Preliminary Results 2013 - Part 3

RNS Number : 1595B

Old Mutual PLC

28 February 2014

Adjusted Group MCEV by line of business
At 31 December 2013
			£m
	Notes	At 31 December 2013	At 31 December 2012 Restated¹
MCEV of the core covered business (Emerging Markets)	B3	2,953	3,316
Adjusted net worth²		1,621	1,838
Value of in-force business		1,332	1,478
MCEV of the core covered business (Old Mutual Wealth)	B3	2,549	2,444
Adjusted net worth²		575	466
Value of in-force business		1,974	1,978
MCEV of the non-core covered business (Old Mutual Bermuda)³	B3	365	625
Adjusted net worth		365	680
Value of in-force business		-	(55)

Adjusted net worth of asset management and other business		1,670	1,772
Emerging Markets		364	444
Old Mutual Wealth		248	225
US Asset Management		1,058	1,103

Value of the banking business		3,172	3,574
Nedbank (market value)		3,113	3,527
Emerging Markets (adjusted net worth)		59	47

Value of the general insurance business
Property & Casualty (adjusted net worth)		183	261

Net other business⁴		366	34
Adjustment for present value of Black Economic Empowerment scheme deferred consideration		201	245
Adjustment for value of own shares in ESOP schemes⁵		123	126
Market value of perpetual preferred callable securities		(582)	(686)
Market value of subordinated debt		(838)	(921)
Adjusted Group MCEV		10,162	10,790

Adjusted Group MCEV per share (pence)		207.5	220.5
Number of shares in issue at the end of the financial period less treasury shares (millions)		4,897	4,893
¹The prior period has been restated for the impact of the change in accounting policies. Refer to note A1 for further information.
²Adjusted net worth is after the elimination of inter-company loans.
³The valuation basis for Old Mutual Bermuda has been simplified for 2013. Refer to note A1 for further information.
⁴Net other business is the aggregate of other Group assets and liabilities not included elsewhere, including net inter-company adjustments and holding company cash.
⁵Includes adjustment for the value of excess own shares in employee share scheme trusts.

Adjusted operating Group MCEV statement of earnings
For the year ended 31 December 2013
			£m
	Notes	Year ended 31 December 2013	Year ended 31 December 2012 Restated¹
Emerging Markets		603	619
Covered business	B2	450	459
Asset management		141	145
Banking		12	15

Old Mutual Wealth		181	(19)
Covered business	B2	162	(5)
Asset management		19	(14)

Nedbank
Banking		797	825
Property & Casualty
General insurance		4	37
US Asset Management
Asset management		111	91
Other operating segments
Finance costs²		(103)	(148)
Corporate costs³		(41)	(40)
Other net (expenses)/income⁴		(2)	(13)
Adjusted operating Group MCEV earnings before tax from core operations		1,550	1,352
¹The prior period has been restated for the impact of the change in accounting policies and reallocation of US Asset Management seed capital gains. Refer to note A1 for further information.
²This includes interest payable from Old Mutual plc to non-core operations of £11 million (December 2012: £18 million).
³Central costs of £13 million (December 2012: £14 million) are allocated to the covered business and provisioned in the VIF. This is based on the proportion of management expenses that are incurred by the covered business as a percentage of total management expenses incurred by the Group. Hence net corporate costs under MCEV of £41 million (December 2012: £40 million) differ from the IFRS amount of £54 million (December 2012: £54 million).
⁴Other net expenses exclude capital gains on seed capital in the US asset management business of £9 million (December 2012: £14 million). These seed capital gains are included in the earnings of Old Mutual Bermuda (Non-core continuing operations) for MCEV reporting.

Adjusted operating Group MCEV earnings per share
For the year ended 31 December 2013

					£m
Year ended 31 December 2013	Notes	Core continuing operations	Non-core continuing operations	Discontinued operations²	Total
Adjusted operating Group MCEV earnings before tax		1,550	31	-	1,581
Covered business	B2	612	31	-	643
Other business		938	-	-	938
Tax on adjusted operating Group MCEV earnings		(423)	1	-	(422)
Covered business	B2	(161)	1	-	(160)
Other business		(262)	-	-	(262)

Adjusted operating Group MCEV earnings after tax		1,127	32	-	1,159
Non-controlling interests
Ordinary shares		(273)	-	-	(273)
Preferred securities		(19)	-	-	(19)
Adjusted operating MCEV earnings after tax attributable to equity holders¹		835	32	-	867
Adjusted operating Group MCEV earnings per share		17.3	0.6	-	17.9
Adjusted weighted average number of shares (millions)					4,836
					£m
Year ended 31 December 2012 Restated³	Notes	Core continuing operations	Non-core continuing operations	Discontinued operations²	Total
Adjusted operating Group MCEV earnings before tax		1,352	99	28	1,479
Covered business	B2	454	99	18	571
Other business		898	-	10	908
Tax on adjusted operating Group MCEV earnings		(373)	-	(3)	(376)
Covered business	B2	(118)	-	-	(118)
Other business		(255)	-	(3)	(258)

Adjusted operating Group MCEV earnings after tax		979	99	25	1,103
Non-controlling interests
Ordinary shares		(277)	-	-	(277)
Preferred securities		(50)	-	-	(50)
Adjusted operating MCEV earnings after tax attributable to equity holders¹		652	99	25	776
Adjusted operating Group MCEV earnings per share		12.9	2.0	0.5	15.4
Adjusted weighted average number of shares (millions)					5,029
¹Adjusted operating Group MCEV earnings 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.
²Discontinued operations include earnings from previously owned Nordic business.
³The prior period has been restated for the impact of the change in accounting policies and reallocation of US Asset Management seed capital gains. Refer to note A1 for further information.

Group MCEV statement of earnings
For the year ended 31 December 2013
			£m
	Notes	Year ended 31 December 2013	Year ended 31 December 2012 Restated¹
Adjusted operating Group MCEV earnings before tax from core continuing operations		1,550	1,352
Adjusted operating Group MCEV earnings before tax from OM Bermuda non-core operations		31	99
Adjusted operating Group MCEV earnings before tax from continuing operations²		1,581	1,451
Adjusting items from continuing operations	C2	389	492
Total Group MCEV earnings before tax from continuing operations		1,970	1,943
Income tax attributable to shareholders		(528)	(490)
Total Group MCEV earnings after tax from continuing operations		1,442	1,453
Total Group MCEV earnings after tax from discontinued operations		3	600
Total Group MCEV earnings after tax for the financial period		1,445	2,053

Total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent		1,170	1,747
Non-controlling interests
Ordinary shares		256	256
Preferred securities		19	50
Total Group MCEV earnings after tax for the financial period		1,445	2,053
Basic total Group MCEV earnings per ordinary share (pence)		25.5	36.6
Weighted average number of shares (millions)		4,597	4,768
¹The prior period has been restated for the impact of the change in accounting policies and reallocation of US Asset Management seed capital gains. Refer to note A1 for further information.
²Refer to note A2 for the definition of adjusted operating Group MCEV earnings.

A: MCEV policies

A1: Basis of preparation

The Market Consistent Embedded Value methodology (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 released interim transitional guidance in September 2012 confirming that there was no requirement to make allowance for Solvency II in subsequent MCEV disclosures.

The Principles have been materially complied with in the preparation of MCEV information for Emerging Markets and Old Mutual Wealth businesses at 31 December 2013. The detailed methodology and assumptions made in presenting this supplementary information are set out in notes A2 and A3.

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

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

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

n The adjusted Group MCEV which is 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 Employee Share Ownership Plan (ESOP) schemes.

(a) Changes in basis of preparation

Old Mutual Bermuda valuation basis change

For the current period, the valuation basis for Old Mutual Bermuda has been simplified from a full bottom-up MCEV calculation to an adjusted IFRS basis. The revised approach uses the IFRS net asset value calculated in accordance with the primary IFRS financial statements, with variable annuity guarantee liabilities restated to reflect a best estimate valuation consistent with MCEV principles.

The main effect of this change is the removal of items previously included in the value of in-force business, apart from expected variable annuity guarantee losses, which are now included in ANW. Items no longer included in the MCEV calculation as a result of not calculating the value of in-force business include the cost of non-hedgeable risk, frictional costs and future annuity contract fee income, net of expenses.

This simplification is part of the consolidation of reporting processes for Old Mutual Bermuda following a significant run-off of the book (given surrenders of variable annuities post the five-year top-up anniversaries) and management actions taken to de-risk the business. As a result, Old Mutual Bermuda's value-in-force has become less significant to the Group from a valuation and risk perspective. Earnings calculated on the adjusted IFRS basis are expected to be similar to bottom-up calculated MCEV earnings.

As a result of this change a simplified analysis of earnings approach has been adopted, with all earnings recorded under other operating experience variances, apart from variable annuity guarantee performance (net of hedge performance) and seed capital gains and losses, which are recorded in economic variances.

Comparative information has not been restated to reflect the valuation basis change.

Emerging Markets valuation basis for certain African entities

The covered business within certain African entities (Zimbabwe, Kenya, Malawi, Swaziland and Nigeria) has been included on an MCEV basis for 2013 year end reporting. Simplified approaches have been used where appropriate to the size of the business, or where insufficient market data is available to perform full bottom-up MCEV calculations. Previously these entities were included in covered business on a basis consistent with the primary IFRS financial statements.

Comparative information has not been restated to reflect this valuation change.

(b) Restatement of comparative information

IAS 19 (Employee Benefits) and IFRS 10 (Consolidated Financial Statements) restatements

The Group has adopted IAS 19 (Employee Benefits) and IFRS 10 (Consolidated Financial Statements) with a date of initial application of 1 January 2013. Further information on the key amendments to these statements are detailed in note I1 in the primary Group IFRS financial statements.

The change in accounting policies has been applied retrospectively and as a result, the comparative information for the year ended 31 December 2012 has been restated accordingly.

US Asset Management seed capital gains

The US asset management seed capital forms part of the adjusted net worth of Old Mutual Bermuda for MCEV reporting purposes following the transfer of ownership in July 2012. Seed capital gains of £9 million (December 2012: £14 million) are recorded in economic variances in MCEV reporting and are therefore excluded from operating MCEV earnings. This differs from the approach for IFRS reporting where seed capital gains are included in adjusted operating profit. The December 2012 operating MCEV earnings have been restated to reflect this treatment.

A2: Methodology

(a) Introduction

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

The MCEV consists of the sum of the following components:

n Adjusted net worth (ANW), which excludes acquired intangibles and goodwill, consisting of:

- free surplus allocated to the covered business; and

- required capital to support the covered business.

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

The adjusted net worth is the market value of shareholders' assets held in respect of the covered business after allowance for the liabilities which are determined 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 entities where the covered business is not material, the treatment within this supplementary information is the same as in the primary IFRS financial statements (i.e. expected future profits for this business are not capitalised for MCEV reporting purposes).

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 is excluded from covered business, for example:

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

n Individual unit trusts and some group market-linked business written by the asset management companies in South Africa through the life company as profits from this business arise in the asset management and asset administration companies.

The treatment within this supplementary information of non-covered business is the same as in the primary financial statements, except for the recognition of certain non-controlling interests in Zimbabwe. 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.

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

(d) Required capital

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

n Economic capital

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

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

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

Economic capital for the covered business is based upon Old Mutual's internal assessment of risks inherent in the underlying business. It measures capital requirements on a basis consistent with a 99.5% confidence level over a one-year time horizon. The confidence level has been changed from 99.93% to 99.5% for Group economic capital calculations at 31 December 2013 to ensure consistency with Solvency II principles and general industry practice.

For Emerging Markets and Old Mutual Wealth, required capital determined with reference to internal management objectives is the most onerous and is the capital measure used for the determination of required capital for MCEV reporting. 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 in South Africa. On consolidation this investment is shown separately.

For Old Mutual Bermuda, regulatory required capital is the most onerous capital measure, and continues to be the case despite the reduction in the Bermuda Monetary Authority (BMA) regulatory capital requirements applicable at 31 December 2013.

In September 2013, the BMA approved a reduction in capital resource requirements from £433 million ($703 million) to £252 million ($418 million). The capital requirement will be kept constant to that approved by the BMA until there is notification of a revised capital requirement after the filing of the 2013 annual return.

The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements.
							£m
		At 31 December 2013			At 31 December 2012
	Notes	Required capital (a)	Regulatory capital (b)	Ratio (a/b)	Required capital (a)	Regulatory capital (b)	Ratio (a/b)
Emerging Markets	B3	1,113	802	1.4	1,312	923	1.4
Old Mutual Wealth¹	B3	326	228	1.4	294	212	1.4
Old Mutual Bermuda	B3	252	252	1.0	433	433	1.0
Total		1,691	1,282	1.3	2,039	1,568	1.3
¹Local regulators for many of the Old Mutual Wealth countries allow intangible assets to be included as part of 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.

(e) Value of in-force (VIF) covered business

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

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

n Time value of financial options and guarantees; less

n Frictional costs of required capital; less

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

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

(f) Present value of future profits

The PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that are expected to emerge from the in-force covered business, including the value of contractual renewal of in-force business, on a best estimate basis where assumed earned rates of return and discount rates are equal to the risk free reference rates. This is also known as a deterministic certainty equivalent valuation of future distributable earnings, and is described in more detail in note A3. Any limitations on distribution of such earnings due to statutory or internal capital requirements are taken into account separately in the calculation of frictional costs of required capital.

PVFP captures the intrinsic value of financial options and guarantees on in-force covered business which are not included in the local statutory reserves forming part of ANW, but excludes any additional allowance for the time value of financial options and guarantees.

(g) Financial options and guarantees

Allowance is made in the determination of 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 local statutory reserves.

The calculation of the value of financial options and guarantees (including the allowance in ANW and VIF components of MCEV) is 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 future 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. Closed form solutions are also applied in Europe provided the nature of any guarantees is not complex.

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

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

n Management has some discretion in managing the 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 (for example, with due consideration of the Principles and Practices of Financial Management (PPFM), in the South African business);

- is 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 the Board, where applicable.

Assumptions that depend on the market performance (such as bonus rates) are set relative to the risk free reference rates (subject to contractual guarantees) and assuming that all market participants are subjected to the same market conditions.

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

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

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

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

- changes in the surrender values.

In determining the value of financial options and guarantees, an appropriate number of simulations are run to ensure that a reasonable degree of convergence of results has been obtained.

Emerging Markets

The financial options and guarantees mainly relate to the guaranteed portion of smoothed bonus business, maturity guarantees and guaranteed annuity options.

As required by the applicable Actuarial Society of South Africa practice note, the value of the financial options and guarantees included in the statutory reserves in the South African businesses has been valued using a risk-neutral market consistent asset model, and is referred to as the 'Investment Guarantee Reserve' (IGR). As the value of financial options and guarantees is held in local statutory reserves that form part of ANW, no further allowance is needed for the time value of financial options and guarantees.

The IGR includes an explicit discretionary margin 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. The value of future anticipated releases of the discretionary margin is included in the VIF.

Old Mutual Wealth

The financial options and guarantees mainly relate to guaranteed annuity options on German deferred annuity contracts and minimum investment return guarantees on French unit-linked investment products. The time value of financial options and guarantees has reduced significantly over 2013 as a result of modelling changes made in Germany. The majority of the value of financial options and guarantees for Old Mutual Wealth is held in local statutory reserves that form part of ANW.

Bermuda

The financial options and guarantees mainly relate to the guaranteed minimum accumulation benefits on variable annuity contracts. Reserves for financial options and guarantees, calculated on a best estimate valuation basis consistent with MCEV principles, are included in ANW.

(h) Frictional costs of required capital

From the shareholders' perspective there is a cost due to restrictions on the distribution of required capital that is locked in entities within the Group. Where material, an allowance has been made for the frictional costs in respect of the taxation on investment return (income and capital gains) and investment costs on the assets backing the required capital for covered business. The allowance for taxation is based on the taxation rates applicable to investment earnings on assets backing the required capital.

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(CHNR)

Sufficient allowance for the majority of financial risks has been made in the PVFP and the time value of financial options and guarantees using techniques that are similar to the type of approaches used in capital markets. In addition, the modelling of some non-hedgeable non-financial risks is incorporated as part of the calculation of the PVFP (for example, to the extent that expected operational losses are incorporated in the maintenance expense assumptions) or the time value of financial options and guarantees (for example, dynamic policyholder behaviour such as the interaction of the investment scenario and the persistency rates). Residual non-financial risks include, for example, liability risks such as mortality, longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk.

For 31 December 2012 information reported for Old Mutual Bermuda, in addition to the allowance for residual non-hedgeable risks, CNHR includes an allowance for hedge ineffectiveness risk and credit spread risk, which are not modelled in the PVFP or TVOG calculations. In 2013, Old Mutual Bermuda moved from a bottom-up MCEV calculation basis to an adjusted IFRS basis with the CNHR no longer calculated.

For 31 December 2013 information reported for Old Mutual Zimbabwe, the CNHR includes an allowance for financial as well as non-financial risks to allow for financial risks that are not allowed for in the PVFP due to insufficient market data.

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. With the exception of operational risk, most residual non-hedgeable risks for the Group as a whole have a symmetric impact on shareholder value, i.e. commensurate upside and downside impacts.

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

The residual non-hedgeable risk capital measure is determined using an internal capital model based on appropriate shock scenarios consistent with a 99.5% confidence level over a one-year time horizon, and is calculated using the same methodology used to determine economic capital. The internal capital model makes allowance for certain management actions, such as reductions in bonus rates, where deemed appropriate. The residual non-hedgeable risk capital makes an allowance for non-linearities between hedgeable and non-hedgeable risks.

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

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

n No diversification benefits are recognised between hedgeable and non-hedgeable risks of the covered business.

n No diversification benefits are recognised between covered and non-covered business.

A cost of capital charge of 2.0% (2012: 2.0%) has been applied to residual symmetric and asymmetric non-hedgeable capital at a business unit level over the life of the contracts.This rate is derived by considering a market based view of required return on equity for the covered business, and then deducting risk free investment returns, frictional costs and an allowance for franchise value. This translates into an equivalent cost of capital rate of approximately 2.4% (2012: 2.4%) being applied to the diversified capital required in respect of such non-hedgeable risks for Emerging Markets and Old Mutual Wealth as a combined group (no CNHR is calculated for Old Mutual Bermuda under the new valuation approach).

(j) Participating business

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

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

(k) Valuation of assets and treatment of unrealised losses

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

No smoothing of market values or unrealised gains/losses is applied in determining the market value of assets.

(l) Asset mix

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

(m) Consolidation adjustments

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

(n) Look through principle

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

(o) Taxation

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

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

United Kingdom:

The Emergency Budget that was held in June 2010 set in motion a series of reductions to the UK's mainstream corporation tax rate. The impact of the corporation tax rate reducing from 23% down to 21%, applicable from April 2014 and the reduction to 20%, applicable from April 2015, has improved the Old Mutual Wealth MCEV position by £18 million.

South Africa:

The Taxation Laws Amendment Bill was released in October 2013, effecting changes to the tax relief in respect of sales, administration and indirect expenses attributable to income incurred in individual and corporate policyholder funds (effective from 1 January 2013). This had the effect of increasing the expense relief ratio, which improved expense experience variances in 2013. Further changes to taxation laws are anticipated in 2014 which are expected to have an adverse effect on post-tax earnings. However no changes have been made to MCEV assumptions at 31 December 2013 to reflect these recent or anticipated changes until the changes are more certain.

(p) Value of debt

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

The IFRS value of total debt is £1,345 million (2012: £1,570 million) and the MCEV value is £1,420 million (2012: £1,607 million).

Where either the principal or the coupon of the debt security has been swapped into an alternate currency, the fair value of these derivative instruments of £50 million (2012: £96 million) has not been included in the value of debt; however, it is included in the Net Other Business value of £366 million (2012: £34 million) (Adjusted Group MCEV by line of business). Further information relating to the debt securities can be found in Note E1 in the Notes to the Consolidated Financial Statements.

(q) New business and renewals

The market consistent value of new business (VNB) measures the value of the future profits expected to emerge from all new business sold, and in certain 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 (for example, 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.

The key principles applied in calculating VNB are noted below.

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

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

n VNB is calculated at point of sale and rolled forward to the end of the reporting period.

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

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

n VNB is calculated net of tax, reinsurance and non-controlling interests.

n Economic and operating variances are not attributed to VNB.

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

(r) Analysis of MCEV earnings

An analysis of MCEV earnings provides a reconciliation of the MCEV for covered business at the beginning of the reporting period and the MCEV for covered business at the end of the reporting period. The analysis is completed on a post-tax basis after the deduction of minority interests.

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

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

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

- Expected earnings on free surplus and required capital and the expected change in VIF assuming that the assets earn the beginning of period risk free reference rates as well as the deterministic release of the time value of options and guarantees, frictional costs and CNHR; and

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

n Transfers from VIF and required capital to free surplus includes the release of required capital and modelled profits from VIF into free surplus in respect of business that was in-force at the beginning of the reporting period. These transfers do not change the overall MCEV.

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

- Development costs are reported separately from other expense experience variances in the MCEV analysis and reflect the cost of projects related to the development of new and existing business, infrastructure and systems, from which we expect to earn higher profits (either through increased sales or lower expenses) in future.

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

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

n Total MCEV earnings also includes 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) 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 regulatory driven changes, the impact of changes to modelled taxation and certain costs to ensure consistency of treatment with IFRS Adjusted Operating Profit.

An analysis of MCEV earnings requires non-operating closing adjustments. These mainly include 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 business unit reporting currency, except for core covered business and total covered business where the calculations are performed in sterling.

The anticipated expected existing business contribution for the 12 months following the year ended 31 December 2013 (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. For comparability against current year earnings, the average exchange rates over 2013 are used. Therefore the expected existing business contribution for the financial year ending 31 December 2014 ultimately reflected in the 2014 financial statements may differ from these results.

(s) Group MCEV presentation

The presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the unadjusted IFRS net asset value, with the exception of US Asset Management that is valued at IFRS NAV allowing for the value of the loan note held with Old Mutual plc. A mark to market adjustment is therefore not performed for external borrowings and other non-covered business items not already reported on a mark to market basis under IFRS.

(t) Adjusted operating Group MCEV earnings

For all businesses, adjusted operating MCEV earnings excludes 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 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.

A3: Assumptions

Non-economic assumptions

The appropriate non-economic projection assumptions for future experience including, mortality, persistency and expense assumptions 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 (for example, 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.

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, maintenance expense assumptions determined for certain businesses in Old Mutual Wealth do make some considerations for future cost reductions:

n Expense assumptions for run-off businesses consider cost reductions in future in line with management actions that would be taken as in-force volumes decrease.

n Expense assumptions for the UK Legacy business reflect anticipated cost reductions arising from the outsourcing of the administration function for this business.

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

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

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

n In line with legislation in Germany, a specified proportion of miscellaneous profits are shared with policyholders. The revenue on in-force business can be reduced by various expense items incurred in any year.

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

Proportion of Group holding company expenses attributable to long-term business		%
	At 31 December 2013	At 31 December 2012
Emerging Markets	17	18
Old Mutual Wealth	8	9
Old Mutual Bermuda¹	n/a	n/a
Total	25	27
¹Based on materiality, no Group holding expenses are allocated to Old Mutual Bermuda.

Economic assumptions

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

Under a market consistent valuation, economic assumptions are determined such that projected cash flows are valued in line with the prices of similar cash flows that are traded on the capital markets. In practice for the PVFP calculation, a certainty equivalent method is used which assumes that actual assets held earn risk free reference rates (including any liquidity adjustment), before tax and investment management expenses, 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 a valuation technique that ensures consistency with current market prices and over time the expectation is that risk premiums will still be earned on assets such as equities and corporate bonds.

Due to the lack of available market data for Old Mutual Zimbabwe, weighted average investment return forecasts are used to determine appropriate economic assumptions.

(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 that is appropriate to the currency of the cash flows.

n For Europe the swap yield curve is obtained from Bloomberg.

n 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 determine the value of financial options and guarantees.

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

At 31 December 2013, no adjustments have been 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 and Fixed Bond businesses. A liquidity premium adjustment is applied to OMLAC(SA)'s Fixed Bond business as OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in excess of the risk free rate and the duration of the asset portfolio and the liability duration are a good match (meaning the asset portfolio is held to maturity). Cash flows on this product are 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 2013 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 2013 by adding 50 bps (2012: 50bps) of liquidity premium for this business to the swap rates used for setting investment return and discounting assumptions. For OMLAC(SA)'s Fixed Bond products 40 bps (2012: 45 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 2013, we compared the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises.

At those durations where swap yields are not available, for example, 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 yield curve has been derived from mid swap rates at the reporting date. Expense inflation rates have been derived by comparing real rates of return against nominal risk free rates for each territory, with adjustments for higher business unit specific inflation where applicable. The risk free reference spot yields (excluding any applicable liquidity adjustments) at various terms for each of the significant regions are provided in the table that follows.

Risk free reference spot yields (excluding any applicable liquidity adjustments)				%
	GBP	EUR	USD	ZAR
At 31 December 2013
1 year	0.7	0.4	0.3	5.7
5 years	2.2	1.3	1.8	7.7
10 years	3.1	2.2	3.3	8.8
20 years	3.6	2.9	4.1	9.7

At 31 December 2012
1 year	0.7	0.3	0.3	5.1
5 years	1.0	0.8	0.9	6.0
10 years	1.9	1.6	1.9	7.1
20 years	2.9	2.2	2.8	7.5

(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 spot 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 Old Mutual 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.

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

(d) Expected asset returns in excess of the risk free reference rates

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

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

n The equity risk premium is 3.7% for Africa and 3% for Europe

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

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

n Returns on corporate bonds reference actual yields from assets held

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

According to the simplified analysis of earnings approach, earnings for the Old Mutual Bermuda business no longer reflect an expected return component.

B: Segment information
B1: Components of Group MCEV and Adjusted Group MCEV
			£m
	Notes	At 31 December 2013	At 31 December 2012
Adjusted net worth attributable to ordinary equity holders of the parent		5,450	5,774
Equity		7,270	7,816
Adjustment to IFRS net asset value	C4	(1,294)	(1,360)
Adjustment to remove perpetual preferred callable securities		(526)	(682)
Value of in-force business	B3	3,306	3,401
Present value of future profits		3,752	3,946
Additional time value of financial options and guarantees		(2)	(53)
Frictional costs		(222)	(221)
Cost of residual non-hedgeable risks		(222)	(271)

Group MCEV		8,756	9,175
Adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value		1,157	1,281
Adjustment for value of own shares in ESOP schemes¹		123	126
Adjustment for present value of Black Economic Empowerment scheme deferred consideration		201	245
Adjustment to bring external debt to market value		(75)	(37)
Adjusted Group MCEV		10,162	10,790

Group MCEV value per share (pence)		178.8	187.5
Adjusted Group MCEV per share (pence)		207.5	220.5
Number of shares in issue at the end of the financial period less treasury shares (millions)		4,897	4,893

Return on Group MCEV (RoEV) per annum from core operations		9.1%	6.7%
Return on Group MCEV (RoEV) per annum from continuing non-core operations		0.3%	1.0%
Return on Group MCEV (RoEV) per annum from discontinued operations		0.0%	0.3%
Return on Group MCEV (RoEV)² per annum		9.4%	8.0%
¹Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2012 and 31 December 2013 is the net effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants during the period and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the financial period.
²The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £867 million (December 2012: £776 million) divided by the opening Group MCEV.

B: Segment information continued
B2: Adjusted operating MCEV earnings for the covered business


	£m
Year ended 31 December 2013	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business¹
Adjusted operating Group MCEV earnings before tax	643	612	450	162	31	-
Tax on adjusted operating Group MCEV earnings	(160)	(161)	(122)	(39)	1	-
Adjusted operating Group MCEV earnings after tax	483	451	328	123	32	-

	£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business¹
Adjusted operating Group MCEV earnings before tax	571	454	459	(5)	99	18
Tax on adjusted operating Group MCEV earnings	(118)	(118)	(131)	13	-	-
Adjusted operating Group MCEV earnings after tax	453	336	328	8	99	18

¹ Discontinued covered business includes earnings from previously owned Nordic business.

B3: Components of MCEV of the covered business
	£m
At 31 December 2013	Total covered business	Core covered business	Emerging Markets¹	Old Mutual Wealth	Non-core covered business²
Adjusted net worth	2,561	2,196	1,621	575	365
Free surplus	870	757	508	249	113
Required capital	1,691	1,439	1,113	326	252
Value of in-force	3,306	3,306	1,332	1,974	-
Present value of future profits	3,752	3,752	1,660	2,092	-
Additional time value of financial options and guarantees³	(2)	(2)	-	(2)	-
Frictional costs	(222)	(222)	(206)	(16)	-
Cost of residual non-hedgeable risks	(222)	(222)	(122)	(100)	-

MCEV	5,867	5,502	2,953	2,549	365

	£m
At 31 December 2012	Total covered business	Core covered business	Emerging Markets¹	Old Mutual Wealth	Non-core covered business²
Adjusted net worth	2,984	2,304	1,838	466	680
Free surplus	945	698	526	172	247
Required capital	2,039	1,606	1,312	294	433
Value of in-force	3,401	3,456	1,478	1,978	(55)
Present value of future profits	3,946	3,950	1,828	2,122	(4)
Additional time value of financial options and guarantees³	(53)	(14)	-	(14)	(39)
Frictional costs	(221)	(220)	(207)	(13)	(1)
Cost of residual non-hedgeable risks	(271)	(260)	(143)	(117)	(11)

MCEV	6,385	5,760	3,316	2,444	625
¹The required capital in respect of Emerging Markets is partially covered by the market value of the Group's investments in banking in South Africa. On consolidation these investments are shown separately.
²For 2013, the valuation basis for Old Mutual Bermuda has been simplified from a full bottom-up MCEV calculation to an adjusted IFRS basis and the valuation therefore does not include a value of in-force component.
³The time value of options and guarantees is fully reflected in reserves held as part of ANW in Emerging Markets and Old Mutual Bermuda, and is mostly covered by reserves held in Old Mutual Wealth. The significant reduction in the time value of options and guarantees in Old Mutual Wealth in 2013 is due to modelling changes.

B4: Analysis of covered business MCEV earnings (after tax)
										£m
Total covered business	Year ended 31 December 2013					Year ended 31 December 2012
	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	945	2,039	2,984	3,401	6,385	685	1,996	2,681	4,536	7,217
New business value	(261)	148	(113)	325	212	(293)	163	(130)	327	197
Expected existing business
contribution (reference rate)	23	50	73	126	199	20	71	91	156	247
Expected existing business
contribution (in excess of
reference rate)	6	10	16	38	54	3	29	32	49	81
Transfers from VIF and
required capital to free
Surplus	666	(170)	496	(496)	-	695	(216)	479	(479)	-
Experience variances	(47)	38	(9)	14	5	(14)	17	3	6	9
Assumption changes	6	(5)	1	(39)	(38)	34	(7)	27	7	34
Other operating variance	(26)	5	(21)	72	51	(26)	18	(8)	(107)	(115)
Operating MCEV earnings	367	76	443	40	483	419	75	494	(41)	453
Economic variances	197	21	218	157	375	258	3	261	259	520
Other non-operating variance	154	(178)	(24)	(30)	(54)	(284)	240	(44)	(3)	(47)
Total MCEV earnings	718	(81)	637	167	804	393	318	711	215	926
Closing adjustments	(793)	(267)	(1,060)	(262)	(1,322)	(133)	(275)	(408)	(1,350)	(1,758)
Capital and dividend flows	(658)	7	(651)	-	(651)	41	(3)	38	1	39
Foreign exchange variance	(105)	(274)	(379)	(320)	(699)	(54)	(145)	(199)	(139)	(338)
MCEV of sold business	15	-	15	-	15	(120)	(127)	(247)	(1,212)	(1,459)
Other¹	(45)	-	(45)	58	13	-	-	-	-	-

Closing MCEV	870	1,691	2,561	3,306	5,867	945	2,039	2,984	3,401	6,385
Return on MCEV (RoEV)² per annum					7.6%					6.3%
¹Other includes the change in valuation basis in Old Mutual Bermuda, the inclusion of certain African entities (Zimbabwe, Kenya, Malawi, Swaziland and Nigeria) on an MCEV basis and an adjustment to allow for non-controlling interests in Zimbabwe. ²Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
						£m
			Year ended 31 December 2013					Year ended 31 December 2012
			Adjusted net worth	Value of in-force	MCEV			Adjusted net worth	Value of in-force	MCEV
Experience Variances			(9)	14	5			3	6	9
Persistency			(13)	15	2			51	10	61
Risk			38	5	43			52	-	52
Expenses			(24)	1	(23)			(48)	12	(36)
Development costs			(51)	1	(50)			(43)	(1)	(44)
Other			41	(8)	33			(9)	(15)	(24)
Assumption changes			1	(39)	(38)			27	7	34
Persistency			(16)	(3)	(19)			12	(25)	(13)
Risk			5	-	5			13	37	50
Expenses			18	(12)	6			12	12	24
Development costs			-	(18)	(18)			-	(15)	(15)
Other			(6)	(6)	(12)			(10)	(2)	(12)

						£m
						Year ended 31 December 2014
						Free surplus	Required capital	Adjusted net worth	Value of in-force	MCEV
Expected existing business contribution (reference rate)						30	61	91	144	235
Expected existing business contribution (in excess of reference rate)						5	10	15	43	58

B5: Analysis per business unit
						£m
	Year ended 31 December 2013
	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business¹	Discontinued covered business²
Opening MCEV	6,385	5,760	3,316	2,444	625	-
New business value	212	212	136	76	-	-
Expected existing business contribution (reference rate)	199	199	169	30	-	-
Expected existing business contribution (in excess of reference rate)	54	54	30	24	-	-
Experience variances	5	(27)	1	(28)	32	-
Assumption changes	(38)	(38)	(12)	(26)	-	-
Other operating variance	51	51	4	47	-	-
Operating MCEV earnings	483	451	328	123	32	-
Economic variances	375	355	241	114	20	-
Other non-operating variance	(54)	(54)	(8)	(46)	-	-
Total MCEV earnings	804	752	561	191	52	-
Closing adjustments	(1,322)	(1,010)	(924)	(86)	(312)	-
Capital and dividend flows	(651)	(300)	(187)	(113)	(351)	-
Foreign exchange variance	(699)	(701)	(713)	12	2	-
MCEV of acquired/sold business	15	15	-	15	-	-
Other³	13	(24)	(24)	-	37	-

Closing MCEV	5,867	5,502	2,953	2,549	365	-
Return on MCEV (RoEV)⁴ per annum	7.6%	7.8%	11.0%	5.0%	4.9%	-
Transfers from VIF and required capital to free surplus						£m
Year ended 31 December 2013	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business¹	Discontinued covered business²
Transfer from value of in-force	(496)	(496)	(189)	(307)	-	-
Transfer from required capital	(170)	(170)	(130)	(40)	-	-
Transfer to free surplus	666	666	319	347	-	-

						£m
Year ended 31 December 2013	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business¹	Discontinued covered business²
Experience variances	5	(27)	1	(28)	32	-
Persistency	2	2	(9)	11	-	-
Risk	43	43	40	3	-	-
Expenses	(23)	(23)	(17)	(6)	-	-
Development costs	(50)	(50)	(16)	(34)	-	-
Other	33	1	3	(2)	32	-

Assumption changes	(38)	(38)	(12)	(26)	-	-
Persistency	(19)	(19)	(25)	6	-	-
Risk	5	5	3	2	-	-
Expenses	6	6	25	(19)	-	-
Development costs	(18)	(18)	(15)	(3)	-	-
Other	(12)	(12)	-	(12)	-	-

¹A simplified analysis of earnings approach has been adopted for Old Mutual Bermuda according to the new adjusted IFRS valuation approach.
²Discontinued covered business relates to MCEV information for previously owned Nordic business.
³Other includes the change in valuation basis in Old Mutual Bermuda, the inclusion of certain African entities (Zimbabwe, Kenya, Malawi, Swaziland and Nigeria) on an MCEV basis and an adjustment to allow for non-controlling interests in Zimbabwe.
⁴Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from total covered and core covered business, which are calculated in sterling. For Emerging Markets for 2013, this been calculated after adjusting the opening balance for the inclusion of certain African entities (as above) on an MCEV basis and an adjustment to allow for non-controlling interests in Zimbabwe.

B5: Analysis per business unit

						£m
	Year ended 31 December 2012
	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business¹
Opening MCEV	7,217	5,718	3,172	2,546	66	1,433
New business value	197	197	135	62	-	-
Expected existing business contribution (reference rate)	247	239	193	46	8	-
Expected existing business contribution (in excess of reference rate)	81	55	32	23	26	-
Experience variances	9	(48)	(29)	(19)	39	18
Assumption changes	34	5	34	(29)	29	-
Other operating variance	(115)	(112)	(37)	(75)	(3)	-
Operating MCEV earnings	453	336	328	8	99	18
Economic variances	520	403	281	122	117	-
Other non-operating variance	(47)	(29)	(26)	(3)	-	(18)
Total MCEV earnings	926	710	583	127	216	-
Closing adjustments	(1,758)	(668)	(439)	(229)	343	(1,433)
Capital and dividend flows	39	(321)	(132)	(189)	360	-
Foreign exchange variance	(338)	(322)	(307)	(15)	(17)	1
MCEV of acquired/sold business	(1,459)	(25)	-	(25)	-	(1,434)

Closing MCEV	6,385	5,760	3,316	2,444	625	-
Return on MCEV (RoEV)² per annum	6.3%	5.9%	10.7%	0.3%	154.0%	1.3%
Transfers from VIF and required capital to free surplus						£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business¹
Transfer from value of in-force	(479)	(540)	(220)	(320)	61	-
Transfer from required capital	(216)	(190)	(153)	(37)	(26)	-
Transfer to free surplus	695	730	373	357	(35)	-

						£m
Year ended 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business	Discontinued covered business¹
Experience variances	9	(48)	(29)	(19)	39	18
Persistency	61	22	(1)	23	39	-
Risk	52	52	46	6	-	-
Expenses	(36)	(38)	(16)	(22)	2	-
Development costs	(44)	(44)	(25)	(19)	-	-
Other	(24)	(40)	(33)	(7)	(2)	18

Assumption changes	34	5	34	(29)	29	-
Persistency	(13)	(32)	(6)	(26)	19	-
Risk	50	50	49	1	-	-
Expenses	24	4	6	(2)	20	-
Development costs	(15)	(15)	(15)	-	-	-
Other	(12)	(2)	-	(2)	(10)	-

¹Discontinued covered business relates to MCEV information for previously owned Nordic business.
²Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart from total covered and core covered business, which are calculated in sterling.

Results highlights

Core covered business

n Favourable market performance led to positive economic variances of £241 million in Emerging Markets and £114 million in Old Mutual Wealth.

n Experience variances include development costs of £50 million. These costs reflect the cost of projects related to the development of new and existing business, infrastructure and systems. Excluding these costs, experience variances are a positive £23 million for the year.

n The depreciation of the rand against sterling over 2013 has led to reduced earnings from Emerging Markets in sterling and foreign exchange translation losses in MCEV closing adjustments.

Emerging Markets

New business: VNB increased by 16% (in rand) compared to 2012 mainly due to higher sales volumes in Mass Foundation Cluster, increased single premium savings sales in Retail Affluent and annuity sales in Corporate Segment. Margins were however reduced by unfavourable operating assumption changes implemented at the end of 2013 (including the strengthening of persistency assumptions in Mass Foundation Cluster and an expense allocation change in Mexico).

Experience variances: Experience variances are a positive £17 million after excluding the development costs of £16 million. Positive mortality experience on protection business was partially offset by negative expense variances and worsening persistency experience on the Mass Foundation Cluster protection business. Positive expense variances in South African business units were more than offset by negative expense variances arising from central costs and costs in other emerging markets businesses (particularly in the Mexican business and those African businesses which are still sub-scale).

Operating assumption changes: Assumption changes include the strengthening of persistency assumptions used for Mass Foundation Cluster products (including distinguishing between debit order and stop order persistency) and an increased provision for development expenditure. These impacts are partially offset by the lowering of per-policy maintenance expense assumptions in Mass Foundation Cluster following the significant growth in the size of this business and the achievement of unit cost efficiencies.

Other operating variances: This includes various modelling changes and management actions. The most significant impacts relate to the effect of changes to the modelling of annual premium and cover increases on Mass Foundation Cluster funeral products and an improvement in the methodology used to value capital preservation options sold with Retail Affluent in-payment annuity products. These effects were largely offsetting.

Economic variances: Economic variances are mainly due to favourable investment performance on policyholder and shareholder funds, which include growth in local equity markets, particularly in South Africa, Zimbabwe and Malawi, and increased returns from assets invested in overseas markets due to the depreciation of the rand.

Other non-operating variances: Negative non-operating variances in 2013 include the impact of refinements to the way in which shareholder tax is reflected in MCEV models.

Closing adjustments: Significant net transfer items relate to the purchase of the Latin American businesses and the purchase of additional African operations in Ghana and Nigeria, as well as net dividends paid (after allowing for dividends received from Nedbank and the Property and Casualty business). In addition, the significant negative foreign exchange variance has resulted from the depreciation of the rand against sterling over 2013.

Old Mutual Wealth

New business: VNB increased by 23% compared to 2012, largely due to lower acquisition costs following a number of cost saving measures implemented at the end of 2012. This impact was partially offset by a shift in UK Platform sales to products on less profitable charging structures. Overall sales for Old Mutual Wealth have declined slightly, with lower volumes from closed businesses mostly offset by improved sales volumes from Core and Manage for Value (Open) businesses.

Expected existing business contribution: The reduction in the expected existing business contribution compared to 2012 is mainly a result of lower risk-free yields at the start of 2013 used to calculate the expected investment return. In addition, the sale of Finland in 2012 has reduced the value of expected transfers in 2013.

Experience variances: Experience variances are a positive £6 million after excluding development costs of £34 million (including Wealth Interactive, Digital and the second phase of the Retail Distribution Review systems project). Positive persistency experience in the International business and positive mortality experience on protection products in Switzerland and Germany were partially offset by expense over-runs in the International business.

Operating assumption changes: Assumption changes are largely driven by the strengthening of per-policy maintenance expense assumptions in the International business and the reduction in assumed switching fee income in the International business (recorded in 'other'). Persistency assumption changes are driven by the lightening of persistency assumptions on the UK Legacy unit-linked business, partially offset by the impact of anticipated transfers to lower margin charging structures on the UK Platform.

Other operating variances: The positive impact is mainly due to modellingchanges implemented in the valuation of the German business. Other operating variances also include largely offsetting effects from the reduction in the CNHR due to improvements made to the assumed run off of risk capital and refinements to the pattern of assumed expenses in Germany as the business runs off.

Economic variances: Favourable economic variances were mainly due to investment gains on policyholder funds, which include favourable UK equity market performance, partially offset by the adverse impact of higher yields on the value of in-force business.

Other non-operating variances: Negative non-operating variances include the impact of changes in regulatory conditions of £24 million in Germany and £14 million in Switzerland, as well as costs related to the Nordic divestment of £13 million and the outsourcing of administration in the UK business of £10 million. These impacts are partially offset by the effect of reducing the UK shareholder tax rate from 23% to 20%.

Closing adjustments: Net transfers consist largely of the payment of dividends to Old Mutual plc. In addition, net transfers include capital contributions made to the UK Platform asset management business. MCEV of acquired/sold business consists of the release of a tax provision related to the sale of the Finnish business.

Non-core covered business (Old Mutual Bermuda)

As a result of the change to a simplified analysis of earnings approach, all earnings are recorded under other operating experience variances, apart from variable annuity guarantee performance (net of hedge performance) and seed capital gains and losses, which are recorded in economic variances.

Experience variances: Positive experience is largely driven by favourable variable annuity persistency experience of £9 million and assumption changes of £10 million following the five year anniversary top-up period. In addition, there have been positive contributions from spread income on OM Group (UK) Limited loan notes of £7 million (net of interest credited to fixed annuity business), and an excess of fee income over operating and commission expenses of £4 million.

Economic variances: Favourable economic variances are largely due to positive variable annuity guarantee performance of £14 million (net of hedge experience) driven by the rise in US interest rates. In addition, economic variances include unrealised gains on seed capital investments of £7 million.

Closing adjustments: Capital and dividend flows are made up of the repatriation of £351 million of capital resources via the cancellation of OM Group (UK) Limited loan notes. Other closing adjustments consist of the valuation basis change from a bottom-up MCEV calculation basis to an adjusted IFRS basis of £37 million.

C: Other supporting information

C1: Value of new business (after tax)

The tables below set out the regional analysis of the value of new business (VNB) after tax. New business profitability is measured by both the ratio of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under PVNBP margin and APE margin below. APE is calculated as recurring premiums plus 10% of single premiums. Old Mutual Bermuda is excluded from the tables below as it is closed to new business.

Year ended 31 December 2013								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors¹	APE	VNB	PVNBP margin	APE margin
Core covered business	466	6,470	8,965	5.4	1,113	212	2.4%	19%
Emerging Markets²	355	1,513	3,409	5.3	507	136	4.0%	27%
Old Mutual Wealth	111	4,957	5,556	5.4	606	76	1.4%	13%

Total covered business	466	6,470	8,965	5.4	1,113	212	2.4%	19%


Year ended 31 December 2012								£m
	Annualised recurring premiums	Single premiums	PVNBP	PVNBP capitalisation factors¹	APE	VNB	PVNBP margin	APE margin
Core covered business	517	5,953	8,665	5.2	1,112	197	2.3%	18%
Emerging Markets³	370	1,321	3,331	5.4	502	135	4.1%	27%
Old Mutual Wealth	147	4,632	5,334	4.8	610	62	1.2%	10%

Total covered business	517	5,953	8,665	5.2	1,112	197	2.3%	18%

¹The PVNBP capitalisation factors are calculated as follows: (PVNBP - single premiums)/annualised recurring premiums.
²New business figures for Rest of Africa (net of minority interests), other than Namibia, are included under Emerging Markets for the first time in 2013. This includes new business annualised recurring premiums of £15 million, single premiums of £49 million, APE of £20 million and VNB of £2 million in respect of the life business in Zimbabwe, Malawi, Kenya, Swaziland and Nigeria. 2012 information has not been restated to reflect this change.
³New business figures for Rest of Africa (gross of minority interests), other than Namibia, were not included in the 2012 information reported above as no value of new business and PVNBP calculations were reported for these businesses in 2012. The amounts for 2012, in respect of the life business in Zimbabwe, Malawi, Kenya, Swaziland and Nigeria are new business single premiums of £37 million, annualised recurring premiums of £17 million, and APE of £21 million.

Additional new business written in the Group:

The value of some of the new individual unit trust linked retirement annuities and pension fund asset management business written by the Emerging Markets long-term business of £1,011 million (2012: £1,093 million) is excluded from VNB above as the profits in 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.

Additionally, new business single premiums of £202 million, annualised recurring premiums of £33 million, and APE of £53 million, in respect of the life business in India and China have been excluded from 2013 information above, as no value of new business and PVNBP calculations have been performed for these businesses.

C2: Adjustments applied in determining total Group MCEV earnings before tax

						£m
	Year ended 31 December 2013			Year ended 31 December 2012
	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	-	(10)	(10)	-	(7)	(7)
Economic variances	513	(6)	507	657	(11)	646
Other non-operating variances	(57)	-	(57)	(56)	-	(56)
Loss on disposal of subsidiaries, associated undertakings and strategic investments	-	(4)	(4)	-	(12)	(12)
Other Group adjustments related to Nordic disposal	(13)	14	1	(14)	615	601
Restructuring costs	(10)	(10)	(20)	-	-	-
Dividends declared to holders of perpetual preferred callable securities	-	42	42	-	42	42
Premium paid on early repayment of senior debt	-	-	-	-	(71)	(71)
US Asset Management equity plans	-	(38)	(38)	-	(13)	(13)
Fair value (losses)/gains on Group debt instruments	-	(31)	(31)	-	(57)	(57)
Adjusting items	433	(43)	390	587	486	1,073
Adjusting items from continuing operations	446	(57)	389	605	(113)	492
Adjusting items from discontinued operations	(13)	14	1	(18)	599	581
Total MCEV adjusting items	433	(43)	390	587	486	1,073


C3: Other movements in IFRS net equity impacting Group MCEV						£m
						£m
	Year ended 31 December 2013			Year ended 31 December 2012
	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Fair value movements	-	17	17	-	(328)	(328)
Net investment hedge	-	43	43	-	160	160
Currency translation differences/exchange differences on translating foreign operations	(699)	(688)	(1,387)	(338)	(677)	(1,015)
Aggregate tax effects of items taken directly to or transferred from equity	-	10	10	-	9	9
Other movements¹	15	-	15	(1,444)	1,449	5
Net income recognised directly into equity	(684)	(618)	(1,302)	(1,782)	613	(1,169)
Capital and dividend flows for the year²	(651)	268	(383)	24	(1,238)	(1,214)
Other³	13	(10)	3	-	-	-
Net sale of treasury shares	-	55	55	-	8	8
Premium on preferred securities purchased	-	(21)	(21)	-	-	-
Other shares issued	-	11	11	-	33	33
Change in share based payment reserve	-	48	48	-	62	62
Other movements in net equity	(1,322)	(267)	(1,589)	(1,758)	(522)	(2,280)
¹December 2012 includes the sale of the Finnish branch in Old Mutual Wealth, the impact of the IAS 19 restatement and the transfer of the Nordic covered MCEV balance on disposal.
²December 2013 capital and dividend flows from the covered business includes the repatriation of funds from Old Mutual Bermuda to Old Mutual plc of £351 million. December 2012 capital and dividend flows from the covered business include the purchase of the Rest of Africa businesses by Emerging Markets from Old Mutual plc and the capital injection of £360 million into Old Mutual Bermuda. The special dividend of £915 million, paid in 2012, is included in non-covered business.
³Other for covered business includes the change in valuation basis in Old Mutual Bermuda, the inclusion of certain African entities (Zimbabwe, Kenya, Malawi, Swaziland and Nigeria) on an MCEV basis and an adjustment to allow for non-controlling interests in Zimbabwe.

C: Other key performance information continued

C4: Reconciliation of MCEV adjusted net worth to IFRS net asset value for the covered business
The table below provides a reconciliation of the MCEV adjusted net worth (ANW) to the IFRS net asset value (NAV) for the covered business.
	£m
At 31 December 2013	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business
IFRS net asset value¹	3,823	3,451	1,212	2,239	372
Adjustment to include long-term business on a statutory solvency basis	(759)	(759)	158	(917)	-
Inclusion of Group equity and debt instruments held in life funds	307	307	293	14	-
Goodwill	(769)	(769)	(8)	(761)	-
Other²	(41)	(34)	(34)	-	(7)
Adjusted net worth attributable to ordinary equity holders of the parent³	2,561	2,196	1,621	575	365

	£m
At 31 December 2012	Total covered business	Core covered business	Emerging Markets	Old Mutual Wealth	Non-core covered business
IFRS net asset value¹	4,308	3,600	1,295	2,305	708
Adjustment to include long-term business on a statutory solvency basis	(926)	(898)	187	(1,085)	(28)
Inclusion of Group equity and debt instruments held in life funds	367	367	364	3	-
Goodwill	(765)	(765)	(8)	(757)	-
Adjusted net worth attributable to ordinary equity holders of the parent³	2,984	2,304	1,838	466	680
¹IFRS net asset value is after elimination of inter-company loans.
²Other includes a restatement of Old Mutual Bermuda variable annuity guarantee liabilities from an IFRS basis to a best estimate valuation consistent with MCEV principles,partially offset by seed capital investment gains, and an adjustment to allow for non-controlling interests in Zimbabwe.
³A further £(32) million (2012: £(36) million) of adjustments relates to the non-covered business. This brings the total adjustment to IFRS net asset value to £1,294 million (2012: £1,360 million).

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

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

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

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

C5: Reconciliation of movements in Group and Adjusted Group MCEV (after tax)
							£m
		Year ended 31 December 2013			Year ended 31 December 2012
	Notes	Covered business MCEV	Non-covered business IFRS	Total Group MCEV	Covered business MCEV	Non-covered business IFRS	Total Group MCEV
Opening Group MCEV		6,385	2,790	9,175	7,217	2,491	9,708
Adjusted operating MCEV earnings	B4	483	384	867	453	323	776
Non-operating MCEV earnings		321	(18)	303	473	498	971
Total Group MCEV earnings		804	366	1,170	926	821	1,747
Other movements in IFRS net equity	C3	(1,322)	(267)	(1,589)	(1,758)	(522)	(2,280)
Closing Group MCEV		5,867	2,889	8,756	6,385	2,790	9,175
Adjustments to bring Group investments to market value	B1	-	1,406	1,406	-	1,615	1,615
Adjusted Group MCEV		5,867	4,295	10,162	6,385	4,405	10,790

D1: Sensitivity tests

The table below shows the sensitivity of the MCEV, value of in-force business at 31 December 2013 and the value of new business for the year ended 31 December 2013 to the following:

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

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

n 10 bps increase of liquidity spreads: Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately.

n 50bps contraction on corporate bond spreads.

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

n 10% decrease in discontinuance rates/10% decrease in maintenance expense: Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges.

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

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

n VNB 10% increase in acquisition expenses: For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges.

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

n Minimum capital requirement: Required capital equal to the minimum statutory requirement.

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

n 99.93% confidence level NHR capital: Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level.

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

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

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

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

Sensitivity tests: MCEV
	£m
	At 31 December 2013			At 31 December 2012
	MCEV	Value of in-force business	Value of new business	MCEV	Value of in-force business	Value of new business
Central assumptions	5,867	3,306	212	6,365	3,401	197
MCEV, VIF & VNB given changes in:
Economic assumption 100bps increase	5,739	3,188	199	6,253	3,285	180
Economic assumption 100bps decrease	5,990	3,412	222	6,471	3,505	215
Equity/property market value 10% increase	6,030	3,418	219	6,647	3,632	206
Equity/property market value 10% decrease	5,629	3,122	206	6,169	3,248	192
10bps increase of liquidity spreads	5,873	3,312	213	6,374	3,410	198
50bps contraction on corporate bond spreads	5,879	3,306	212	6,380	3,402	197
25% increase in equity/property implied volatilities	5,790	3,236	212	6,311	3,358	197
25% increase in swaption implied volatilities	5,854	3,293	212	6,353	3,389	197
10% decrease in discontinuance rates	6,031	3,473	251	6,519	3,568	237
10% decrease in maintenance expense	6,043	3,482	229	6,580	3,616	216
5% decrease in mortality/morbidity rates	5,976	3,415	227	6,495	3,531	214
5% decrease in annuitant mortality assumption	5,863	3,302	211	6,358	3,394	197
VNB 10% increase in acquisition expenses	n/a	n/a	197	n/a	n/a	180
VNB on closing economic assumptions	n/a	n/a	206	n/a	n/a	205
Minimum capital requirement	5,920	3,359	217	6,421	3,457	202
NHR capital diversification	5,893	3,332	215	6,408	3,444	201
99.93% confidence level NHR capital	5,822	3,261	207	6,306	3,342	192

This information is provided by RNS

The company news service from the London Stock Exchange

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