusted net worth held in the business as this exceeds the transitional capital. Capital for this business is managed at Group level on an economic capital basis. The Bermudan regulator allows intangible assets to be included as admissible regulatory capital. The movement in required capital is discussed further in Note B4: Analysis of covered business MCEV earnings (after tax) for Bermuda.

(e) Value of in-force covered business

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

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

· Time value of financial options and guarantees; less

· Frictional costs of required capital; less

· Cost of residual non-hedgeable risks (CNHR).

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

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A2: Methodology continued

(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. It therefore represents a deterministic certainty equivalent valuation of future distributable earnings. The certainty equivalent valuation approach is described in more detail in note A3. Any limitations on distribution of such earnings due to statutory or internal capital requirements are taken into account separately in the calculation of frictional costs of required capital.

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

(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 cover severely adverse experience.

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

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

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

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

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

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

- changes in surrender values.

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

Europe

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

Emerging Markets

The financial options and guarantees mainly relate to maturity guarantees and guaranteed annuity options.

As required by the applicable Actuarial Society of South Africa guidance note, the time value of the financial options and guarantees included in the statutory reserves in the Emerging Markets businesses as at 31 December 2011 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.

US Life

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

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

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

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

(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. All such risks for which no or insufficient allowance is made in the PVFP or time value of financial options and guarantees, together with some allowance for hedge risk and credit spread risk in the US Life and Bermudan businesses, are considered within the allowance for the CNHR.

An allowance is made in the CNHR to reflect uncertainty in the best estimate of shareholder cash flows as a result of both symmetric and asymmetric non-hedgeable risks since these risks 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 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 economic capital model based on appropriate shock scenarios consistent with a 99.5% confidence level over a one-year time horizon. The internal economic capital model makes allowance for certain management actions, such as reductions in bonus and crediting rates, where deemed appropriate.

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

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

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

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

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

Capital held in respect of non-hedgeable risks	£m
		At 31 December 2011	At 31 December 2010
Emerging Markets		808	751
Retail Europe		147	115
Wealth Management		684	622
Bermuda		335	274
Nordic		290	362
US Life		n/a	678
Total		2,264	2,802

During 2011 the methodology to calculate non-hedgeable risk capital was enhanced and standardised across all insurance business units in order to align with emerging Solvency II requirements. This enhancement has generally led to an increase in the non-hedgeable risk capital in all business units, except for Nordic where it fell due to a significant reduction in the level of operational risk capital as a result of the rebate tax ruling in June 2011 (i.e. tax on rebates is no longer a risk component for operational risk).

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A2: Methodology continued

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

(j) Participating business

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

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

(k) Spread-based products

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

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

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

(l) 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.

(m) 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.

(n) Defined benefit pension scheme

Where a defined benefit pension scheme within the covered business is in surplus or deficit on the liability basis that is used to determine future employer contributions, the employer pension fund expense assumptions incorporated within the VIF allow appropriately for the expected release of surplus or funding of the deficit.

(o) Consolidation adjustments

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

(p) Look through principle

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

(q) 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.

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.

There was previously uncertainty around both the basis and effective date for possible taxation of fee income earned from fund managers by Swedish insurance companies and the expenses that can be relieved against such income. On 10 June 2011 the Supreme Administrative Court in Sweden delivered the final verdict stating that fund rebates are not taxable for corporate income tax purposes. We will therefore continue to treat fee income from our Swedish unit-linked business as being exempt from corporation tax within our MCEV.

The Emergency Budget of 22 June 2010 announced a reduction in the UK corporation tax rate by 1% per year for four years from the financial year beginning April 2011, ultimately bringing the corporation tax rate down to 24%. The Budget of 23 March 2011 announced an additional 1% reduction to be enacted during 2011, bringing the ultimate tax rate down to 23%. The 31 December 2011 MCEV results therefore reflect the 1% reduction to 26% enacted during 2011, as well as the further 1% reduction to 25% which is effective from April 2012 as this has been substantially enacted.

The effect of the first reduction to 27% was included within the 31 December 2010 MCEV results (£4 million). A further £8 million is allowed for at 31 December 2011 as an assumption change relating to the tax rate reduction from 27% to 25%. The impact of the remaining future reductions from 25% down to 23% is estimated to be an MCEV profit of £8 million and this will be reflected once these future annual reductions are enacted.

A new dividend withholding tax system (replacing the current Secondary Tax on Companies (STC) system) will be introduced in South Africa effective from 1 April 2012. This is reflected in the results at 31 December 2011, i.e. no allowance will be made in future for the impact of the new dividend withholding tax in the MCEV, except for an allowance for withholding tax on the remittance of dividends to Old Mutual plc, as the actual level of taxation will depend on the legal nature of each shareholder. The Emerging Markets MCEV has increased by approximately R1,221 million (£105 million) while the value of new business for the year ending 31 December 2011 has increased by approximately R104 million (£9 million). This has led to the average effective tax rate reducing from 33% to 28%.

(r) 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 table below shows the comparison of debt on an IFRS and MCEV basis.

£m
		At 31 December 2011		At 31 December 2010
Debt securities	Notes to the Consolidated Financial Statements	Book value	MCEV	Book value	MCEV
£350 million perpetual preferred callable securities	E1	350	263	350	270
€500 million perpetual preferred callable securities	E1	338	342	338	328
US$750 million cumulative preference securities	E1	458	465	458	449
R3.0 billion repayable 27 October 2015 (8.9%)	E1 (e)	239	249	293	293
€2 million fixed rate note repayable December 2013	H2 (a)	2	2	2	2
US$16.5 million secured senior debt repayable August 2014 (5.23%)	E1 (b)	11	11	-	-
€200 million (2010: €750 million) (4.5% to January 2012 and 6 month EURIBOR plus 0.96% thereafter)*	E1 (e)	166	166	609	609
£500 million repayable 3 June 2021 (8.0%)** - new	E1 (e)	471	471	-	-
R100 million floating rate note repayable February 2011 (3 month ZAR-JIBAR-SAFEX plus 4.5%) - repaid	E1 (b)	-	-	10	10
£300 million repayable 21 October 2016 (5.0%)** - repaid	E1 (e)	-	-	297	297
£500 million euro bond repayable October 2016 (7.125%)***	E1 (e)	504	546	503	539
US$50 million floating rate note repayable September 2011 (3 month LIBOR plus 0.35%) - repaid	E1 (a)	-	-	32	32
Value of debt		2,539	2,515	2,892	2,829

* The principal and coupon on the bond were swapped into Sterling and US Dollars.

** The coupon on the bond was swapped into Krona.

*** This differs from the value in the Borrowed Funds note E1 (e) by the accrued interest at the end of the year, which is included within the book value of the debt in determining the MCEV market value uplift to maintain consistency and comparability with the market value.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A2: Methodology continued

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 £86 million (2010: £20 million) has not been included in the value of debt above, however it is included in the Net other business value of £175 million (Adjusted Group MCEV presented per business line). Further information relating to the debt securities can be found in Note E1 in the Notes to the Consolidated Financial Statements.

(s) 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:

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

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

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

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

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

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

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

New business margins are disclosed as:

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

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

(t) Analysis of MCEV earnings

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

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

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

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

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

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

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

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

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

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

· Economic variances incorporate the impact of changes in economic assumptions from the beginning of the reporting period to the end of the reporting period (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 Wealth Management, Long Term Savings and total covered business where the calculations are performed in sterling.

The anticipated expected existing business contribution for the 12 months following the year ended 31 December 2011 (at the reference rate as well as in excess of the reference rate) is provided to assist users of the MCEV supplementary information in forecasting operating MCEV earnings. Note that the exchange rates that are used for such disclosure are the same rates that are used to translate current year earnings for comparability purposes, i.e. average exchange rates. Therefore the ultimate expected existing business contribution for the financial year ending 31 December 2012 may differ from these results.

(u) Analysis of Group MCEV earnings

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

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.

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

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

· The MCEV makes provision for future development costs and one-off expenses (such as those incurred on the integration of businesses following an acquisition, restructuring costs and costs related to Solvency II implementation) that relate to covered business to the extent that such project costs are known with sufficient certainty, based on three year business plans.

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

Group holding Company expenses attributable to long-term business		%
	At 31 December 2011	At 31 December 2010
Emerging Markets	17	17
Retail Europe	3	3
Wealth Management	5	6
Nordic	3	4
US Life	-	2
Total	28	32

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A3: Assumptions (continued)

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, including those costs arising in respect of new business acquisition expenses in any year. Skandia Leben in Germany therefore sets the best estimate assumptions for the amount to be shared with policyholders in future years after making an allowance for the acquisition expenses in relation to the new business expected to be written over the next three years. However note that, as previously mentioned, MCEV excludes the value of future new business.

Economic assumptions

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

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

(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 validated to the Bloomberg swap yield curve.

At 31 December 2011, 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 business. 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 2011 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 2011 by adding 50bps of liquidity premium for this business (31 December 2010: 45bps) to the swap rates used for setting investment return and discounting assumptions. For OMLAC(SA)'s Fixed Bond products 50 bps of liquidity premium was added to the swap rates. 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 2011, we have reviewed emerging Solvency II matching premium guidance and a comparison of 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) and expense inflation rates at various terms for each of the significant regions are provided in the table below. The risk free reference spot yield curve has been derived from mid swap rates at the reporting date.

Risk free reference spot yields (excluding any applicable liquidity adjustments)					%
	GBP	EUR	USD*	ZAR	SEK
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

At 31 December 2010
1 year	0.9	1.3	0.4	5.6	2.3
5 years	2.7	2.5	2.2	7.4	3.3
10 years	3.6	3.3	3.5	8.2	3.7
20 years	4.0	3.7	4.3	8.1	4.0

* For prior reporting periods, the risk free spot yields disclosed for USD were on a semi-annual par basis. The assumptions at 31 December 2011, as well as the comparative for the prior period are now shown as annualised spot yields, consistent with other regions.

Expense inflation					%
	GBP	EUR	USD	ZAR	SEK
At 31 December 2011
1 year	3.0	2.5	3.0	6.1	1.3
5 years	3.4	2.5	3.0	7.0	2.2
10 years	3.8	2.5	3.0	7.7	2.5
20 years	4.3	2.5	3.0	7.5	2.6

At 31 December 2010
1 year	3.0	2.5	3.0	5.0	2.2
5 years	4.3	2.5	3.0	6.4	3.0
10 years	5.3	2.5	3.0	7.2	3.2
20 years	5.1	2.5	3.0	7.0	3.3

(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.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A3: Assumptions (continued)

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

ZAR volatilities*					%
Option term	1 year swap	5 year swap	10 year swap	20 year swap	Equity (total return index)
At 31 December 2011
1 year	30.6	25.0	23.1	23.3	27.6
5 years	21.9	21.5	22.4	23.0	26.7
10 years	22.9	23.8	24.0	23.5	26.6
20 years	25.8	25.7	25.1	23.7	29.3

At 31 December 2010
1 year	18.7	16.9	15.8	15.1	23.4
5 years	16.4	15.5	14.9	14.4	25.5
10 years	15.6	15.0	14.5	13.9	27.0
20 years	13.8	13.3	12.8	11.9	27.8

* Due to limited liquidity in the ZAR swaption market, the market consistent asset model has been calibrated by extrapolating swaption and equity implied volatility data beyond a term of one year and 5 years respectively for assumptions at 31 December 2011 (2 year and 3 years respectively for assumptions at 31 December 2010).

** Property index implied volatilities have been removed from the table above as they are no longer material to the Emerging Markets stochastic models.

USD volatilities				%
Option term	1 year swap	5 year swap	10 year swap	20 year swap
At 31 December 2011
1 year	71.8	49.1	45.1	41.8
5 years	42.1	36.8	34.6	33.8
10 years	32.7	31.2	31.1	29.9
20 years	29.8	29.3	27.9	27.5

At 31 December 2010
1 year	37.8	34.3	31.2	27.7
5 years	26.2	24.7	23.0	20.9
10 years	20.0	18.8	17.7	16.1
20 years	16.8	15.7	14.7	13.1

International equity volatilities (applicable to Bermuda)*										%
Option term	SPX	RTY	EWZ	TPX	HSCEI	TWY	KOSP12	NIFTY	SX5E	UKX
At 31 December 2011
1 year	25.0	n/a	35.9	26.7	31.5	26.1	25.1	25.6	27.2	23.9
5 years	27.8	n/a	34.8	28.0	32.3	25.0	24.6	25.2	25.3	25.0
10 years	27.8	n/a	34.8	28.0	32.3	25.0	24.6	25.2	25.3	25.0

At 31 December 2010
1 year	21.5	28.1	n/a	26.7	27.8	21.5	21.4	22.0	24.3	21.5
5 years	23.6	32.6	n/a	28.3	32.3	25.5	24.0	26.6	25.2	24.2
10 years	23.6	32.6	n/a	28.3	32.3	25.5	24.0	26.6	25.2	24.2

International equity volatilities (applicable to Bermuda)*				%
Option term	EEM	USAgg	EUAgg	APAgg
At 31 December 2011
1 year	33.9	5.5	13.0	12.3
5 years	33.0	5.5	13.0	12.3
10 years	33.0	5.5	13.0	12.3

At 31 December 2010
1 year	27.4	5.5	13.0	12.6
5 years	27.7	5.5	13.0	12.6
10 years	27.7	5.5	13.0	12.6

* Long-term option implied volatility has been calibrated assuming a flat volatility term structure beyond 5 years due to limited data availability for some indices. The assumptions at 31 December 2011, as well as the comparative for the prior period are shown as the annualised volatilities applicable over the entire option term specified, consistent with the disclosure of volatilities for other regions. These volatilities, as represented by their Bloomberg codes, refer to the price indices. Due to ongoing enhancements in the fund mapping process, the indices referenced may vary from period to period. In the first half of 2011, a decision was made to remove the Russell 2000 Index (RTY) and add the MSCI Brazil Index (EWZ) which provides exposure to Latin America.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

A: MCEV policies continued

A3: Assumptions (continued)

All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in Note C2 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 or crediting rates, are set at levels consistent with the real-world investment return assumptions.

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

· The equity risk premium is 3.5% for Africa and 3% for Europe.

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

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

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

(e) Tax

The weighted average effective tax rates that apply to the cash flow projections at 31 December 2011 are set out below:

Weighted average effective tax rates	%
		At 31 December 2011	At 31 December 2010
OMLAC(SA)*		28	33
Namibia		-	-
Retail Europe		25	27
Wealth Management		8	11
Bermuda		-	-
Nordic		4	4

* The reduction in weighted average effective tax rate for OMLAC(SA) from 31 December 2010 to 31 December 2011 is as a result of the new dividend withholding tax effective from 1 April 2012 as detailed in Note A2 (q).

A4: Discontinued business

Disposal of US Life

On 6 August 2010, the Company announced that it had entered into an agreement to sell the assets and liabilities of its US Life insurance business to Harbinger Capital Partners for the sum of £215 million ($350 million) subject to regulatory approval. The sale was completed, following regulatory approval, on 7 April 2011. This transaction has resulted in an uplift of £451 million to the adjusted Group MCEV, as analysed below.

Adjusted Group MCEV uplift from disposal of US Life			£m
	Covered business	Other business	Total
Headline purchase price	-	215	215
Advisor fees and costs	-	(17)	(17)
US Life sale proceeds	-	198	198
Retention of OM Re	-	71	71
Total proceeds from US Life disposal	-	269	269
Removal of US Life MCEV*	182	-	182
Adjusted Group MCEV uplift	182	269	451

* The MCEV results for US Life include allowance for Old Mutual Reassurance (Ireland) Limited (OM Re)

The total earnings over the period are equal to the MCEV uplift, however we have not attributed these earnings to specific line items in the analysis of MCEV earnings.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information

B1: Components of Group MCEV and Adjusted Group MCEV

			£m
	Notes	At 31 December 2011	At 31 December 2010
Adjusted net worth attributable to ordinary equity holders of the parent		5,193	5,737
Equity		8,488	8,951
Adjustment to IFRS net asset value	C5	(2,607)	(2,526)
Adjustment to remove perpetual preferred callable securities		(688)	(688)
Value of in-force business		4,535	4,164
Present value of future profits		5,248	5,256
Additional time value of financial options and guarantees		(136)	(433)
Frictional costs		(243)	(276)
Cost of residual non-hedgeable risks		(334)	(383)

Group MCEV		9,728	9,901
Adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value		655	715
Adjustment for value of own shares in ESOP schemes*		117	85
Adjustment for present value of Black Economic Empowerment scheme deferred consideration**		270	266
Adjustment to bring external debt to market value		24	63
Adjusted Group MCEV		10,794	11,030

Group MCEV value per share (pence)		174.9	181.5
Adjusted Group MCEV per share (pence)		194.1	202.2
Number of shares in issue at the end of the financial period less treasury shares - millions		5,562	5,456

Return on Group MCEV (ROEV) per annum from core operations		8.8%	9.8%
Return on Group MCEV (ROEV) per annum from continuing non-core operations		0.5%	(0.3)%
Return on Group MCEV (ROEV) per annum from discontinued operations		1.4%	1.4%
Return on Group MCEV (ROEV***) per annum		10.7%	10.9%

* Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2010 and 31 December 2011 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2011 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. The effect of the acquisition of the minority interest in Mutual & Federal during 2010 has been included in this adjustment for the first time during 2011.

** The effect of the acquisition of the minority interest in Mutual & Federal during 2010 has been included in this adjustment for the first time during 2011.

*** The ROEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £1,055 million (2010: £830 million) divided by the opening Group MCEV.

B2: Adjusted operating MCEV earnings for the covered business

								£m
Year ended 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
Adjusted operating Group MCEV earnings before tax	918	714	468	24	222	48	156	-
Tax on adjusted operating Group MCEV earnings	(191)	(162)	(119)	(5)	(38)	(1)	(28)	-
Adjusted operating Group MCEV earnings after tax	727	552	349	19	184	47	128	-

								£m
Year ended 31 December 2010	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
Adjusted operating Group MCEV earnings before tax	725	640	443	68	129	(28)	65	48
Tax on adjusted operating Group MCEV earnings	(135)	(118)	(99)	(2)	(17)	4	(20)	(1)
Adjusted operating Group MCEV earnings after tax	590	522	344	66	112	(24)	45	47

B3: Components of MCEV of the covered business

								£m
Year ended 31 December 2011	Total covered business	Long Term Savings	Emerging Markets*	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
Adjusted net worth	2,676	2,204	1,768	104	332	187	285	-
Free surplus	680	522	400	52	70	-	158	-
Required capital	1,996	1,682	1,368	52	262	187	127	-
Value of in-force	4,536	3,509	1,399	484	1,626	(121)	1,148	-
Present value of future profits	5,248	4,001	1,740	547	1,714	36	1,211	-
Additional time value of financial options and guarantees	(136)	(14)	-	(12)	(2)	(122)	-	-
Frictional costs	(243)	(236)	(218)	(8)	(10)	(2)	(5)	-
Cost of residual non-hedgeable risks	(333)	(242)	(123)	(43)	(76)	(33)	(58)	-

MCEV	7,212	5,713	3,167	588	1,958	66	1,433	-

								£m
Year ended 31 December 2010	Total covered business	Long Term Savings	Emerging Markets*	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
Adjusted net worth	3,351	2,228	1,804	103	321	403	186	534
Free surplus	507	390	306	41	43	-	51	66
Required capital	2,844	1,838	1,498	62	278	403	135	468
Value of in-force	4,164	3,685	1,509	520	1,656	(116)	1,318	(723)
Present value of future profits	5,256	4,160	1,849	573	1,738	145	1,397	(446)
Additional time value of financial options and guarantees	(433)	(12)	-	(10)	(2)	(235)	-	(186)
Frictional costs	(276)	(261)	(240)	(11)	(10)	(2)	(6)	(7)
Cost of residual non-hedgeable risks	(383)	(202)	(100)	(32)	(70)	(24)	(73)	(84)

MCEV	7,515	5,913	3,313	623	1,977	287	1,504	(189)

* 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.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

B4: Analysis of covered business MCEV earnings

	£m
Total covered business	Year ended 31 December 2011					Year ended 31 December 2010
	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	507	2,844	3,351	4,164	7,515	416	2,399	2,815	3,212	6,027
New business value	(444)	187	(257)	490	233	(485)	226	(259)	431	172
Expected existing business contribution (reference rate)	17	65	82	179	261	9	89	98	192	290
Expected existing business contribution (in excess of reference rate)	7	34	41	87	128	7	27	34	174	208
Transfers from VIF and required capital to free surplus	943	(236)	707	(707)	-	899	(276)	623	(623)	-
Experience variances	10	30	40	111	151	(1)	6	5	71	76
Assumption changes	23	4	27	1	28	(2)	2	-	(98)	(98)
Other operating variance	188	(205)	(17)	(57)	(74)	(125)	74	(51)	(7)	(58)
Operating MCEV earnings	744	(121)	623	104	727	302	148	450	140	590
Economic variances	(221)	(22)	(243)	(214)	(457)	224	23	247	521	768
Other non-operating variance	32	1	33	93	126	(7)	25	18	-	18
Total MCEV earnings	555	(142)	413	(17)	396	519	196	715	661	1,376
Closing adjustments	(382)	(706)	(1,088)	389	(699)	(428)	249	(179)	291	112
Capital and dividend flows	(243)	55	(188)	-	(188)	(468)	-	(468)	-	(468)
Foreign exchange variance	(75)	(312)	(387)	(306)	(693)	40	249	289	291	580
MCEV of acquired/sold business	(64)	(449)	(513)	695	182	-	-	-	-	-

Closing MCEV	680	1,996	2,676	4,536	7,212	507	2,844	3,351	4,164	7,515
Return on MCEV (RoEV)% per annum					9.7%					9.8%

Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling. The operating assumption changes and other operating variances are not annualised.

	£m
	Year ended 31 December 2011				Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV	Adjusted net worth		Value of in-force	MCEV
Experience variances	40	111	151	5		71	76
Persistency	20	84	104	7		57	64
Risk	43	4	47	22		(2)	20
Expenses	(44)	13	(31)	(37)		5	(32)
Other	21	10	31	13		11	24
Assumption changes	27	1	28	-		(98)	(98)
Persistency	21	40	61	(22)		(53)	(75)
Risk	-	8	8	19		12	31
Expenses	(7)	(99)	(106)	(2)		(44)	(46)
Other	13	52	65	5		(13)	(8)

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	23	71	94	201	295
Expected existing business contribution (in excess of reference rate)	4	36	40	75	115

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

The Long Term Savings segment consists of Emerging Markets, Retail Europe and Wealth Management.

	£m
Long Term Savings (LTS)	Year ended 31 December 2011					Year ended 31 December 2010
	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	390	1,838	2,228	3,685	5,913	289	1,470	1,759	3,079	4,838
New business value	(390)	179	(211)	388	177	(370)	154	(216)	375	159
Expected existing business contribution (reference rate)	14	60	74	137	211	8	76	84	154	238
Expected existing business contribution (in excess of reference rate)	7	10	17	40	57	7	(3)	4	33	37
Transfers from VIF and required capital to free surplus	748	(179)	569	(569)	-	699	(184)	515	(515)	-
Experience variances	(5)	32	27	103	130	(46)	33	(13)	44	31
Assumption changes	9	4	13	27	40	23	2	25	30	55
Other operating variance	33	(28)	5	(68)	(63)	(49)	33	(16)	18	2
Operating MCEV earnings	416	78	494	58	552	272	111	383	139	522
Economic variances	23	(6)	17	(24)	(7)	104	29	133	256	389
Other non-operating variance	(7)	-	(7)	96	89	(24)	25	1	-	1
Total MCEV earnings	432	72	504	130	634	352	165	517	395	912
Closing adjustments	(300)	(228)	(528)	(306)	(834)	(251)	203	(48)	211	163
Capital and dividend flows	(232)	55	(177)	-	(177)	(283)	-	(283)	-	(283)
Foreign exchange variance	(68)	(283)	(351)	(306)	(657)	32	203	235	211	446

Closing MCEV	522	1,682	2,204	3,509	5,713	390	1,838	2,228	3,685	5,913
Return on MCEV (RoEV)% per annum					9.3%					10.8%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV	Adjusted net worth	Value of in-force	MCEV
Experience variances	27	103	130	(13)	44	31
Persistency	9	70	79	20	26	46
Risk	43	3	46	17	8	25
Expenses	(37)	13	(24)	(56)	5	(51)
Other	12	17	29	6	5	11
Assumption changes	13	27	40	25	30	55
Persistency	7	40	47	-	3	3
Risk	-	8	8	17	14	31
Expenses	(3)	(77)	(80)	(2)	(2)	(4)
Other	9	56	65	10	15	25

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	20	67	87	166	253
Expected existing business contribution (in excess of reference rate)	4	12	16	45	61

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

										£m
Emerging Markets*	Year ended 31 December 2011					Year ended 31 December 2010
	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	306	1,498	1,804	1,509	3,313	80	1,225	1,305	1,158	2,463
New business value	(189)	155	(34)	133	99	(159)	134	(25)	111	86
Expected existing business contribution (reference rate)	11	58	69	105	174	6	73	79	124	203
Expected existing business contribution (in excess of reference rate)	2	10	12	18	30	-	(3)	(3)	16	13
Transfers from VIF and required capital to free surplus	359	(150)	209	(209)	-	356	(166)	190	(190)	-
Experience variances	28	24	52	50	102	11	14	25	10	35
Assumption changes	1	4	5	1	6	19	-	19	18	37
Other operating variance	(7)	(11)	(18)	(44)	(62)	(6)	(2)	(8)	(22)	(30)
Operating MCEV earnings	205	90	295	54	349	227	50	277	67	344
Economic variances	1	8	9	23	32	57	21	78	84	162
Other non-operating variance	(7)	-	(7)	100	93	4	-	4	1	5
Total MCEV earnings	199	98	297	177	474	288	71	359	152	511
Closing adjustments	(105)	(228)	(333)	(287)	(620)	(62)	202	140	199	339
Capital and dividend flows	(39)	51	12	-	12	(93)	-	(93)	-	(93)
Foreign exchange variance	(66)	(279)	(345)	(287)	(632)	31	202	233	199	432

Closing MCEV	400	1,368	1,768	1,399	3,167	306	1,498	1,804	1,509	3,313
Return on MCEV (RoEV)% per annum					11.9%					13.2%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV	Adjusted net worth	Value of in-force	MCEV
Experience variances	52	50	102	25	10	35
Persistency	25	31	56	29	5	34
Risk	39	(1)	38	11	7	18
Expenses	(17)	8	(9)	(15)	4	(11)
Other	5	12	17	-	(6)	(6)
Assumption changes	5	1	6	19	18	37
Persistency	7	48	55	-	2	2
Risk	-	-	-	17	(1)	16
Expenses	(2)	(47)	(49)	2	15	17
Other	-	-	-	-	2	2

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	18	63	81	122	203
Expected existing business contribution (in excess of reference rate)	3	12	15	21	36

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

Emerging Markets

Overview

New business: The new business value increased (compared to 2010) largely driven by very strong Mass Foundation Cluster sales volumes and an improvement in margins resulting from changes to economic and operating assumptions.

Operating earnings: The operating profits on the in-force book were driven by strong positive mortality and persistency experience variances.

Non-operating earnings and closing adjustments: The most material impact was caused by the rand depreciating against sterling, leading to a large negative foreign exchange variance. The changes to tax legislation in South Africa (in particular, the move to a withholding tax regime for dividends) account for most of the large one off positive non-operating variance.

New Business

The increase in the value of new business was largely driven by the increased sales of higher margin Mass Foundation Cluster business. Margins in general were impacted positively by operating assumption changes (mainly relating to persistency) and a more favourable economic basis. However, there were also offsetting negative impacts on margins resulting from a less profitable mix of business (more market-linked business sold relative to with-profit business). There was a small net negative impact on the value of new business from tax legislation changes. This was a combination of the negative effect of tax legislation changes affecting the Fixed Bond product and the positive effect of moving to a dividend withholding tax regime (increase to VNB of £9 million).

Expected existing business contribution

The unwind of returns on the in-force business over 2011 was slightly lower than 2010. The lower unwind was the combined effect of the negative impact due to lower 1-year risk-free rates, offset by positive impacts due to a higher assumed real world expected return on cash and a higher opening MCEV balance on which the unwind is based.

Experience variances

Both mortality and persistency experience were very strong in 2011 and included a number of one-off items, leading to a significantly improved positive experience variance compared to 2010. The mortality variance was the result of exceptionally good experience in Retail Affluent, continued good experience in Mass Foundation Cluster and improved Corporate Segment experience. The persistency profits were improved by continued business efforts to improve retention. It should be noted that the experience variance includes ANW earnings of £14 million relating to the life business in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe as profits not modelled.

Operating assumption changes

The small overall assumption change impact was the result of a number of different offsetting effects, particularly an improvement in the persistency basis (to reflect the good experience in recent years) and negative impacts from expense assumption changes, mainly the increased provision for project costs. Although mortality experience was very positive in 2011, no mortality assumption changes were made as the experience appeared unusually positive compared to recent years and was further boosted by one-off items which contributed significantly to the profit. The assumptions will be considered again in 2012 following a review of the experience.

Other operating variances

The negative other operating variance was the result of an increase in the CNHR resulting from implementation of a new economic capital model (alignment with Solvency II requirements) to determine non-hedgeable risk capital and the effect of other miscellaneous modelling changes.

Economic variances

Investment returns over 2011 were lower than 2010. The JSE SWIX index increased slightly by 1% over 2011 (compared with 18% over 2010). The year-end economic basis (mainly the swap curve) boosted MCEV. In aggregate, this had the impact of leading to a small positive economic variance.

Other non-operating variances

A new dividend withholding tax system (replacing the current Secondary Tax on Companies ("STC") system) will be introduced in South Africa effective from 1 April 2012. The current STC tax allowance was removed from the embedded value models, resulting in an increase in VIF. This was offset by an allowance for dividend withholding tax on remittance of dividends to Old Mutual plc. The overall effect is a material increase in the net of tax VIF of £105 million.

Capital and dividend flows

This includes a large one-off positive effect of £69m for the inclusion of the opening ANW for the life businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe which are included in Emerging Markets for the first time in 2011, with any foreign exchange movement on this balance allocated as a foreign exchange variance. This is largely offset by dividends paid.

Foreign exchange effects

The large negative effect was caused by the 18% depreciation in the rand against sterling applied to the MCEV closing balance. The majority of Emerging Market's MCEV earnings are rand denominated, and the volatility of the rand against sterling is largely unhedged. Hence, all the line items shown in the analysis of covered business MCEV earnings are also implicitly impacted by movements in the rand against sterling.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

	£m
Retail Europe	Year ended 31 December 2011					Year ended 31 December 2010
	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	41	62	103	520	623	46	32	78	453	531
New business value	(73)	1	(72)	80	8	(69)	1	(68)	75	7
Expected existing business contribution (reference rate)	1	-	1	8	9	1	-	1	8	9
Expected existing business contribution (in excess of reference rate)	-	-	-	5	5	-	-	-	3	3
Transfers from VIF and required capital to free surplus	93	1	94	(94)	-	97	2	99	(99)	-
Experience variances	3	-	3	(3)	-	5	(1)	4	1	5
Assumption changes	-	-	-	2	2	-	-	-	11	11
Other operating variance	6	(6)	-	(5)	(5)	(9)	-	(9)	40	31
Operating MCEV earnings	30	(4)	26	(7)	19	25	2	27	39	66
Economic variances	2	(4)	(2)	(13)	(15)	1	2	3	19	22
Other non-operating variance	-	-	-	-	-	(26)	25	(1)	(5)	(6)
Total MCEV earnings	32	(8)	24	(20)	4	-	29	29	53	82
Closing adjustments	(21)	(2)	(23)	(16)	(39)	(5)	1	(4)	14	10
Capital and dividend flows	(19)	-	(19)	-	(19)	(6)	-	(6)	-	(6)
Foreign exchange variance	(2)	(2)	(4)	(16)	(20)	1	1	2	14	16

Closing MCEV	52	52	104	484	588	41	62	103	520	623
Return on MCEV (RoEV)% per annum					3.0%					12.8%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV		Adjusted net worth	Value of in-force	MCEV
Experience variances	3	(3)	-		4	1	5
Persistency	(2)	3	1		(2)	3	1
Risk	3	2	5		3	-	3
Expenses	(3)	-	(3)		(3)	-	(3)
Other	5	(8)	(3)		6	(2)	4
Assumption changes	-	2	2		-	11	11
Persistency	-	(2)	(2)		-	9	9
Risk	-	-	-		-	-	-
Expenses	-	5	5		-	(4)	(4)
Other	-	(1)	(1)		-	6	6

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	-	1	1	11	12
Expected existing business contribution (in excess of reference rate)	1	-	1	3	4

Retail Europe

Overview

Operating earnings: The operating profits on the in-force book were mainly driven by new business contribution and the expected unwind of the MCEV.

Non-operating earnings and closing adjustments: The most material impacts are as a result of the negative economic variances, largely due to reduced fund returns, and the foreign exchange variance as a result of the depreciation of the euro against sterling.

New Business

The value of new business has increased due to higher sales volumes in Poland and Switzerland. Margins have also increased as a result of positive volume effects, driven by a decrease in acquisition expense over-runs in Switzerland, and favourable economic assumption changes.

Expected existing business contribution

The expected existing business contribution is in line with 2010.

Experience variances

The most significant experience variance is in respect of mortality risk. This is partially offset by adverse expense variances due to higher overhead expenses.

Operating assumption changes

The most significant operating assumption change relates to the lowering of expense assumptions as a result of refinements to the allocation of Retail Europe overhead expenses to individual insurance entities.

Other operating variances

The negative other operating variance mainly relates to a change in methodology used to calculate CNHR to align with Solvency II requirements.

Economic variances

There was a large negative investment return variance on the VIF mainly due to the effect of negative market developments and poor fund returns over 2011. This was partially offset by a positive impact due to the reduction in swap rates across all Retail Europe currencies.

Capital and dividend flows

The main capital flow relates to a significant dividend paid from the covered business to Old Mutual plc.

Foreign exchange effects

The foreign exchange variance is mainly due to unfavourable exchange rate movements on translation as a result of the euro depreciating against sterling.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

	£m
Wealth Management	Year ended 31 December 2011					Year ended 31 December 2010
	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	43	278	321	1,656	1,977	163	213	376	1,468	1,844
New business value	(128)	23	(105)	175	70	(142)	19	(123)	189	66
Expected existing business contribution (reference rate)	2	2	4	24	28	1	3	4	22	26
Expected existing business contribution (in excess of reference rate)	5	0	5	17	22	7	-	7	14	21
Transfers from VIF and required capital to free surplus	296	(30)	266	(266)	-	246	(20)	226	(226)	-
Experience variances	(36)	8	(28)	56	28	(62)	20	(42)	33	(9)
Assumption changes	8	-	8	24	32	4	2	6	1	7
Other operating variance	34	(11)	23	(19)	4	(34)	35	1	-	1
Operating MCEV earnings	181	(8)	173	11	184	20	59	79	33	112
Economic variances	20	(10)	10	(34)	(24)	46	6	52	153	205
Other non-operating variance	-	-	-	(4)	(4)	(2)	-	(2)	4	2
Total MCEV earnings	201	(18)	183	(27)	156	64	65	129	190	319
Closing adjustments	(174)	2	(172)	(3)	(175)	(184)	-	(184)	(2)	(186)
Capital and dividend flows	(174)	4	(170)	-	(170)	(184)	-	(184)	-	(184)
Foreign exchange variance	-	(2)	(2)	(3)	(5)	-	-	-	(2)	(2)

Closing MCEV	70	262	332	1,626	1,958	43	278	321	1,656	1,977
Return on MCEV (RoEV)% per annum					9.3%					6.1%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV		Adjusted net worth	Value of in-force	MCEV
Experience variances	(28)	56	28		(42)	33	(9)
Persistency	(14)	36	22		(7)	18	11
Risk	1	2	3		3	1	4
Expenses	(17)	5	(12)		(38)	1	(37)
Other	2	13	15		-	13	13
Assumption changes	8	24	32		6	1	7
Persistency	-	(6)	(6)		-	(8)	(8)
Risk	-	8	8		-	15	15
Expenses	(1)	(35)	(36)		(4)	(13)	(17)
Other	9	57	66		10	7	17

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	2	3	5	33	38
Expected existing business contribution (in excess of reference rate)	-	-	-	21	21

Wealth Management

Overview

New business: The new business value increased (compared to 2010); largely driven by a change in business mix and assumption changes. Sales volumes were below 2010 levels for all Wealth Management businesses, except for the UK Platform which saw 2% year on year growth.

Operating earnings: The operating profits on the in-force book were driven by the expected unwind of the MCEV, favourable rebate assumption changes, and strong positive rebate, persistency and mortality experience variances.

Non-operating earnings and closing adjustments: The most material impact below the line was the capital returned to group during the year and foreign exchange variances due to funds held in non-sterling denominations.

New Business

The increase in the value of new business was largely due to the lower internal acquisition costs following a cost reduction programme, together with the higher rebate and improved persistency assumptions. Margins in general were impacted positively by external factors, in particular the more favourable economic basis. However, there were also offsetting negative impacts on margins resulting from lower volumes.

Expected existing business contribution

The expected existing business contribution (in excess of reference rate) is not significant on the required capital portion of the business as shareholder assets backing capital requirements are typically invested in highly secure government paper and other short-term instruments.

Experience variances

Rebate, persistency and mortality experience was strong in 2011 leading to a positive experience variance compared to 2010. The persistency variance was as a result of assumptions made for the anticipated impacts of the Retail Distribution Review (RDR)* that have yet to emerge on Legacy business in the UK. The adverse expense experience was due to one-off variances relating to software development. Maintenance expenses have come under pressure due to lower than assumed sales on UK platform and a changing mix of business.

Operating assumption changes

Assumptions changes were generally favourable with the release of margins on rebates following strong recent experience and more clarity from the FSA regarding the future treatment of rebates. Positive mortality experience led to favourable assumption changes, offset by the adverse expense and persistency assumption changes.

Other operating variances

The other operating variance was the result of some large offsetting items. Modelling changes include the impact of a move to a 50^th percentile best estimate basis** offset by an associated move to more granular persistency modelling techniques giving an overall impact of £(13) million. Other operating variances also include the results of modelling improvements for the Platform business following a migration of valuation models (£14 million); an increase in the CNHR resulting from implementation of the 50^th percentile best estimate basis; and the effect of other miscellaneous modelling changes.

Economic variances

Investment returns over 2011 were lower than 2010 due to reduced fund growth as a result of the fall in equity markets. The tax position of the Legacy business resulted in large deemed disposal losses. These were partially offset by a reduction in the effective tax rate in the UK businesses and in International's Finnish operation and a positive contribution from lower swap rates in 2011.

Other non-operating variances

Other non-operating variances include the benefit of reductions in headline UK corporation tax. The Emergency Budget of 22 June 2010 announced that the UK's mainstream corporation tax rate would be reduced from its current level of 28% down to 24% in annual 1% steps. The first reduction to 27% was included within the full-year 2010 results. In the 23 March 2011 Budget speech an additional 1% reduction, to come into effect during 2011, was announced. The further reduction to 25% (effective from April 2012) has also been allowed for and the impact of the 2% reduction to 25% is £8 million.

Capital and dividend flows

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

Foreign exchange effects

The negative effect was caused by the depreciation of the euro and Swiss franc against sterling.

* Retail Distribution Review (RDR): The RDR is an FSA consumer protection initiative which aims to drive structural change in the retail investments industry to give consumers confidence that the advice they are given, and products they are sold, are best suited to their needs. Whilst the regulations will not be in force until 1^st January 2013 the market is already starting to change. The exact impact of the RDR is still uncertain and assumption changes include an allowance for expected worsening persistency experience in 2012 and 2013 because of the RDR impacts.

** Modelling changes to allow for 50^th percentile best estimate basis: Traditionally the Group MCEV methodology has allowed assumptions to incorporate a margin over the 50^th percentile (best estimate) where this could be justified on the grounds of modelling uncertainty of the best estimate. In preparation for full Solvency II implementation, a revised group-wide MCEV approach is being phased in. The approach requires the release of margins when calculating MCEV on a true best estimate basis.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

	£m
Bermuda	Year ended 31 December 2011					Year ended 31 December 2010
	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	-	403	403	(116)	287	-	363	363	(165)	198
New business value	-	-	-	-	-	-	-	-	-	-
Expected existing business contribution (reference rate)	-	2	2	6	8	-	3	3	9	12
Expected existing business contribution (in excess of reference rate)	-	24	24	14	38	-	30	30	35	65
Transfers from VIF and required capital to free surplus	66	(57)	9	(9)	-	16	(45)	(29)	29	-
Experience variances	16	(1)	15	9	24	(18)	1	(17)	(2)	(19)
Assumption changes	14	-	14	(22)	(8)	(19)	-	(19)	(16)	(35)
Other operating variance	155	(177)	(22)	7	(15)	(32)	37	5	(52)	(47)
Operating MCEV earnings	251	(209)	42	5	47	(53)	26	(27)	3	(24)
Economic variances	(251)	-	(251)	(10)	(261)	53	-	53	52	105
Other non-operating variance	-	-	-	-	-	-	-	-	-	-
Total MCEV earnings	-	(209)	(209)	(5)	(214)	-	26	26	55	81
Closing adjustments	-	(7)	(7)	-	(7)	-	14	14	(6)	8
Capital and dividend flows	-	-	-	-	-	-	-	-	-	-
Foreign exchange variance	-	(7)	(7)	-	(7)	-	14	14	(6)	8

Closing MCEV	-	187	187	(121)	66	-	403	403	(116)	287
Return on MCEV (RoEV)% per annum					17.0%					(11.4)%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV		Adjusted net worth	Value of in-force	MCEV
Experience variances	15	9	24		(17)	(2)	(19)
Persistency	14	8	22		(15)	(1)	(16)
Risk	-	-	-		-	-	-
Expenses	3	-	3		(8)	-	(8)
Other	(2)	1	(1)		6	(1)	5
Assumption changes	14	(22)	(8)		(19)	(16)	(35)
Persistency	14	6	20		(16)	9	(7)
Risk	-	-	-		2	(1)	1
Expenses	(4)	(22)	(26)		-	(26)	(26)
Other	4	(6)	(2)		(5)	2	(3)

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	-	1	1	7	8
Expected existing business contribution (in excess of reference rate)	-	24	24	5	29

Bermuda

Overview

Operating earnings: Profits from Variable Annuity surrender experience and persistency assumption changes increased operating earnings in 2011, partially offset by losses from the strengthening of expense assumptions and modelling changes to the CNHR and Fixed Annuity reserves.

Non-operating earnings and closing adjustments: The closing MCEV balance reduced considerably because of unfavourable market impacts on the Variable Annuity Guaranteed Minimum Accumulation Benefit (GMAB) performance.

Expected existing business contribution

The expected contribution in excess of the risk-free rate has reduced in 2011, with the VIF component reflecting lower credit spread income as a result of the run off of the fixed income portfolio and lower earned credit spreads, and the ANW component reflecting lower interest earned on Old Mutual plc loan notes.

Experience variances

Positive persistency variances in 2011 are mainly due to the surrender of Variable Annuity contracts over the period. This includes the impact of special surrender fee waiver offers given to Universal Guarantee Option (UGO) clients outside of Hong Kong during the year, which significantly increased the number of surrenders taking place in 2011. Expense variances in 2011 include a one-off profit impact of £5m due to the release of a legal expense provision.

Operating assumption changes

Partial withdrawal and surrender assumptions were refined according to the results of the most recent experience investigation, with the main impacts being an increase in surrender rates of out-the-money UGO Variable Annuity contracts, and an increase in partial withdrawal rates on all products apart from Variable Annuities sold outside of Hong Kong. Expense assumptions were strengthened to take account of an updated forecast of business expenditure over the next 3 years and higher anticipated per-policy expenses over the run-off of the in-force book.

Other operating variances

Losses due to other operating experience variances consist mainly of CNHR modelling changes, where the capital model used has been updated to reflect Old Mutual's Solvency II Internal Model framework, as well as the strengthening of Fixed Annuity reserves to allow for market-value adjustments to withdrawal payments that compensate policyholders in a low interest rate environment. The movement between free surplus and required capital is mostly due to the current policy of calculating required capital as the ANW held in the business. ANW, and therefore required capital, have reduced significantly over the period, largely due to the impact of adverse financial markets on Variable Annuity (GMAB) reserves. Capital requirements for Bermuda are managed at Group on an economic capital basis.

Economic variances

Below-the-line economic variance losses consist largely of increases in Variable Annuity (GMAB) reserves due to adverse equity market and exchange rate movements (net of gains from the partial hedging strategy), as well as significantly lower interest rates.

Foreign exchange effects

The negative effect was caused by the depreciation in the US dollar against sterling applied to the MCEV earnings and closing balance.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

	£m
Nordic	Year ended 31 December 2011					Year ended 31 December 2010
	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	51	135	186	1,318	1,504	91	104	195	1,114	1,309
New business value	(54)	8	(46)	102	56	(49)	6	(43)	84	41
Expected existing business contribution (reference rate)	3	3	6	36	42	-	1	1	14	15
Expected existing business contribution (in excess of reference rate)	-	-	-	33	33	-	-	-	26	26
Transfers from VIF and required capital to free surplus	129	-	129	(129)	-	103	-	103	(103)	-
Experience variances	(1)	(1)	(2)	(1)	(3)	30	(5)	25	(1)	24
Assumption changes	-	-	-	(4)	(4)	-	-	-	(55)	(55)
Other operating variance	-	-	-	4	4	(44)	4	(40)	34	(6)
Operating MCEV earnings	77	10	87	41	128	40	6	46	(1)	45
Economic variances	7	(16)	(9)	(180)	(189)	(4)	12	8	86	94
Other non-operating variance	39	1	40	(3)	37	17	-	17	-	17
Total MCEV earnings	123	(5)	118	(142)	(24)	53	18	71	85	156
Closing adjustments	(16)	(3)	(19)	(28)	(47)	(93)	13	(80)	119	39
Capital and dividend flows	(11)	-	(11)	-	(11)	(100)	-	(100)	-	(100)
Foreign exchange variance	(5)	(3)	(8)	(28)	(36)	7	13	20	119	139

Closing MCEV	158	127	285	1,148	1,433	51	135	186	1,318	1,504
Return on MCEV (RoEV)% per annum					8.5%					3.3%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV		Adjusted net worth	Value of in-force	MCEV
Experience variances	(2)	(1)	(3)		25	(1)	24
Persistency	(3)	6	3		(2)	(6)	(8)
Risk	-	1	1		5	-	5
Expenses	(10)	-	(10)		2	-	2
Other	11	(8)	3		20	5	25
Assumption changes	-	(4)	(4)		-	(55)	(55)
Persistency	-	(6)	(6)		-	(7)	(7)
Risk	-	-	-		-	-	-
Expenses	-	-	-		-	(18)	(18)
Other	-	2	2		-	(30)	(30)

	£m
	Year ended 31 December 2012
	Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)	3	3	6	28	34
Expected existing business contribution (in excess of reference rate)	-	-	-	25	25

Nordic

Overview

On 15 December 2011, the Company announced that it had entered into an agreement to sell the Nordic business unit to Skandia Liv for the sum of SEK 22.5 billion (£2.1 billion). This transaction is still subject to shareholder approval. The Nordic business was therefore owned by the Company over the entire reporting period.

New business: The new business value increased (compared to 2010) largely driven by the strong sales growth in Skandia Link Denmark.

Operating earnings: The operating profits on the in-force book were driven by the expected unwind of the MCEV. The overall impact of experience variances and assumption changes was small.

Non-operating earnings and closing adjustments: The most material impact was due to the negative economic variance, largely driven by a fall in the equity markets during 2011.

New Business

The key reason for the increase in volume and margin is the strong sales growth in Skandia Link Denmark, which tends to attract higher margins. Sales in Sweden were relatively flat in 2011 compared to 2010. The strong sales in Denmark are a result of the using a tied agent network as well as the effect of the new commission legislation (which resulted in a surge of new business before the law was effected).

Expected existing business contribution

The unwind of returns on the in-force business over 2011 was higher than 2010. The higher unwind was due to higher assumed real world expected returns and a higher opening MCEV balance on which the unwind is based.

Experience variances

The experience variances are primarily driven by a major restructuring programme implemented in 2011. This was offset by positive rebate experience arising from a higher level of rebate income than expected.

Operating assumption changes

The impact of assumption changes has reduced significantly compared to 2010 and largely reflect a strengthening of the persistency assumptions (premium reductions, transfers and surrenders). The strengthening of persistency assumptions reflects higher anticipated future transfers within a few specific segments rather than recent experience (which has been positive).

Other operating variances

The positive other operating variance was the result of a decrease in the CNHR resulting from implementation of a new economic capital model (to align with Solvency II requirements). This was partially offset by the impact of a change in the methodology used to determine expense inflation assumptions.

Economic variances

The negative economic variance has been driven by a fall in the equity markets during the second half of 2011 (the Swedish OMX index decreased by 17% over 2011 compared with an increase of 18% over 2010), with the downward shift in the swap curve producing a further negative impact.

Other non-operating variances

The other non-operating variance relates primarily to the net effect of a capital contribution from Skandia Liv. During the year, Skandia Liv made a group contribution of £154 million to the Skandia Group. Unrelieved tax losses have been used to offset the entire tax charge on this transaction. Simultaneously, the Skandia Group made a capital injection of £110 million back to Skandia Liv, corresponding to the group contribution net of tax relief.

Capital and dividend flows

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

Foreign exchange effects

The negative effect was caused by the 2% depreciation in the krona against sterling applied to the MCEV closing balance.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

B: Segment information continued

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

	£m
US Life	Year ended 31 December 2011					Year ended 31 December 2010
	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	66	468	534	(723)	(189)	36	462	498	(816)	(318)
New business value	-	-	-	-	-	(66)	66	-	(28)	(28)
Expected existing business contribution (reference rate)	-	-	-	-	-	1	9	10	15	25
Expected existing business contribution (in excess of reference rate)	-	-	-	-	-	-	-	-	80	80
Transfers from VIF and required capital to free surplus	-	-	-	-	-	81	(47)	34	(34)	-
Experience variances	-	-	-	-	-	33	(23)	10	30	40
Assumption changes	-	-	-	-	-	(6)	-	(6)	(57)	(63)
Other operating variance	-	-	-	-	-	-	-	-	(7)	(7)
Operating MCEV earnings	-	-	-	-	-	43	5	48	(1)	47
Economic variances	-	-	-	-	-	71	(18)	53	127	180
Other non-operating variance	-	-	-	-	-	-	-	-	-	-
Total MCEV earnings	-	-	-	-	-	114	(13)	101	126	227
Closing adjustments	(66)	(468)	(534)	723	189	(84)	19	(65)	(33)	(98)
Capital and dividend flows	-	-	-	-	-	(85)	-	(85)	-	(85)
Foreign exchange variance	(2)	(19)	(21)	28	7	1	19	20	(33)	(13)
MCEV of acquired/sold business	(64)	(449)	(513)	695	182	-	-	-	-	-

Closing MCEV	-	-	-	-	-	66	468	534	(723)	(189)
Return on MCEV (RoEV)% per annum					-					14.1%

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

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Adjusted net worth	Value of in-force	MCEV		Adjusted net worth	Value of in-force	MCEV
Experience variances	-	-	-		10	30	40
Persistency	-	-	-		4	38	42
Risk	-	-	-		-	(10)	(10)
Expenses	-	-	-		25	-	25
Other	-	-	-		(19)	2	(17)
Assumption changes	-	-	-		(6)	(57)	(63)
Persistency	-	-	-		(6)	(58)	(64)
Risk	-	-	-		-	(1)	(1)
Expenses	-	-	-		-	2	2
Other	-	-	-		-	-	-

US Life

For the year ended 31 December 2011, Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States Life Companies, is included within the Old Mutual plc results. For all comparative periods, the results for US Life include allowance for OMRe.

The sale of the US Life insurance business to Harbinger Capital Partners was completed, following regulatory approval, on 7 April 2011. This transaction has resulted in an uplift of £451 million to the adjusted Group MCEV, based on the 31 December 2010 value for US Life. Further details relating to the MCEV impact of this transaction are noted in A4.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

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. Bermuda is excluded from the tables below as it is closed to new business.

Year ended 31 December 2011								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors*	APE	VNB	PVNBP margin	APE margin
Long Term Savings	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%
Retail Europe	67	56	549	7.4	72	8	1.5%	11%
Wealth Management	139	4,714	5,269	4.0	611	70	1.3%	11%
Nordic	153	753	1,347	3.9	229	56	4.2%	25%
US Life**	-	-	-	-	-	-	-	-
Total covered business	722	6,964	10,460	4.8	1,418	233	2.2%	16%

Year ended 31 December 2010								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors*	APE	VNB	PVNBP margin	APE margin
Long Term Savings	554	7,359	10,162	5.1	1,290	159	1.6%	13%
Emerging Markets	325	1,611	3,269	5.1	487	86	2.6%	18%
Retail Europe	63	63	513	7.2	69	7	1.4%	11%
Wealth Management	166	5,685	6,380	4.2	734	66	1.0%	9%
Nordic	144	573	1,104	3.7	201	41	3.7%	21%
US Life**	10	824	889	6.6	92	(28)	(3.2)%	(31)%
Total covered business	708	8,756	12,155	4.8	1,583	172	1.4%	11%

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

** The US Life VNB is negative when calculated on an MCEV basis, due to the reliance on spread in the pricing basis, and the low risk free swap curve.

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 £884 million (2010: £723 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 Wealth Management of £704 million (2010: £304 million) is excluded as this is more appropriately classified as unit trust business.

New business single premiums of £31 million, annualised recurring premiums of £14 million and APE of £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: Drivers of new business value for covered business (PVNBP margin)*

							%
Year ended 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Nordic	US Life
Margin at the end of comparative period**	1.8	1.6	2.6	1.4	1.0	3.7	-
Change in volume	0.2	0.1	0.3	0.5	(0.1)	0.1	-
Change in country and product mix	(0.2)	(0.2)	(0.6)	(0.3)	-	0.4	-
Change in operating assumptions	0.2	0.2	0.4	(0.4)	0.2	(0.1)	-
Change in economic assumptions	0.2	0.2	0.4	0.3	0.1	0.1	-
Change in tax/regulation	-	-	(0.1)	-	0.1	-	-
Exchange rate movements	-	-	-	-	-	-	-

Margin at the end of the period	2.2	1.9	3.0	1.5	1.3	4.2	-

							%
Year ended 31 December 2010	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Nordic	US Life
Margin at the end of comparative period	1.6	1.3	2.3	(1.0)	1.0	3.8	2.2
Change in volume	(0.1)	-	0.1	1.6	(0.1)	(0.1)	(0.1)
Change in country and product mix	0.1	0.2	0.4	(0.2)	(0.1)	0.6	(0.9)
Change in operating assumptions	0.1	0.2	(0.1)	0.9	0.2	(0.4)	(0.6)
Change in economic assumptions	(0.4)	(0.1)	(0.1)	0.1	-	(0.2)	(3.8)
Change in tax/regulation	-	-	-	-	-	-	-
Exchange rate movements	0.1	-	-	-	-	-	-

Margin at the end of the period	1.4	1.6	2.6	1.4	1.0	3.7	(3.2)

* The PVNBP margin changes are calculated in the business unit reporting currency.

** The PVNBP margin at the end of the comparative period has been restated to exclude the US Life margin impact.

The value of new business has increased for all business units during 2011 relative to 2010, with the PVNBP margin also displaying positive trends across all business units.

For Emerging Markets the increase in new business margin is largely influenced by external factors, in particular the change from STC to dividend withholding tax in South Africa and the more favourable economic basis, as well as favourable operating assumption changes. Strong sales growth in Mass Foundation Cluster, which has higher margins than other segments, also contributed positively. These effects were partly offset by the adverse effect of tax legislation changes reducing the profitability of the Fixed Bond product and a less favourable product mix, particularly in the Corporate Segment.

The new business margin in Retail Europe increased slightly over the period, mainly due to positive volume effects, driven by a decrease in acquisition expense over-runs in Switzerland, and favourable economic assumption changes.

For Wealth Management, the increase in margin is predominately due to reduced acquisition expenses and favourable assumption changes (both operating and economic).

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

C: Other key performance information continued

C3: Adjustments applied in determining total Group MCEV earnings before tax

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
Analysis of adjusting items	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Income/(expense)
Goodwill impairment and amortisation of non-covered business acquired intangible assets and impact of acquisition accounting	-	(283)	(283)	-	(20)	(20)
Economic variances	(554)	(28)	(582)	864	(7)	857
Other non-operating variances	22	-	22	17	-	17
Acquired/divested business*	-	182	182	-	(22)	(22)
Dividends declared to holders of perpetual preferred callable securities	-	44	44	-	44	44
Adjusting items relating to US Asset Management equity plans and non-controlling interests	-	(3)	(3)	-	6	6
Fair value gains on Group debt instruments	-	22	22	-	(203)	(203)
Adjusting items	(532)	(66)	(598)	881	(202)	679
Adjusting items from continuing operations	(378)	(59)	(437)	591	(196)	395
Adjusting items from discontinued operations	(154)	(7)	(161)	290	(6)	284
Total MCEV adjusting items	(532)	(66)	(598)	881	(202)	679

* This relates to the non-covered businesses in Kenya, Malawi, Nigeria, Swaziland, and Zimbabwe that have been included for the first time during 2011.

C4: Other movements in IFRS net equity impacting Group MCEV

	£m
	Year ended 31 December 2011			Year ended 31 December 2010
	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Fair value gains/(losses)	-	24	24	-	8	8
Net investment hedge	-	28	28	-	(86)	(86)
Currency translation differences/exchange differences on translating foreign operations	(693)	(498)	(1,191)	580	448	1,028
Aggregate tax effects of items taken directly to or transferred from equity	-	11	11	-	14	14
Other movements*	182	128	310	-	(24)	(24)
Net income recognised directly into equity	(511)	(307)	(818)	580	360	940
Capital and dividend flows for the year**	(257)	(8)	(265)	(468)	322	(146)
Inclusion of other African life businesses**	69	-	69	-	-	-
Net purchase of treasury shares	-	(17)	(17)	-	(28)	(28)
Shares issued in lieu of cash dividends	-	124	124	-	162	162
Other shares issued	-	10	10	-	4	4
Acquisition of non-controlling interest in Mutual & Federal	-	-	-	-	(93)	(93)
Change in share based payment reserve	-	50	50	-	4	4
Other movements in net equity	(699)	(148)	(847)	112	731	843

* This relates to the reversal of the US Life MCEV on the covered business.

** Dividends are allowed for on a cash basis, consistent with IFRS.The effect of the capital transfer relating to the inclusion of the other African life businesses is separated out from the other capital and dividend flows for the period as this is not eliminated on group consolidation. The £69 million is included in the Capital and dividend flows of £(188) million included in Note B4: Analysis of covered business MCEV earnings for Emerging Markets. Any foreign exchange movement on this opening balance is allocated as a foreign exchange variance.

C5: 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 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
IFRS net asset value*	5,214	3,744	1,230	600	1,914	201	1,269	-
Adjustment to include long-term business on a statutory solvency basis	(1,905)	(1,108)	182	(305)	(985)	(14)	(783)	-
Inclusion of Group equity and debt instruments held in life funds**	365	365	365	-	-	-	-	-
Goodwill	(998)	(797)	(9)	(191)	(597)	-	(201)	-
Adjusted net worth attributable to ordinary equity holders of the parent	2,676	2,204	1,768	104	332	187	285	-

£m
At 31 December 2010	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic	US Life
IFRS net asset value*	5,794	3,845	1,216	632	1,997	432	1,243	274
Adjustment to include long-term business on a statutory solvency basis	(1,822)	(1,202)	207	(331)	(1,078)	(29)	(851)	260
Inclusion of Group equity and debt instruments held in life funds**	389	389	389	-	-	-	-	-
Goodwill	(1,010)	(804)	(8)	(198)	(598)	-	(206)	-
Adjusted net worth attributable to ordinary equity holders of the parent	3,351	2,228	1,804	103	321	403	186	534

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

** A further £(69)m (2010: £(83) million) relates to the non-covered business.

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:

· 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.

· 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 amortizing DAC allowed under the ANW.

· For the US Life business, the reversal of the IFRS impairment for discontinued operations which is included in the IFRS net asset value, as this is not recognised on a statutory solvency basis.

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

D1: Sensitivity tests

The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2011 and the value of new business for the year ended 31 December 2011 to the following:

· Economic assumptions 1% increase: Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately

· Economic assumptions 1% decrease: Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately

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

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

· 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

· 50bps contraction on corporate bond spreads

· 25% increase in equity/property implied volatilities: 25% multiplicative increase in equity and property implied volatilities

· 25% increase in swaption implied volatilities: 25% multiplicative increase in swaption implied volatilities

· 10% decrease in discontinuance rates: Voluntary discontinuance rates decreasing by 10%

· 10% decrease in maintenance expense: Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges

· 5% decrease in mortality/morbidity rates: Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges

· 5% decrease in mortality assumption: Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges

· 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

· VNB on closing economic assumptions: Value of new business calculated on economic assumptions at the end of reporting period

· Minimum capital requirement: Required capital equal to the minimum statutory requirement

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

· 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 IGR.

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

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

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

Sensitivity tests: MCEV

							£m
At 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic
Central assumptions	7,212	5,713	3,167	588	1,958	66	1,433
Effect on MCEV of:
Economic assumption 1% increase	7,103	5,579	3,109	566	1,904	117	1,407
Economic assumption 1% decrease	7,315	5,836	3,209	603	2,024	18	1,461
Equity/property market value 10% increase	7,585	5,948	3,285	597	2,066	118	1,519
Equity/property market value 10% decrease	6,869	5,509	3,054	579	1,876	14	1,346
10bps increase of liquidity spreads	7,221	5,722	3,176	588	1,958	66	1,433
50bps contraction on corporate bond spreads	7,232	5,728	3,182	588	1,958	71	1,433
25% increase in equity/property implied volatilities	7,124	5,691	3,146	588	1,957	-	1,433
25% increase in swaption implied volatilities	7,198	5,701	3,157	586	1,958	64	1,433
10% decrease in discontinuance rates	7,405	5,884	3,224	605	2,055	48	1,473
10% decrease in maintenance expense	7,471	5,919	3,305	609	2,005	77	1,475
5% decrease in mortality/morbidity rates	7,333	5,833	3,270	592	1,971	66	1,434
5% decrease in mortality assumption	7,190	5,693	3,147	588	1,958	66	1,431
Minimum capital requirement	7,267	5,766	3,217	589	1,960	68	1,433
NHR capital diversification	7,282	5,759	3,192	598	1,969	70	1,453
99.93% confidence level NHR capital:	7,155	5,660	3,140	581	1,939	62	1,433

Sensitivity tests: Value of in-force business

							£m
At 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Bermuda	Nordic
Central assumptions	4,536	3,509	1,399	484	1,626	(121)	1,148
Effect on value of in-force business of:
Economic assumption 1% increase	4,384	3,392	1,338	464	1,590	(129)	1,121
Economic assumption 1% decrease	4,673	3,611	1,443	498	1,670	(114)	1,176
Equity/property market value 10% increase	4,790	3,674	1,475	493	1,706	(118)	1,234
Equity/property market value 10% decrease	4,283	3,346	1,327	475	1,544	(124)	1,061
10bps increase of liquidity spreads	4,545	3,519	1,409	484	1,626	(121)	1,147
50bps contraction on corporate bond spreads	4,540	3,509	1,399	484	1,626	(116)	1,147
25% increase in equity/property implied volatilities	4,513	3,488	1,379	484	1,625	(122)	1,147
25% increase in swaption implied volatilities	4,521	3,497	1,388	483	1,626	(123)	1,147
10% decrease in discontinuance rates	4,749	3,680	1,455	501	1,724	(119)	1,188
10% decrease in maintenance expense	4,795	3,715	1,537	505	1,673	(110)	1,190
5% decrease in mortality/morbidity rates	4,657	3,629	1,502	488	1,639	(121)	1,149
5% decrease in mortality assumption	4,514	3,490	1,380	484	1,626	(121)	1,145
Minimum capital requirement	4,590	3,562	1,449	485	1,628	(119)	1,147
NHR capital diversification	4,606	3,555	1,424	494	1,637	(117)	1,168
99.93% confidence level NHR capital:	4,478	3,456	1,372	477	1,607	(125)	1,147

Notes to the MCEV basis supplementary information

For the year ended 31 December 2011

D1: Sensitivity tests continued

Sensitivity tests: Value of new business

						£m
At 31 December 2011	Total covered business	Long Term Savings	Emerging Markets	Retail Europe	Wealth Management	Nordic
Central assumptions	233	177	99	8	70	56
Effect value of new business of:
Economic assumption 1% increase	215	160	92	5	63	55
Economic assumption 1% decrease	250	192	105	10	77	58
Equity/property market value 10% increase	244	183	99	8	76	61
Equity/property market value 10% decrease	223	172	99	8	65	51
10bps increase of liquidity spreads	234	178	100	8	70	56
50bps contraction on corporate bond spreads	233	177	99	8	70	56
25% increase in equity/property implied volatilities	232	176	99	8	69	56
25% increase in swaption implied volatilities	233	177	99	8	70	56
10% decrease in discontinuance rates	280	214	125	9	80	66
10% decrease in maintenance expense	255	196	111	10	75	59
5% decrease in mortality/morbidity rates	247	191	114	7	70	56
5% decrease in mortality assumption	233	177	99	8	70	56
VNB 10% increase in acquisition expenses	214	159	88	6	65	55
VNB on closing economic assumptions	251	195	107	9	79	56
Minimum capital requirement	238	182	104	8	70	56
NHR capital diversification	239	181	101	9	71	58
99.93% confidence level NHR capital:	227	171	97	8	66	56

Sensitivity tests: Total covered business at 31 December 2010

			£m
At 31 December 2010	MCEV	Value of in-force business	Value of new business
Central assumptions	7,515	4,164	172
Effect on Total covered business of:
Economic assumption 1% increase	7,259	3,847	180
Economic assumption 1% decrease	7,761	4,468	156
Equity/property market value 10% increase	7,567	4,216	176
Equity/property market value 10% decrease	7,886	4,441	180
10bps increase of liquidity spreads	7,147	3,895	165
50bps contraction on corporate bond spreads	7,815	4,444	172
25% increase in equity/property implied volatilities	7,396	4,138	172
25% increase in swaption implied volatilities	7,423	4,072	147
10% decrease in discontinuance rates	7,747	4,415	211
10% decrease in maintenance expense	7,777	4,426	192
5% decrease in mortality/morbidity rates	7,654	4,304	185
5% decrease in mortality assumption	7,464	4,114	171
VNB 10% increase in acquisition expenses	n/a	n/a	154
VNB on closing economic assumptions	n/a	n/a	189
Minimum capital requirement	7,578	4,227	176
NHR capital diversification	7,565	4,215	175
99.93% confidence level NHR capital:	7,437	4,087	166

E1: Disposal of Nordic businesses

On 15 December 2011, the Company announced that it had entered into an agreement to sell the assets and liabilities of its Nordic business unit to Skandia Liv for the sum of SEK 22.5 billion (£2.1 billion). This transaction is still subject to shareholder approval. As a result, the MCEV earnings of the Nordic business have been included as discontinued within the MCEV results, including restating the prior year. Nordic life business does however continue to contribute to the covered business MCEV at 31 December 2011.

The tables below indicate the estimated impact to the Adjusted Group MCEV at 31 December 2011 as a result of the disposal of the Nordic businesses.

Estimated Adjusted Group MCEV uplift from proposed disposal of Nordic			£m
	Covered business	Other business	Total
Headline purchase price	-	2,100	2,100
Advisor fees and costs	-	(20)	(20)
Nordic sale proceeds	-	2,080	2,080
Removal of Nordic MCEV*	(1,433)	(329)	(1,762)
Adjusted Group MCEV uplift	(1,433)	1,751	318
Adjusted Group MCEV uplift per share (pence)**	(25.8)	31.5	5.7

* This includes the covered and non-covered business

** This excludes the impact of the share consolidation

On 3 February 2012 the Company announced that it:

· Intends to return approximately £1 billion of net proceeds from the Disposal to Ordinary Shareholders by means of a Special Dividend (equivalent to 18 pence per Ordinary Share);

· Intends to carry out a share consolidation on a 7 for 8 consolidation basis (designed to keep the share price broadly unchanged).

Estimated Adjusted Group MCEV post disposal of Nordic			£m
	Covered business	Other business	Total
Adjusted Group MCEV per share at 31 December 2011	129.7	64.4	194.1
Net sales proceeds*	(25.8)	31.5	5.7
Special dividend	-	(18.0)	(18.0)
Share consolidation	14.8	11.2	26.0
Adjusted Group MCEV per share at 31 December 2011 post disposal of Nordic	118.7	89.1	207.8

* Net of the removal of the Nordic MCEV

This information is provided by RNS

The company news service from the London Stock Exchange

END

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