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OML
OLOML
OML - Old Mutual Plc Preliminary Results for the year ended 31 December 2009
and Strategy Update
OLD MUTUAL PLC
ISIN CODE: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
11 March 2010
Old Mutual plc Preliminary Results for the year ended 31 December 2009 and
Strategy Update
Focus on Long-Term Value Creation
Financial Summary 2009 2008
Adjusted operating profit before tax (IFRS basis)* GBP1,170m GBP1,136m
Adjusted operating earnings per share (IFRS basis)** 12.1p 14.9p
Adjusted MCEV per share 171.0p 117.6p
IFRS book value per share 147p 134p
Funds under management GBP285bn GBP265bn
Final dividend 1.5p -
Strong performance in challenging year
- Substantial progress in delivering against the five strategic priorities
set last year
- Positive second half sales momentum with fourth quarter life APE sales up
29%, strongest quarter for the LTS business for at least 2 years
- Long-Term Savings (LTS): IFRS pre-tax AOP up 52% to GBP685 million (2008:
GBP452 million) reflecting turnaround in US Life
- Nedbank: resilient performance in tough market and improved capital
strength
- US Asset Management: funds under management at 31 December 2009 up 9% to
$261 billion
- FGD surplus at 31 December 2009 increased to GBP1.5 billion (31 December
2008: GBP0.7 billion)
- Increase in IFRS book value and MCEV per share during the year
- Return to dividend payments Board recommending 1.5p final dividend for
2009 with scrip alternative
Clear strategy focused on building a long-term savings, protection and
investment group
- Anticipated partial IPO of US Asset Management to fund growth, enhance
market profile and provide valuation visibility
- Group-wide cost saving target of GBP100 million per annum by the end of
2012;
further cost and revenue synergies identified
- Specific cost saving and return on equity targets for LTS businesses;
overall LTS return on equity target of 16%-18% by the end of 2012
- Further rationalisation planned, including exiting markets with sub-scale
operations or no prospect of meeting 15% RoE hurdle
- Reducing exposure to US by exploring disposal of US Life business following
completion of turnaround
- Proceeds from the rationalisation and from retained earnings expected to be
used to reduce Group debt by at least GBP1.5 billion
Julian Roberts, Group Chief Executive, commented:
"Our operating results for 2009 are ahead of the previous year despite the
highly volatile markets over the period. We benefited from improved market
conditions in the second half, which resulted in greater demand for
equity-based products from our clients, but the improvement also reflects our
aggressive expense management as part of our drive to improve business
performance. In the fourth quarter we saw especially good sales growth, with
the strongest LTS quarterly sales performance for two years.
"During 2009 our priority was to stabilise the business by addressing the
issues in US Life and Bermuda and restoring the Group`s capital and liquidity
positions, while implementing more effective governance and controls. With
substantial improvements in place, we started the process of simplifying our
portfolio of businesses and improving our operational performance, while
further examining the Group to determine its optimal future shape. We are today
setting out a clear strategy to build a cohesive long-term savings, protection
and investment group by leveraging the strength of our capabilities in South
Africa and around the world.
"We will rigorously drive performance improvement across all of our businesses
and have introduced challenging three-year cost saving and return on equity
targets. We have also identified specific synergy opportunities from our
businesses working together. We anticipate further rationalisation of our
activities and will exit markets where we do not have scale or our operations
are not capable of achieving a return on equity of 15% over the next three
years. We are exploring the disposal of US Life and anticipate a partial IPO of
US Asset Management. However, we will only execute transactions when markets
allow us to maximise value for shareholders.
"We are determined that over the medium to long-term these measured and
fully-funded actions will provide considerable value for shareholders.
Together with further growth in assets under management as market conditions
continue to improve, these actions are expected to have a significantly
positive impact on underlying operating profitability and return on equity.
Accordingly, the Board has every confidence in the Group`s prospects, as
reflected by the resumption of a dividend."
Enquiries
Investor Relations
Patrick Bowes UK +44 (0)20 7002 7440
Deward Serfontein SA +27 (0)82 810 5672
Media
Matthew Gregorowski UK/SA +44 (0)20 7002 7133
+44 (0)7748 183 834
Don Hunter (Finsbury) UK +44 (0)20 7251 3801
Notes
Unless otherwise stated, wherever the terms asterisked in the Financial
Highlights are used, whether in the Financial Highlights, the Group Chief
Executive`s Statement, the Group Finance Director`s Review or the Business
Review, the following definitions apply:
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business, it includes compensation costs in respect of certain
long-term incentive schemes defined as non-controlling interests in accordance
with IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, put revaluations related to
long-term incentive schemes, profit/(loss) on disposal of subsidiaries,
associated undertakings and strategic investments, dividends declared to
holders of perpetual preferred callable securities, and fair value
(profits)/losses on certain Group debt movements.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and non-controlling interests. It excludes income
attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and BEE trusts.
Cautionary statement
This announcement has been prepared solely to provide additional information to
shareholders to assess the Group`s strategies and the potential for those
strategies to succeed. It should not be relied on by any other party or for any
other purpose.
This announcement contains forward-looking statements with respect to certain
of Old Mutual plc`s plans and its current goals and expectations relating to
its future financial condition, performance and results. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond Old Mutual plc`s control,
including, among other things, UK domestic and global economic and business
conditions, market-related risks such as fluctuations in interest rates and
exchange rates, policies and actions of regulatory authorities, the impact of
competition, inflation, deflation, the timing and impact of other uncertainties
or of future acquisitions or combinations within relevant industries, as well
as the impact of tax and other legislation and other regulations in territories
where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc`s actual future financial condition, performance
and results may differ materially from the plans, goals and expectations set
forth in Old Mutual plc`s forward-looking statements. Old Mutual plc undertakes
no obligation to update any forward-looking statements contained in this
announcement or any other forward-looking statements that it may make.
Notes to Editors:
A webcast of the presentation and Q&A will be broadcast live at 9:00am (GMT),
10:00am (CET), 11:00am (South African time) today on the Company`s website
www.oldmutual.com. Analysts and investors who wish to participate in the call
should dial the following numbers:
UK (toll-free) 0500 5510 77
US (toll-free) +1 877 491 0064
Sweden (toll-free) 0200 8876 51
South Africa (toll-free) 0800 9914 68
International +44 (0)20 7162 0077
Playback (available until midnight on 25 March 2010), using pass-code 859189:
UK (toll-free) 0800 3581 860
US (toll-free) +1 888 365 0240
International +44 (0)20 7031 4064
Copies of these Preliminary Results, together with high-resolution images and
biographical details of the Executive Directors of Old Mutual plc, are
available in electronic format to download from the Company`s website at
www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company`s Preliminary Results
can be found on the website. This contains key financial data for 2009 and
2008.
Group Chief Executive`s Review
Review of Operations
Introduction
Our operating results for 2009 are ahead of the previous year despite the
highly volatile markets over the period. This is largely due to the improvement
in market conditions during the second half, which resulted in greater demand
for equity-based products from our clients and our drive to improve business
performance, including the aggressive expense management programme completed in
the US. We had especially good sales growth during the fourth quarter, the
strongest quarterly sales performance for the LTS business for at least two
years.
During 2009 our priority was to address the issues facing the Group,
exacerbated by the global financial crisis. The turnaround in US Life is
complete, the business in Bermuda is in run-off, we have built a strong capital
and liquidity base and implemented strong central governance and controls.
Despite previously announced expectations, we did not need to make any further
capital injection in US Life in the early part of this year and do not
anticipate any capital injection will be required during 2010.
We have made good progress in the process of simplifying our portfolio of
businesses and improving operational performance, with a particular focus on
our long-term savings, protection and investment businesses. These represent
the heart of the Group and building them is central to our future strategy,
which is set out in my Strategy Update below. We are confident that by
leveraging our core capabilities and applying them consistently across the
Group we will deliver sustainable long-term value for all our stakeholders.
One of the strategic priorities announced in March last year was to strengthen
and maintain our capital and liquidity position. I am pleased to report that we
now have good balance sheet stability, as demonstrated by a doubling of our FGD
surplus to GBP1.5 billion as at 31 December 2009, from GBP0.7 billion at the
end of 2008, and total liquidity of GBP1.2 billion. With the Group now in good
financial health, we are able to turn our attention to the future.
Long-Term Savings (LTS)
Our LTS division delivered strong results for the year with operating profits
up 52% from 2008, largely driven by the turnaround in US Life. Sales were down
just 6% for the year and were up 5% in the second half compared to the same
period in 2008. Margins improved, and net client cash flows and funds under
management grew considerably during the year.
Two further strategic priorities that were announced in March last year were to
leverage scale in our long-term savings businesses and to streamline our
portfolio of businesses. During the year we integrated our long-term savings
businesses into a single division under Paul Hanratty, Chief Executive of LTS.
The division was restructured around geographic and customer-related market
segments, with a focus on identifying where we could extract costs and generate
profitable organic growth through enhancing the customer value proposition.
We sold a number of businesses and exited a number of markets where we lacked
scale and where the cost of building scale would not deliver sufficient
returns, including Australia, Portugal, Hungary, the Czech Republic and Chile.
We also sold Bankhall in the UK and closed our Asia Pacific regional office and
our ELAM head office as part of the restructuring.
LTS: Emerging Markets
In South Africa, we have shown good resilience with strong profitability and a
continuing high return on equity in very difficult economic conditions.
Like-for-like sales on an APE basis were up marginally compared to the prior
year. We continued to invest in our distribution capability and, as a result,
we grew market share in our core product ranges and are well positioned to
benefit from the recovery in consumer confidence.
In Latin America, profits were up 133% in very difficult market conditions and
we have developed a new retail mass product in Mexico which will be launched
this year. In India, sales were down by 19%, which was better than the industry
average and in China, sales were up 19%. Drawing on our South African
expertise, we are developing several new products which we believe are highly
suitable for these markets, some of which we have already begun selling in
India.
Despite South Africa emerging from recession in the third quarter, consumer
confidence remains low. However, the outlook for the long-term savings,
protection and investment environment is positive given South Africa`s low
dependence on credit, prudent economic policies, growing emerging black middle
class and affluent markets, and improving regulatory frameworks and
transparency of financial products. During 2010 we will continue our transition
from a traditional life insurer to a modern savings, protection and investment
business, while focusing on growing distribution, improving investment
performance and service levels, and reducing cost.
LTS: Nordic
Life APE sales were up 8% on 2008 as our retail market continued to demonstrate
resilience to the adverse economic environment, partly buoyed by increased
direct sales of certain products through Skandiabanken. The recession did have
an adverse impact on occupational pension sales in the corporate sector
although we saw lower outflows from maturities and surrenders. Mutual fund
sales were strong, up 47% on 2008 in line with wider market trends.
All of this contributed to very strong positive net client cash flows
representing 13% of opening funds under management. Along with the improvement
in equity markets, this helped to boost overall funds under management by 38%
to a record level from the position at the end of 2008. Skandia Link in Sweden
generated excellent investment returns during 2009 as clients` risk appetite
improved, as demonstrated by their increased weighting in equities. Our
relationship with Skandia Liv is improving, although normalising the corporate
and economic linkages will take time to come to fruition.
We are focused on protecting our improving margins through continued expense
management, further growth in sales and new product development, including
products designed for direct distribution. We are increasingly focused on our
clients` needs and business profitability, while our strong brand, broad
product mix and good market position give us excellent competitive advantage.
Although the financial markets continue to be volatile, the outlook for the
Nordic markets is favourable.
LTS: Retail Europe
The difficult economic environment had a much more marked impact in our Retail
Europe countries. Unit-linked markets were considerably weaker as demand for
guarantee products increased, resulting in lower than anticipated new business
in the second half. Life APE sales were down 34% compared to the prior year,
and IFRS profit was adversely affected by a substantial one-off charge in
respect of policyholder profit sharing agreement with the regulatory
authorities in Germany between 2005 and 2007. The performance of the business
improved dramatically in the fourth quarter, with sales up 57% compared to the
previous three months, driven particularly by the German and Polish markets.
Overall net client cash flows for the year remained strong compared to 2008,
remaining flat against 2008 levels and representing 15% of opening funds under
management, driven by improved surrender experience. Funds under management
were up 27% on the 2008 year-end position, supported by our asset mix and
improved client investment appetite during the second half.
After the change in structure in LTS, we focused on laying the foundations for
business improvement and growth. We are developing single premium products in
line with growing customer demand and through improved distribution of regular
premium products have good prospects for over two-thirds of anticipated sales
for 2010. With further product expansion out of South Africa, from which lower
cost administration will also be provided for the business, we will now seek to
grow market share and sustainable profitability.
LTS: Wealth Management
Again, the volatile markets during 2009 had a considerable impact on customer
confidence, although sentiment improved in the second half which helped to grow
sales, net client cash inflows and assets under management. Despite the tough
first half, net client cash inflows for the year were up 25% and funds under
management were up 21% as at 31 December 2009.
In the UK, the transition to our platform-enabled model was evidenced by the
22% increase in non-covered mutual fund business over 2008 versus a 6% decline
in covered business, as clients` investment preferences shifted from more
traditional life products into mutual funds. On the back of our strong
distributor relationships, APE sales in Italy increased significantly as we
grew our share of the unit-linked market from 4% to 12%, while in France sales
remained steady with good growth in the fourth quarter. Total Wealth Management
APE sales for the fourth quarter increased 38% over the previous quarter.
We remain the leading UK platform provider with a market share of 33% of total
assets as at the end of 2009. We have launched a significant operational
efficiency drive as well as seeking to enhance our new product offerings using
the skill base in South Africa, where we develop our own technology. This is a
distinct advantage over our competitors and when marketing to new customers. We
are well positioned to capture the strong anticipated inflows as a result of
increased customer demand for low cost and transparent products, and as they
look to exit maturing traditional products such as with-profits bonds and
endowments.
LTS: US Life
2009 was a transformation year for US Life. Having reduced the product profile,
scaled back distribution and reduced the overhead base by 33%, the business
returned to profitability on an AOP basis. As planned, Life APE sales were down
57% but despite this decrease in sales volume, we maintained strong
relationships with the top-tier producing agents through whom we are now
selling more profitable, capital light products. Margins for the year were
strong at 20%.
The business did not need additional capital from the Group in the early part
of this year and we believe we will not need to inject any further capital
during 2010. The business is now self sustaining and is well positioned to
deliver improved returns during 2010 on higher sales levels and a lower cost
base, with new FIA and Universal Life products due to be introduced in the
second quarter.
Bermuda
Our Bermuda business is now closed to new business, is in run-off and is
treated as non-core. During 2009 the focus has been on de-risking, maintaining
a stable operating environment, reducing costs, and managing capital and
liquidity. We have continued to improve our understanding of the liabilities,
with all positions monitored and marked to market on a daily basis. Most
guarantees remain `in the money` and the level of redemptions has remained low.
However, if markets continue to rise and the value of customers` contracts move
above the guarantee level, we anticipate a pronounced increase in the level of
redemptions, which will accelerate the run-off.
Nedbank
The South African banking industry experienced an exceptionally tough and
volatile year in 2009. Demand for credit grew at historically low rates and
retail impairments increased dramatically as consumers came under severe
pressure from falling income, job losses, declining asset prices and record
high debt burdens. Despite the negative economic trends, underlying trading
conditions showed early signs of improvement from the third quarter, when South
Africa emerged from recession.
Nedbank`s net interest income grew 0.8% to R16.3 billion and non-interest
revenue, including the consolidation of the Bancassurance & Wealth joint
ventures, grew by 11% to R11.9 billion. However, in line with expectations and
with the other South African banks, earnings were impacted by rising bad debts.
Although Nedbank`s credit loss ratio declined to 1.47% for 2009, its liquidity
position remains sound and its capital ratios remain above target levels. The
Tier 1 capital adequacy ratio improved from 9.6% at the end of 2008 to 11.5% at
the year-end, and the total capital adequacy ratio increased from 12.4% to
14.9%.
The rebound in the South African economy is likely to be slower than in
previous cycles given weak consumer and business confidence and tighter lending
criteria. However, retail trading conditions are expected to improve and
interest rates are likely to remain steady at current levels, leading to lower
impairments. The strength of Nedbank`s balance sheet positions it well to
capitalise on growth opportunities and to benefit from the expected turnaround
in economic conditions.
US Asset Management
Although market conditions in 2009 were challenging, we took a number of
actions to drive more profitable growth in this business. We have reorganised
our central distribution structure, and strengthened our shared services offer
to our affiliates and key aspects of our successful multi- boutique model. We
reduced operating expenses by 22% and carried out a reorganisation of Old
Mutual Capital, our retail mutual fund business, which will deliver $15 million
to $20 million of annual expense savings from 2010.
Our track record of investment performance has positioned us well relative to
competitors, and our diversified asset mix between equities, fixed income and
alternatives helped us weather market volatility. While net client cash flows
were down, they were broadly in line with the average of our peer group for the
year. This partially offset a 16% rise in asset values resulting in funds under
management for the year increasing by 9% to $261 billion.
Non-US clients already represent 25% of total funds under management as at the
end of the period, and a key objective is to grow and diversify by expanding
our international distribution capability. Prior to the recent market turmoil,
clients were migrating asset allocation decisions toward international, global
and alternative strategies. We believe these trends will continue in 2010, and
our track record of investment performance and global business focus positions
us well to capture these asset flows. Churn of underperforming managers in
traditional domestic equity and fixed income mandates will also present
opportunities to win new mandates.
Dividend
The Board has carefully considered the position in respect of a final ordinary
dividend for 2009, and is recommending the payment of a final 2009 dividend of
1.5p per share (or its equivalent in other currencies).
The Board intends to pursue a dividend policy consistent with our strategy, and
having regard to overall capital requirements, liquidity and profitability, and
targeting dividend cover of at least 2.5 times IFRS AOP earnings over time.
Strategy Update
During 2009 our priority was to stabilise the business by addressing the issues
in US Life and Bermuda and restoring the capital and liquidity positions of the
Group, whilst at the same time implementing more effective governance and
controls. With substantial improvements in place, we also started the process
of simplifying our portfolio of businesses and improving our operational
performance, while further examining the Group to determine its optimal future
shape. We now have a clear strategy to build a cohesive long-term savings,
protection and investment group by leveraging the strength of our capabilities
in South Africa and around the world.
The strategy is designed to focus, drive and optimise our businesses to enhance
value for both our customers and shareholders. It will increase our
international cash earnings and overall return on equity. It will result in a
rationalisation of our activities over time, reducing substantially the
complexity of the Group, and optimise our structure as we manage our businesses
with a disciplined approach to risk management, governance and allocation of
capital.
We will reduce our exposure to the US by exploring the disposal of US Life. We
anticipate the listing of a minority shareholding in US Asset Management. We
will continue to sell or exit markets where we do not have scale, have no
prospect of achieving satisfactory returns or where the operations are outside
of our risk tolerance. We expect the proceeds from this rationalisation and
from retained earnings will be used to reduce debt by at least GBP1.5 billion
and improve the quality of the Group`s balance sheet.
We will retain businesses which meet our capital and risk requirements, can
achieve a 15% return on equity, add value to other parts of the Group, have
scope for sustainable future growth and are capable of creating future
shareholder value. We will be ruthless in our application of these criteria and
our businesses will be subject to continual review. By leveraging our core
capabilities and maximising available synergies, we will deliver a good blend
of profit growth, improved cash returns and generation of long-term embedded
value. We will transfer technology and intellectual capital through shared
skills and infrastructure, based on utilising our strong capabilities in South
Africa and around the world to drive revenue and cost improvements.
We will focus on developing our customer proposition which is relevant to their
needs, backed up by good distribution, support and service. We aim to deliver
high performance in each of our businesses by driving profitable growth and
operational efficiency, optimising risk and return and aligning reward schemes
to activities that deliver value, with strengthened governance and control from
the centre.
We have set specific targets of reducing costs by GBP100 million by the end of
2012, including GBP15 million of Group-wide corporate cost savings as the Group
structure evolves. We have also set specific performance targets for our
individual LTS businesses and for LTS as a whole, as set out below.
Long-Term Savings
Our LTS businesses can be categorised into three groups: those in mature
markets which have scale and deliver high cash returns, such as Old Mutual
South Africa (OMSA) within Emerging Markets; those that are established and
growing but where profitability can be improved, such as Wealth Management and
Nordic; and those that are sub-scale but have strong prospects for growing
embedded value and delivering good return on, such as Retail Europe and, within
Emerging Markets, India and China.
We have set targets to deliver cost savings of GBP75 million per annum and to
improve overall return on equity from 14.9% (excluding US Life and reflecting
the LTIR rate for Emerging Markets for 2010) as at 31 December 2009 to between
16%-18%, both by the end of 2012. To achieve this, we have set specific return
on equity and cost savings targets for each of our LTS businesses.
Over and above this, we have identified opportunities for further cost and
revenue synergies in three principal areas: in IT, by extending outsourcing to
a global level, rationalising technology platforms and sharing applications; in
administration by taking advantage of the efficient cost base in South Africa;
and in product development, through sharing products and investment funds
across our businesses.
In Emerging Markets, we are already distributing products designed in South
Africa into India and expect to do the same into the other large and
under-penetrated markets such as China and Mexico. South Africa has a well
regulated long-term savings industry and a growing middle income and affluent
market, which we are penetrating through our strong brand and powerful
distribution platforms. We are therefore coordinating our Emerging Markets
business, which includes our Africa operations, from OMSA. Having acquired the
minorities in Mutual & Federal, we are also developing Old Mutual branded
short-term insurance products for the South African middle income market. We
have set a cost reduction target for Emerging Markets of GBP5 million per annum
and a return on equity target of between 20%-25% by the end of 2012.
In Sweden, we already have a strong market share and are now broadening our
product and service offering to the direct market through Skandiabanken, the
region`s most successful internet bank. For example, through Skandia Investment
Group (SIG) we have exported the highly successful Spectrum concept of
risk-targeted funds from the UK to Sweden, and Skandia Nordic has developed its
own supporting web-based advisory tools for its direct customers. For the
Nordic business we have set a cost reduction target of GBP10 million per annum
and a return on equity target of between 12%-15% by the end of 2012.
In Retail Europe, we are already making good progress in transferring IT and
back office functions to South Africa, which will significantly improve
margins. We will also broaden its product set, including introducing protection
products. We have set a cost reduction target for Retail Europe of GBP15
million per annum and return on equity target of 15%-18% by the end of 2012.
We have commenced an expense reduction exercise in Wealth Management which is
intended to deliver cost savings across the business of GBP45 million per annum
by 2012, with associated one-off restructuring costs at approximately the same
level. The bulk of this is in Skandia UK, which is aiming to reduce its cost
base in order to operate profitably and sustainably in the new low-margin
environment. We already have an excellent platform capability and will be
developing increased functionality and new products, sourced in South Africa,
which are capital-light but provide good downside protection. We have also set
a Wealth Management return on equity target of between 12%-15% by the end of
2012.
We have made a number of new appointments in LTS to help ensure delivery
against these targets. We have appointed a new head of product development from
within OMSA, and expanded the roles of other senior OMSA executives to enhance
operational efficiency and distribution across our LTS businesses. We are also
in the process of appointing a new head of IT. They will all report directly to
Paul Hanratty, Chief Executive of LTS.
Following the completion of the expense management programme in US Life, the
business is now profitable on an AOP basis and is able to grow without further
support from the Group. However, it lacks scale, has little overlap with the
rest of our LTS businesses and, given its capital intensive nature, the
risk-adjusted return on further investment does not meet our hurdle rate. As a
result, with market conditions improving, we are exploring the disposal of US
Life to allow the business to achieve its potential under different ownership.
We remain firmly committed to supporting the business at an RBC ratio of 300%.
Asset Management
We have excellent, well established asset management businesses which are
highly profitable and generate good cash flow. In South Africa, we are already
the market leader and with investment performance improving we are confident of
driving future net client inflows. In Europe, we expect guided architecture to
complement our open architecture platform, allowing us to capture significant
inflows within SIG, our manager-of-managers business.
In the US, there are considerable opportunities for growing the business and
expanding our existing franchises into international markets. We have already
completed an expense management programme which reduced costs by 22%. The
resulting margin improvement, together with anticipated growth in performance
fees in line with the recovery in markets, will drive strong profitability and
cash flows to the centre. We have also set a new cost reduction target of GBP10
million per annum and margin target of 25%-30% by the end of 2012.
We believe this will position the business well for a future listing and
anticipate a partial IPO for the business within the next three years. The
timing is dependent on margin progression, investment performance and market
conditions. The IPO will allow it to benefit from an enhanced market profile
and more visible valuation. It will provide access to capital markets and a
mechanism for growth, and allow us to continue to improve the alignment of
management.
Banking
In line with the South African banking industry, Nedbank`s result was affected
by the cyclical credit stress in the domestic economy. Despite the increased
level of retail impairments, Nedbank has continued to strengthen its capital
base. The sophisticated and well regulated South African banking system has
ensured that the banks in South Africa were well insulated from the worst of
the global financial crisis, while Nedbank`s strong management team has
continued to drive world-class risk management practices and outstanding
performance in nearly all areas of the business. Despite the negative economic
trends in 2009, underlying trading conditions showed early signs of improvement
around the third quarter.
I am pleased to welcome the new Nedbank Chief Executive, Mike Brown and look
forward to his contributions to our Group Executive Committee.
As Mike and his team develop their future banking strategy, I look forward to
discussing any changes Mike would like to make to the Nedbank strategy to
continue its growth. We thank Tom Boardman for his tremendous success in the
rehabilitation of Nedbank after we led its refinancing in 2004.
Outlook
We are determined that over the medium to long-term these measured and
fully-funded actions will provide considerable value for shareholders.
Together with further growth in assets under management as market conditions
continue to improve, these actions will have a significantly positive impact on
underlying operating profitability and return on equity. Accordingly, the Board
has every confidence in the Group`s prospects, as reflected by the resumption
of a dividend.
Julian Roberts
Group Chief Executive
11 March 2010
Group Finance Director`s Review
Group Results
Overview of 2009 results
GBPm GBPm
Group Highlights (GBPm) 2009 2008 % Change
IFRS results 1,170 1,136 3%
Adjusted operating profit (IFRS
basis)(pre-tax)*
Adjusted operating earnings per share (IFRS
basis)* 12.1 14.9 (19%)
Basic earnings per share (7.8p) 8.6p (191%)
(Loss)/profit after tax (118) 683 (117%)
Sales statistics
Life assurance sales APE basis* 1 380 1 466 (6%)
Life assurance sales PVNBP basis* 10 202 10 814 (6%)
Value of new business* 167 158 6%
Unit trust/mutual fund sales 7 567 6,600 15%
MCEV results
Adjusted Group MCEV (GBPbn) 9.0 6.2 45%
Adjusted Group MCEV per share 171.0p 117.6p 45%
Adjusted operating Group MCEV
earnings (post-tax) 562 575 (2%)
Adjusted operating Group MCEV earnings per
share 10.7p 11.0p (3%)
Financial metrics
Return on equity* 9.1% 11.3%
Return on Group MCEV 10.7% 7.8%
Net client cash flows (GBPbn) (3.1) (1.2) (158%)
Funds under management 285 265 8%
Dividend 1.5p 2.45p
FGD (GBPbn) 1.5 0.7 114%
* Treating Bermuda as a non-core business
The Group has delivered a solid performance in 2009, which is particularly
satisfying given the volatile market and weak operating conditions seen during
the year, particularly during the first half. Our performance improved
significantly in the second half of the year, when strong sales performance in
the third and fourth quarters and recovering markets helped deliver good
earnings growth. Across the Group as a whole, we have seen sales return to
similar levels as in the first half of 2008. The decline in profitability in
Europe and Nedbank was more than offset by the increase in profitability of the
US Life business, following reserve strengthening and impairment losses in
2008.
IFRS adjusted operating profit (AOP) for 2009 of GBP1,170 million was GBP34
million higher than the comparable 2008 profit. Adjusted operating profit in
the second half of 2009 was GBP636 million compared to GBP316 million for the
second half of 2008. Adjusted Operating Profit earnings per share were 12.1p
for 2009 compared to 14.9p for 2008. The AOP eps for the second half of 2009
was 6.8p compared to 6.2p for the second half of 2008. In 2008, results had
been significantly affected by the need to strengthen reserves in the US Life
and Bermuda business: these businesses both made a profit in 2009. Bermuda is
now treated as a non-core business and its profit is therefore excluded from
the IFRS adjusted operating profit, and the 2008 IFRS adjusted operating profit
has been restated on the same basis.
In particular the performance of our LTS business showed the benefits of the
geographic split of the business between Europe and Emerging Markets. While the
profits from our Emerging Markets business were broadly evenly spread across
the two halves of the year, both Nordic and Wealth Management showed
significant improvements in the second half. Lower earnings on shareholder
funds, increased levels of credit impairment in the banking businesses, and
lower asset management profits in South Africa and the US, restricted profits
despite a creditable sales performance for the year overall.
Net client cash flows were GBP1.9 billion positive in LTS as a whole, although
Group net client cash flows were negative GBP3.1 billion, as a result of the
net GBP4.5 billion outflow in US Asset Management, of which GBP4.1 billion
occurred in the fourth quarter.
Adjusted Group MCEV per share for 2009 increased to 171.0p from 117.6p at the
year end 2008, and from 143.8p for the first half of 2009. The increase in the
Adjusted Group MCEV per share over the period was largely driven by the
substantial reduction over the period in corporate bond credit spreads in US
Life, an increase in equity markets, positive exchange rate movements,
operating earnings from covered business, and an amendment arising from an
allocation of assets between covered and non-covered businesses at the
beginning of the year. This was partially offset by a lower result in
operations in Europe, and by an increase in the market value of listed debt and
fair value of non-listed debt (where applicable). As anticipated, Wealth
Management benefited from a tax gain in aggregate of GBP205 million following
the changes made to the corporation tax treatment of dividends received from
overseas subsidiaries by the Finance Act 2009. MCEV data still includes Bermuda
as covered business for both 2008 and 2009.
Adjusted operating Group MCEV earnings per share for 2009 of 10.7p were 3%
lower than the 2008 year end results. Adjusted MCEV operating earnings in US
Life and Bermuda increased significantly, mainly resulting from higher expected
returns in 2009 from the corporate bond portfolio. This was offset by lower
operating earnings from the other long-term insurance businesses (in
particular, Wealth Management) due to lower short- term swap rates, adverse
operating assumption changes in relation to persistency and capitalisation of
planned development and project expenditure, and lower earnings in both the
asset management and banking businesses. These fell on a pre-tax basis from
GBP97 million to GBP83 million, and from GBP575 million to GBP470 million
respectively.
The ROEV of 10.7% has increased significantly from 2008 largely as a result of
the lower opening MCEV for 2009.
Reconciliation of IFRS and AOP profits
The IFRS after tax result for 2009 was a loss of GBP118 million, compared to a
profit of GBP683 million in 2008. This movement was largely driven by the
impact of marking-to-market of Group debt, as the improvement in the external
valuation of Group debt in 2009 negatively impacted profit after tax by GBP263
million for the year, reversing the positive impact of GBP503 million of
marking-to-market our own debt instruments in 2008. The movement was also
driven by the unusually high effective tax rate on the IFRS results. In
accordance with our AOP policy, a charge relating to acquisition accounting of
GBP443 million and negative short-term fluctuations in investment return of
GBP316 million represent the other significant deductions from the adjusted
operating profit (pre-tax) to arrive at the 2009 loss after tax. As usual at
the year-end, we have reviewed our goodwill balances, and we have recognised a
goodwill impairment (included within the acquisition accounting charge noted
above) of GBP187 million in respect of Retail Europe business and GBP79 million
in respect of Wealth Management which arose specifically in continental Europe.
This impairment reflects a downgrading of our view of the value of these
businesses since the time of acquisition given the changed economic
circumstances in Europe and market readjustments. We continue to recognise
goodwill of around GBP200 million for Retail Europe which we believe is
supportable going forward, and the goodwill for the continental Europe part of
Wealth Management has been written off. There was also a release of other
provisions relating to long-standing litigation matters of GBP61 million.
Management Discussion and Analysis of Results for 2009
The principal businesses of the group are the Long-Term Savings division,
Nedbank, Mutual & Federal and US Asset Management. During the year, Old Mutual
owned on average 55% of Nedbank and 74% of Mutual & Federal. At 31 December
2009, the market capitalisation of Nedbank was GBP5.2 billion and of Mutual &
Federal was GBP610 million. Since 31 December 2009, Old Mutual has completed
the purchase of the remaining minorities of Mutual & Federal.
Long-Term Savings
The key financial metrics for the Long-Term Savings division are:
GBPm
Emerging
2009 Markets Nordic Retail Europe
Life assurance sales (APE) 393 235 67
PVNBP 2 834 1 150 537
Value of new business 65 44 (5)
Unit trust/mutual fund sales 2,765 393 24
NCCF (GBPbn) (1.6) 1.0 0.5
FUM (GBPbn) 43.5 11.0 4.1
Adjusted operating profit (IFRS
basis) (pre-tax) 446 62 22
Operating MCEV earnings (covered
business) (post tax) 212 81 (44)
GBPm
Wealth
2009 Management US Life Total
Life assurance sales (APE) 617 68 1 380
PVNBP 5 042 639 10 202
Value of new business 49 14 167
Unit trust/mutual fund sales 3 210 - 6,392
NCCF (GBPbn) 2.5 (0.5) 1.9
FUM (GBPbn) 46.9 6.7 112.2
Adjusted operating profit (IFRS
basis) (pre-tax) 106 49 685
Operating MCEV earnings (covered
business) (post tax) (4) 266 511
GBPm
Emerging
2008 Markets Nordic Retail Europe
Life assurance sales (APE) 362* 213 91
PVNBP 2 482* 991 555
Value of new business 61* 32 10
Unit trust/mutual fund sales 2 708 262 47
NCCF (GBPbn) (1.8) 0.6 0.5
FUM (GBPbn) 40.3 8.0 3.5
Adjusted operating profit (IFRS
basis) (pre-tax) 415 88 29
Operating MCEV earnings (covered
business) (post tax) 343 149 14
GBPm
Wealth
2008 Management US Life Total
Life assurance sales (APE) 664 136 1 466
PVNBP 5 540 1 246 10 814
Value of new business 67 (12) 158
Unit trust/mutual fund sales 2 561 - 5,578
NCCF (GBPbn) 2.0 - 1.3
FUM (GBPbn) 38.9 0.3 91.0
Adjusted operating profit (IFRS
basis) (pre-tax) 150 (230) 452
Operating MCEV earnings (covered
business) (post tax) 229 (364) 371
* Includes Nedgroup Life sales. The comparative figures excluding Nedgroup Life
are as follows: APE: GBP334m; PVNBP: GBP2,399m; VNB: GBP53m
LTS reported strong results with IFRS operating profits up 52%, margins
improved, and there was strong growth in funds under management, with positive
net client cash flows. Sales for the whole of LTS were down only 6% for the
full year but up 5% for the second half compared to the same period in 2008.
Emerging Markets sales in the first half were strong relative to those of other
parts of LTS reflecting the later entry of South Africa into recession. Wealth
Management sales performance in the second half was particularly strong, as was
Nordic with very good NCCF and funds under management. Sales in Europe
accounted for 67% of the APE and 53% of the value of new business. US Life
sales were as planned, and the turnaround in the US Life business, which has
delivered a small AOP profit, as compared to a significant loss in 2008, led to
the increase in IFRS operating profits.
The APE margin of 12% for the year has held up well relative to the comparative
period (2008: 11%) despite the lower sales, and given the greater focus on
product pricing. The PVNBP margin has also remained steady.
Further discussion on the drivers for the movements within the individual units
of LTS, namely Emerging Markets, Nordic, Retail Europe, Wealth Management and
US Life is given in the Business Review which follows.
Shareholder allocation and long-term investment return
The AOP result includes the long-term investment return (LTIR) result. The most
significant portion of this return arises in the Emerging Markets unit, and in
2009 we have separated the return into those assets supporting OMLAC(SA)`s
Capital Adequacy Requirement (CAR) and the excess shareholder assets. OMLAC(SA)
is our principal legal entity in the South African part of the Emerging Markets
Business Unit. The analysis of the investment return for this business is shown
in the table below:
GBPm
31 December 2008
as previously
31 December 2009 31 December 2008
as currently reported restated reported
OMLAC(SA)
LTIR 126 133 241
Other
operating
segments 91 108 0
Total 217 241 241
In 2009, the OMLAC(SA) LTIR fell from GBP133 million to GBP126 million and
reflects a lower expected return of 13.3% (2008: 16.6%) combined with a lower
average asset base. In 2010, the LTIR rate for OMLAC(SA) and M&F is 9.4%
reflecting the expected asset mix of 25% equities and 75% cash. OMLAC(SA)`s
investible asset base at the year end was GBP1.2 billion, with GBP1 billion
being the assets supporting their capital requirement. The LTIR rates for the
European Business Units reflect the shift towards a higher proportion of cash
investment and the LTIR rates for the other businesses have not changed
materially in 2009, and are expected to remain stable in 2010.
Currency development
The South African rand strengthened this year by 14% against sterling and the
US dollar strengthened against sterling by 15% on an average basis over the
year. This had the effect of improving rand-denominated and dollar earnings
whilst decreasing the sterling value of dollar-denominated debt at the year-end
rates.
Return on Equity
Return on Equity for the Group declined to 9.1% in 2009 from 11.3% in 2008,
primarily due to the lower profits from Nedbank, a return to a normalised tax
rate and lower European profits, partially offset by improvements in US
earnings.
Funds under management and net client cash flow
Funds under management at 31 December 2009 were GBP285 billion compared to
GBP265 billion at the end of 2008. During 2009, Old Mutual delivered robust
investment performance in challenging markets. Group net client cash flows were
negative GBP3.1 billion, as a result of the net GBP4.5 billion outflow (net of
Group transfers) in US Asset Management, although net client cash flows were
GBP1.9 billion positive in LTS as a whole. We produced positive flows of GBP4.0
billion in our Wealth Management, Nordic and Retail Europe businesses combined,
offset by outflows of GBP1.6 billion in our Emerging Markets business and
GBP0.5 billion in our US Life business. The USAM negative net client cash flow
was a result of outflows from several of our US Asset Management affiliates.
The overall FUM and NCCF result is pleasing, considering the challenges of
delivering on absolute investment performance in the extremely volatile markets
of the past two years. While over the course of 2009, the FTSE-100, the JSE
Africa All Share Index and S&P 500 all grew more than 15%, within the period
there has been significant fluctuation in many asset classes. The US and South
African equity portfolios showed the greatest volatility. Given the movement in
monthly funds under management during the period, there were adverse impacts on
both management fees and performance fees in the first half of 2009, and these
reversed in the second half of 2009. Our large fixed income assets under
management performed well. Investment performance in South Africa improved on
prior years. Benchmark performance of the US Asset Management business was
mixed with `quant` underperforming and `credit` out-performing.
Key actuarial and MCEV developments in 2009
Old Mutual reports its supplementary embedded value information in accordance
with the Market Consistent Embedded Value Principles (the `Principles`) issued
in June 2008 by the CFO Forum and updated in October 2009 to reflect the
inclusion of a liquidity premium. The risk free reference rate to be applied
under MCEV should include both the swap yield curve appropriate to the currency
of the cash flows and a liquidity premium where appropriate. The CFO Forum is
performing further work to develop more detailed application guidance. The
Principles have been fully complied with for all businesses at 31 December
2009.
For the US Life business and OMLAC(SA)`s Retail Affluent Immediate Annuity
business we considered the currency, credit quality and duration of our actual
corporate bond portfolios, together with a wide range of liquidity market data
and literature, and derived adjusted risk free reference rates at 31 December
2009. It is the Directors` view that a significant proportion of corporate bond
spreads at 31 December 2009 is attributable to a liquidity premium rather than
credit and default risk and that returns in excess of swap rates can be earned
on our portfolios, rather than entire corporate bond spreads being lost to
worsening default experience. Liquidity premiums of 100 basis points for the US
Life business (31 December 2008: 300 basis points; 30 June 2009: 175 basis
points) and 50 basis points for OMLAC(SA)`s Retail Affluent Immediate Annuity
business (31 December 2008: zero allowance; 30 June 2009: 50 basis points) were
added to swap rates used for setting investment return and discounting
assumptions. We believe that the differences between market yields on our US
Life and OMLAC(SA)`s Retail Affluent bond portfolios and the adjusted risk free
reference rates still provide adequate implied margins for defaults. No
liquidity adjustment is applied for other regions.
When the liquidity premium adjustment was calibrated and introduced for US Life
business at 31 December 2008, similar research was not yet concluded for South
Africa to estimate the quantum of the liquidity premiums inherent in South
African corporate bond spreads. In addition, the impact of a liquidity premium
adjustment on US Life business was far more material than for OMLAC(SA)`s
Retail Affluent Immediate Annuity business as the concentration of investments
in the corporate bond market is far greater and the widening of corporate bond
spreads has been more pronounced in the US compared to other regions. Hence the
application of a liquidity premium adjustment was initially focused on the US
and an adjustment was only introduced for OMLAC(SA) at 30 June 2009 for
consistency in methodology.
The recovery of global equity markets together with the contraction of
corporate bond spreads, whilst partly offset by the reduction in the liquidity
premium adjustment for US Life, were the main factors driving positive economic
variances of GBP1.0 billion for 2009. In addition there was also a strong
contribution from foreign exchange movements mainly caused by strong rand
appreciation against sterling.
Adverse persistency was experienced across a number of operations and the
organisational restructure led to negative expense variances, although this was
partly offset by positive mortality variances across all operations.
Persistency assumptions were strengthened, partly to allow for temporary
worsening in persistency, and planned development and project expenditure has
been capitalised in the value of in-force (VIF). This was partly offset by
positive mortality assumption changes, in particular because of a weakening of
mortality assumptions in OMSA`s Retail Mass business following positive
experience for assured lives.
The MCEV of Wealth Management was boosted by the removal of dividend tax in the
International business.
Following the purchase of the minority interests in respect of Mutual & Federal
on 8 February 2010 in exchange for 147 million Old Mutual plc shares, Mutual &
Federal has been delisted and will be incorporated in the adjusted Group MCEV
at its IFRS equity amount from 2010 onwards. If the transaction had completed
on 31 December 2009, it would have diluted the 2009 adjusted Group MCEV per
share by approximately 6p.
The anticipated expected existing business contributions (or expected `unwind`
of the MCEV) at the `reference rate` of GBP262 million as well as `in excess of
the reference rate` of GBP189 million for the twelve months following the year
ended 31 December 2009 are provided to assist users of the MCEV supplementary
information in forecasting operating MCEV earnings. Note that the exchange
rates that are used for such disclosure are the same rates that are used to
translate current year earnings for comparability purposes. Therefore the
ultimate expected existing business contribution for the financial year ending
31 December 2010 may differ from these results.
Lapses and Surrenders
We continue to monitor and manage actively the lapse and surrender behaviour of
clients and specific agents. The pattern of surrenders in the US during 2009
was more volatile than in 2008 in the fixed annuity book, similar to
industry-wide trends, and terminations were above assumption levels for the
first half of 2009. A moderation through the second half brought about by an
active lapse and surrender management programme had the effect of reducing
fixed annuity termination rates close to assumption levels. Termination
experience for life products were below assumed levels and fixed annuity
experience improved during the course of the year.
Emerging markets saw some indications of deteriorating persistency in certain
regular premium Retail Mass products given the economic conditions in the first
half of 2009, which led to increased unemployment. Lapse and surrender
management programmes in the unit are well established, but we have
nevertheless strengthened operating assumptions for our Emerging Markets unit,
partially short-term, and this reduced MCEV by GBP83 million.
The experience in Wealth Management, particularly in the UK and International
businesses reflected anxiety around equity-based investments, although this
stabilised in the second quarter and onwards for the rest of 2009. However,
given the changes in the operating model of the UK business and the migration
to the platform business from the older product lines, we have also made a
negative operating assumption change of GBP81 million in respect of
persistency.
Elsewhere in LTS, trends were generally in line with assumptions.
Surrenders in Bermuda occurred mainly on the non-guaranteed book as asset
values recovered. Conservation activity here focused on managing cash flow and
profitability, and efforts in this regard are likely to develop further in 2010
in a way that is consistent with maximising long-term value for the Group.
Overall the financial circumstances of our customer base remain the key driver
of lapse and surrender behaviour. For example, rising unemployment in a number
of markets has led to what we believe to be a temporary deterioration in
persistency, which should revert back to long- term assumptions as economic
conditions improve.
Capital, liquidity, leverage and dividends
Capital
The Group`s regulatory capital surplus, calculated under the EU Financial
Groups Directive, at 31 December 2009 was GBP1.5 billion (31 December 2008:
GBP0.7 billion; 30 June 2009 GBP1.0 billion). This represents a coverage ratio
of 135%, compared to 121% at 31 December 2008 and 128% at 30 June 2009. The
increase since 31 December 2008 comprises the statutory earnings in the period,
rand strength and a Nedbank Tier 2 capital raising offset by modest rises in
statutory bank capital requirements in South Africa. There was a positive
GBP0.1 billion movement in FGD arising from management actions including the
disposal of Australia, closure of Bermuda to new business, and a change in the
investment mix of Emerging Markets` shareholder funds held to back the Capital
Adequacy Requirement. The Group FGD surplus was reduced by GBP42 million
compared to 2008, as US Life is now included at 200% of local capital required
rather than 150% in prior periods.
Our Group capital is structured in the following way:
GBPm
2009 % 2008 %
Ordinary Equity 4 218 73 3 048 70
Other Tier 1 Equity 611 11 573 13
Tier 1 Capital 4 829 84 3 621 83
Tier 2 2 550 44 2 430 56
Deductions from total capital (1 597) (28) (1 724) (39)
Total Capital 5 782 100 4 327 100
Tier 1 includes GBP174m of the hybrid debt capital reported for accounting
purposes as Minority Interests and Tier 2 includes GBP338 million of capital
hybrid debt, which is reported as Group Preference Shares.
The Solvency II Directive was approved by the European Union in November 2009,
and is scheduled to come into effect in October 2012. The Group is actively
participating in the industry consultations, such as the Quantative Impacts
Studies, which are taking place to develop the more detailed implementation
measures which the European Union will agree over the next two years.
The Solvency II Directive is intended to align the regulatory capital regime
for insurers more closely with the economic risk view of the business.
However, it also changes the qualifying criteria for regulatory capital in
response to the market events of the past couple of years, and in addition, has
considerable implications on the governance structures and operating models for
EU insurance businesses.
Although the Solvency II Directive applies to EU insurers only, it applies to
the Group`s businesses globally; furthermore we expect other jurisdictions,
notably South Africa, to implement equivalent regimes shortly afterwards.
Our subsidiary businesses continue to have strong local statutory capital
cover.
At 31 December 2009 At H1 2009 At 31 December 2008
Ratio Ratio Ratio
Statutory Entity
OMLAC(SA) 4.1x 3.9x 3.8x
Mutual & Federal 172% 141% 104%
US Life 312% 281% 305%
Nordic 10.8x 10.8x 9.9x
UK 2.9x 3.0x 2.5x
Nedbank* Core Tier 1: 9.9% Core Tier 1: 8.6% Core Tier 1: 8.2%
Tier 1: 11.5% Tier 1: 10.0% Tier 1: 9.6%
Total: 14.9% Total: 13.2% Total: 12.4%
* This includes unappropriated profits.
We remain committed to supporting the US Life capital ratio at a level above
300% RBC. In February 2009, $225 million of cash was injected into the US Life
business. Since then, the improvement in performance has meant that the Group
has not been required to provide any net additional capital to the US Life
businesses. This compares favourably with our previous guidance where we stated
the business could require between $200- 300 million. The development for 2010
capital needs in US Life depends upon a wide range of factors including our
statutory earnings, market movements, ratings migration and the implementation
of possible changes to both US GAAP and NAIC accounting rules which are
currently under consideration. Such developments may result in a release of
statutory capital requirements in due course. Given the capital position of the
business and our expected level of IFRS impairments for 2010 of $55 million, we
do not anticipate a capital injection into the business during 2010.
Liquidity and Cash Flow
As a Group we concentrate on maintaining effective dialogue and strong
commercial relationships with our banks and fixed income investors. In 2009 we
have successfully extended two existing bank facilities of GBP250 million, have
put in place an additional three-year bank facility of $200 million, and in
October 2009, we successfully placed a GBP500 million seven-year 7.125% fixed
rate senior bond.
At 31 December 2009, the Group holding company had total liquidity headroom of
GBP1.2 billion (2008: GBP0.6 billion), comprising cash of GBP0.4 billion and
undrawn facilities of GBP0.8 billion.
In addition to the cash and available resources referred to above at the
holding company level, each of the individual businesses also maintains
liquidity to support their normal trading operations.
008: GBP308 million) was generated by the LTS division. Bermuda continues to be
included as covered business for both 2008 and 2009.
Leverage
Our reported net debt at 31 December 2009 was 0.4% up on the 2008 year-end
position at GBP2,273 million, but was GBP102 million lower than at 30 June
2009. This represented senior debt leverage of 1.8% compared to 5.4% in 2008
and total debt leverage was 20.1% in 2009, compared to 26.7% in 2008.
At 31 December 2009, our gross debt on an IFRS basis was GBP2,842 million, and
at market value it was GBP2,526 million.
The movement in the net debt position is as follows:
GBPm
2009 2008
Opening Net debt (2 263) (2 420)
Inflows from businesses 529 822
Outflows to businesses and expenses (339) (440)
Debt and equity movements
Ordinary Dividends paid - (353)
Share repurchase - (175)
Equity issuance 2 5
Other non-cash movements (202) 298
Closing Net debt (2 273) (2 263)
Net decrease/(increase) in debt (10) 157
During the year, the business units contributed GBP529 million of inflows which
were offset by GBP339 million of operational expenses and organic investment
including the $225 million of capital injected into US Life in the first
quarter. During the period, cash of GBP41 million was also used to exit the AA
TEDA transaction and GBP80 million was paid in respect of the settlement of
certain longstanding litigation matters.
Dividend
The Board has carefully considered the position in respect of a final ordinary
dividend for 2009, and is recommending the payment of a final 2009 dividend of
1.5p per share (or its equivalent in other currencies). The Company is planning
to offer, for the first time, a scrip dividend alternative for eligible
shareholders subject to finalising the associated logistics and timetable. A
separate announcement will be made about this when these matters have been
clarified. The dividend timetable is set out below:
Currency conversion date 5 May 2010
Currency equivalents announced 6 May 2010
Last Day to Trade cum div for shareholders
on the registers in Malawi, Namibia,
7 May 2010
South Africa and Zimbabwe
Ex-dividend date for shareholders on the
registers in Malawi, Namibia, South Africa
and Zimbabwe 10 May 2010
Last Day to Trade cum div for shareholders
on the UK Register 11 May 2010
Ex-dividend date for shareholders on the UK
Register 12 May 2010
Record date for the dividend 14 May 2010 (Close of business)
Payment date 25 June 2010
Share certificates on the South African register may not be dematerialised or
rematerialised between 10 May 2010 and 14 May 2010, both days inclusive.
The Board intends to pursue a dividend policy consistent with our strategy, and
having regard to overall capital requirements, liquidity and profitability, and
targeting dividend cover of at least 2.5 times IFRS AOP earnings over time.
US Life bond portfolio performance
The cash characteristics of the US Life business are very different from that
of the equivalent period of 2008. We consider that the unusual market
conditions have validated our decision to hold a higher than usual cash
weighting in the US Life Investment portfolio. In the second half of 2009, we
began to make selective purchases of new bonds. We currently hold around $0.8
billion of cash and other short-term holdings in the portfolio. The profile for
maturities from the bond portfolio and new premium inflow, gives us
considerable flexibility when considering actions to mitigate against having to
realise losses on corporate bonds. The portfolio is well matched with assets
(including cash and short-term holdings) of 5.6 years of average duration
compared to 5.8 years of liabilities.
On the US Life $15.3 billion fixed income security portfolio, the unrealised
loss was $0.5 billion as at the end 2009, and has continued to improve to below
$0.2 billion as at the end of February 2010. This compares to $1.6 billion as
at 30 June 2009 and $2.3 billion at 31 December 2008. All of the above amounts
are stated net of the impact of reclassification of certain securities
permitted by the amendment of IAS 39, the unrealised loss on which amounted to
$45 million at 31 December 2009, $283 million at 30 June 2009 and $387 million
at 31 December 2008.
Of the portfolio, 50% is rated `A` and above, 42% is rated `BBB` or below and
8% is not rated. The ten largest holdings account for $1.3 billion (8.1%) of
the portfolio (31 December 2008: $1.1 billion and 6.1%) with an average holding
of $128 million (2008: $107 million). The portfolio continues to have
approximately 15.7% in residential and commercial mortgage-backed securities,
with approximately 5% in preferred stock and hybrid instruments.
There have been a small number of defaults in the portfolio in the year
amounting to $14 million. Total impairments amounted to $389 million in 2009
compared to $711 million in 2008. The valuation of the bonds held in the
portfolio has benefited from the ongoing equity recapitalisations, mainly of
financial companies. As a result, we have taken advantage of the opportunity to
harvest gains so as to further improve the underlying features of the bond
portfolio. The running yield of the portfolio is 5.82% (including cash and
other invested assets).
Bermuda
Bermuda is in run-off and consequently is treated as a non-core entity from
2009. The effect of this is to remove its result from our AOP disclosures, but
to account for the interest on the loan notes to the Group as a cost for AOP
purposes of approximately GBP40 million annually. It continues to be
consolidated for the purposes of IFRS reporting. The AOP eps for 2008 has also
been restated from 12.2p to 14.9p.
During most of 2009, hedges were applied to a core number of components
(interest rates, foreign exchange, equity markets), with an average hedge
effectiveness of 95-96% achieved in the period to September 2009. Given the
improvement in the capital position of the Group and the stabilisation of the
hedge effectiveness, combined with management`s improved understanding and
management systems for tracking the underlying risks, a process of selective
and progressive release of the external hedge position commenced in the fourth
quarter of 2009, with strict oversight and within risk parameters agreed with
the Group Risk and Capital Committee. By 31 December 2009, the majority of the
equity market hedges had been released. The release of the hedges is subject to
a stop-loss protocol, and controls are in place to ensure that effective hedges
can be reinstated quickly if required.
The business remains well capitalised and able to meet all its future
obligations. Surrender behaviour that is influenced by underlying fund
performance will determine the speed at which the Bermudan book of business
runs-off over time, and the extent and timing of any capital and cash release.
Group restructuring, corporate disposals and acquisitions and related party
Transactions
The Group continues to simplify its structure and reduce its spread of business
to focus on areas of key competence and competitive strength, and drive
operational improvements. As discussed in the Group Chief Executive`s Report,
we have announced a programme of corporate restructuring designed to simplify
the Group and realise value for shareholders. A number of operations have been
identified for potential exit. We expect proceeds from disposals and from
retained earnings will be deployed to reduce debt as part of the Group Capital
Management Programme. Within each business and in particular in the Wealth
Management division of LTS, reorganisations and efficiency programmes are being
launched, with a target of reducing costs by GBP100 million across the Group by
the end of 2012. In aggregate, these will result in expected 2010 charges to
AOP of around GBP50 million. While the restructuring programme is put into
effect, we will be able to assess the impact on Group Head Office resources
required and the progress made from iCRaFT and other risk management
improvements. Head Office costs for 2009 were GBP65 million, and following the
implementation of iCRaFT and the completion of the restructuring, we anticipate
that we can maintain underlying Group Head Office costs at less than GBP60
million per annum.
During 2009, the Group launched an offer for remaining minorities of Mutual &
Federal. This transaction closed on February 2010 with the issue of 147 million
ordinary shares to the minority shareholders. We also successfully completed
the acquisition of a 100% share in ACSIS, a South African asset management
firm, in August. Disposals in 2009 were of the Chilean and Australian
businesses, and the withdrawal from the AA TEDA acquisition in China in the
first half of 2009, and Bankhall in the UK in October 2009. Following the
disposal to Nedbank of several Old Mutual joint ventures, Old Mutual has sold
the shares received from Nedbank in accordance with regulatory approved
processes. During February 2010, Nedbank received final regulatory approvals to
acquire 100% of the ordinary and preference shares in Imperial Bank.
Tax and Non-controlling interests
The effective tax rate on adjusted operating profits of 25% has returned to
within its normal anticipated range, from 8% in the comparative period.
Factors increasing the 2009 AOP tax rate compared to 2008 include a reduced
proport ion of profits being earned on low-taxed dividends and capital profits,
partially offset by prior year adjustments and lower secondary tax on companies
(STC) costs on reduced dividends. We anticipate a similar rate for 2010.
Furthermore, the 2008 rate was anomalously low due to the unprecedented market
conditions, the recognition of pre viously unrecognised deferred tax assets and
a release of provisions following agreement of various issues with tax
authorities.
The IFRS effective tax rate for 2009 was anomalously high at 148% reflecting
policyholder contribution, losses carried forward not recognised and
non-deductible goodwill.
Risks and Uncertainties
There are a number of potential risks and uncertainties that could have a
material impact on the Group`s performance and that could cause actual results
to differ materially from expected and historical results.
Continued volatility in world economic conditions creates uncertainty in equity
markets, currency fluctuations, credit spreads, corporate bond defaults and
rating agency actions both on investments owned by the Group and the Group
underlying entities. Unemployment conditions continue to deteriorate and could
adversely affect termination experience in respect of the life insurance
business that could result in realising losses on illiquid assets, particularly
in the case of US Life, although this is likely to be less than in 2008 and
2009. Credit losses in South Africa`s banking system are subject to uncertainty
and volatility.
Economic uncertainty has contributed to reduced consumer confidence, which we
have experienced as a consequence of changing product preferences to lower risk
investment products and affecting termination experience in respect of existing
and new business. These may have an impact on earnings and present both risks
and opportunities for the Group.
The Group is continually monitoring these uncertainties and taking appropriate
actions wherever feasible. The Group continues to meet Group and individual
entity capital requirements and day to day liquidity needs.
The implementation of the new operating model will present challenges, yet
reduce risk across the Group. The Group continues to strengthen and embed its
risk management framework, whereby we actively monitor and manage risk through
the three-lines-of-defence at both a Business Unit and Group level, where risks
exceeding pre-determined thresholds are escalated to management and risk
officers, who are responsible for the appropriate mitigating action. Each
business regularly reviews its overall business risk exposure against risk
appetite set in conjunction with Group Head Office. Further detail on risk
management is provided in the Group Risk Report.
Philip Broadley
Group Finance Director
11 March 2010
Business Review
Long-Term Savings: Emerging Markets
Excellent results in a tough operating environment
2009 2008 % Change
Highlights (Rm)
Long-term business adjusted operating profit 3 263 3 398 (4%)
Asset management adjusted operating profit 958 921 4%
Long-term investment return (LTIR) 1 658 2 032 (18%)
Adjusted operating profit (IFRS basis)
(pre-tax) 5 879 6 351 (7%)
Return on allocated capital (OMSA only) 26.0% 27.8%
Operating MCEV earnings (covered business)
(post-tax) 2,794 5,237 (47%)
Return on embedded value (covered business)
(post-tax) 9.8% 14.4%
Life assurance sales (APE) 5 178 5 105* 1%
Unit trust/mutual fund sales 36 421 41,418 (12%)
PVNBP 37 339 36 675* 2%
Value of new business 853 813* 5%
APE margin 16% 16%
PVNBP margin 2.3% 2.2%
Net client cash flows (NCCF) (Rbn) (20.5) (27.3) 25%
%
2009 2008 Change
Highlights (Rbn)
Total funds under management 518.4 552.6 (6%)
Of which, SA client funds under management 448.7 443.0 1%
* Excludes Nedgroup Life sales. The comparative including Nedgroup Life are as
follows: APE: R5,537 million; PVNBP: R37,959 million; VNB: R934 million; APE
margin: 17%; PVNBP margin: 2.5%
A summarised sterling version of above table is shown in the Group Finance
Director`s Review.
Overview
Emerging Markets` economies rallied strongly during the second half of 2009,
benefiting from a weaker dollar and higher commodity prices after the credit
crisis. South Africa experienced a comparatively modest and short recession in
the first half of 2009, but returned to growth in the third quarter and ended
the year with positive quarterly GDP growth. We expect this momentum to
continue into 2010. The South African equity market enjoyed a very strong final
quarter as local and foreign investors moved into equities. Growth also resumed
in Latin America and Asia from the third quarter onwards. Markets rallied
strongly during the second half of the year and emerging markets` currencies
generally appreciated strongly against both the pound and dollar, with the
closing rand rate rising against those currencies by 13% and 22% respectively.
The impact of the economic volatility led to an increase in the share of risk
product sales across our product lines relative to savings and investment
products.
South Africa constitutes approximately 94% of the IFRS adjusted operating
profit of our Emerging Markets Business Unit.
South Africa
In South Africa, our business has been resilient with strong profitability and
high return on allocated capital in very difficult economic conditions, with
our like-for-like sales on an APE basis up marginally compared to prior year
(after excluding Nedgroup Life sales in 2008). We continued to invest in our
distribution capability and as a result, we grew market share in our core
product ranges and are well positioned to benefit from the recovery in consumer
confidence. Nevertheless, the demand for our products during 2009 was adversely
affected by rising unemployment and generally low consumer confidence across
the economy. These factors, among others, have put pressure on disposable
income, resulting in a number of customers terminating their policies. This
poor persistency experience adversely affected the claims experience in the
year. However, through continued investment, we improved the service levels to
our customers. This is evidenced by the number of service awards we continue to
win. We were awarded first place for service excellence in the long-term
assurance category in the 2009 Ask Afrika Orange Index national surveys as well
as the 2009 award for Best National Call Centre. We continued expanding our
distribution footprint by retaining and attracting intermediaries and growing
our relationships with them. Despite the economic challenges, we have expanded
our tied distribution from 5,181 intermediaries in 2008 to 5,229 intermediaries
in 2009, and we successfully completed the acquisition of a 100% share in
ACSIS, a South African asset management firm, in August, thereby gaining access
to a niche market of private and retirement fund customers. 2009 was also the
first full year of trading of Old Mutual Finance (OMF), our new retail loan
business, which has expanded our distribution reach by establishing 65 OMF
branches in 2009.
In June 2009 we sold our shares in the Nedgroup Life and BOE Private Client
joint ventures to Nedbank. As a result we now exclude Nedgroup Life sales from
our life sales and embedded value for both 2009 and 2008 sales and margin
numbers. However, for IFRS and AOP profit reporting, these businesses have
still been included for the first 5 months to 1 June 2009 and for the full year
in 2008.
Other Emerging Markets
Namibia
We achieved remarkable results in a year of immensely tough trading conditions.
Sales of recurring premium products, which is core to the life company, ended
12% up on the prior year. There was a swing to investment business and we grew
our Unit Trust sales by 62% from 2008. The bulk of our Unit Trust sales went
into the money market fund, which is competing effectively with similar funds
run by banking institutions.
We developed and rolled out an innovative lending product. In addition, we
successfully implemented a new retirement fund administration system.
Rest of Africa
We continue to manage our investments in the Rest of Africa for value, although
they remain small relative to our profile in South Africa in 2009.
Latin America
Whilst our businesses in Latin America are small relative to others in the
Emerging Markets Business Unit, we have had an excellent profit growth of 133%
(in rand terms) in very difficult economic conditions. Non-life sales were
strong despite the slow start of the year following the H1N1 outbreak.
We have developed a new Retail Mass product in Mexico to be launched in 2010
and we are confident that this will significantly boost sales. We also intend
to tap into the expertise in South Africa to develop a range of transferable
and suitable product-types such as the "smoothed bonus" and "umbrella"
products.
Asia
Old Mutual`s operations in Asia consist of a joint venture with the Beijing
State-owned Asset Management Company in China (Skandia:BSAM) which sells
unit-linked and universal life products, and a 26% share in Kotak Mahindra Old
Mutual in India, a life assurance joint venture with the Indian-listed
financial services company, the Kotak Mahindra Group.
India accounts for the bulk of our Asian sales, with APE of R1.8 billion
(INR10.3 billion), and despite our business there growing faster than the rest
of the sector during the first quarter of 2009, sales were down 26% in rand
terms from the 2008 comparative (19% in local currency terms). Its strategy has
subsequently changed to focus on more profitable growth, as opposed to pure
revenue generation. Kotak Mahindra Old Mutual is still growing at an
encouraging rate on a relative basis and now occupies 10th position in the
industry for Individual business, with 1 million lives insured, and 9th
position in the industry for Group business, with 1.4 million lives insured.
APE sales in sterling terms in China (Skandia:BSAM) increased by 19% in local
currency terms from CNY77 million (R92 million) to CNY92 million (R113 million)
for the year. The increase in APE sales, was largely a result of a strong
growth in single premium sales, up 112% to CNY679 million (R836 million). Our
business in China continued to experience strong competitive pressure from a
number of direct competitors in the market. The industry ranking for
Skandia:BSAM, measured on a gross written premiums basis, improved from 40th at
H1 2009 to 38th by year-end. A number of new products are currently in the
pipeline for 2010.
Life sales summary
Over the whole year, life sales improved by 1% from 2008, despite the tough
environment. In South Africa, this was mainly as a result of strong growth of
recurring premium sales of 8% which was partially offset by a 6% drop in single
premium sales.
Recurring premium sales
Risk
Recurring premium risk sales increased primarily due to:
- promotion of the Severe Illness Benefit on the Greenlight product, where
sales in the Affluent Market grew by 11%;
- 5% growth in our sales force in Retail Mass and an increased focus on risk
products, which led to a 31% growth in the Retail Mass market; and
- success in securing large schemes in Corporate, leading to a 62% increase
in Group Assurance sales over the 2008 level.
Savings
OMSA sales of recurring premium savings products declined 7% relative to prior
year. Lower sales in our Retail segments, which were partially offset by strong
sales in the Corporate segment. Sales of recurring savings products were down
23% in the Retail Affluent segment as customers were reluctant to commit to
long-term savings products in light of the higher risk of job losses and lower
disposable incomes. In the Retail Mass segment, recurring premium savings sales
were down 5% mainly as a result of economic pressures. The new commission
structure on savings products also contributed to the lower sales of recurring
premium savings products in the Retail segments. However, we grew our recurring
savings sales by 139% in the Corporate segment as a result of higher sales of
our umbrella funds, our increased focus on building the direct sales channel
and expanded distribution through retail intermediary channels.
Single premium sales
Single premium sales were down 6% on prior year due to lower annuity sales.
Corporate annuity sales were affected by volatility in the market during the
first half of the year which led to greater caution by trustees, as well as
some pension funds being under-funded and, hence unwilling to transfer their
business to us and having to make a net contribution to the fund.
Life sales in the second half of the year improved by 35% in rand terms
compared to the first half and by 1% compared to 2008, as confidence began to
return to the economy and markets rallied. In Retail Affluent, life sales
improved by 26% in the second half after we enhanced our Investment Frontiers
fixed bond and Greenlight products. In Retail Mass, we improved our life sales
by 33% in the second half as a result of the increase in productivity of our
sales team. We secured new customers into our umbrella scheme, called
Evergreen, in the last quarter of the year, which boosted our Corporate
recurring premium sales by 57% compared to the first half of the year. The
strong pipeline we had in Corporate in the first half of the year materialised
in the second half of the year, resulting in 45% growth in single premium sales
over the first half.
A more detailed review by segment is included in the Financial Disclosure
Supplement which is available at www.oldmutual.com.
Unit Trust Sales
Unit trust sales were 12% behind 2008, with lower flows through Old Mutual
Investment Services (OMIS) in 2009 partially offset by good flows into money
market unit trusts early in the year and inclusion of Futuregrowth unit trusts
in our product range in 2009. Money market unit trusts slowed down in the
second half of the year as a result of a decline in interest rates. The 2008
comparative numbers were boosted by a one-off R2bn inflow into the Money Market
fund from the Galaxy platform. Sales in the second half of R19.1 billion showed
an improvement on the first half levels of R17.4 billion.
IFRS AOP Results
Adjusted operating profit was down 7%, driven mainly by a reduced LTIR, and the
long-term business profits declined by only 4% from prior year level. This was
mainly due to:
- impact of lower equity levels on asset-based fees and investment variances;
- mortality and disability losses on Group Permanent Health Insurance and
Group Life Assurance products;
- a small charge for share-based payments this year compared to a large
credit in the prior year as a result of the strong Group share price
performance; and
- the loss of seven months` contribution to profit from joint ventures with
Nedbank.
Excluding the contribution from Nedgroup Life in both 2008 and 2009, profit on
the life business was flat compared to the prior year.
In South Africa, life business adjusted operating profit declined by 19% in the
second half of 2009, mainly because the first half included higher contribution
from reserve releases than the second half, as well as the absence of profits
from Nedgroup Life and BOE.
Asset management operating profit in South Africa was down 16% on prior year as
a result of:
- lower average asset values and a reduction in the proportion of assets held
in equities (which attract higher fees) adversely impacting base fees;
- lower third-party managed funds
- lower transactional revenue in Old Mutual Properties business;
- mark-to-market losses in our Old Mutual Specialised Finance (OMSFIN)
business; and
- higher share-based payment costs.
The factors above were partially offset by higher performance fees earned in
the second half of the year and higher revenue on the term portfolio of OMSFIN
as the interest rate cycle turned. Asset management profits increased by 68% in
the second half of 2009 compared with the first half following the recovery of
equities and improved OMIGSA investment performance, which resulted in higher
performance fees. The Emerging Markets asset management result included an
increase in asset management profits in Latin America.
LTIR was 18% lower at R1,522 million after a 330 basis point decrease in the
rate of expected return (from 16.6% in 2008 to 13.3% in 2009), combined with a
marginally lower average asset base. The asset class split for 2009 was 30%
equities, 70% cash and bonds, compared to 48% equities and 52% cash and bonds
for 2008.
Value of new business and margins
The value of new business margin (excluding Nedgroup Life) remained flat at 16%
on an APE basis and improved from 2.2% in 2008 to 2.3% in 2009 on a PVNBP basis
mainly due to more favourable operating assumptions changes for new business.
MCEV Results
Market Consistent Embedded Value (MCEV) operating earnings after tax declined
by 47% from the 2008 level. This was mainly due to lower than expected returns
which decreased by R1.7 billion (based on lower one-year swap rates and a lower
opening embedded value of R28.4 billion compared to R36.4 billion in 2008), and
the impact of adverse operating assumption changes (-R1.0 billion) primarily
related to persistency and the capitalisation of certain project expenses.
Net Client Cash Flows
Retail net client cash flows were positive but overall net client cash flows
were at R20.5 billion worse than the prior period due to the previously
reported net outflow of R16.2 billion from the Public Investment Corporation
(PIC). Net client cash flows in the Retail Mass and Retail Affluent channels
improved on the prior year as a result of ACSIS and unit trust sales in the
Affluent segment, good sales protection sales growth and better than expected
mortality experience in the Mass segment. Corporate and OMIGSA experienced net
outflows. This was a result of higher benefit withdrawals (especially
withdrawal benefits from pension funds on the back of job losses across the
economy), two large terminations in Corporate, and net outflows from
Futuregrowth in OMIGSA, as well as the PIC outflow previously mentioned. We
anticipate further withdrawals from PIC in 2010 as part of their planned
mandate reallocation.
Investment performance
Overall OMIGSA investment performance continues to improve. Fifteen of our
collective investment scheme funds ended the calendar year in the top quartile
of their respective industry categories over one year, with ten and eleven
funds achieving top quartile ranking over three and five years respectively.
Notable performance has come from Macro Strategy, where all three of their
Flexible, Balanced and Stable Growth unit trusts are positioned in the top
quartile of their respective categories over the calendar year to end December.
Similar recovery has come from Value Equity and Select Equity, where their High
Yield Opportunity Fund, Growth Fund and Top Companies Fund are all in the top
ten funds (out of 76) in the General Equity category over the year.
Funds under management
Funds under management of R518 billion decreased for Emerging Markets as a
whole, mainly due to the inclusion of Skandia Australia`s funds under
management of approximately R25 billion in 2008. Skandia Australia was sold in
March 2009. FUM in OMSA improved by 2% from 2008 as a result of acquisition of
ACSIS and positive market returns partially offset by negative net client cash
flow.
Outlook
The South African economy emerged from recession in the third quarter although
consumer confidence remains low. Latest government predictions are for the
South African economy to grow by 2.3% in 2010, and consumer confidence is
expected to continue to increase. However, some concerns remain as private debt
levels are still above sustainable levels and further job cuts are expected
despite the economic recovery.
We believe that the outlook for the rand is favourable because of the high
interest rates, a narrowing trade deficit, the global recovery and growing
confidence regarding South Africa`s economic policy direction, as evidenced in
the recent Budget.
The long-term outlook for the savings and investment environment is positive
and is supported by a combination of factors:
- the prudent fiscal and monetary policies of the past years are expected to
continue the recent trends of the economy returning to a robust growth path by
the end of 2010;
- the growing emerging black middle class and affluent markets, supported by
the reduction in interest rates in 2009, the now-growing economy and Black
Economic Empowerment efforts should sustain consumer spending growth;
- the Government`s continuing investment in infrastructure and public sector
employment programmes;
- Governmental policies for the formulation of a framework for mandatory
retirement savings; and
- improvements in the level of financial education and the transparency of
financial products.
The short-term picture looks increasingly optimistic, but remains at risk from
market volatility as well as volatility in the rand. We are monitoring the
current situation with increasing vigilance and are well positioned to react
quickly to any unfavourable eventualities.
In 2010 we will continue our activities to transition from a traditional life
assurer to a modern savings and investment business as well as continuing to
grow the business and underlying net client cash flows. We will work on growing
distribution, improving investment performance and service levels as well as
expense management.
We also continue our measured expansion into the Rest of Africa. Africa is an
important growth market given improvements in governance and increased
disposable wealth, leading to a growing demand for financial services products.
In Latin America we will continue to focus on how to grow the business by
leveraging strengths and capabilities in OMSA and the rest of the Group.
We will broaden our retail product offering, expanding our distribution, and
developing asset management capability for our corporate business.
Long-Term Savings: Nordic
Continued strong net client cash flows, rising FUM and strengthened relations
with distributors
Highlights (SEKm) 2009 2008 % Change
Long-term business adjusted operating profit 502 754 (33%)
Banking business adjusted operating profit 193 283 (32%)
Asset management adjusted operating profit 42 39 8%
Adjusted operating profit (IFRS basis)
(pre-tax) 737 1,076 (32%)
Return on equity* 11.7% 17.0%
Operating MCEV earnings (covered business)
(post-tax) 965 1,839 (48%)
Return on embedded value (covered business)
(post-tax) 8.1% 12.9%
Life assurance sales (APE) 2 819 2 599 8%
Unit trust/mutual fund sales 4 708 3 207 47%
PVNBP 13 774 12 108 14%
Value of new business 526 397 32%
APE margin 19% 15%
PVNBP margin 3.8% 3.3%
Net client cash flows (SEKbn) 11.6 7.0 66%
2009 2008
Highlights (SEKbn)
Funds under management 127.2 91.9 38%
* Return on equity is IFRS AOP (post tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles
A summarised sterling version of above table is shown in the Group Finance
Director`s Review.
Sales
New sales in Nordic increased by 8% compared to the prior year, driven by the
very successful Skandia Depa product sold through Skandiabanken direct sales,
the internal advisory channel and brokers. Retail business was strong with
muted impact on our particular target markets from the recession. However, the
effects of the economic downturn did have an adverse impact on occupational
pension sales in the Swedish corporate sector with lower inflows as a result of
less workforce mobility, lower salary increases, and higher than expected
premium cessations due to layoffs. Management closed down sales of an
unprofitable unit-linked product in September 2009 and this had a meaningful
impact on sales growth in the final quarter of 2009.
Nordic had excellent growth in mutual fund sales, which increased by 47%
compared to the prior year. The driver behind this growth was Skandia Global
Hedge, one of the best performing hedge funds in Sweden, which attracted SEK950
million of inflows. In addition, during 2009 there was a material inflow of
customer fund holdings from other banks as the result of a marketing campaign
launched early in the year.
IFRS AOP results
IFRS AOP decreased 32% in 2009 compared to the prior year. The fall in interest
rates in Sweden and specific differences in valuation basis between IFRS assets
and the liabilities under Swedish regulations resulted in unrealised losses of
SEK119 million in the assets backing reserves in the unit-linked and health
businesses. Interest rates are now at a historical low in Sweden. The health
insurance business (rebranded as Lifeline) was also negatively affected by the
higher cost of claims and lower premium income. Management has re-priced the
business and made changes to both products and policy conditions. In Denmark,
where similar management actions were taken in early 2009, the business showed
considerable improvement in the second half of 2009, and similarly the Swedish
business is expected to improve in 2010.
Skandiabanken`s results were weaker due to lower net interest income following
the repo rate declines during the year and the impact on the margin of prudent
liquidity management. Credit losses increased marginally, but the credit loss
ratio is still at a low level (0.14% in 2009 compared to 0.13% in 2008),
reflecting the low-risk nature of Skandiabanken`s lending business, and the
stability of the Nordic residential market.
IFRS AOP was positively affected by increased investment value in the private
equity portfolio of SEK51 million. The second half of 2009 showed strong
results in the unit-linked business due to positive growth in FUM driven by
positive stock markets trends, together with a strong NCCF, thus increasing
fund-based income.
We are continuing to review the expense base of the business, and will seek to
cut costs in 2010 where we are able to do so.
Skandia AB and Skandia Liv have decided that for the time being there will be
no changes made to the corporate form of Skandia Liv, but that they will be
moving forward with the objective "One Skandia", maintaining a close
cooperation between the two companies.
Value of new business and margins
The value of new business and profit margin increased substantially during the
second half of 2009, due to a more profitable business mix, positive operating
assumption changes and sales growth. The business mix was positively affected
by the closure of the private regular premium unit-linked product referred to
above, which was replaced by a much more profitable, lower commission product.
The assumption changes are driven by changed mortality pricing and positive
experience as well as high transfers into the unit-linked decumulation product,
thereby prolonging the duration significantly. The effects came through during
the second half of 2009, and PVNBP margin improved from 3.3% for 2008 to 3.8%
for 2009, and APE margin from 15% for 2008 to 19% for 2009.
The price pressure in the Swedish market continues, especially in the corporate
market. In the medium term, the margin is still expected to remain in the high
teens, but this will require continued high new sales, product development and
cost control.
MCEV results
Operating MCEV earnings were down 48% on the comparative period mainly due to
lower than expected existing business contribution arising from historically
low interest rates, capitalised one-off developmental project costs, and
increased outward transfer assumptions during the accumulation phase of
corporate business. The closing MCEV has increased substantially, especially in
the second half of the year, due to the impact on non- operating earnings of
strong stock market performance leading to large positive investment variances,
and a release of provisions after the settlement of certain longstanding
litigation matters.
NCCF
Net client cash flows for the year were an exceptional, and record high of, SEK
11.6 billion, representing 13% of opening funds under management.
The positive performance was largely driven by a combination of strong Life
sales, especially the Investment Portfolio product, regular premium unit-linked
sales, and lower outflows related to maturities and surrenders in the
occupational pension business. Positive flows in mutual funds also contributed
to this performance. Net client cash flow increased 66% compared to the prior
year, although it weakened in the second half as a result of the increase in
the pace of corporate outflows.
Funds under management
Funds under management at 31 December 2009 were SEK127 billion, up 38% from the
level at 31 December 2008, and 18% from 30 June 2009. The increase was due to
strong net client cash flows and positive development on the equity markets.
This is a significant improvement compared to previous periods.
Our 2009 investment performance was excellent. For the third consecutive year,
Skandia Link was awarded for best performance among the unit- linked companies
in the Swedish market. During 2009 Skandia Link`s average client enjoyed
investment performance of 29%. Average performance on a weighted index (66%
MSCI AC World and 34% OMRX Total Market) during the same period was 15%.
Clients are increasing their appetite for investment risk by weighting a larger
proportion of their holdings in equities, and in particular emerging markets
equities.
Outlook
Although the financial markets continue to be volatile, the outlook for the
Nordic markets remains positive. The mass corporate market is challenging with
an increasing movement towards low margin tendered business. We continue to
focus on strengthening the market position by delivering first-class products
and offerings to customers both on the private market, as well as the higher
margin segment of the corporate market. A key part of this is the improvements
to the Skandia Nordic platform, Skandia.se, which was re-launched during the
second quarter of 2009. With the launch of a series of combined offerings such
as the Skandia Investment Portfolio, Skandia DepA?, the business has started to
exploit the potential of decumulation products and increased cross-selling. We
have also strengthened our ALM capacity, improved our operating model to be
more customer oriented, and announced changes in the commission structure to
improve future profitability. With increased focus on client needs and
profitability, we remain convinced that we can turn this period of disruption
into a lasting opportunity. The broad product mix and market position of our
business gives us a competitive advantage in a challenging market.
We are disposing of further private equity assets and expect a pre-tax profit
of approximately SEK126 million from this source in 2010.
Long-Term Savings: Retail Europe
Key foundations laid for the future development of the business
Highlights (EURm) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 25 36 (31%)
Return on equity 9.0% 18.6%
Operating MCEV earnings (covered business)
(post-tax) (49) 18 (372%)
Return on embedded value (covered business)
(post-tax) (7.9%) 2.6%
Life assurance sales (APE) 75 114 (34%)
Unit trust/mutual fund sales 27 59 (54%)
PVNBP 603 699 (14%)
Value of new business (6) 13 (146%)
APE margin (8%) 11%
PVNBP margin (1.0%) 1.8%
Net client cash flows (bn) 0.6 0.6 0%
2009 2008 % Change
Highlights (EURbn)
Funds under management 4.7 3.7 27%
A summarised sterling version of above table is shown in the Group Finance
Director`s Review.
Sales
The Retail Europe countries were impacted by the difficult economic
environment, which affected the consumer confidence in our products. Unit-
linked markets decreased materially in premium size during 2009, whilst the
relative attraction of guaranteed products increased. This impacted the normal
increase in new business towards the year-end which did not materialise to the
same degree as in previous years. Overall APE sales in Retail Europe decreased
by 34% compared to the prior year.
2009 was a critical year for Retail Europe during which key foundations have
been laid for the future development of the business. In particular an
integrated senior management team has been established and functional heads
have been appointed for key cross-European functions, such as finance and risk.
The business is now working as a cross-border team whilst at the same time
maintaining focus on the distributor requirements in each market.
In the second half of the year, efforts to tackle new sales development were
increased within all Retail Europe businesses. The objective is to grow to
achieve critical mass in all our chosen niche markets. Examples include
intensifying the relationship with special distribution partners in Germany,
the initiation of cooperation agreements with Deutsche Bank in Poland, and the
development of the new Safety Plan product in Switzerland.
The combined impact of these initiatives and the recovery of the stock market
meant that in the fourth quarter new sales rose by 57% compared to the previous
three months, driven particularly by the German and Polish markets. The
variance against the fourth quarter of 2008 was reduced to 10%. This impact was
most marked in Poland where in the final quarter sales were 145% above the same
period in 2008 and 73% above the previous quarter. Similarly, German sales in
the final three months of the year exceeded the previous quarter by 76%.
Overall, the rally in sales, underpinned by the rally in equity markets,
positioned the business well at the end of the year after a very weak first
half of 2009.
IFRS AOP Results
The IFRS AOP for 2009 was EUR25 million, 31% lower than in 2008, mainly
affected by reduced fees, a lower investment result and a policyholder
profit sharing agreement with the regulatory authorities for the German
business. The main contribution to the IFRS AOP in 2009 has been made by
the Austrian business, exceeding the prior year result, driven by lower
administration costs and reduced commission expense. All markets achieved
positive IFRS results.
All businesses realised substantial cost savings in administration and staff
costs in 2009, aligning the cost base to the reduced sales environment.
However these savings were partially offset by the investment to integrate the
new management structure, and the one-off costs from closing the businesses in
both Hungary and Czech Republic, and our contribution towards the now-closed
ELAM office.
Value of new business and margins
The VNB in 2009 was negative EUR6 million, significantly below 2008 which was
EUR13 million.
The negative VNB and negative profit margin were mainly driven by the decrease
in new sales which caused sales volume acquisition expense overruns that could
not be entirely compensated for by savings in expenses. A reduction in higher
margin single premium business also added to the shortfall. Despite the lower
new sales, Poland, maintained a positive profit margin in 2009.
MCEV Results
The decrease in 2009 MCEV operating earnings is mainly driven by the lower new
business contribution, adverse experience variances and changes in operating
assumptions.
In comparison to the 2008 results, experience and assumption changes had a
negative impact of EUR24 million. This is as a result of the one-off experience
variances and a further assumption change for profit-sharing in Germany, as
well as expenses overruns, other minor methodology changes, and the recognition
of one-off developmental project costs. This was offset by positive persistency
assumption changes and less adverse persistency experience than in 2008.
The management action taken in 2009 and the rebound in the markets provide a
positive backdrop to the MCEV prospects for 2010.
NCCF
The NCCF in 2009 remained robust at EUR551 million due to stable regular
premiums, and was flat relative to 2008. The continued strong performance of the
NCCF represented 15% of the opening funds under management.
The strong result is driven by the positive development of surrender
experience, which was 20% below 2008 in the unit-linked business.
Management action to increase client and broker communication led to this
positive result despite the ongoing volatility in financial markets.
Funds under management
Funds under management ended the year 27% above the position at 31 December
2008, heavily benefiting from market performance and stable NCCF. This includes
positive market movements on portfolio values of 19% of opening FUM, reflecting
the rise in financial markets seen across the globe in the second half of 2009.
In the German business the EUR2 billion mark was exceeded for the first time.
Equity funds particularly benefited from the capital market developments in
2009. Actively managed portfolios as well as guarantee funds rose in line with
total client funds (31% and 27% compared to 30% in total client funds). This
was close to leading market indices such as the MSCI World (in EUR) which rose
by 23%.
FUM was supported by the effective asset mix of the portfolio and reflects the
investment appetite of our clients. While client funds were impacted by the
fall in equity markets during the financial crisis, they have benefited from
the recovery that started in the second half of the year, and this trend is
expected to continue throughout 2010.
Outlook
Retail Europe faces another challenging year, but we are confident of
increasing market share and strengthening our position. Our core strength is
the flexibility of our unit-linked concept with embedded guaranteed funds and
our strong investment expertise. The senior management team has established a
systematic change management approach to steer and successfully implement the
ongoing transformation of the business in the challenging international
environment. We continue to explore opportunities to create efficiencies by
utilising the skills, and capacity available in the South African business.
Despite the ongoing uncertainty in our markets, we expect improved performance
and profit growth in 2010.
Long-Term Savings: Wealth Management
Improved sales performance in Old Mutual`s largest market
Highlights (GBPm) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 106 150 (29%)
Return on equity* 7.9% 9.7%
Operating MCEV earnings (covered business)
(post-tax) (4) 229 (102%)
Return on embedded value (covered business)
(post-tax) (0.3%) 14.3%
Life assurance sales (APE) 617 664 (7%)
Unit trust/mutual fund sales 3 210 2 561 25%
PVNBP 5 042 5 540 (9%)
Value of new business (post-tax) 49 67 (27%)
APE margin 8% 10%
PVNBP margin 1.0% 1.2%
Net client cash flows (GBPbn) 2.5 2.0 25%
Highlights (GBPbn) 2009 2008 % Change
Client funds under management 46.9 38.9 21%
* Return on equity is IFRS AOP (post tax) divided by average shareholders`
equity, excluding goodwill, PVIF and other acquired intangibles A summarised
version of above table is shown in the Group Finance Director`s Review.
Overview
Wealth Management has been operating in volatile markets during 2009. The UK
has experienced a severe recession, while France and Italy have also been
impacted to a lesser degree. While stock markets have now recovered somewhat,
customer confidence in savings has been significantly affected by uncertainty.
During the second half of the year, sentiment improved and as our customer
proposition became sharper, we have seen good growth in our sales, strong net
client cash flows and a marked uplift in funds under management. The fourth
quarter was particularly strong, contributing GBP203 million of the total
GBP617 million APE sales for the year, and GBP1,066 million of the GBP3,210
million unit trust/mutual fund sales for the year.
Sales
UK market
In the UK, our platform proposition is working well. This was particularly
evident in the second half of the year, when sales reached record levels and we
adjusted our product offering to sustain its relevance in the changing market
environment. The degree to which business is transitioning to our
platform-enabled model is highlighted by the material increase in contribution
from non-covered mutual fund business in the UK, which recorded a 22% increase
in sales when compared to 2008. By contrast, our covered business sales in the
UK declined by 6% year-on-year as client investment preference continued to
shift towards mutual funds, and away from the more traditional life product
offerings. We remained the leader in the UK platform market, with 33% market
share (in assets) (source: Lipper) at the end of the fourth quarter, well ahead
of our competitors. Our strong performance in the UK platform market is aligned
with our focus on delivering transparent, convenient and efficient services. We
are pleased with the momentum in this business, and this has been recognised in
the positive responses from a syndicated study conducted among pensions and
investment providers by ORC, a UK market research company, in the third
quarter.
International markets
In the markets in which Skandia International operates (primarily UK offshore,
the Far East, Latin America and the Middle East), the negative impact of the
global recession has had a lagged effect compared to 2008 when new sales were
relatively unaffected, with 2009 showing falls in inflow levels compared to
2008. However, sales in the second half of 2009 showed some improvement on the
first half. Single premium business represents 44% of our International
business. In the UK single premium offshore market, we have overtaken two
competitors and are now ranked second with a 14% market share based on
statistics for the third quarter of the year (source: MSE), a 4% increase on
previous periods. The UK offshore market represents 26% of our total business.
Following a change in government pension legislation, we have decided to cease
writing new pension business in Finland and are reviewing our other products.
Pensions were a significant profit generator for Skandia International in the
past, and the curtailing of that activity there will result in changes to the
emphasis of the business and reduce the cost base.
Continental Europe
In continental Europe (France and Italy), we have benefited from close and
positive relationships with distributors, resulting in sustained inflows
throughout the year. We continue to explore mechanisms to improve traction in
these markets, both in terms of the efficiency of our operational structure and
the nature of our relationships with distribution channels. Our continental
European business overall delivered covered business APE sales 54% higher than
in 2008 (on sterling basis), as both new and existing distributor relationships
generated improved sales. In Italy, our market share (assessed as new sales in
the unit-linked segment) grew from approximately 4% at the end of 2008 to 12%
at the end of 2009 (source: Ania).
In France, the market remains oriented towards guarantee products but sales in
the last quarter showed some recovery, rising by 33% over the previous quarter
of 2009 in sterling terms. We have decided to reduce our activity with
financial planners in Spain given the lack of business, and we will adjust our
headcount accordingly.
IFRS AOP results
IFRS adjusted operating profit was 29% below prior year levels on a pre-tax
basis. This reflects the operating leverage of the business, with lower
year-on-year net sales, and lower average levels of funds under management over
the course of the year, resulting in reduced management fee revenues. Lower
interest rates have negatively impacted shareholder investment return and
profit levels on the protection business in the UK. These negative movements
were partially offset by increased policyholder contribution profit recognition
in accordance with the three-year smoothing policy. The large contribution to
profits of the fourth quarter of 2008 following the market weakness are
smoothed over twelve quarters and so the full-year impact is only felt during
2009.
The IFRS AOP pre-tax result was negatively impacted by one-off items in 2009.
As previously announced, there were a number of write-offs in the first half of
the year, relating to unit allocation errors in International (GBP19 million)
and France (GBP4 million), a GBP6 million provision in the UK for legacy
product valuation and a write-down of GBP6 million on a property unit trust
investment relating to the Glanmore fund.
On a post-tax basis, the IFRS AOP result is 8% below 2008, due to a large
reduction in the AOP effective tax rate. The effective tax rate for 2008 was
unusually high at 38%, compared to 19% in the current year.
A significant portion of the UK AOP result, in both 2008 and 2009, arises from
gains in respect of policyholder contribution. These gains fluctuate over time,
although we would expect a normalised level of gains to be GBP30-GBP35 million
per annum. In 2008 and 2009, the gains recognised within the adjusted operating
result amounted to GBP59 million (pre-tax) and GBP96 million (pre-tax)
respectively, reflecting the market volatility experienced. In accordance with
industry practice and our stated accounting policy, these gains have been
smoothed through our results over a three-year period, rather than recognised
immediately in AOP. In 2010 we would expect the gain to be approximately GBP100
million (pre-tax), falling to GBP60 million (pre-tax) in 2011, before it
reverts to normalised levels in 2012.
Under the revised management structure of the Wealth Management unit, a robust
programme is underway to adjust how we serve the market, particularly in the
UK, and to restructure the operational infrastructure supporting the business.
Besides ensuring that our market offering is oriented towards servicing the
needs of our distributors, the programme is expected to deliver cost savings
across the business of GBP45 million on a run- rate basis by 2012, with
associated one-off restructuring cost at approximately the same level. GBP13
million of costs have been already incurred in the 2009 AOP results, with the
majority of the balance anticipated to be incurred during 2010, and an
associated run-rate saving of GBP11 million already achieved. We have also
streamlined the operations of Skandia Investment Group (SIG), appointing a new
head and announcing the closure of the US sales office, which has resulted in
GBP1 million in restructuring costs in 2009.
Value of new business and margins
Compared with 2008, the value of new business and profit margins were
influenced by three main factors:
- Lower sales volumes across all markets, with APE down 7% year-on-year,
which had a negative impact of GBP5 million on VNB and a 10 basis point
reduction in the PVNBP margin.
- This was offset by the positive impact of the reduction in the effective
tax rate on business value created on new sales in our offshore markets,
delivering GBP11 million of VNB and 22 basis points of PVNBP margin.
- The internal expense base did not scale down in line with reduced sales
production. Rather the internal acquisition expense base grew year- on-year
leading to a GBP15 million reduction in VNB and a 30 basis point reduction in
PVNBP margin. The increase in expenses reflects investments in the platform
business, but highlights the opportunity for further operational efficiencies
in the future.
MCEV results
The Market Consistent Embedded Value (MCEV) operating earnings after tax
declined from GBP229 million in 2008 to a loss of GBP4 million in 2009. The
change was mainly due to a lower than expected existing business contribution
(based on lower one-year swap rates), a lower new business contribution,
adverse experience and operating assumption changes partially offset by the
removal of dividend tax in International. For the latter effect, the impact on
adjusted net worth was recognised within the operating earnings, while the
impact on VIF was recognised in non- operating earnings.
In 2009 the adverse operating assumption changes of GBP99 million were the net
impact of:
- strengthening persistency assumptions in both the UK and International
businesses (-GBP81million), of which -GBP24 million was in response to the new
regulation in Finland,
- capitalisation of planned development and project spend together with a
strengthening of maintenance expenses (-GBP66 million),
- a higher fee income assumption (GBP36 million)`
- changing a morbidity risk assumption in the UK to align with positive
experience (GBP12 million)` and
The fall in operating MCEV earnings is the driver of the 14.6% year-on-year
fall in RoEV.
NCCF
Net client cash flows showed a 25% improvement on the prior year, driven by
good new sales inflows and improving persistency.
On the UK platform, annualised surrender rates improved from approximately 14%
of average funds under management at the beginning of the year to 12% by the
end of 2009. As we migrate business to the platform, the UK legacy business has
seen lower inflows coupled with higher surrender rates, which has resulted in
negative net client cash flow for the year from this part of the business.
Surrender rates on the legacy book appear to be stabilising, and a retention
team has been mobilised locally to improve persistency, including assessing
options for controlled transfers to the platform where this would serve client
investment objectives. However, we do anticipate that the traditional book of
business will gradually decline as more investors move away from the legacy
products towards the platform-enabled investment propositions.
Net client cash flows in our offshore business were impacted mainly by lower
sales levels, with surrender levels remaining relatively high as a result of
market conditions. 2009 surrender experience, influenced by broker-specific
surrenders and changed regulations in Finland, have prompted us to review and
strengthen our persistency assumptions, the effect of which can be seen in the
MCEV indicators. With recent improvements in surrender rates, our outlook for
persistency in the coming periods is cautiously positive.
Strong inflows and maintained focus on persistency have resulted in good net
client cash flows in continental Europe, which were significantly higher than
in 2008, and reached 19% of opening funds under management on a sterling basis.
Funds under management
Funds under management recovered strongly in 2009 as global equity markets
lifted from their low levels at the start of the year and as a result of strong
net client cash flows. 2009 full-year funds under management were 21% above
2008 closing position. Net client cash flow contributed 6% in asset growth,
while market movements on the portfolio added a further 15% to total funds
under management. Throughout the year, we have witnessed gradual changes in the
asset mix, as clients started shifting from conservative portfolios with high
fixed income weightings into relatively more risky asset classes as equity
markets recovered. This has a positive impact on the run-rate of our revenue
streams, which are substantially driven by fund rebates.
Investment performance on funds selected and managed by SIG showed a marked
improvement in 2009, with both our core range of researched third party funds
and our proprietary funds performing well, particularly since the restructure
of the UK fund range during 2009. In addition, SIG`s Asset Allocation Model
Portfolios have consistently outperformed benchmark since launch, with
significantly lower levels of volatility relative to benchmark. 2009 was an
excellent year for SIG, with overall fund range performance in the top quartile
in the industry, having 64% of funds ahead of benchmarks.
The improvements in investment performance in 2009 were aided by the
establishment of a dedicated portfolio management team, while the UK fund range
restructuring concentrated effort and scale into funds, cut total expense
ratios and enabled the use of tactical asset allocation for the first time. In
addition, improving economic and market conditions boosted risk appetite, with
active managers being rewarded for taking risk.
Outlook
Over the last quarter of the year, we attracted markedly better new business
inflows on the back of sustained financial market performance during 2009.
While the recovery in the global economy is still fragile and individuals`
economic situations remain constrained, we believe that investor appetite for
long-term investment is returning, while the gap between the need to save and
actual savings levels is increasing. The sustainability, speed and strength of
the economic recovery are difficult to predict; however, we are cautiously
optimistic. We expect that competition will be tough in 2010, as providers race
to capture the returning market. We believe that those providers with
market-relevant product offers and high levels of service quality and
responsiveness will be the winners.
The aftermath of the recession and its long-term impacts on customer behaviour,
trust and risk appetites is likely to be significant for the industry over the
next few years. However, we believe we are well-positioned to respond to these
changes as we build out our product proposition and offers with continued focus
on transparent, advice-led business.
Our market share has grown over 2009, which demonstrates that our products and
service quality remain relevant in the market. As the market recovers, we
expect this to position us strongly for further growth in funds under
management. The development of product spread and depth in the UK platform
market is critical to the success of the business and we will be accelerating
our focus on this in the period to 2012.
Our efficiency programme is intended to align the cost base of the business
with the nature of the lower margin platform business. We expect that this,
coupled with improving volumes and revenue, will have a positive effect on IFRS
and MCEV results in future years. Further restructuring costs are expected in
2010 as we implement these programmes. We have set ourselves goals for 2012 of
delivering a return on equity of 12-15%, net client cash flow of at least 5% of
opening funds under management, as well as GBP45 million of cost savings
referred to earlier.
Long-Term Savings: US Life
Continued progress to improve profitability and enhance risk management
Highlights ($m) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 76 (425) 118%
Return on equity 10.5% (25.3)%
Operating MCEV earnings (covered business)
(post-tax) 417 (676) 162%
Return on embedded value (covered
business) (post-tax) 22.7%** (97.6%)
Life assurance sales (APE) 107 251 (57%)
PVNBP 1,000 2,307 (57%)
Value of new business 22 (21) 205%
APE margin 20% (8)%
PVNBP margin 2.2% (0.9)%
Net client cash flows ($bn)* (1.5) (0.4) (275%)
2009 2008
Highlights ($bn)
Funds under management* 16.7 15.2 10%
* Stated on a start manager basis as USAM manages $6bn of the funds on behalf
of US Life
** Calculated as the operating MCEV earnings (post-tax) divided by the absolute
value of the opening MCEV
A summarised sterling version of above table is shown in the Group Finance
Director`s Review.
Overview
During 2009 we successfully transformed and scaled back the business. The major
actions of reducing the product profile, scaling back distribution with a focus
on top-tier producing agents, lowering staff numbers, and carrying out a full
review of the company`s outsourcing model are now complete. As a result of
these actions, the company made significant strides in addressing the three
core focus areas in the business, which are operational efficiency and cost
control, product and assumption risk, and the ongoing effort to de-risk the
company`s fixed income investment portfolio.
Sales
Total US Life sales (APE basis) were down 57% over the comparative period as a
result of a planned reduction in the number of products offered as well as
focusing on top-tier producing agents and conserving capital. As planned, total
gross sales declined from $1,950 million in 2008 to $860 million in 2009.
Elsewhere, the wider life insurance industry suffered a decline in sales not
seen since the end of World War II.
The product profile was streamlined to focus on more profitable sales and
products with lower new business capital strain. Fixed indexed annuity (FIA)
sales were down 47% to $60 million on an APE basis. This product line is the
company`s key offering, contributing 56% of total APE for 2009 and currently
offers attractive margins. It meets the needs of customers who seek principal
protection, as well as fixed interest guarantees or a guaranteed fixed income.
Immediate annuity sales represent 18% of total 2009 APE and remain an important
offering as they contribute to capital in the year of sale.
APE for the Universal Life product suite was down 57% to $22 million on an APE
basis and our core life product, Indexed Universal Life, fared the best out of
all life product segments, partially due to the elimination of Universal Life
products other than Indexed Universal Life. Indexed Universal Life continues to
offer attractive sales potential in the life market due to indexed crediting
options, and tax-advantaged growth and income options.
Term Life sales were suspended in 2009 due in part to their capital
inefficiency as a product.
Although volumes were managed down by design, key distributors that drive the
company`s sales remain largely intact year on year. In the annuity distribution
channel, four of the top five and eight of the top ten distributors are the
same in 2009 as in 2008. In the life distribution channel, three of the top
five and seven of the top ten distributors are the same in 2009 as in 2008.
Having recently concluded the company`s annual distributor conference, general
consensus was that US Life exceeded expectations in dealing with difficult
economic conditions in 2009 through a transparent communications
plan, creating a new foundation for future growth. Confidence from this group
remains high and key distributor relationships are strong.
IFRS AOP results
Pre-tax adjusted operating profit (IFRS basis) was $76 million for 2009
compared to a loss of $425 million for 2008. Gross margins (prior to DAC
amortisation) of $430 million in 2009 compared to a loss of $54 million in
2008. The prior year was impacted by a $436 million mortality assumption change
for the Immediate Annuity line. The underlying additional $48 million of margin
earned in 2009 is primarily driven by the annuity product lines which showed
better underwriting experience. Mortality on the Immediate Annuity line
improved over 2008 while 2009 includes a gain arising from commutation of 17
large cases. The FIA line generated higher surrender charges as a result of
increased surrender activity. Offsetting the better underwriting experience was
lower net investment income due to holding cash at the low interest rates of
the period and the increased level of surrender activity. DAC amortisation was
$354 million and $368 million respectively for 2009 and 2008. Unlocking in 2008
was due to prospective annuity assumption changes while that of 2009 was due to
the retrospective amortisation impact of surrenders and the decline in premiums
from Universal Life sales.
IFRS operating expenses were $58 million or 33% lower over the comparative
period resulting from tight expense management and cost renegotiations of three
key service providers.
Value of new business and margins
Value of new business increased by $43 million over the comparative period,
with the margin for the year at 20%. The increase in margin was mainly due to
higher swap rates and the focus on selling more profitable business. Management
actions to improve margins on fixed indexed annuities have also increased the
value of the in-force. The traditional life business has been shrunk given its
capital inefficiency.
MCEV results
Operating MCEV earnings improved significantly up $1,093 million from the prior
year loss of $676 million. This was mainly due to increased expected existing
business contributions, which accounted for $363 million of earnings in this
reporting period compared to $44 million in the comparative period, and the
large negative experience variances and assumption changes in 2008 which were
not repeated in 2009 (experience variances were negative $2 million in 2009
compared to negative $280 million in 2008, and assumption changes had a
positive impact of $47 million in 2009, compared to negative $619 million in
2008). MCEV does not capitalise investment spreads in excess of the adjusted
risk free reference rate up-front, as was the case under EEV. Were these
spreads to be capitalised, the increase in embedded value from the 2008 level
would be in excess of $900 million. Unlike for 2008, guarantees on the policies
in force in 2009 although above the low reference risk free rates prevalent for
the period, were generally less than the actual yield earned on the portfolio.
During the period we commuted a block of our SPIA contracts to the owners
through their third party advisors at a value less than the reserve established
for this block after the recent reserve strengthening, giving a positive
variance. Although the experience from the total SPIA annuity block can be
expected to be volatile, since it is a small book with some large individual
contracts, we are confident that the reserve adjustments made in previous
periods are adequate to cover the future expected outcomes in respect of this
business and the transaction described above supports this view. Changes in
lapse assumptions due to improved experience resulted in a small gain, while
amendments to the opening TVOG (time value of options and guarantees) balance
and the lapse methodology also gave a small net gain. We consider that the
anticipation of attractive crediting rates available from the rise in equity
markets during 2009 had a progressively beneficial impact on surrenders.
The large movements in non-operating earnings demonstrate the sensitivity of
the US Life MCEV to changes in the economic environment, as market consistent
methodology means that results move more directly in line with the movements in
the market in general. Since assets are marked to market the high unrealised
losses in the bond portfolio have a large impact on the MCEV. The $1.8 billion
decrease in unrealised losses in 2009, partially offset by a significantly
lowered liquidity premium assumption (100 basis points in 2009 from 300 basis
points in 2008), was the key driver of a net positive $681 million and 8.30p
per share impact on non-operating earnings, to the Group MCEV earnings per
share respectively, at 31 December 2009.
NCCF
Net client cash flows were negative compared to the prior year due to the
decision to reduce new business volumes and due to an increase in surrender
activity during the first half. We believe that this was driven by policyholder
liquidity needs and the adverse effect that the equity markets had on our fixed
index annuity returns. During the second quarter of 2009, a conservation
programme was introduced to focus on the reduction of full surrender activity.
The programme delivered benefits and surrender experience trended downwards in
the second half of 2009. By the end of 2009, the four-week average for full
surrender activity was nearly half the level seen at the peak in second quarter
of 2009 and was in line with long- term expectations.
Funds under management
Funds under management ended the period at $16.7 billion, up 10% from the
opening position primarily due to a $1.3 billion (10%) increase in the market
value of the investment portfolio and investment income for the period. This
was partially offset by negative net client cash flows of $1.5 billion, or 10%
of opening funds under management.
Investment portfolio
The fixed income portfolio continued to be affected by poor economic and
volatile financial market conditions, however the fair value of the portfolio
increased $1.3 billion from year-end 2008. The yield on the book value of the
fixed income portfolio was 5.82% (including cash and other invested assets),
and has not changed significantly from that of 2008, as reinvestment of cash
has not materially changed the overall yield. The company ended the year with
$0.8 billion (5% of holdings) in cash and short term holdings, reflecting
purchases of assets from cash inflows, as well as with cash proceeds from
de-risking and gain-harvesting transactions. Purchase activity has targeted
NAIC 1 to 2 rated securities including selectively into the financial services
sector. The net unrealised loss position on the fixed income security portfolio
improved to $0.5 billion at 31 December 2009 ($2.3 billion at 31 December
2008), reflecting a broad recovery in financial markets in general, and
narrowing corporate credit spreads in particular and selective de-risking. It
has continued to improve to below $0.2 billion as at the end of February 2010.
Continued Government purchases in the residential mortgage bond markets, and
increased support to the commercial mortgage market through programmes such as
the Term Asset-Backed Securities Loan (TALF) and Public-Private Investment
Program (PPIP) have also led to narrowing spreads across structured securities,
which have also been favourable to the portfolio`s unrealised loss position. As
the Federal Reserve`s support of the Agency market through explicit purchase of
such securities comes to an end in the first quarter of 2010, it is likely that
Agencies could retreat from current valuations. As such, despite excellent
collateral quality, we view Agencies as posing potential spread-widening risk.
Similarly, very highly-rated, long maturity securities are at risk of
underperformance or negative price action as long-dated Treasury yields move
higher on the back of mounting Federal deficits and the need to fund ongoing
stimulus programmes.
Approximately $1.5 billion of the fixed income portfolio is classified as Loans
and Receivables, which are carried at amortised cost. As a result, $45 million
of unrealised losses on a mark-to-market basis are not reflected in the balance
sheet in accordance with IAS 39.
During the last three quarters of the year, the financial services sector
securities were generally the largest contributors to the improvement in the
net unrealised loss position for the fixed income portfolio. With increased
access to capital and the prospect of stabilising and improving earnings
quality, the likelihood of coupon deferrals for weaker financial hybrids, such
as those of US regional banks, appears to be diminishing. Against the backdrop
of improved liquidity in the capital markets and a recovery in economic
activity, high yield default rates are expected to decline by around 50 to 75%
from prior year levels and investment grade downgrades are expected to return
towards historic norms. This implies that the worst of corporate defaults and
ratings downgrades has passed.
The fair value of the US fixed income investment portfolio at 31 December 2009,
after recognition of the impairments, totalled $15.3 billion compared to $14.0
billion at 31 December 2008.
Impairments
During 2009, there were three defaults in the corporate bond portfolio of $14
million included in the total $389 million of IFRS impairment losses on 82
securities. These were partially offset by $35 million of net investment
trading gains. As of 31 December 2009 compared to 31 December 2008, $807
million of investment grade securities were downgraded to non-investment grade
and $35 million of non-investment grade securities have been downgraded
further. Impairment losses included $235 million related to structured
securities, with the losses being due to adverse changes in expected future
cash flows. The impairment losses were primarily in residential mortgage-backed
securities ($138 million), commercial mortgage- backed securities ($80
million), preferred stocks and hybrid securities ($43 million net) and 13
corporate holdings ($111 million), the most significant of which were related
to financial sector issuers.
The fixed income portfolio has exposure to approximately $0.8 billion of
preferred stock/hybrid instruments amounting to approximately 5% of the
portfolio at 31 December 2009 compared to $0.6 billion (5% of the portfolio) at
31 December 2008, with the bulk of this exposure concentrated in the financial
services sector. During the first half of 2009, these holdings came under
pressure as concerns about financial institutions continued to mount In the
second half of 2009, however, the fair value of these securities have recovered
sharply, as results from the Federal Reserve`s "stress test" of banks were
released, and banks and other financial institutions successfully raised
capital to bolster their balance sheets.
We monitored closely and reduced our exposure to hybrid preferred securities
and other assets in advance of adverse rating migration (e.g. Dubai Ports in
2009) through trading activity. We also selectively harvested gains to offset
realised losses. We are encouraged with the progress we have been able to make
with better understanding and anticipating the dynamics of the portfolio
through our own processes and close co-operation with our expanded investment
management roster.
OM Financial Life Insurance Company regulatory capital, including capital
contributions, increased slightly compared to statutory 2008 levels as strong
statutory operating earnings offset investment impairments. OM Financial Life`s
required capital was essentially unchanged (at the targeted 300% level). In the
end, higher risk-based capital charges resulting from credit rating migration
of the portfolio due to investment downgrades and did not have a significant
impact in 2009. As expected, credit rating migration took place within the
corporate bond portfolio but this was offset by improved charges on the
structured security portfolio. The main reason for this was the NAIC RMBS
rating initiative that adjusted the asset risk required capital to account for
loss severity in the structured security portfolio. As yet no adjustment to the
CMBS ratings requirement has been agreed although this and other relief
measures are likely to be discussed by the regulators and the Industry.
The risk-based capital ratio increased from 305% at year end 2008 to 312% at 31
December 2009 based on the small movement in both capital and required capital.
The US Life business in aggregate did not need additional capital from the
Group in 2009, although capital was repositioned between companies within the
US Life Group through the transfer of $30 million from OM Re to achieve the
312% year end result. Given our anticipated level of impairments for 2010 of
$55 million, and the net capital consumption of our sales plans, we do not
consider it likely at this stage that we will require further new capital for
this business.
Outlook
By leveraging the business transformation successes accomplished in 2009, the
company is well positioned to generate modest, quality returns in the coming
year. Sales levels in 2010 are expected to increase over 2009 levels, but
within the capital utilisation parameters set for the business and with a
targeted focus on profitable products. New FIA and Universal Life products are
expected to be introduced in the second quarter of 2010.
Expense actions taken in 2009 will provide a lower expense base in 2010.
Capital self sufficiency is again the goal of the business for 2010 and the
balance sheet, including invested assets, is more conservatively positioned
than prior quarter-ends. In 2010, we are assuming a long-run rate of
impairments at 30 basis points of our bond portfolio for IFRS AOP.
The economic backdrop in the US continues to be quite muddled, with financial
market returns reflecting a sense of optimism and confidence that at times
appears at odds with core economic metrics. The impact of the government`s
extraordinary stimulus efforts has had a direct effect on the narrowing of risk
spreads across the board, and credit is flowing again to corporate America.
However, the labour market remains challenging, with the unemployment rate
hovering at around 10%, and companies still reluctant to materially expand
payrolls. The backdrop of high unemployment and below-average economic growth
continues to weigh on sentiment in the housing market and this gives rise to
risks to surrender levels. The exposure of the US bond market to real estate
impairments represents a further source of uncertainty as does the potential
price impact on higher quality bonds if rates rise.
Nedbank Group (Nedbank)
Resilient performance in a challenging environment
The full text of Nedbank`s results for the year ended 31 December 2009,
released on 25 February 2010, can be accessed on Nedbank`s website
http://www.nedbankgroup.co.za
Highlights (Rm) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax)* 6 192 8 800 (30%)
Headline earnings** 4 277 5 765 (26%)
Net interest income** 16 306 16 170 1%
Non-interest revenue** 11,906 10 729 11%
Net interest margin** 3.39% 3.66%
Credit loss ratio** 1.47% 1.17%
Cost to income ratio** 53.5% 51.1%
ROE** 11.5% 17.7%
ROE (excluding goodwill)** 13.0% 20.1%
Highlights (GBPm) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 470 575 (18%)
* Prior year AOP included an amount of R726 million in respect of the sale of
Visa shares.
** As reported by Nedbank in their report to shareholders as at
31 December 2009
Banking environment
The local banking industry experienced an exceptionally tough and volatile year
as a result of the impact of the global recession combined with cyclical credit
stress in the domestic economy.
Demand for credit slowed dramatically and retail impairments increased
significantly as consumers came under severe pressure from falling income, job
losses, declining asset prices and record high debt burdens. By the end of 2009
growth in asset-based finance had slowed to 1.0% year-on-year. Interest rates
were reduced by 450 basis points to cushion the effects of a rapidly slowing
economy and increasing unemployment.
Corporate demand for credit lost momentum due to weak global and local demand,
which eroded corporate profits through weaker pricing power, lower commodity
prices and a strong rand. Support came from construction projects and increased
government spending, boosted primarily by the public sector`s infrastructure
drive and preparations for the 2010 FIFA World Cup.
Despite the negative economic trends dominating much of 2009, underlying
trading conditions showed early signs of improvement around the third quarter.
This was led by a rebound in growth in emerging markets, especially China and
India, and was followed by initial indications of recovery in most
industrialised countries, chiefly brought about by unprecedented government
intervention and massive fiscal and monetary stimulation. Improved commodity
prices and global demand brought an element of relief to domestic export
manufacturers, lifting South Africa out of `official` recession in the third
quarter. There are early signs that the sharp drop in interest rates is
starting to revive household credit demand as house prices showed modest signs
of a slow recovery towards the end of the year.
Key to the outlook for 2010 will be employment growth. After job losses of
nearly one million during the downturn, employment showed early signs of
stabilising in the fourth quarter of 2009. Job creation in the formal sector is
likely to be slow, with an overall 2% employment gain for the year being
expected. This will support household income and lead to some improvement in
consumer finances and therefore spending. The rebound is likely to be slower
than in previous cycles given weak consumer and business confidence and tighter
lending criteria.
Review of results
For Old Mutual reporting purposes, IFRS AOP (pre-tax) profits fell by 30% to
R6,192 million.
Headline earnings decreased by 25.8% from R5,765 million to R4,277 million.
Basic earnings reduced by 24.7% to R4,826 million (2008: R6,410 million).
Diluted headline earnings per share (EPS) decreased by 29.8% from 1,401 cents
to 983 cents. Diluted basic EPS declined by 28.8% from 1,558 cents to 1,109
cents. These results are in line with the guidance given in the third-quarter
trading update.
Nedbank`s return on average ordinary shareholders` equity (ROE), excluding
goodwill, decreased from 20.1% to 13.0%. ROE decreased from 17.7% to 11.5% for
the year. These declines were driven primarily by increasing retail impairment
levels and the negative impact from lower endowment earnings that reduced
headline earnings, together with strengthened capital levels as shareholders`
equity growth far exceeded growth in total assets.
Nedbank Retail`s credit quality deteriorated in 2009, with impairments
worsening significantly, although the rate of new defaults slowed in the second
half of the year. Business banking and wholesale banking impairments ended the
year at better levels than originally anticipated.
Nedbank`s funding and liquidity levels have remained sound as a result of
ongoing focus on increasing and strengthening liquidity buffers, lengthening
the funding profile, maintaining a low reliance on interbank, foreign and
capital markets, as well as robust balance sheet management. A strong, broad-
based deposit franchise also provides Nedbank with diverse
funding sources.
Financial performance
Net interest income (NII)
NII grew 0.8% to R16,306 million. Following a 450 basis point interest rate cut
during 2009 and the resulting effect of lower endowment income, Nedbank`s net
interest margin decreased in line with expectations to 3.39% from 3.66% in
2008. The primary drivers of margin compression were: liability margin
compression reflecting the higher cost of term funding; lower endowment on
capital and non-repricing of transactional deposit accounts that are not
rate-sensitive; and quicker downward repricing of interest-earning assets
compared with interest-earning liabilities. These were partially offset by the
repricing of asset margins in line with Nedbank`s risk-based pricing policies.
Impairments charge on loans and advances
The credit loss ratio of 1.47% for 2009 (2008: 1.17%) showed signs of
improvement after having peaked at 1.67% at 31 March 2009.
The credit cycle has to date largely impacted consumers and the smaller
businesses, as reflected in the continued deterioration of retail credit loss
ratios. High levels of unemployment, lower collateral values due to weak
housing and vehicle markets, and delays in recoveries resulting from debt
counselling have all played a part in the increase in defaulted advances in
retail secured loans.
Wholesale banking credit loss ratios have improved since June 2009 and remained
better than anticipated for this part of the economic cycle. On the whole
credit quality in the Capital, Corporate and Business Banking books has
remained within acceptable levels, although in this volatile economic
environment the risk of corporate default remains high.
Defaulted advances increased by 56.3% from R17,301 million to R27,045 million
and represent 6.0% of total advances. Total impairment provisions increased by
24.7% from R7,859 million to R9,798 million. Although early arrears have
improved for the last seven consecutive months in the year, defaulted advances
have continued increasing albeit at a slower rate.
Non-interest revenue (NIR)
NIR, including the consolidation of the Bancassurance and Wealth joint
ventures, grew by 11.0% to R11,906 million (2008: R10,729 million). Like-
for-like NIR increased by 6.1%, driven by good growth in commission and fee
income and trading income offset to an extent by fair-value gains, which
dropped from R368 million in 2008 to R44 million. The drop in fair-value gains
is mainly the result of Nedbank reporting, in 2008, fair-value gains of R207
million from the mark-to-market of its own debt, which we mentioned was
unlikely to be repeated and was highlighted as poor-quality income that was not
attributed to capital. In 2009 fair-value gains on Nedbank`s debt amounted to
R6 million.
Commission and fee income was 12.4% higher, largely from volume growth in
retail transactional banking and increases in fees charged across the bank.
Trading income increased by 18.6% from R1,553 million in 2008 to R1,841 million
in 2009, reflecting robust trading activity in treasury, investment banking and
the global market businesses.
Bancassurance and Wealth NIR increased by 61.7% to R1,518 million for the year,
driven primarily from the consolidation of the joint ventures for seven months
and with good performances from the asset management, financial planning and
life insurance businesses. On a like-for-like basis NIR for Bancassurance and
Wealth increased by 4.7%, with good growth in the SA businesses.
Expenses
Nedbank Group continued to maintain tight control on discretionary spending
while investing in strategic areas of the business. Expenses increased by 9.9%
to R15,100 million (2008: R13,741 million). This increase was impacted by the
consolidation of the Bancassurance and Wealth joint- venture acquisitions with
effect from June 2009. On a like-for-like basis, excluding the joint-venture
acquisitions, expenses increased by 7.7%.
Associate income
Associate income decreased to R55 million in 2009 (2008: R154 million) as a
result of the BoE Private Clients and Nedgroup Life Assurance Company
joint-venture acquisitions that were previously accounted for as joint ventures
under the equity method.
Taxation
The taxation charge (excluding taxation on non-trading and capital items)
decreased by 29.9% from R1,757 million in 2008 to R1,232 million.
Non-trading and capital items
Income after taxation from non-trading and capital items decreased to R549
million for the year (2008: R645 million). The main contribution in 2009 came
from the accounting revaluation of the Bancassurance and Wealth joint ventures
immediately prior to their acquisition, while in the previous year the main
contributor was R622 million after-tax profit from the sale of Visa shares.
Capital
Nedbank Group remains focused on optimising and strengthening its capital
ratios. During 2009 these ratios have increased significantly and continue to
be maintained above Nedbank`s target ratios. Nedbank holds a surplus of R13.5
billion above its minimum total regulatory capital adequacy requirements.
Regulatory
Capital adequacy 2009 ratio 2008 ratio Target range minimum
Core Tier 1 ratio 9.9% 8.2% 7.5% to 9.0% 5.25%
Tier 1 ratio 11.5% 9.6% 8.5% to 10.0% 7.00%
11.5% to
Total capital ratio 14.9% 12.4% 13.0% 9.75%
* Capital adequacy ratios include unappropriated profit at year-end.
Regulatory capital adequacy ratios increased mainly due to the retention of
earnings and a key focus on the optimisation of capital and risk- weighted
assets, enabled by enhancing data quality and more selective asset growth using
our economic-profit-based `managing for value` philosophy. This resulted in
risk-weighted assets decreasing by 8.1%, which is well below overall balance
sheet growth of 0.6%. Nedbank was also able to maintain its dividend cover at
2.3 times while increasing capital.
To increase conservatism, Nedbank increased its target debt rating (solvency
standard) from A- to A for internal economic capital requirements in line with
the higher target ratios for regulatory capital announced early in 2009. A more
conservative definition of available financial resources to cover the economic
capital requirements was also introduced.
Nedbank currently holds a surplus of R11.8 billion against its economic capital
requirements. This is calibrated to the new A debt rating including a 10%
buffer, which is assessed against comprehensive stress and scenario testing.
Nedbank`s leverage ratio (total assets to ordinary shareholders` equity) at
14.4 times (2008: 16.2 times) is conservative by international standards and in
line with the local peer group.
Liquidity
Nedbank`s liquidity position remains sound, with a loan-to-deposit ratio of
95.9%. Management continues to focus on diversifying the funding base,
lengthening the funding profile and further strengthening and increasing the
liquidity buffers.
In addition to the strong deposit franchise across Nedbank Retail, Nedbank
Business Banking and Nedbank Corporate providing a diverse funding mix, Nedbank
successfully increased the size of its liquidity buffer in 2009 and lengthened
the overall funding profile in order to achieved improved asset-to-liability
matching. Increased focus on capital market issuance under the domestic
medium-term note programme, the introduction of innovative fixed-deposit
products for retail clients and a broader offering of money market products
were the primary drivers behind the lengthening of the funding profile.
During the year the following programmes were undertaken to diversify the
funding base and lengthen the bank`s existing funding profile: the issuing of
R5.6 billion of senior unsecured debt, which was five times oversubscribed; the
raising of R153 million in perpetual preference shares;
obtaining a $100 million credit line from a foreign development bank; and
focusing on the retail deposit base through innovative products.
Nedbank maintains a low reliance on interbank, capital market and foreign
funding. Its small proportion of foreign funding at just over 1.0% is driven by
its regional focus where 91.4% of its asset base is in South Africa. Low
historic reliance in the abovementioned markets creates diversification
opportunities subject to pricing.
Nedbank continues to adopt a strategy of applying best international practice,
with the Basel principles on sound liquidity management having been further
embedded during this financial period.
Total assets
Total assets increased by 0.6% to R571 billion (2008: R567 billion). During the
year: cash and securities declined by 8.2% mainly from the maturing of R10
billion of additional liquid assets. This was offset by the purchase of
replacement government bonds of R4 billion to hedge long-term debt instruments;
and Nedbank showed lower trading and derivative balances mainly arising from
foreign exchange movements.
This was balanced by: growth in intangible assets related to the Bancassurance
and Wealth joint-venture acquisitions; growth in investments from the
first-time consolidation of Nedgroup Life; and an increase in advances.
Advances and Deposits
Advances increased by 3.7% to R450 billion, reflecting: ongoing growth in
Nedbank Capital and Imperial Bank; slower growth in Nedbank Corporate and
Nedbank Retail; and reduced advances in Nedbank Business Banking due to a
slowdown in client demand for credit and a reduction of single- product loans
in line with the drive to reduce higher risk exposures and focus on primary
clients.
Growth in advances took place across a number of categories, including personal
loans, mortgage loans, preference shares, deposits placed under reverse
repurchase agreements and other loans, offset by a decrease in low-margin
overnight loans. Overall market share increased by 1.4%.
Nedbank has focused on managing for value and selective asset growth while
improving margins, resulting in bank advances growth and lower levels of
advances in the trading portfolio.
Nedbank retained a strong ratio of advances to deposits of 96%. It grew
deposits in line with its requirement to fund the growth in balance sheet
assets, with deposits increasing by 0.5% to R469.4 billion (2008: R466.9
billion). In the retail deposit market current and savings account balances
remain at low levels as consumers reduce debt levels. In the wholesale deposit
market current and savings accounts as well as fixed deposits have increased,
partially offset by a reduction in other term deposits.
Optimising and diversifying the funding mix and lengthening the profile
continued to be a key management focus. Despite intense competition in the
local deposit market, Nedbank has maintained its strong deposit franchise and
continues to hold the second largest share of household deposits at 24.2%.
During the year a number of innovative retail deposit products were
successfully introduced, including Nedbank`s Equity-linked Deposit, EasyAccess
Deposit and Platinum Park-It.
Outlook
Nedbank currently anticipates gross domestic product (GDP) growth of around
2.2% in 2010, indicating slightly better prospects for the banking sector. The
global environment and the 2010 FIFA World Cup are primary factors influencing
domestic recovery, although the global recovery remains fragile and reliant on
continued government support.
Locally retail trading conditions are expected to improve as disposable income
stabilises, retrenchments ease, general labour conditions start improving, debt
burdens moderate and house prices start to recover. Interest rates are likely
to remain steady at current levels and lead to lower impairment levels. The
2010 FIFA World Cup is expected to lift confidence and encourage an increase in
household credit demand and transactional banking volumes.
Fixed-investment activity is expected to remain modest as a result of excess
capacity in the private sector and some loss of momentum in the government`s
infrastructure spending programme as several large projects around the hosting
of the FIFA World Cup are completed. These developments are likely to contain
corporate demand for credit, while strong competition will place pressure on
margins.
Interest rate cuts from the previous year will continue to have a negative
endowment effect on banking interest margins, but should be partially offset by
a gradual decrease in impairments as recoveries and arrears levels improve. The
reversal of provisions in the balance sheet is expected to take longer as
defaulted advances continue to increase, albeit at a slower rate. Nedbank
remains cautious about impairments as, although corporate impairments have been
benign, there can be large once-off charges that are difficult to predict, and
it is uncertain how the current economic challenges could further impact
consumers.
Nedbank Group`s performance in 2010 is likely to reflect: advances growth in
the mid-single digits; pressure on interest margins remaining as a result of a
continued negative endowment effect and anticipated to be compressed by a
further 10 to 20 basis points; continued improvement of Nedbank credit loss
ratio, but remaining above our target range; mid double-digit NIR growth, the
increase being impacted by the consolidation of the Bancassurance and Wealth
joint-venture acquisitions for the full period in 2010, compared with the seven
months in 2009; lower double-digit expense growth, the increase being impacted
by the consolidation of the Bancassurance and Wealth joint-venture
acquisitions; a further strengthening of capital adequacy ratios and focus on
funding and liquidity; and a focus on extracting value from acquisitions made
in 2009.
The economic environment remains fragile, presenting forecast risk. The
short-term outlook for 2010 assumes that interest rates will remain unchanged
for the year.
Mutual & Federal (M & F)
Return to stability
Highlights (Rm) FY 2009 FY 2008 % Change
Underwriting result 140 299
Long-term investment return (LTIR) 791 925
Restructuring costs (13) (55)
Adjusted operating profit (IFRS basis)
(pre-tax) 918 1 169 (21%)
Gross premiums 8 456 9 159 (8%)
Earned premiums 6 874 7 669 (10%)
Claims ratio 69.4% 67.1%
Combined ratio 98.0% 96.1%
Solvency ratio 55.9% 41.0%
Return on equity* (1 year average) 21.2% 29.0%
Highlights (GBPm) FY 2009 FY 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 70 76 (8%)
* The ROE is now shown over a 1 year average equity base (previously 3 years
average) to achieve consistency with the rest of the Group.
IFRS AOP results
Following adverse investment conditions and high levels of claims in early
2009, the company recovered well in the later parts of 2009. Management action
on profitability led to the cancellation of some personal scheme business in
2009. This contributed to a fall in premiums for 2009 as whole.
Despite the underwriting loss recorded in the first half, there was a
significant improvement in underwriting results during the second half and an
overall underwriting surplus of 2% was achieved. This followed the
implementation of various corrective measures and a generally improved trading
environment.
Investment returns were strongly higher in 2009 with a return to greater
stability in world financial markets. Total actual investment return for the
year amounted to R660 million compared to a loss of R146 million in 2008.
During the year, the company completed the implementation of a sophisticated
state-of-the-art system for processing a large portion of the personal
portfolio. Whilst this caused unfortunate declines in service levels in the
first half, these were largely remedied by the year-end and have resulted in
substantial improvements in processing opportunities for clients and
intermediaries.
Solvency margin
Following improvements in investment return and underwriting stability during
the second half, the solvency margin (being the ratio of net assets to net
premiums) improved to 56% at year-end (2008: 41%). This is well within
management`s target level range.
Acquisition of minorities shares by Old Mutual
The acquisition of the minority shares in M & F was successfully concluded in
early February 2010. Whilst the finalisation was delayed by certain outstanding
approvals, the overall process was completed with limited disruption to staff
and customers. Management can look forward to closer working relationships with
Old Mutual and increased opportunities for growth and profitability through
joint ventures and other cooperation.
Outlook for 2010
Despite the unusually heavy rains in the Johannesburg area of South Africa,
which have led to some higher than usual personal lines claims in the early
months of 2010, management remain confident with regard to underwriting
prospects in 2010.
M & F has been through a significant period of restructuring and systems
implementation over the last two years. While difficult, this was an important
and necessary step towards creating a sound base for the company on which to
grow revenue over the coming years. The strategy will be supported by the
following priorities:
- developing new products;
- process enhancements and optimisation through continuous improvements and
bedding down of the business model;
- completing the IT strategy of moving to state of the art technology
platforms; and
- maintaining a tight control over capital and solvency.
M & F has a strong brand in the Southern Africa market and good relationships
with its intermediary partners. The next few years promises much for the
company as it looks to leverage these relationships, as well as good systems
and processes, for profitable and sustainable growth.
US Asset Management
Earnings grew strongly in the second half of the year as markets recovered
Highlights ($m) FY 2009 FY 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 130 181 (28%)
Return on Capital 4.1% 7.2%
Operating margin 18% 20%
Net client cash flows ($bn) (7.1) (5.2) (37%)
Funds under management ($bn) 261 240 9%
Highlights (GBPm) 2009 2008 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 83 97 (14%)
Overview
While market conditions during 2009 were challenging, it was a year in which
management successfully completed a number of long-term strategic actions to
reposition the business. Those actions included realigning our retail platform
to focus on the professionally-sold marketplace, integrating a cash management
team at Dwight, reorganising our central distribution structure and optimising
our shared services model to deliver further economies of scale. Provision of
central services to our affiliates is a key aspect of the multi-boutique model,
delivering operational leverage across the business, supporting lift-outs and
incubation of new teams, and allowing investment professionals to maximise
their focus on managing money for clients.
As a result of these actions, our business is well positioned strategically to
take advantage of market, demographic and related trends as we continue to
develop innovative product solutions, deliver strong investment performance and
grow our business. Our track record of investment performance has positioned us
well relative to competitors, and our diversified asset mix between equities,
fixed income and alternatives will continue to help us weather market
volatility.
Investment Performance
Long-term investment performance from our member firms remains strong. At 31
December 2009, 58% of assets had outperformed their benchmarks over the
trailing three-year period and 50% of assets were ranked above the median of
their peer group over the trailing three year period. As of the trailing
five-year period, 61% of assets outperformed their respective benchmarks and
52% of assets were ranked above the median of their peer group. Value equity
and global fixed income continue to rank among our top performing asset
classes. Recent challenges among our quantitative managers are showing signs of
improvement as markets return to historical patterns of performance with a bias
toward higher-quality investments.
IFRS AOP results
Strong market growth and a reduction in the expense base of the business drove
significant earnings growth during the second half of the year, with IFRS
adjusted operating profit of $84 million increasing 83% ($38 million) over the
first half result. IFRS adjusted operating profit of $130 million for the full
year was down $51 million (28%), due largely a decrease in management fees,
driven by lower average funds under management as a result of market weakness
in the first quarter and cyclical lows in performance fees. However the impact
of lower revenues was offset in part by continued success in managing expenses.
The result also includes $12 million in significant one-time restructuring
costs related primarily to our retail business.
Operating margin and cost management
Operating expenses for 2009 were down 22% compared to the prior year, enabling
us to experience significant leverage in 2010 from the recent and ongoing
recovery in market levels. The full year operating margin of 18% was down 2%
from 2008, driven by the pace and severity of market declines and lower
revenues late in 2008 and early in 2009. The margin for the second half of 2009
of 21% was an improvement on our 2008 full year margin of 20%, and reflects the
success of expense management actions taken by management in response to
declining revenues. As previously indicated, expense reductions in our retail
business will deliver $15 million to $20 million of annual expense savings from
2010.
Net client cash flows
Net client cash flows of ($7.1 billion) or (3%) of opening funds under
management was broadly in line with the average of our peer group for the year.
The result was primarily driven by outflows at Acadian, Barrow Hanley and
Dwight, partially offset by strong inflows at Heitman, Campbell and Thompson,
Siegel and Walmsley. Despite the challenging environment, nearly half of our
managers experienced net cash inflows for the year.
Funds under management
Funds under management increased 9% or $21 billion during 2009, with a 16%
market uplift offset in part by asset outflows. Growth and diversification
through international distribution remains a key element of our strategy, with
non-US clients comprising 25% of total funds under management at the end of the
period.
Affiliate Developments
As previously announced, equity plans were implemented at five affiliates
during 2009, and we will complete the rollout for the remaining firms during
2010. Alignment of the interests of affiliate management was a key factor in
the success of our cost management initiatives during 2009, and remains a vital
component of our long-term strategy, critical to talent retention and
positioning the business for sustainable long-term growth.
Retail Developments
Efforts to reposition Old Mutual`s US retail platform in 2009 were successful.
A strategic assessment of the business was completed and resulting
recommendations executed by the end of 2009. Actions taken during the second
half of 2009 provided a refreshed and more focused product offering aligned
with the best of Old Mutual`s institutional investment capabilities. Retail
distribution will more specifically target Registered Investment Advisors
(RIAs), Family Offices, and Bank Trust channels which are among the fastest
growing segment of the financial service industry. The traditional and
alternative investment expertise of Old Mutual`s distinct institutional
boutiques aligns well with the needs of the professional buyer market. Overall,
retail efforts provided a reduction in spending and increased margins for the
business while preserving a valuable retail shareholder base with significant
opportunity for growth in an important distribution channel for the future.
Outlook
We remain cautiously optimistic on the recovery of global markets in 2010.
However, there may be a wider dispersion of growth rates between regions and
historically high volatility throughout the year. Difficulties within financial
institutions have created significant opportunities for investment businesses
with strong balance sheets to position for the next growth cycle and win the
war for investment talent within the US. Market volatility has widened the gap
between top quartile and bottom quartile performers with an expectation that
clients will continue to increase the rate of replacement for underperforming
managers and asset classes. While we have a number of accounts at risk at
certain affiliates, our overall new business pipeline is robust and we expect
to remain in the top half of our peer group in terms of net client cash flows.
Prior to the current market troubles, clients were migrating asset allocation
decisions toward international, global and alternative strategies. We believe
these trends will continue in 2010, however churn of underperforming managers
in traditional domestic equity and fixed income mandates will present
opportunities to gain new client funds to manage. Search activity has steadily
increased in the second half of 2009 with the winners being those investment
firms that are truly institutional quality and offer risk management,
continuity of firm personnel, strong ownership structures and transparency of
investment process with longevity of performance.
Our efforts to reposition the business and the recovery in capital markets in
2009 position us well for growth in 2010. In the absence of this continued
recovery in global equity markets, future earnings growth for our US Asset
Management business will be restricted. However, our track record of investment
performance and global business focus has positioned us well relative to our
competitors, and our diversified asset/client mix will continue to help us
weather market volatility.
Bermuda
Business transformed and delivering on run-off plan
Highlights ($m) 2009 2008 % Change
IFRS profit (pre-tax) 34 (675) 105%
Insurance reserves (excluding those held in
the separate account) 2 053 3 084 (33%)
Operating MCEV earnings (covered business)
(post-tax) (29) (436) 93%
Highlights ($bn) 2009 2008 % Change
Funds under management* 5.8 5.8 0%
Highlights (GBPm) 2009 2008 % Change
IFRS profit (pre-tax) 22 (365) 106%
* Stated on a start manager basis as USAM manages $1.1 billion of funds on
behalf of Old Mutual Bermuda.
Overview
The business performed credibly against its core objectives, with all written
policies passing their first anniversary date meaning no further policyholder
premiums have been permitted since August 2009.
Old Mutual Bermuda (OMB)`s core focus in 2009 was to retain the key staff
necessary to execute against the agreed run-off plan, reduce business expense
levels by half over a three-year period, improve operational efficiencies,
strengthen the governance structure, manage capital and liquidity,
significantly improve management information analytics and to continue
de-risking the in-force variable annuity book through a range of measures.
In 2009, management implemented a soft-close strategy to restrict fund choices
and continued to improve hedge effectiveness by reducing basis fund mismatches.
The business has been transformed with a significantly improved understanding
of liabilities and associated management information systems developed, with
robust financial metrics and a return to profitability.
Significant reductions in the business expense base were delivered during 2009
(over 40% expense reduction year-on-year), with further expense savings and
operational improvement initiatives targeted for 2010. Overall a leaner
business operating model has been adopted, with ongoing cost efficiencies
anticipated to drive costs down by a further 5-10% annually.
Aggregate surrender activity remains in line with expectations. Ultimately,
surrender activity will determine the speed of run-off and the extent and
timing of any associated capital, or cash, release. The business remains well
capitalised and able to meet all its future obligations, with the knowledge
that retention packages are in place for key employees needed to execute on the
run-off plan.
IFRS results
As stated in the Group Finance Director`s Report, Bermuda is now treated as a
non-core business and its profit is therefore excluded from the Group`s IFRS
adjusted operating profit, and the 2008 IFRS adjusted operating profit has been
restated on the same basis.
IFRS pre-tax profit of $34 million for 2009 was significantly better than 2008
($675 million IFRS pre-tax loss for 2008) benefiting from expense reductions,
lower DAC expense (mainly due to reduced unlocking) and lower guarantee losses,
primarily as a result of improved effectiveness of the hedging programme,
favourable equity markets and currency movements, higher interest rates, lower
volatility and improved fund basis development. The impact of selective
releases of hedge positions instituted in the fourth quarter of 2009 were also
beneficial in reducing guarantee losses, in conjunction with reduced overall
reserve requirements as a result of favourable markets.
MCEV results
The post-tax loss on the MCEV operating earnings of $29 million for 2009 was
significantly better than prior year mainly due to the large negative
assumption changes made in 2008 for the GMAB strengthening and lower interest
rates. Surrender development also led to persistency experience variances.
Reserves
Of total insurance liabilities of $6,741 million (2008: $7,018 million), $4,688
million (2008: $3,934 million) is held in the separate account, relating to
Variable Annuity investments, where risk is borne by policyholders. The
remaining reserves amount to $2,053 million (2008: $3,084 million). Of this,
$763 million (2008: $1,428 million) is in respect of GMAB/GMDB liabilities on
the Variable Annuity business, and $1,290 million (2008: $1,656 million) for
policyholder liabilities which are supported by the fixed income portfolio
(these liabilities include deferred and fixed indexed annuity business as well
as Variable Annuity fixed interest investments). These non-separate account
reserves represent the discounted future expected account balance needed to
meet policy obligations. OMB reserves are calculated on a policy-by-policy
basis and are updated frequently and verified independently through both
internal and external actuarial review, as well as subject to internal and
external audit, as part of the normal statutory audit.
New fund mappings developed in 2009 better allocated exposures to Asian and
other emerging markets (which require higher levels of reserving given their
inherent higher volatility), thereby improving the accuracy of the reserves.
OMB maintains a very significant surplus to its minimum capital requirement,
and no further cash or capital injections are anticipated.
Investment Portfolio
No defaults were recorded in the year, with reported impairments of $20 million
(2008: $56 million) for 2009. The net unrealised loss position improved to $29
million as at 31 December 2009 ($277 million as at 31 December 2008) as spreads
continued to narrow across key sectors.
The book value of the portfolio fell from $1.3 billion at the end of 2008 to
$1.0 billion at the end of 2009, primarily to meet surrenders and withdrawals.
The fixed income portfolio remains at an A2 average quality, with an
improvement to 95% investment grade compared to 2008 of 93%.
As at 31 December 2009, the book value, fair value and unrealised loss of the
investment portfolio with a market value to book value ratio of 80% or less was
$71 million, $50 million and $21 million respectively (compared to $521
million, $324 million and $197 million, respectively, at 31 December 2008).
Management of Hedging
The hedge policy originally adopted by OMB focused on hedging the underlying
economic risk of the guarantees. Generally, this strategy reduces the income
statement exposure, but can result in substantial cash flow movements as the
realised changes in value of the underlying derivatives are offset by an
unrealised movement reflected in the reserves. In a falling market, this will
result in large cash inflows, while in a rising market, there will be cash
outflows. During most of 2009, hedges were applied to a core number of
components (interest rates, foreign exchange, equity markets), with an average
hedge effectiveness of 95-96% achieved in the period to September 2009.
Given the improvement in the capital position of the Group, combined with
management`s improved understanding and management systems for tracking the
underlying risks, a process of selective and progressive release of the hedge
position commenced in the fourth quarter of 2009. This has been subject to
strict oversight and is operated within risk parameters agreed with the Group
Risk and Capital Committee. The control systems in place mean that the
reinstatement of effective hedges could be made in very short order if
required. The new approach continues to manage the underlying economics, but is
more dynamic in nature, striking a balance between the potential changes in the
income statement, cash flow movements and the transactional costs. Where
considered appropriate, the level of hedging activity may be adjusted, subject
to a strict stop-loss policy.
The OMB hedge team evaluates the hedging strategy on a continuing basis, with
any proposed changes to the strategy subject to strict oversight. A stop-loss
protection protocol, and daily management and reporting of Value at Risk cash
and profit & loss are used by the Group to monitor business exposures.
Outlook
OMB aims to continue to aggressively execute against its run-off strategy,
whilst maintaining high levels of customer service through continued
operational and service improvements. A return to more normal market conditions
will further underpin the continued recovery in profitability, although the
business expects increased volatility in earnings in the medium term,
particularly as the peak of the crystallisation of guarantees approaches in
2012 and then 2017.
With the business transformed in 2009, the key priorities for 2010 will be to:
- further improve expense and operational efficiencies delivered in 2009,
maintaining cost focus/discipline to deliver further planned expense
reductions;
- effective management of capital and liquidity;
- further embed risk management into key business decision making processes;
- continue to de-risk the in-force variable annuity book, with the
appropriate execution of a dynamic hedging program on key risks; and
- implement of conservation efforts to better retain profitable non-
guaranteed assets.
Statement of directors` responsibilities in respect of the preliminary
announcement of the Annual Report and the financial statements
We confirm that to the best of our knowledge:
The financial statements, prepared in accordance with the applicable set of
accounting standards, gives a true and fair view of the assets, liabilities,
financial position and profit of the Group and the undertakings included in the
consolidation taken as a whole;
The Group Finance Director`s review and the Business review include a fair view
of the development and performance of the business and the position of the
Group and the undertakings included in the consolidation taken as a whole,
together with a description of the important events, principal risks and
uncertainties that they face.
Julian Roberts Philip Broadley
Group Chief Executive Group Finance Director
11 March 2010 11 March 2010
Consolidated income statement
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
Notes 2009 2008
Revenue
Gross earned premiums B3 3 820 5 156
Outward reinsurance (369) (335)
Net earned premiums 3 451 4 821
Investment return (non-banking) 11 616 (11 578)
Banking interest and similar income 3 989 4 059
Banking trading, investment and
similar income 168 162
Fee and commission income, and income
from service activities 2 422 2 313
Other income 202 270
Total revenues 21 848 47
Expenses
Claims and benefits (including change
in insurance contract provisions) (5 069) (3 610)
Reinsurance recoveries 328 262
Net claims and benefits incurred (4 741) (3 348)
Change in investment contract
liabilities (8 345) 10 051
Losses on loans and advances (511) (319)
Finance costs (322) 392
Banking interest payable and similar
expenses (2 627) (2 853)
Fee and commission expenses, and
other acquisition costs (806) (937)
Other operating and administrative
expenses (3 139) (2 834)
Goodwill impairment C1(b) (266) (74)
Change in third party interest in
consolidated funds (470) 779
Amortisation of PVIF and other
acquired intangibles C1(b) (326) (361)
Total expenses (21,553) 496
Share of associated undertakings`
profit/(loss) after tax 2 (1)
(Loss)/profit on disposal of
subsidiaries, associated undertakings
and strategic investments C1(c) (50) 53
Profit before tax 247 595
Income tax (expense)/credit D1(a) (365) 88
(Loss)/profit after tax for the
financial year (118) 683
Attributable to
Equity holders of the parent (340) 441
Non-controlling interests
Ordinary shares F2(a) 158 188
Preferred securities F2(a) 64 54
(Loss)/profit after tax for the
financial year (118) 683
Earnings per share
Basic earnings per ordinary share
(pence) C3(a) (7.8) 8.6
Diluted earnings per ordinary share
(pence) C3(a) (7.8) 8.1
Weighted average number of shares
millions C3(a) 4 758 4 755
Consolidated statement of comprehensive income
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Notes
(Loss)/profit after tax for the
financial year (118) 683
Other comprehensive income for the
financial year
Fair value (losses)/gains
Property revaluation (10) 16
Net investment hedge (41) 281
Available-for-sale investments
Fair value gains/(losses) 1 087 (1 635)
Recycled to the income statement 239 414
Shadow accounting 27 26
Currency translation
differences/exchange differences on
translating foreign operations 302 429
Other movements 21 68
Income tax relating to components of
other comprehensive income D1(c) (397) 366
Total other comprehensive income for
the financial year 1 228 (35)
Total comprehensive income for the
financial year 1 110 648
Attributable to
Equity holders of the parent 709 305
Non-controlling interests
Ordinary shares 334 299
Preferred securities 67 44
Total comprehensive income for the
financial year 1 110 648
Reconciliation of adjusted operating profit to profit after tax
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Notes
Core operations
Long Term Savings B2 685 452
Nedbank B2 470 575
M&F B2 70 76
USAM B2 83 97
1 308 1 200
Finance costs (104) (140)
Long term investment return on excess
assets 91 108
Interest payable to non-core
operations Bermuda (40) -
Other shareholders` expenses (85) (32)
Adjusted operating profit B2 1 170 1 136
Adjusting items C1(a) (1 137) 60
Non core operations Bermuda 22 (365)
Profit before tax (net of
policyholder tax) 55 831
Income tax attributable to
policyholder returns 192 (236)
Profit before tax 247 595
Total income tax (expense)/credit D1(a) (365) 88
(Loss)/profit after tax for the
financial year (118) 683
Adjusted operating profit after tax attributable to ordinary equity holders
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Notes
Adjusted operating profit 1 170 1 136
Tax on adjusted operating profit D1(d) (292) (86)
Adjusted operating profit after ta 878 1 050
Non-controlling interests ordinary
shares F2(a) (180) (218)
Non-controlling interests preferred
securities F2(a) (65) (54)
Adjusted operating profit after tax
attributable to ordinary equity
holders 633 778
Adjusted weighted average number of
shares (millions) C3(b) 5 229 5 230
Adjusted operating earnings per share
(pence) C3(b) 12.1 14.9
Basis of preparation
The reconciliation of adjusted operating profit has been prepared so as to
reflect the Directors` view of the underlying long-term performance of the
Group. The statement reconciles adjusted operating profit to profit after tax
as reported under IFRS as adopted by the EU.
For core life assurance and general insurance businesses, adjusted operating
profit is based on a long-term investment return, including investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain
long-term incentive schemes defined as non-controlling interests in accordance
with IFRS. For all core businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, revaluations of put options
related to long-term incentive schemes, the impact of closure of unclaimed
shares trusts, profit/(loss) on disposal of subsidiaries, associated
undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, and fair value profits/(losses) on
certain Group debt movements. Bermuda, which is non-core, is not included in
adjusted operating profit.
Adjusted operating earnings per ordinary share is calculated on the same basis
as adjusted operating profit. It is stated after tax attributable to adjusted
operating profit and non-controlling interests. It excludes income attributable
to Black Economic Empowerment trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and Black Economic Empowerment trusts.
Consolidated statement of financial position
At 31 December 2009
GBPm
At At
31 December 31 December
2009 2008
Restated
Assets
Goodwill and other intangible assets 5 159 5 882
Mandatory reserve deposits with
central banks 882 734
Property, plant and equipment 828 682
Investment property 1 759 1 478
Deferred tax assets 570 1 590
Investments in associated
undertakings and joint ventures 135 111
Deferred acquisition costs 3 138 3 199
Reinsurers` share of life assurance
policyholder liabilities 1 296 1 148
Reinsurers` share of general
insurance liabilities 120 115
Deposits held with reinsurers 146 164
Loans and advances 42 393 35 745
Investments and securities 98 461 83 522
Current tax receivable 169 118
Client indebtedness for acceptances 170 220
Trade, other receivables and other
assets 3 051 3 137
Derivative financial instruments
assets 2 546 3 228
Cash and cash equivalents 2 982 3 203
Non-current assets held-for-sale 1 7
Total assets 163 806 144 283
Liabilities
Life assurance policyholder
liabilities 93 876 81 269
General insurance liabilities 372 344
Third party interests in consolidated
funds 2 906 2 591
Borrowed funds E1 3 309 2 295
Provisions 263 477
Deferred revenue 654 598
Deferred tax liabilities 905 1 452
Current tax payable 210 219
Trade, other payables and other
liabilities 4 305 4 074
Liabilities under acceptances 170 220
Amounts owed to bank depositors 44 135 38 171
Derivative financial instruments
liabilities 1 990 2 990
Non-current liabilities held-for-sale - 6
Total liabilities 153 095 134 706
Net assets 10 711 9 577
Shareholders` equity
Equity attributable to equity holders
of the parent 8 464 7 737
Non-controlling interests
Ordinary shares F2(b) 1 537 1 147
Preferred securities F2(b) 710 693
Total non-controlling interests 2 247 1 840
Total equity 10 711 9 577
Consolidated statement of cash flows
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Restated
Cash flows from operating activities
Profit before tax 247 595
Capital (gains)/losses included in investment
income (9 762) 14 183
Loss on disposal of property, plant and
equipment 1 3
Depreciation of property, plant and equipment 86 74
Amortisation and impairment of goodwill and
other intangible assets 648 504
Impairment of loans and receivables 770 320
Share-based payment expense 21 21
Share of associated undertakings` (profit)/loss
after tax (2) 1
Loss/(profit) arising on disposal of
subsidiaries, associated undertakings and
strategic investments 50 (53)
Other non-cash amounts in profit (465) (294)
Non-cash movements in profit before tax (8 653) 14 759
Reinsurers` share of life assurance
policyholder liabilities (148) 486
Reinsurers` share of general insurance
liabilities (5) (49)
Deferred acquisition costs 62 (370)
Loans and advances (6 589) (5 206)
Insurance liabilities (652) 282
Investment contracts 13 163 (10 260)
Amounts owed to bank depositors 5 964 6 110
Other operating assets and liabilities (1 798) (3 901)
Changes in working capital 9 997 (12 908)
Taxation paid (373) (458)
Net cash inflow from operating activities 1 218 1 988
Cash flows from investing activities
Net acquisitions of financial investments (2 674) (1 170)
Acquisition of investment properties (82) (145)
Proceeds from disposal of investment properties 57 13
Acquisition of property, plant and equipment (138) (99)
Proceeds from disposal of property, plant and
equipment 29 11
Acquisition of intangible assets (43) (18)
Acquisition of interests in subsidiaries (5) (93)
Disposal of interests in subsidiaries,
associated undertakings and strategic
investments 40 1 138
Net cash outflow from investing activities (2 816) (363)
Cash flows from financing activities
Dividends paid to
Equity holders of the Company - (352)
Non-controlling interests and preferred
security interests (190) (208)
Interest paid (excluding banking interest paid) (57) (87)
Proceeds from issue of ordinary shares
(including by subsidiaries to non-controlling
interests) 100 31
Net sale of treasury shares 38 5
Shares repurchased in buyback programme - (175)
Issue of subordinated and other debt 1 049 374
Subordinated and other debt repaid (441) (225)
Net cash inflow/(outflow) from financing
activities 499 (637)
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Restated
(1,099) 988
Net increase/(decrease) in cash and cash
equivalents
Effects of exchange rate changes on cash and
cash equivalents 160 399
Cash and cash equivalents at beginning of the year 4 983 3 596
Cash and cash equivalents at end of the year 4 044 4 983
Consisting of
Coins and bank notes 263 221
Money at call and short notice 2 412 2 794
Balances with central banks (other than
mandatory reserve deposits) 307 188
Cash and cash equivalents in the statement of
financial position 2 982 3 203
Mandatory reserve deposits with central banks 882 734
Short term cash balances held in policy holder funds 897 2 043
Cash and cash equivalents subject to
consolidation of funds (717) (997)
Total 4 044 4 983
Other supplementary cash flow disclosures
Interest income received (including banking
interest) 5 394 5 384
Dividend income received 335 493
Interest paid (including banking interest) 2 544 3 078
The 31 December 2008 cash flows have been restated as detailed in note A.
Cash flows presented in this statement include all cash flows relating to
policyholders` funds for life assurance.
Except for mandatory reserve deposits with central banks and cash and cash
equivalents subject to consolidation of funds, management do not consider that
there are any material amounts of cash and cash equivalents which are not
available for use in the Group`s day to day operations.
Mandatory reserve deposits are, however, included in cash and cash equivalents
for the purposes of the cash flow statement in line with market practice in
South Africa.
Consolidated statement of changes in equity
For the year ended 31 December 2009
GBPm
Millions
Number of Attributable to
shares issued equity holders
Year ended 31 December 2009 and fully paid of the parent
Notes
Shareholders` equity at
beginning of the year 5,516 7 737
Profit after tax for the
financial year - (340)
Other comprehensive income
Fair value gains/(losses)
Property revaluation - (12)
Net investment hedge - (41)
Available-for-sale investments
Fair value gains - 1,087
foreign operations - 239
Shadow accounting - 27
Currency translation
differences/exchange
differences on translating
foreign operations - 124
Other movements - 22
Income tax relating to
components of other
comprehensive income D1(c) - (397)
Total comprehensive income for
the financial year - 709
Dividends for the year C4 - (45)
Net sale of treasury shares - 39
Issue of ordinary share
capital by the Company - 2
Change in participation in
subsidiaries - -
Exercise of share options 2 3
Change in share-based payments
reserve - 19
Transactions with shareholders 2 18
Shareholders` equity at end of
the year 5,518 8,464
GBPm
Total
non-controlling Total
Year ended 31 December 2009 interests equity
Shareholders` equity at beginning of the year 1,840 9,577
Profit after tax for the financial year 222 (118)
Other comprehensive income
Fair value gains/(losses)
Property revaluation 2 (10)
Net investment hedge - (41)
Available-for-sale investments
Fair value gains - 1,087
foreign operations - 239
Shadow accounting - 27
Currency translation differences/exchange
differences on translating
foreign operations 178 302
Other movements (1) 21
Income tax relating to components of other
comprehensive income - (397)
Total comprehensive income for the financial year 401 1,110
Dividends for the year (145) (190)
Net sale of treasury shares - 39
Issue of ordinary share capital by the Company - 2
Change in participation in subsidiaries 150 150
Exercise of share options - 3
Change in share-based payments reserve 1 20
Transactions with shareholders 6 24
Shareholders` equity at end of the year 2,247 10,711
GBPm
Share Share Other
Year ended 31 December 2009 capital premium reserves
Notes
Attributable to equity holders
of the parent at
beginning of the year 552 766 2,130
Profit for the financial year
attributable to equity
holders of the parent - - -
Other comprehensive income
Fair value gains/(losses)
Property revaluation - - (12)
Net investment hedge - - -
Available-for-sale investments
Fair value gains - - 1,087
Recycled to income statement - - 239
Shadow accounting - - 27
Currency translation
differences/exchange
differences on translating
foreign operations - - -
Other movements - - 7
Income tax relating to
components of other
comprehensive income - - (410)
Total comprehensive income for
the financial year - - 938
Dividends for the year C4 - - -
Net sale of treasury shares - - -
Issue of ordinary share capital
by the Company - 2 -
Exercise of share options - 3 -
Change in share-based payments
reserve - - 19
Transactions with shareholders - 5 19
Attributable to equity holders
of the parent at end
of the year 552 771 3,087
GBPm
Perpetual
preferred
Translation Retained callable
Year ended 31 December
2009 reserve earnings securities Total
Attributable to equity
holders of the parent at
beginning of the year 386 3,215 688 7,737
Profit for the financial
year attributable to
equity
holders of the parent - (372) 32 (340)
Other comprehensive income
Fair value gains/(losses)
Property revaluation - - - (12)
Net investment hedge (41) - - (41)
Available-for-sale
investments
Fair value gains - - - 1,087
Recycled to income
statement - - - 239
Shadow accounting - - - 27
Currency translation
differences/exchange
differences on
translating foreign
operations 124 - - 124
Other movements - 15 - 22
Income tax relating to
components of other
comprehensive income - - 13 (397)
Total comprehensive
income for the financial
year 83 (357) 45 709
Dividends for the year - - (45) (45)
Net sale of treasury
shares - 39 - 39
Issue of ordinary share
capital by the Company - - - 2
Exercise of share options - - - 3
Change in share-based
payments reserve - - - 19
Transactions with
shareholders - 39 (45) 18
Attributable to equity
holders of the parent at
end
of the year 469 2,897 688 8,464
Other reserves attributable to equity holders of the parent
GBPm
Available- Property
Merger for-sale revaluation
reserve reserve reserve
At the beginning of the year 2,716 (844) 85
Fair value gains/(losses)
Property revaluation - - (12)
Available-for-sale investments
Fair value gains - 1,087 -
Recycled to income statement - 239 -
Shadow accounting - 9 18
Other movements - 1 (4)
Income tax relating to components of
other
comprehensive income - (410) -
Change in share-based payments
reserve - - -
At end of the year 2,716 82 87
GBPm
Share-
based
payments Other
reserve reserves Total
At the beginning of the year 171 2 2,130
Fair value gains/(losses)
Property revaluation - - (12)
Available-for-sale investments
Fair value gains - - 1,087
Recycled to income statement - - 239
Shadow accounting - - 27
Other movements 1 9 7
Income tax relating to components of other
comprehensive income - - (410)
Change in share-based payments reserve 19 - 19
At end of the year 191 11 3,087
Retained earnings were reduced by GBP379 million at 31 December 2009 in respect
of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings.
Consolidated statement of changes in equity
For the year ended 31 December 2009 continued
GBPm
Millions
Number of Attributable to
shares issued equity holders
Year ended 31 December 2008 and fully paid of the parent
Notes
Shareholders` equity at 5,510 7,961
beginning of the year
Profit after tax for the
financial year - 441
Other comprehensive income
Fair value gains/(losses)
Property revaluation - 16
Net investment hedge - 281
Available-for-sale investments
Fair value losses - (1,635)
Recycled to the income
statement - 414
Shadow accounting - 26
Currency translation
differences/exchange
differences on translating
foreign operations - 419
Other movements - (23)
Income tax relating to
components of other
comprehensive income D1(c) - 366
Total comprehensive income for
the financial year - 305
Dividends for the year C4 - (395)
Net sale of treasury shares
Net sale of treasury shares - 5
Shares repurchased in the
buyback programme - (175)
Issue of ordinary share
capital by the Company - 5
Change in participation in
subsidiaries - -
Exercise of share options 6 5
Change in share-based payments
reserve - 26
Transactions with shareholders 6 (529)
Shareholders` equity at end of
the year 5,516 7,737
GBPm
Total
non-controlling Total
Year ended 31 December 2008 interests equity
Shareholders` equity at beginning of the year 1,636 9,597
Profit after tax for the financial year 242 683
Other comprehensive income
Fair value gains/(losses)
Property revaluation - 16
Net investment hedge - 281
Available-for-sale investments
Fair value losses - (1,635)
Recycled to the income statement - 414
Shadow accounting - 26
Currency translation differences/exchange
differences on translating
foreign operations 10 429
Other movements 91 68
Income tax relating to components of other
comprehensive income - 366
Total comprehensive income for the financial
year 343 648
Dividends for the year (165) (560)
Net sale of treasury shares
Net sale of treasury shares - 5
Shares repurchased in the buyback programme - (175)
Issue of ordinary share capital by the Company - 5
Change in participation in subsidiaries 26 26
Exercise of share options - 5
Change in share-based payments reserve - 26
Transactions with shareholders (139) (668)
Shareholders` equity at end of the year 1,840 9,577
GBPm
Share Share Other
Year ended 31 December 2008 capital premium reserves
Notes
Attributable to equity holders
of the parent at
beginning of the year 551 757 2,908
Profit for the financial year
attributable to equity
holders of the parent - - -
Other comprehensive income
Fair value gains/(losses)
Property revaluation - - 16
Net investment hedge - - -
Available-for-sale investments
Fair value losses - - (1,635)
Recycled to income statement 414
Shadow accounting - - 26
Currency translation
differences/exchange
differences on translating
foreign operations - - -
Other movements - - 8
Income tax relating to
components of other
comprehensive income - - 367
Total comprehensive income for
the financial year - - (804)
Dividends for the year C4 - - -
Net sale of treasury shares - - -
Shares repurchased in the
buyback Programme - - -
Issue of ordinary share capital
by the Company - 5 -
Exercise of share options 1 4 -
Change in share-based payments
reserve - - 26
Transactions with shareholders 1 9 26
Attributable to equity holders
of the parent at end
of the year 552 766 2,130
GBPm
Perpetual
preferred
callable
Translation Retained
Year ended 31 December
2008 reserve earnings securities Total
Attributable to equity
holders of the parent at
beginning of the year (304) 3,361 688 7,961
Profit for the
financial year
attributable to equity
holders of the parent - 410 31 441
Other comprehensive
income
Fair value
gains/(losses)
Property revaluation - - - 16
Net investment hedge 281 - - 281
Available-for-sale
investments
Fair value losses - - - (1,635)
Recycled to income
statement - - - 414
Shadow accounting - - - 26
Currency translation
differences/exchange
differences on
translating foreign
operations 419 - - 419
Other movements 3 (34) - (23)
Income tax relating to
components of other
comprehensive income (13) - 12 366
Total comprehensive
income for the
financial year 690 376 43 305
Dividends for the year - (352) (43) (395)
Net sale of treasury
shares - 5 - 5
Shares repurchased in
the buyback Programme - (175) - (175)
Issue of ordinary share
capital by the Company - - - 5
Exercise of share
options - - - 5
Change in share-based
payments reserve - - - 26
Transactions with
shareholders - (522) (43) (529)
Attributable to equity
holders of the parent
at end
of the year 386 3,215 688 7,737
GBPm
Available- Property
Merger for-sale revaluation
Other reserves attributable to
equity holders of the parent reserve reserve reserve
At beginning of the year 2,716 (30) 75
Fair value gains/(losses) - - 16
Property revaluation
Available-for-sale investments
Fair value losses - (1,635) -
Recycled to income statement - 414 -
Shadow accounting - 41 (15)
Other movements - (1) 9
Income tax relating to components
of other comprehensive
income - 367 -
Change in share-based payments
reserve - - -
At end of the year 2,716 (844) 85
GBPm
Share-
based
payments Other
Other reserves attributable to
equity holders of the parent reserve reserves Total
At beginning of the year 147 - 2,908
Fair value gains/(losses) - - 16
Property revaluation
Available-for-sale investments
Fair value losses - - (1,635)
Recycled to income statement - - 414
Shadow accounting - - 26
Other movements (2) 2 8
Income tax relating to components
of other comprehensive
income - - 367
Change in share-based payments
reserve 26 - 26
At end of the year 171 2 2,130
Retained earnings were reduced by GBP280 million at 31 December 2008 in respect
of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings.
Notes to the consolidated financial statements
For the year ended 31 December 2009
A: Accounting policies
Basis of preparation
The consolidated financial information contained herein has been prepared in
accordance with the recognition and measurement principles of International
Financial Reporting Standards adopted by the EU. The Group`s results for the
year ended 31 December 2009 and the position at that date have been prepared
using accounting policies consistent with those applied in the preparation of
the Group`s 2008 Annual Report and Accounts, except for the revised IAS 1 set
out below.
The consolidated financial statements have been prepared on the going concern
basis which the directors believe to be appropriate.
The 31 December 2008 financial position has been restated to reduce both
derivative financial assets and liabilities by an amount of GBP1,405 million
and to increase both cash and cash equivalents and other liabilities by GBP305
million on a consistent basis to 31 December 2009, with a corresponding
restatement made to the cash flows where applicable. In addition certain
comparative information including segmentation has been revised in accordance
with changes to presentation made in the current year. There was no impact on
the consolidated net assets at 31 December 2008 as a result of the restatement.
The 31 December 2007 statement of financial position has not been presented on
the basis that there were no changes required to that statement as a
consequence of the 2008 restatements.
The financial information set out herein does not constitute the Company`s
statutory accounts for the years ended 31 December 2009 or 2008.
Statutory accounts for 2008 have been delivered to the Registrar of Companies,
and those for 2009 will be delivered in due course. The auditors have reported
on those accounts; their reports were (i) unqualified, (ii) did not include
references to any matters to which the auditors drew attention by way of
emphasis without qualifying their reports, and (iii) did not contain statements
under section 498(2) or (3) of the Companies Act 2006.
Implementation of revised IAS 1 `Presentation of Financial Statements`
The financial information set out herein incorporates changes introduced as a
result of the publication of a revised version of IAS 1 `Presentation of
Financial Statements`, effective for accounting periods commencing on or after
1 January 2009. The principal change is the inclusion of a new statement, a
consolidated statement of comprehensive income, separately from the
consolidated statement of changes in equity. Comparative information has been
restated accordingly. There were no impacts on the Group`s results or net
assets as a result of the introduction of the revised standard.
Segment presentation
The Group`s results are analysed and reported consistent with the way that
management and the Board of Directors considers information when making
operating decisions and the basis on which resources are allocated and
performance assessed by management and the Board of Directors.
The operating segments are Emerging Markets, Nordic, Retail Europe, Wealth
Management and US Life (collectively being the newly formed Long Term Savings)
plus Nedbank, Mutual & Federal (M&F), US Asset Management and Other operating
segments (comprising the Group head office functions). The Bermuda segment is
treated as a non-core operation. The above reported segments have been revised
during the year to reflect the change in the way that management and the Board
of Directors consider information, with the comparative information having been
revised to report on a consistent basis to the amended structure.
There are four principal business activities from which the Group generates
revenues. These are life assurance (premium income), asset management business
(fee and commission income), banking (banking interest receivable) and general
insurance (premium income). The revenues generated in each reported segment can
be seen in the analysis of profits and losses in note B.
The information reflected in note B reflects the measures of profit and loss,
assets and liabilities for each operating segment as regularly provided to
management and the Board of Directors. There are no differences between the
measurement of the assets and liabilities reflected in the primary statements
and that reported for the segments. A reconciliation between the segment
revenues and expenses and the Group`s revenues and expenses is shown in note B.
In line with internal reporting, assets, liabilities, revenues or expenses that
are not directly attributable to a particular segment are allocated between
segments where appropriate and where there is a reasonable basis for doing so.
The Group accounts for inter-segment revenues and transfers as if the
transactions were with third parties at current market prices. Given the nature
of the operations, there are no major customers within any of the segments.
Reclassifications of comparative segment information have been made to align
segment information to the Group`s revised management reporting structure
described above. There was no impact on net profit or net assets.
Notes to the consolidated financial statements
For the year ended 31 December 2009 continued
B: Segment information
B1: Basis of segmentation
The Group`s core operations are Emerging Markets, Nordic, Retail Europe, Wealth
Management and US Life (collectively Long Term Savings), Nedbank, Mutual &
Federal, US Asset Management and Other operating segments (comprising the Group
head office functions). The Bermuda operating segment is regarded as non core.
This represents a change in structure from that reported in the previous
financial year end is consistent with the revised way that management and the
Board of Directors considers information when making operating decisions and is
the basis on which resources are allocated and performance assessed by
management and the Board of Directors. Comparative segment information has been
changed accordingly. The Group generates revenue from four principal business
activities: life assurance, asset management, banking and general insurance.
The types of products and services from which each operating segment derives
its revenues are as follows:
Core operations
Emerging Markets life assurance and asset management
Nordic life assurance, asset management and banking
Retail Europe life assurance and asset management
Wealth Management life assurance and asset management
US Life life assurance
Nedbank banking and asset management
Mutual & Federal general insurance
US Asset Management asset management
Other operating segments
Non core operations
Bermuda life assurance
Adjusted operating profit is one of the key measures reported to the Group`s
management and Board of Directors for their consideration in the allocation of
resources to and the review of performance of the segments. The Group utilises
additional measures to assess the performance of each of the segments, in
particular the level of funds under management. Additional performance measures
considered by management and the Board of Directors in assessing the
performance of the segments can be found in the Old Mutual Market Consistent
Embedded Value information presented on pages 84 to 132.
In the analysis that follows, consolidation adjustments include the elimination
of inter-segment revenues, expenses, assets and liabilities together with the
impacts of the consolidation of the Group`s interest in unit trusts, mutual
funds and similar entities.
B2: Adjusted operating profit statement segment information year ended 31
December 2009
Long Term Savings
GBPm
Emerging Retail
Markets Nordic Europe
Revenue
Gross earned premiums 1,946 109 31
Outward reinsurance (56) (5) (8)
Net earned premiums 1,890 104 23
Investment return (non-banking) 2,636 2,035 564
Banking interest and similar income - 157 -
Banking trading, investment and similar
income - - -
Fee and commission income, and income from
service activities 305 190 189
Other income 65 6 -
Inter-segment revenues 55 32 10
Total revenues 4,951 2,524 786
Expenses
Claims and benefits (including change in
insurance contract provisions) (2,551) (72) (37)
Reinsurance recoveries 76 2 5
Net claims and benefits incurred (2,475) (70) (32)
Change in investment contract liabilities (1,040) (1,972) (554)
Losses on loans and advances - (5) (1)
Finance costs (including interest and
similar expenses) - - -
Banking interest payable and similar
expenses - (70) -
Fee and commission expenses, and other
acquisition costs (184) (53) (79)
Other operating and administrative expenses (768) (215) (96)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns (37) (39) -
Inter-segment expenses (5) (38) (2)
Total expenses (4,509) (2,462) (764)
Share of associated undertakings`
profit/(loss) after tax 4 - -
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - -
Adjusted operating profit/(loss) before tax
and non-controlling interests 446 62 22
Tax expense (130) 9 (8)
Non-controlling interests (2) - -
Adjusted operating profit/(loss) after tax
and non-controlling interests 314 71 14
Adjusting items net of tax and
non-controlling interests (200) (4) (228)
Profit/(loss) after tax attributable to
equity holders of the parent 114 67 (214)
Long Term Savings
GBPm
Wealth
Management US Life
Revenue
Gross earned premiums 315 800
Outward reinsurance (81) (102)
Net earned premiums 234 698
Investment return (non-banking) 4,997 654
Banking interest and similar income - -
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities 746 -
Other income 24 6
Inter-segment revenues 27 -
Total revenues 6,028 1,358
Expenses
Claims and benefits (including change in insurance
contract provisions) (255) (1,283)
Reinsurance recoveries 46 128
Net claims and benefits incurred (209) (1,155)
Change in investment contract liabilities (4,775) -
Losses on loans and advances - -
Finance costs (including interest and similar
expenses) - -
Banking interest payable and similar expenses - -
Fee and commission expenses, and other acquisition
costs (394) (78)
Other operating and administrative expenses (380) (67)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns (116) -
Inter-segment expenses (48) (9)
Total expenses (5,922) (1,309)
Share of associated undertakings` profit/(loss)
after tax - -
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - -
Adjusted operating profit/(loss) before tax and
non-controlling interests 106 49
Tax expense (20) (9)
Non-controlling interests - -
Adjusted operating profit/(loss) after tax and
non-controlling interests 86 40
Adjusting items net of tax and non-controlling
interests (225) (120)
Profit/(loss) after tax attributable to equity
holders of the parent (139) (80)
Of the total revenues, excluding intercompany revenues, GBP5,544 million was
generated in UK (2008: GBP5,826 million loss), GBP3,938 million in rest of
Europe (2008: GBP3,045 million loss), GBP10,084 million in South Africa (2008:
GBP6,676 million), GBP2,201 million in the United States (2008: GBP2,194
million) and GBP81 million relates to Other operating segments (2008: GBP48
million).
GBPm
Other
Total Long operating Consolidation
Term Savings Nedbank M&F USAM segments adjustments
3,201 - 612 - - -
(252) - (117) - - -
2,949 - 495 - - -
10,886 - 58 13 91 509
157 3,832 - - - -
- 168 - - - -
1,430 663 22 429 - (6)
101 70 1 7 - 1
124 31 29 6 21 (251)
15,647 4,764 605 455 112 253
(4,198) - (412) - - -
257 - 72 - - -
(3,941) - (340) - - -
(8,341) - - - - -
(6) (505) - - - -
- - - - (104) -
(70) (2,557) - - - -
(788) (2) (106) (18) - (12)
(1,526) (1,167) (64) (354) (84) (22)
- - - - - -
- - - - - (470)
- - - - - -
(192) - - - - -
(102) (65) (25) - (58) 251
(14,966) (4,296) (535) (372) (246) (253)
4 2 - - (4) -
- - - - - -
685 470 70 83 (138) -
(158) (96) (15) (19) (4) -
(2) (193) (16) - (34) -
525 181 39 64 (176) -
(777) 15 - (3) (241) -
(252) 196 39 61 (417) -
GBPm
Adjusting Non core
Adjusted items operations IFRS Income
operating profit (Note C1) Bermuda statement
3,813 - 7 3,820
(369) - - (369)
3,444 - 7 3,451
11,557 (425) 484 11,616
3,989 - - 3,989
168 - - 168
2,538 (116) - 2,422
180 - 22 202
(40) - 40 -
21,836 (541) 553 21,848
(4,610) - (459) (5,069)
329 - (1) 328
(4,281) - (460) (4,741)
(8,341) - (4) (8,345)
(511) - - (511)
(104) (218) - (322)
(2,627) - - (2,627)
(926) 167 (47) (806)
(3,217) 97 (19) (3,139)
- (266) - (266)
(470) - - (470)
- (326) - (326)
(192) 192 - -
1 - (1) -
(20,668) (354) (531) (21,553)
2 - - 2
- (50) - (50)
1,170 (945) 22 247
(292) (84) 11 (365)
(245) 23 - (222)
633 (1,006) 33 (340)
(1,006) 1,006 - -
(373) - 33 (340)
B2: Adjusted operating profit statement segment information year ended 31
December 2008
Long Term Savings
GBPm
Emerging Retail
Markets Nordic Europe
Revenue
Gross earned premiums 1,687 92 22
Outward reinsurance (48) (4) (7)
Net earned premiums 1,639 88 15
Investment return (non-banking) (420) (2,317) (997)
Banking interest and similar income - 266 -
Banking trading, investment and similar
income - 24 -
Fee and commission income, and income from
service activities 252 184 178
Other income 98 20 1
Inter-segment revenues 237 104 18
Total revenues 1,806 (1,631) (785)
Expenses
Claims and benefits (including change in
insurance contract provisions) (721) (68) (26)
Reinsurance recoveries 42 4 2
Net claims and benefits incurred (679) (64) (24)
Change in investment contract liabilities 204 2,390 1,011
Losses on loans and advances - (4) -
Finance costs
Finance costs - - -
Banking interest payable and similar
expenses - (183) -
Fee and commission expenses, and other
acquisition costs (174) (49) (72)
Other operating and administrative expenses (563) (193) (82)
Goodwill impairment - - -
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other acquired
intangibles - - -
Income tax attributable to policyholder
returns 6 (52) (1)
Inter-segment expenses (188) (126) (18)
Total expenses (1,394) 1,719 814
Share of associated undertakings`
profit/(loss) after tax 3 - -
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - -
Adjusted operating profit/(loss) before tax
and non-controlling interests 415 88 29
Tax expense (138) (11) (10)
Non-controlling interests (5) - -
Adjusted operating profit/(loss) after tax
and non-controlling interests 272 77 19
Adjusting items net of tax and
non-controlling interests 147 (122) (28)
Profit/(loss) after tax attributable to
equity holders of the parent 419 (45) (9)
Long Term Savings
GBPm
Wealth
Management US Life
Revenue
Gross earned premiums 186 1,269
Outward reinsurance (78) (106)
Net earned premiums 108 1,163
Investment return (non-banking) (6,610) 211
Banking interest and similar income - -
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities 775 -
Other income 14 3
Inter-segment revenues 108 -
Total revenues (5,605) 1,377
Expenses
Claims and benefits (including change in insurance
contract provisions) (94) (1,478)
Reinsurance recoveries 34 106
Net claims and benefits incurred (60) (1,372)
Change in investment contract liabilities 6,442 -
Losses on loans and advances - -
Finance costs
Finance costs - -
Banking interest payable and similar expenses - -
Fee and commission expenses, and other acquisition
costs (401) (158)
Other operating and administrative expenses (388) (68)
Goodwill impairment - -
Change in third party interest in consolidated funds - -
Amortisation of PVIF and other acquired intangibles - -
Income tax attributable to policyholder returns 283 -
Inter-segment expenses (121) (9)
Total expenses 5,755 (1,607)
Share of associated undertakings` profit/(loss)
after tax - -
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - -
Adjusted operating profit/(loss) before tax and
non-controlling interests 150 (230)
Tax expense (57) 76
Non-controlling interests - -
Adjusted operating profit/(loss) after tax and
non-controlling interests 93 (154)
Adjusting items net of tax and non-controlling
interests 50 (341)
Profit/(loss) after tax attributable to equity
holders of the parent 143 (495)
GBPm
Other
Total Long operating
Term Savings Nedbank M&F USAM segments
3,256 - 570 - -
(243) - (91) - -
3,013 - 479 - -
(10,133) - 56 (3) 94
266 3,793 - - -
24 138 - - -
1,389 533 16 473 -
136 85 - 17 -
467 19 26 8 66
(4,838) 4,568 577 495 160
(2,387) - (401) - -
188 - 72 - -
(2,199) - (329) - -
10,047 - - - -
(4) (315) - - -
- - - - (140)
(183) (2,684) - - -
(854) - (101) (10) -
(1,294) (928) (59) (388) (38)
- - - - -
- - - - -
- - - - -
236 - - - -
(462) (71) (12) - (37)
5,287 (3,998) (501) (398) (215)
3 5 - - (9)
- - - - -
452 575 76 97 (64)
(140) (123) (17) 2 192
(5) (227) (19) - (21)
307 225 40 99 107
(294) 29 (49) 1 341
13 254 (9) 100 448
Adjusting Non core GBPm
Consolidation Adjusted items operations IFRS Income
adjustments operating profit (Note C1) Bermuda statement
- 3,826 - 1,330 5,156
- (334) - (1) (335)
- 3,492 - 1,329 4,821
(713) (10,699) (108) (771) (11,578)
- 4,059 - - 4,059
- 162 - - 162
(1) 2,410 (97) - 2,313
13 251 - 19 270
(586) - - - -
(1,287) (325) (205) 577 47
- (2,788) - (822) (3,610)
- 260 - 2 262
- (2,528) - (820) (3,348)
- 10,047 - 4 10,051
- (319) - - (319)
- (140) 532 - 392
- (2,867) 14 - (2,853)
(44) (1,009) 178 (106) (937)
(34) (2,741) (77) (16) (2,834)
- - (74) - (74)
779 779 - - 779
- - (361) - (361)
- 236 (236) - -
586 4 - (4) -
1,287 1,462 (24) (942) 496
- (1) - - (1)
- - 53 - 53
- 1,136 (176) (365) 595
- (86) 174 - 88
- (272) 30 - (242)
- 778 28 (365) 441
- 28 (28) - -
- 806 - (365) 441
B3: Gross earned premiums
Long Term Savings
GBPm
Year ended 31 December 2009 Emerging Retail
Markets Nordic Europe
Life assurance insurance contracts 1,287 109 31
Life assurance investment contracts with
discretionary participation
features 659 - -
General insurance - - -
Gross earned premiums 1,946 109 31
Life assurance other investment contracts
recognised as deposits 2,726 1,199 733
Long Term Savings
Year ended 31 December 2009 Wealth
Management US Life
Life assurance insurance contracts 315 800
Life assurance investment contracts with
discretionary participation
features - -
General insurance - -
Gross earned premiums 315 800
Life assurance other investment contracts
recognised as deposits 4,906 171
Long Term Savings
Emerging Retail
Year ended 31 December 2008 Markets Nordic Europe
Life assurance insurance contracts 1,163 92 22
Life assurance investment contracts with
discretionary participation
features 524 - -
General insurance - - -
Gross earned premiums 1,687 92 22
Life assurance other investment contracts
recognised as deposits 1,409 976 690
Long Term Savings
Wealth
Year ended 31 December 2008 Management US Life
Life assurance insurance contracts 186 1,269
Life assurance investment contracts with
discretionary participation
features - -
General insurance - -
Gross earned premiums 186 1,269
Life assurance other investment contracts
recognised as deposits 5,236 115
Total Long Term Savings Nedbank M&F USAM
2,542 - - -
659 - - -
- - 612 -
3,201 - 612 -
9,735 - - -
GBPm
Non-core operations
Total core operations Bermuda Total
2,542 7 2,549
659 - 659
612 - 612
3,813 7 3,820
9,735 8 9,743
Total Long Term Savings Nedbank M&F USAM
2,732 - - -
524 - - -
- - 570 -
3,256 - 570 -
8,426 - - -
Non-core operations
Total core operations Bermuda Total
2,732 1,330 4,062
524 - 524
570 - 570
3,826 1,330 5,156
8,426 115 8,541
B4: Impairments of financial assets
GBPm
Year ended Year ended
31 December 2009 31 December 2008
Nordic 5 5
US Life 248 384
Total Long Term Savings 253 389
Nedbank 504 315
Bermuda 13 30
Total 770 734
B5: Funds under management
Long Term Savings
GBPm
Emerging Retail
As at 31 December 2009 Markets Nordic Europe
Life assurance policyholder funds 25,454 9,221 3,569
Unit trusts and mutual funds 7,686 1,428 391
Third party client funds 8,229 - -
Total client funds under management 41,369 10,649 3,960
Shareholder funds 2,130 360 210
Total funds under management 43,499 11,009 4,170
GBPm
Long Term Savings
Wealth
As at 31 December 2009 Management US Life
Life assurance policyholder funds 34,721 6,689
Unit trusts and mutual funds 11,308 -
Third party client funds - -
Total client funds under management 46,029 6,689
Shareholder funds 830 -
Total funds under management 46,859 6,689
Long Term Savings
Emerging Retail
As at 31 December 2008 Markets Nordic Europe
20,599 6,605 2,881
Life assurance policyholder funds
Unit trusts and mutual funds 7,678 1,000 416
Third party client funds 10,325 - -
Total client funds under management 38,602 7,605 3,297
Shareholder funds 1,672 418 213
Total funds under management 40,274 8,023 3,510
Long Term Savings
Wealth
As at 31 December 2008 Management US Life
29,200 241
Life assurance policyholder funds
Unit trusts and mutual funds 8,777 -
Third party client funds - -
Total client funds under management 37,977 241
Shareholder funds 943 -
Total funds under management 38,920 241
Total Long Term Savings Nedbank M&F USAM
79,654 658 - 6,789
20,813 3,775 - 4,095
8,229 3,800 - 150,423
108,696 8,233 - 161,307
3,530 - 162 169
112,226 8,233 162 161,476
GBPm
Non-core operations
Total core operations Bermuda Total
87,101 2,913 90,014
28,683 - 28,683
162,452 - 162,452
278,236 2,913 281,149
3,861 - 3,861
282,097 2,913 285,010
Total Long Term Savings Nedbank M&F USAM
59,526 425 - 13,623
17,871 2,617 - 3,127
10,325 3,375 - 147,956
87,722 6,417 - 164,706
3,246 - 145 177
90,968 6,417 145 164,883
GBPm
Non-core operations
Total core operations Bermuda Total
73,574 2,401 75,975
23,615 - 23,615
161,656 - 161,656
258,845 2,401 261,246
3,568 - 3,568
262,413 2,401 264,814
B6: Statement of financial position segment information year ended 31
December 2009
Long Term Savings
GBPm
Emerging Retail
At 31 December 2009 Markets Nordic Europe
Notes
Assets
Goodwill and other intangible
assets 106 1,035 563
Goodwill 91 219 204
Present value of acquired in-force
business - 624 265
Software development 6 1 3
Other intangibles 9 191 91
Mandatory reserve deposits with
central banks - - -
Property, plant and equipment 336 7 4
Investment property 1,518 - -
Deferred tax assets 54 108 17
Investments in associated
undertakings and joint ventures 20 2 -
Deferred acquisition costs 123 49 275
Insurance contracts - 2 -
Investment contracts 107 47 271
Asset management 16 - 4
Reinsurers` share of life
assurance policyholder liabilities 11 10 6
Insurance contracts 11 7 4
Unit-Linked investment contracts
and similar contracts - - -
Outstanding claims - 3 2
Reinsurers share of general
insurance liabilities - - -
Deposits held with reinsurers - 108 -
Loans and advances 340 4,209 2
Policyholder loans 58 2 2
Other loans and advances 282 4,207 -
Investments and securities 27,603 10,836 3,693
Government and
government-guaranteed securities 3,586 150 60
Listed other debt securities,
preference shares and
debentures 1,825 1,453 53
Unlisted other debt securities,
preference shares and
debentures 2,989 - 2
Listed equity securities 8,854 1 10
Unlisted equity securities 1,223 15 -
Listed pooled investments 457 547 -
Unlisted pooled investments 6,123 8,670 3,568
Short-term funds and securities
treated as investments 2,543 - -
Other securities 3 - -
Current tax receivable 4 4 16
Client indebtedness for acceptances - - -
Trade, other receivables and other
assets 630 155 58
Derivative financial instruments
assets 327 9 -
Cash and cash equivalents 189 344 81
Non-current assets held-for-sale - - -
Inter-segment assets 1,352 59 23
Total assets 32,613 16,935 4,738
Long Term Savings
GBPm
Wealth
At 31 December 2009 Management US Life
Assets
Goodwill and other intangible assets 1,602 94
Goodwill 656 -
Present value of acquired in-force business 671 89
Software development 35 5
Other intangibles 240 -
Mandatory reserve deposits with central banks - -
Property, plant and equipment 19 1
Investment property 2 -
Deferred tax assets 23 183
Investments in associated undertakings and joint
ventures - -
Deferred acquisition costs 778 1,671
Insurance contracts 50 1,671
Investment contracts 654 -
Asset management 74 -
Reinsurers` share of life assurance policyholder
liabilities 772 475
Insurance contracts 45 450
Unit-Linked investment contracts and similar
contracts 717 -
Outstanding claims 10 25
Reinsurers share of general insurance liabilities - -
Deposits held with reinsurers - 35
Loans and advances 148 54
Policyholder loans 148 53
Other loans and advances - 1
Investments and securities 35,120 10,045
Government and government-guaranteed securities 251 302
Listed other debt securities, preference shares and
debentures - 6,766
Unlisted other debt securities, preference shares and
debentures 104 2,439
Listed equity securities - -
Unlisted equity securities - -
Listed pooled investments 437 3
Unlisted pooled investments 34,327 16
Short-term funds and securities treated as
investments 1 519
Other securities - -
Current tax receivable 86 -
Client indebtedness for acceptances - -
Trade, other receivables and other assets 232 213
Derivative financial instruments assets - 187
Cash and cash equivalents 278 4
Non-current assets held-for-sale - -
Inter-segment assets 277 74
Total assets 39,337 13,036
Total Long
Term
GBPm
Savings Nedbank M&F USAM
3,400 543 30 1,171
1,170 393 11 1,142
1,649 - - -
50 150 19 1
531 - - 28
- 882 - -
367 417 23 19
1,520 18 - -
385 24 6 147
22 82 - 7
2,896 2 17 29
1,723 - 17 -
1,079 - - -
94 2 - 29
1,274 22 - -
517 22 - -
717 - - -
40 - - -
- - 120 -
143 - 3 -
4,753 37,638 2 -
263 - - -
4,490 37,638 2 -
87,297 5,501 425 162
4,349 2,044 - -
10,097 2,532 2 -
5,534 - 4 -
8,865 41 87 -
1,238 209 6 -
1,444 675 41 122
52,704 - - 40
3,063 - 285 -
3 - - -
110 51 - -
- 170 - -
1,288 432 96 126
523 1,067 - -
896 660 79 173
- 1 - -
1,785 148 48 1
106,659 47,658 849 1,835
GBPm
Other
Consolidation
operating
Bermuda segments adjustments Total
2 13 - 5,159
- 13 - 2,729
- - - 1,649
2 - - 222
- - - 559
- - - 882
- 2 - 828
- - 221 1,759
- 8 - 570
- 24 - 135
194 - - 3,138
194 - - 1,934
- - - 1,079
- - - 125
- - - 1,296
- - - 539
- - - 717
- - - 40
- - - 120
- - - 146
- - - 42,393
- - - 263
- - - 42,130
2,942 43 2,091 98,461
- - 1,775 8,168
461 1,729 14,821
167 - 5,705
- - 9,503 18,496
37 - - 1,490
2,059 - 1,400 5,741
- - (12,678) 40,066
218 - 293 3,859
- 43 69 115
- 8 - 169
- - - 170
878 111 120 3,051
- 154 802 2,546
32 425 717 2,982
- - - 1
564 1,363 (3,909) -
4,612 2,151 42 163,806
Long Term Savings
GBPm
Emerging
At 31 December 2009 Markets
Nordic
Notes
Liabilities
Life assurance policyholder liabilities 28,655 9,514
Insurance contracts 11,783 74
Unit-Linked investment contracts and similar
contracts 9,838 9,335
Other investment contracts 115 -
Discretionary participating investment
contracts 6,639 -
Outstanding claims 280 105
General insurance liabilities - -
Third party interests in consolidated funds - -
Borrowed funds E1 272 26
Senior debt securities - 26
Mortgage backed securities - -
Subordinated debt securities 272 -
Provisions 147 11
Deferred revenue 23 5
Life assurance 16 5
Asset management 7 -
General insurance - -
Deferred tax liabilities 200 113
Current tax payable 70 20
Trade, other payables and other liabilities 1,512 203
Liabilities under acceptances - -
Amounts owed to bank depositors - 5,448
Derivative financial instruments liabilities 141 22
Non-current liabilities held-for-sale - -
Inter-segment liabilities 51 37
Total liabilities 31,071 15,399
Net assets 1,542 1,536
Equity
Equity attributable to equity holders of the
parent 1,540 1,536
Non-controlling interests 2 -
Non-controlling interests ordinary shares F2(b) 2 -
Non-controlling interests preference shares F2(b) - -
Total equity 1,542 1,536
Long Term Savings
GBPm
Retail Wealth
At 31 December 2009 Europe Management
US Life
Liabilities
Life assurance policyholder liabilities 3,689 35,554 11,625
Insurance contracts 121 901 10,787
Unit-Linked investment contracts and
similar contracts 3,560 34,639 -
Other investment contracts - - 788
Discretionary participating investment
contracts - - -
Outstanding claims 8 14 50
General insurance liabilities - - -
Third party interests in consolidated
funds - - -
Borrowed funds - - -
Senior debt securities - - -
Mortgage backed securities - - -
Subordinated debt securities - - -
Provisions 8 33 -
Deferred revenue 160 456 -
Life assurance 155 379 -
Asset management 5 77 -
General insurance - - -
Deferred tax liabilities 124 167 126
Current tax payable 2 37 -
Trade, other payables and other
liabilities 79 550 359
Liabilities under acceptances - - -
Amounts owed to bank depositors - - -
Derivative financial instruments
liabilities - - 9
Non-current liabilities held-for-sale - - -
Inter-segment liabilities - 181 170
Total liabilities 4,062 36,978 12,289
Net assets 676 2,359 747
Equity
Equity attributable to equity holders of
the parent 676 2,359 747
Non-controlling interests - - -
Non-controlling interests ordinary
shares - - -
Non-controlling interests preference
shares - - -
Total equity 676 2,359 747
The net assets of Emerging Markets are stated after eliminating investments in
Group equity and debt instruments of GBP340 million (2008: GBP236 million)
held in policyholder funds. These include investments in the Company`s ordinary
shares and subordinated liabilities and preferred securities issued by the
Group`s banking subsidiary Nedbank Limited. All Emerging Markets debt relates
to life assurance. All other debt relates to other shareholders` net assets.
GBPm
Total Long
Term
Savings Nedbank M&F USAM Bermuda
89,037 661 - - 4,178
23,666 95 - - 3,788
57,372 - - - -
903 566 - - 390
6,639 - - - -
457 - - - -
- - 372 - -
- - - - -
298 1,614 - - -
26 484 - - -
- 118 - - -
272 1,012 - - -
199 1 21 2 -
644 1 9 - -
555 1 - - -
89 - - - -
- - 9 - -
730 148 2 - -
129 21 - 10 5
2,703 897 118 221 (9)
- 170 - - -
5,448 38,687 - - -
172 969 - - -
- - - - -
439 697 - 1,202 -
99,799 43,866 522 1,435 4,174
6,860 3,792 327 400 438
6,858 2,084 265 371 438
2 1,708 62 29 -
2 1,444 62 29 -
- 264 - - -
6,860 3,792 327 400 438
GBPm
Other
operating Consolidation
segments adjustments Total
- - 93,876
- - 27,549
- - 57,372
- - 1,859
- - 6,639
- - 457
- - 372
- 2,906 2,906
1,397 - 3,309
636 - 1,146
- - 118
761 - 2,045
40 - 263
- - 654
- - 556
- - 89
- - 9
25 - 905
45 - 210
120 255 4,305
- - 170
- - 44,135
59 790 1,990
- - -
1,571 (3,909) -
3,257 42 153,095
(1,106) - 10,711
(1,552) - 8,464
446 - 2,247
- - 1,537
446 - 710
(1,106) - 10,711
B6: Statement of financial position segment information year ended 31
December 2008
Long Term Savings
GBPm
Emerging
At 31 December 2008 Markets Nordic
Notes
Assets 111 1,183
Goodwill and other intangible assets
Goodwill 95 222
Present value of acquired in-force business (2) 742
Software development 4 1
Other intangibles 14 218
Mandatory reserve deposits with central
banks - -
Property, plant and equipment 277 4
Investment property 1,282 -
Deferred tax assets 68 78
Investments in associated undertakings and
joint ventures 33 -
Deferred acquisition costs 116 34
Insurance contracts - 2
Investment contracts 96 32
Asset management 20 -
Reinsurers` share of life assurance
policyholder liabilities 6 13
Insurance contracts 6 10
Unit-Linked investment contracts and
similar contracts - -
Outstanding claims - 3
Reinsurers share of general insurance
liabilities - -
Deposits held with reinsurers - 121
Loans and advances 59 3,846
Policyholder loans 59 -
Other loans and advances - 3,846
Investments and securities 22,447 7,595
Government and government-guaranteed
securities 3,769 214
Listed other debt securities, preference
shares and
debentures 1,805 813
Unlisted other debt securities, preference
shares and
debentures 2,113 -
Listed equity securities 6,932 -
Unlisted equity securities 885 12
Listed pooled investments 411 155
Unlisted pooled investments 4,263 6,401
Short-term funds and securities treated as
investments 2,264 -
Other securities 5 -
Current tax receivable 6 -
Client indebtedness for acceptances - -
Trade, other receivables and other assets 455 138
Derivative financial instruments assets 209 -
Cash and cash equivalents 467 372
Non-current assets held-for-sale 7 -
Inter-segment assets 1,326 264
Total assets 26,869 13,648
Long Term Savings
Retail Wealth
At 31 December 2008 Europe Management US Life
Assets 865 1,814 132
Goodwill and other intangible assets
Goodwill 420 742 -
Present value of acquired in-force
business 326 764 120
Software development 5 23 12
Other intangibles 114 285 -
Mandatory reserve deposits with central
banks - - -
Property, plant and equipment 6 25 1
Investment property - 2 -
Deferred tax assets 45 172 1,036
Investments in associated undertakings
and joint ventures - - -
Deferred acquisition costs 253 698 1,896
Insurance contracts - 49 1,896
Investment contracts 248 585 -
Asset management 5 64 -
Reinsurers` share of life assurance
policyholder liabilities 5 607 505
Insurance contracts 3 42 477
Unit-Linked investment contracts and
similar contracts - 551 -
Outstanding claims 2 14 28
Reinsurers share of general insurance
liabilities - - -
Deposits held with reinsurers - - 40
Loans and advances 2 139 62
Policyholder loans 2 138 61
Other loans and advances - 1 1
Investments and securities 2,958 29,477 10,284
Government and government-guaranteed
securities - 699 97
Listed other debt securities, preference
shares and
debentures 26 2 7,021
Unlisted other debt securities,
preference shares and
debentures 45 22 2,488
Listed equity securities - 1 -
Unlisted equity securities 5 26 -
Listed pooled investments - 649 8
Unlisted pooled investments 2,882 28,078 18
Short-term funds and securities treated
as investments - - 652
Other securities - - -
Current tax receivable 6 81 -
Client indebtedness for acceptances - - -
Trade, other receivables and other assets 67 228 252
Derivative financial instruments assets - - 36
Cash and cash equivalents 134 236 (18)
Non-current assets held-for-sale - - -
Inter-segment assets 10 238 46
Total assets 4,351 33,717 14,272
Total Long
Term Savings Nedbank M&F USAM Bermuda
4,105 425 29 1,305 5
1,479 308 10 1,271 -
1,950 - - - -
45 117 19 1 5
631 - - 33 -
- 734 - - -
313 316 24 26 -
1,284 15 - - -
1,399 25 8 158 -
33 75 - - -
2,997 2 15 40 145
1,947 - 15 - 145
961 - - - -
89 2 - 40 -
1,136 9 - - 3
538 9 - - 3
551 - - - -
47 - - - -
- - 115 - -
161 - 3 - -
4,108 31,634 2 - -
260 - - - -
3,848 31,634 2 - -
72,761 5,043 322 177 3,676
4,779 2,255 - - -
9,667 2,172 1 - 534
4,668 - 2 - 202
6,933 38 67 - -
928 152 5 - 118
1,223 426 36 135 2,085
41,642 - - 42 -
2,916 - 211 - 737
5 - - - -
93 25 - - -
- 220 - - -
1,140 486 68 139 789
245 1,627 - - 21
1,191 631 56 220 29
7 - - - -
1,884 19 46 99 377
92,857 41,286 688 2,164 5,045
GBPm
Other operating Consolidation
segments adjustments Total
13 - 5,882
13 - 3,081
- - 1,950
- - 187
- - 664
- - 734
3 - 682
- 179 1,478
- - 1,590
3 - 111
- - 3,199
- - 2,107
- - 961
- - 131
- - 1,148
- - 550
- - 551
- - 47
- - 115
- - 164
1 - 35,745
- - 260
1 - 35,485
88 1,455 83,522
- 1,942 8,976
- 1,695 14,069
- 175 5,047
- 7,938 14,976
- - 1,203
- 1,310 5,215
- (11,853) 29,831
- 125 3,989
88 123 216
- - 118
- - 220
96 419 3,137
226 1,109 3,228
79 997 3,203
- - 7
1,339 (3,764) -
1,848 395 144,283
Long Term Savings
GBPm
Emerging Retail
At 31 December 2008 Markets Nordic Europe
Notes
Liabilities
Life assurance policyholder
liabilities 23,261 6,884 2,973
Insurance contracts 10,619 71 92
Unit-Linked investment contracts
and similar contracts 6,690 6,704 2,874
Other investment contracts 105 - -
Discretionary participating
investment contracts 5,646 - -
Outstanding claims 201 109 7
General insurance liabilities - - -
Third party interests in
consolidated funds - - -
Borrowed funds E1 237 - -
Senior debt securities - - -
Mortgage backed securities - - -
Subordinated debt securities 237 - -
Provisions 132 203 8
Deferred revenue 31 3 128
Life assurance 17 3 122
Asset management 14 - 6
General insurance - - -
Deferred tax liabilities 176 93 173
Current tax payable 98 22 -
Trade, other payables and other
liabilities 1,197 198 88
Liabilities under acceptances - - -
Amounts owed to bank depositors - 4,622 -
Derivative financial instruments
liabilities 31 - -
Non-current liabilities
held-for-sale 6 - -
Intersegment liabilities 66 174 40
Total liabilities 25,235 12,199 3,409
Net assets 1,634 1,449 942
Equity
Equity attributable to equity
holders of the parent 1,626 1,449 942
Non-controlling interests 8 - -
Non-controlling interests
ordinary shares F2(b) 8 - -
Non-controlling interests
preference shares F2(b) - - -
Total equity 1,634 1,449 942
Long Term Savings
Wealth
At 31 December 2008 Management US Life
Liabilities
Life assurance policyholder liabilities 29,603 13,337
Insurance contracts 694 12,365
Unit-Linked investment contracts and similar
contracts 28,893 -
Other investment contracts - 914
Discretionary participating investment contracts - -
Outstanding claims 16 58
General insurance liabilities - -
Third party interests in consolidated funds - -
Borrowed funds 1 -
Senior debt securities 1 -
Mortgage backed securities - -
Subordinated debt securities - -
Provisions 29 -
Deferred revenue 428 -
Life assurance 347 -
Asset management 81 -
General insurance - -
Deferred tax liabilities 256 578
Current tax payable 28 (15)
Trade, other payables and other liabilities 573 267
Liabilities under acceptances - -
Amounts owed to bank depositors - -
Derivative financial instruments liabilities 1 -
Non-current liabilities held-for-sale - -
Intersegment liabilities 258 1
Total liabilities 31,178 14,169
Net assets 2,539 103
Equity
Equity attributable to equity holders of the parent 2,539 103
Non-controlling interests - -
Non-controlling interests ordinary shares - -
Non-controlling interests preference shares - -
Total equity 2,539 103
The 31 December 2008 financial position has been restated to reduce both
derivative financial instruments assets and liabilities by an amount of
GBP1,405 million and to increase both cash and cash equivalents and other
liabilities by GBP305 million on a consistent basis to 31 December 2009. There
was no impact on the consolidated net assets at 31 December 2008 as a result of
the restatement.
GBPm
Total Long
Term Savings Nedbank M&F USAM Bermuda
76,058 426 - - 4,785
23,841 - - - 4,265
45,161 - - - -
1,019 426 - - 520
5,646 - - - -
391 - - - -
- - 344 - -
- - - - -
238 960 - - -
1 - - - -
- 104 - - -
237 856 - - -
372 1 21 3 -
590 - 8 - -
489 - - - -
101 - - - -
- - 8 - -
1,276 162 2 - -
133 18 2 8 19
2,323 747 71 299 9
- 220 - - -
4,622 33,549 - - -
32 1,731 - - -
6 - - - -
539 427 (1) 1,452 3
86,190 38,241 447 1,762 4,815
6,667 3,045 241 402 230
6,659 1,717 193 365 230
8 1,328 48 37 -
8 1,081 48 37 -
- 247 - - -
6,667 3,045 241 402 230
GBPm
Other operating Consolidation
segments adjustments Total
- - 81,269
- - 28,106
- - 45,161
- - 1,965
- - 5,646
- - 391
- - 344
- 2,591 2,591
1,097 - 2,295
556 - 557
- - 104
541 - 1,634
80 - 477
- - 598
- - 489
- - 101
- - 8
12 - 1,452
39 - 219
160 465 4,074
- - 220
- - 38,171
124 1,103 2,990
- - 6
1,344 (3,764) -
2,856 395 134,706
(1,008) - 9,577
(1,427) - 7,737
419 - 1,840
(27) - 1,147
446 - 693
(1,008) - 9,577
C: Other key performance information
C1: Operating profit adjusting items
(a) Summary of adjusting items
In determining the adjusted operating profit of the Group for core operations
certain adjustments are made to profit before tax to reflect the directors`
view of the underlying long-term performance of the Group. The following table
shows an analysis of those adjustments from adjusted operating profit to profit
before and after tax.
GBPm
Long Term Savings
Emerging
Year ended 31 December 2009 Notes Markets Nordic
Income/(expense)
Goodwill impairment and impact of
acquisition accounting C1(b) (1) (12)
(Loss)/profit on disposal of
subsidiaries, associated undertakings
and strategic investments C1(c) (51) -
Short-term fluctuations in investment
return C1(d) (38) (1)
Investment return adjustment for Group
equity and debt
instruments held in life funds C1(e) (109) -
Dividends declared to holders of
perpetual preferred callable
securities C1(f) - -
US Asset Management equity plans and
non-controlling interests C1(g) - -
Credit-related fair value losses on Group
debt instruments C1(h) - -
Total adjusting items (199) (13)
Tax on adjusting items D1(d) (1) 9
Non-controlling interest in adjusting
items F2(a)(ii) - -
Total adjusting items after tax and
non-controlling interests (200) (4)
Long Term Savings
Retail Wealth
Year ended 31 December 2009 Europe Management US Life
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (243) (167) (14)
(Loss)/profit on disposal of
subsidiaries, associated undertakings
and strategic investments - (7) -
Short-term fluctuations in investment
return 1 (88) (150)
Investment return adjustment for Group
equity and debt
instruments held in life funds - - -
Dividends declared to holders of
perpetual preferred callable
securities - - -
US Asset Management equity plans and
non-controlling interests - - -
Credit-related fair value losses on Group
debt instruments - - -
Total adjusting items (242) (262) (164)
Tax on adjusting items 14 37 44
Non-controlling interest in adjusting
items - - -
Total adjusting items after tax and
non-controlling interests (228) (225) (120)
Long Term Savings
Emerging
Year ended 31 December 2008 Notes Markets Nordic
Income/(expense)
Goodwill impairment and impact of
acquisition accounting C1(b) (1) (195)
(Loss)/profit on disposal of
subsidiaries, associated undertakings
and strategic investments C1(c) (11) 55
Short-term fluctuations in investment
return C1(d) (95) 4
Investment return adjustment for Group
equity and debt
instruments held in life funds C1(e) 234 -
Dividends declared to holders of
perpetual preferred callable
securities C1(f) - -
US Asset Management equity plans and
non-controlling interests C1(g) - -
Credit-related fair value gains on Group
debt instruments C1(h) - -
Total adjusting items 127 (136)
Tax on adjusting items D1(d) 20 14
Non-controlling interest in adjusting
items F2(a)(ii) - -
Total adjusting items after tax and
non-controlling interests 147 (122)
GBPm
Long Term Savings
Retail Wealth
Year ended 31 December 2008 Europe Management US Life
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (46) (100) (96)
(Loss)/profit on disposal of
subsidiaries, associated undertakings
and strategic investments - - -
Short-term fluctuations in investment
return 1 140 (248)
Investment return adjustment for Group
equity and debt
instruments held in life funds - - -
Dividends declared to holders of
perpetual preferred callable
securities - - -
US Asset Management equity plans and
non-controlling interests - - -
Credit-related fair value gains on Group
debt instruments - - -
Total adjusting items (45) 40 (344)
Tax on adjusting items 17 10 3
Non-controlling interest in adjusting
items - - -
Total adjusting items after tax and
non-controlling interests (28) 50 (341)
(a) Summary of adjusting items continued
GBPm
Total Long
Term Savings Nedbank M&F USAM
(437) (4) - (2)
(58) - - 1
(276) - (10) -
(109) - - -
- - - -
- - - (1)
- - - -
(880) (4) (10) (2)
103 - 3 2
- 19 7 (3)
(777) 15 - (3)
GBPm
Other Total
- (443)
7 (50)
(30) (316)
- (109)
45 45
- (1)
(263) (263)
(241) (1 137)
- 108
- 23
(241) (1 006)
Total Long
Term Savings Nedbank M&F USAM
(438) - - -
44 1 (10) 1
(198) - (72) -
234 - - -
- - - -
- - - 7
- 14 - -
(358) 15 (82) 8
64 (4) 14 -
- 18 19 (7)
(294) 29 (49) 1
GBPm
Other Total
- (438)
17 53
(72) (342)
- 234
43 43
- 7
489 503
477 60
(136) (62)
- 30
341 28
(b) Goodwill impairment and impact of acquisition accounting
Acquisition date deferred acquisition costs and deferred revenues are not
recognised. These are reversed in the acquisition statement of financial
position and replaced by goodwill, other intangible assets and the value of the
acquired present value of in-force business (`acquired PVIF`). In determining
its adjusted operating profit the Group recognises deferred revenue and
acquisition costs in relation to policies sold by acquired businesses
pre-acquisition, and excludes the impairment of goodwill and the amortisation
of acquired other intangibles and acquired PVIF and the movements in certain
acquisition date provisions.
Goodwill impairment and acquisition accounting adjustments to adjusted
operating profit are summarised below:
GBPm
Emerging Retail Wealth
Year ended 31 December 2009 Markets Nordic Europe Management
Amortisation of acquired PVIF - (106) (37) (86)
Amortisation of acquired
deferred costs and revenue 1 21 (5) 34
Amortisation of other
acquired intangible assets (2) (25) (14) (36)
Change in acquisition date
provisions - 98 - -
Goodwill impairment - - (187) (79)
(1) (12) (243) (167)
GBPm
US
Year ended 31 December 2009 Life Nedbank USAM Total
Amortisation of acquired PVIF (14) - - (243)
Amortisation of acquired deferred costs
and revenue - - - 51
Amortisation of other acquired
intangible assets - (4) (2) (83)
Change in acquisition date provisions - - - 98
Goodwill impairment - - - (266)
(14) (4) (2) (443)
Emerging Retail Wealth
Year ended 31 December 2008 Markets Nordic Europe Management
Amortisation of acquired PVIF - (105) (49) (97)
Amortisation of acquired
deferred costs and revenue 1 22 16 42
Amortisation of other
acquired intangible assets (1) (24) (13) (37)
Change in acquisition date
provisions - (76) - (8)
Goodwill impairment (1) (12) - -
(1) (195) (46) (100)
GBPm
US
Year ended 31 December 2008 Life Nedbank USAM Total
Amortisation of acquired PVIF (35) - - (286)
Amortisation of acquired deferred costs
and revenue - - - 81
Amortisation of other acquired
intangible assets - - - (75)
Change in acquisition date provisions - - - (84)
Goodwill impairment (61) - - (74)
(96) - - (438)
(c) (Loss)/profit on disposal of subsidiaries, associated undertakings and
strategic investments On 6 March 2009 the Group disposed of its interest in Old
Mutual Australia at a loss of GBP8 million.
In August 2008, an agreement with ABN AMRO Asset Management Asia and their
parent company, Fortis Bank was entered into to acquire the 49% stake that
Fortis holds in AATEDA, a major Chinese asset management joint venture for 165
million. On 27 May 2009 the termination of this agreement with ABN AMRO Asset
Management Asia and Fortis Bank was announced, with an exit fee of GBP41
million which has been accounted for as a loss on disposal.
On 11 June 2008, the Group completed the disposal of its controlling
shareholding in Palladyne, an asset management business, resulting in a profit
on disposal of GBP17 million.
Part of the Nordic segment`s banking business, Skandia`s Nordic vehicle finance
operation, Skandiabanken Bilfinans, was sold in the previous financial year,
resulting in a profit on disposal of GBP55 million.
In the previous financial year, the Group has closed its project to develop a
direct financial services capability in South Africa due to adverse market
conditions. Costs relating to the closure amounting to GBP25 million have been
excluded from the adjusted operating profit. Emerging Markets realised a profit
of GBP4 million on the sale of its administration business and Nedbank
recognised a GBP1 million profit on the disposal of Bond Choice.
(Loss)/profits on the disposal of subsidiaries, associated undertakings and
strategic investments are analysed below:
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Emerging Markets (51) (11)
Nordic - 55
Wealth Management (7) -
US Life - -
Total Long Term Savings (58) 44
Nedbank - 1
M&F - (10)
USAM 1 1
Other 7 17
(Loss)/profit on disposal of subsidiaries,
associated undertakings and strategic
investments (50) 53
(d) Long-term investment return
Profit before tax includes actual investment returns earned on the shareholder
assets of the Group`s life assurance and general insurance businesses. Adjusted
operating profit is stated after recalculating shareholder asset investment
returns based on a long-term investment return rate. The difference between the
actual and the long-term investment returns are short-term fluctuations in
investment return.
Long-term rates of return are based on achieved real rates of return
appropriate to the underlying asset base, adjusted for current inflation
expectations, default assumptions, costs of investment management and consensus
economic investment forecasts, and are reviewed frequently, usually annually,
for appropriateness. These rates of return have been selected with a view to
ensuring that returns credited to adjusted operating profit are consistent with
the actual returns expected to be earned over the long-term.
For Emerging Markets, the return is applied to an average value of investible
shareholders` assets, adjusted for net fund flows. For Nordic, Retail Europe,
Wealth Management and US Life, the return is applied to average investible
assets. For M&F general insurance business, the return is an average value of
investible assets supporting shareholders` funds and insurance liabilities,
adjusted for net fund flows.
%
Year ended Year ended
31 December 31 December
Long-term investment rates 2009 2008
Emerging Markets 13.3 16.6
Nordic 1.8 3.5
Retail Europe 2.8 3.1
Wealth Management 5.0 5.0
US Life 5.9 5.9
M&F 13.3 16.6
Analysis of short-term fluctuations in investment return
Long Term Savings
Emerging Retail Wealth
Year ended 31
December 2009 Markets Nordic Europe Management US Life
Long-term
investment return 126 1 1 109 539
Less: Actual
shareholder
investment
return 88 - 2 21 389
Short-term
fluctuations in
investment return 38 1 (1) 88 150
GBPm
Long Term Savings
Total Long
Year ended 31 December 2009 Term Savings M&F Other Total
Long-term investment return 776 60 91 927
Less: Actual shareholder investment
return 500 50 61 611
Short-term fluctuations in
investment return 276 10 30 316
Long Term Savings
Emerging Retail Wealth
Year ended 31
December 2008 Markets Nordic Europe Management US Life
Long-term
investment return 133 1 - 65 440
Less: Actual
shareholder
investment return 38 5 1 205 192
Short-term
fluctuations in
investment return 95 (4) (1) (140) 248
GBPm
Long Term Savings
Total Long
Year ended 31 December 2008 Term Savings M&F Other Total
Long-term investment return 639 60 108 807
Less: Actual shareholder
investment return 441 (12) 36 465
Short-term fluctuations in
investment return 198 72 72 342
The actual investment return attributable to shareholders for US life assurance
reflects total investment income, as a distinction is not drawn between
shareholder and policyholder funds.
(e) Investment return adjustment for Group equity and debt instrument held in
life funds Adjusted operating profit includes investment returns on
policyholder investments in Group equity and debt instruments held by the
Group`s life funds. These include investments in the Company`s ordinary shares,
and the subordinated liabilities and ordinary securities of Nedbank. These
investment returns are eliminated within the consolidated income statement in
arriving at profit before tax, but are included in adjusted operating profit.
In 2009 the investment return adjustment increased adjusted operating profit by
GBP109 million (2008: decrease of GBP234 million).
(f) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group`s perpetual preferred callable
securities were GBP45 million in the year ended 31 December 2009 (2008: GBP43
million). These are recognised in finance costs on an accruals basis for the
purpose of determining adjusted operating profit. In the IFRS financial
statements this cost is recognised in equity.
(g) US Asset Management equity plans and non-controlling interests
US Asset Management has a number of long-term incentive arrangements with
senior employees in its asset management affiliates.
In accordance with IFRS requirements the cost of these schemes is disclosed as
being attributable to non-controlling interests. However, this is treated as a
compensation expense in determining adjusted operating profit. The gain
recognised in 2009 was GBP1 million (2008: loss GBP7 million).
The Group has issued put options to senior employees as part of some of its US
affiliate incentive schemes. The impact of revaluing these instruments is
recognised in accordance with IFRS, but excluded from adjusted operating
profit. As at 31 December 2009 these instruments were revalued, the impact of
which was GBPnil (2008: GBPnil).
(h) Credit-related fair value gains and losses on Group debt instruments
The narrowing of credit spread of the Group`s debt instruments in the market
price has resulted in losses of GBP263 million (2008: gains due to widening of
GBP489 million) on Other operating segments and GBPnil (2008: GBP14 million
gain) in Nedbank being recorded in the Group`s income statement for those
instruments that are recorded at fair value.
In the directors` view, such movements are not reflective of the underlying
performance of the Group and will reverse over time. They have therefore been
excluded from adjusted operating profit.
C2 Foreign currencies
The principal exchange rates used to translate the operating results, assets
and liabilities of key foreign business segments to Sterling are:
Statement of
Income financial
statement position
(average rate) (closing rate)
31 December 2009
Rand 13.1746 11.9172
US dollars 1.5655 1.6148
Swedish kronor 11.9743 11.5562
Euro 1.1227 1.1268
31 December 2008
Rand 15.2948 13.7194
US dollars 1.8524 1.4575
Swedish kronor 12.2209 11.4494
Euro 1.2594 1.0446
C3: Earnings and earnings per share
(a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the financial
year attributable to ordinary equity shareholders by the weighted average
number of ordinary shares in issue during the year excluding own shares held in
policyholder funds, ESOP trusts, Black Economic Empowerment trusts and other
related undertakings.
GBPm
Year ended Year ended
31 December 31 December
2009 2008
(Loss)/profit for the financial year
attributable to equity holders of the parent (340) 441
Dividends declared to holders of perpetual
preferred callable securities (32) (31)
(Loss)/profit attributable to ordinary equity
holders (372) 410
Total dividends declared to holders of
perpetual preferred callable securities
of GBP45 million in 2009 (2008: GBP43 million)
are stated net of tax credits of
GBP13 million (2008: GBP12 million).
Millions
Year ended Year ended
31 December 31 December
2009 2008
Weighted average number of ordinary shares in
issue 5 277 5 294
Shares held in charitable foundations (7) (19)
Shares held in ESOP trusts (41) (45)
Adjusted weighted average number of ordinary
shares 5 229 5 230
Shares held in life funds (236) (240)
Shares held in Black Economic Empowerment trusts (235) (235)
Weighted average number of ordinary shares 4 758 4 755
Basic earnings per ordinary share (pence) (7.8) 8.6
Diluted earnings per share recognises the dilutive impact of share options held
in ESOP trusts and Black Economic Empowerment trusts which are currently in the
money in the calculation of the weighted average number of shares, as if the
relevant shares were in issue for the full period.
Millions
Year ended Year ended
31 December 31 December
2009 2008
Weighted average number of ordinary shares 4 758 4 755
Adjustments for share options held by ESOP
trusts - 61
Adjustments for shares held in Black Economic
Empowerment trusts - 235
4 758 5 051
Diluted earnings per ordinary share (pence) (7.8) 8.1
No adjustments to the weighted average number of ordinary shares have been
effected for 2009 in order to calculate the diluted earnings per ordinary share
as any adjustments would be antidilutive.
(b) Adjusted operating earnings per ordinary share
Adjusted operating earnings per ordinary share is determined based on adjusted
operating profit. Adjusted operating profit represents the directors` view of
the underlying performance of the Group. For long-term and general insurance
business adjusted operating profit is based on a long-term investment return,
includes investment returns on life funds` investments in Group equity and debt
instruments and is stated net of income tax attributable to policyholder
returns. For the US Asset Management business it includes compensation costs in
respect of certain long-term incentive schemes defined as non-controlling
interests in accordance with IFRS. For all businesses, adjusted operating
profit excludes goodwill impairment, the impact of acquisition accounting,
revaluations of put options related to long-term incentive schemes, the impact
of closure of unclaimed shares trusts, profit/(loss) on disposal of
subsidiaries, associated undertakings and strategic investments, dividends
declared to holders of perpetual preferred callable securities,
income/(expense) from closure of unclaimed shares trusts and fair value
gains/(losses) on Group debt instruments.
The reconciliation of profit for the financial year to adjusted operating
profit after tax attributable to ordinary equity holders is as follows:
GBPm
Year ended Year ended
31 December 31 December
2009 2008
(Loss)/profit for the financial year
attributable to equity holders of the parent (340) 441
Adjusting items 1 137 (60)
Non core operations Bermuda (33) 365
Tax on adjusting items (108) 62
Non-controlling interest on adjusting items (23) (30)
Adjusted operating profit after tax
attributable to ordinary equity holders 633 778
Adjusted weighted average number of ordinary
shares (millions) 5 229 5 230
Adjusted operating earnings per ordinary share
(pence) 12.1 14.9
(c) Headline earnings per share
In accordance with the JSE Limited (JSE) listing requirements, the Group is
required to calculate a `headline earnings per share` (HEPS), determined by
reference to the South African Institute of Chartered Accountants` circular
8/2007 `Headline Earnings`. The table below sets out a reconciliation of basic
earnings per ordinary share and HEPS in accordance with that circular.
Disclosure of HEPS is not a requirement of International Financial Reporting
Standards.
Year ended
31 December 2009
Gross Net
(Loss)/profit for the financial year attributable to equity
holders of the parent (340) (340)
Dividends declared to holders of perpetual preferred
callable securities (32) (32)
(Loss)/profit attributable to ordinary equity holders (372) (372)
Adjustments:
Impairments of goodwill and intangible assets 266 266
Loss/(profit) on disposal of subsidiaries, associated
undertakings and strategic
investments 50 53
Realised gains/losses (including impairments) on
available-for-sale financial assets 239 239
Headline earnings 183 186
Weighted average number of ordinary shares 4 758 4 758
Diluted weighted average number of ordinary shares 5 109 5 109
Headline earnings per share (pence) 3.8 3.9
Diluted headline earnings per share (pence)
3.6 3.6
GBPm
Year ended
31 December 2008
Gross Net
(Loss)/profit for the financial year attributable to equity
holders of the parent 441 441
Dividends declared to holders of perpetual preferred
callable securities (31) (31)
(Loss)/profit attributable to ordinary equity holders 410 410
Adjustments:
Impairments of goodwill and intangible assets 100 100
Loss/(profit) on disposal of subsidiaries, associated
undertakings and strategic
investments (53) (67)
Realised gains/losses (including impairments) on
available-for-sale financial assets 414 381
Headline earnings 871 824
Weighted average number of ordinary shares 4 755 4 755
Diluted weighted average number of ordinary shares 5 051 5 051
Headline earnings per share (pence) 18.3 17.3
Diluted headline earnings per share (pence) 17.2 16.3
Notes to the consolidated financial statements
For the year ended 31 December 2009 continued
C: Other key performance information continued
C4: Dividends
Dividends paid were as follows:
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Note
2007 Final dividend paid 4.55p per
10p share - 227
2008 Interim dividend paid 2.45p per
10p share - 125
Dividends to ordinary equity holders - 352
Dividends declared to holders of
perpetual preferred callable
securities 45 43
Dividend payments for the year 45 395
Dividends paid to ordinary equity holders, as above, are calculated using the
number of shares in issue at the record date, less treasury shares held in ESOP
trusts, life funds of Group companies, Black Economic Empowerment trusts and
related undertakings.
As a consequence of the exchange control arrangements in place in certain
African territories, dividends to ordinary equity holders on the branch
registers of those countries (or, in the case of Namibia, the Namibian section
of the principal register) are settled through Dividend Access Trusts
established for that purpose.
In March and November 2009, GBP22 million and GBP23 million respectively were
declared and paid to holders of perpetual preferred callable securities (March
2008: GBP23 million and November 2008: GBP20 million).
A final dividend of 1.5 pence per 10p share has been recommended by the
directors. Subject to shareholders` approval, the dividend will be paid on 25
June 2010 to shareholders on the register at the close of business on 14 May
2010. The dividend will absorb an estimated GBP81 million of shareholders`
funds. The Company is planning to offer, for the first time, a scrip dividend
alternative for eligible shareholders subject to finalising the associated
logistics and timetable.
Notes to the consolidated financial statements
For the year ended 31 December 2009 continued
D: Other income statement notes
D1: Income tax expense/(credit)
(a) Analysis of total income tax expense/(credit)
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Current tax
United Kingdom tax
Corporation tax 46 93
Double tax relief - (145)
Overseas tax
South Africa 257 264
United States - 4
Europe 49 68
Secondary Tax on Companies (STC) 13 22
Prior year adjustments 14 1
Total current tax 379 307
Deferred tax
Origination and reversal of temporary
differences 45 (548)
Changes in tax rates/bases - (1)
Write down/recognition of deferred tax assets (59) 154
Total deferred tax (14) (395)
Total income tax expense/(credit) 365 (88)
(b) Reconciliation of total income tax expense/(credit)
GBPm
Year ended Year ended
31 December 31 December
2008
2009
Profit before tax 595
247
Tax at standard rate of 28% (2008: 28.5%) 69 169
Different tax rate or basis on overseas
operations (9) (23)
Untaxed and low taxed income (86) (218)
Disallowable expenses 180 8
Net movement on deferred tax assets not
recognised 83 123
Effect on deferred tax of changes in tax rates (2) (5)
STC 19 53
Income tax attributable to policyholder returns 142 (169)
Other (31) (26)
Total income tax expense/(credit) 365 (88)
(c) Income tax relating to components of other comprehensive income
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Fair value gains/(losses) 428 (383)
Shadow accounting (18) 16
Currency translation differences/exchange
differences on translating foreign operations - 13
Other (13) (12)
Income tax expense/(credit) relating to
components of other comprehensive income 397 (366)
(d) Income tax on adjusted operating profit
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Income tax expense/(credit) 365 (88)
Tax on adjusting items
Impact of acquisition accounting 40 46
Profit on disposal of subsidiaries, associated
undertakings and strategic investments (2) 12
Short-term fluctuations in investment return 83 35
Income tax attributable to policyholders returns (192) 236
Tax on dividends declared to holders of
perpetual preferred callable securities
recognised in equity (13) (12)
Fair value gains and losses on group debt
instruments - (143)
Tax on non-core operations 11 -
Income tax on adjusted operating profit 292 86
E: Borrowed funds
E1: Borrowed funds GBPm
Group At
excluding 31 December
Nedbank Nedbank 2009
Notes
Senior debt securities and
term loans E9(a) 662 484 1 146
Mortgage backed securities E9(b) - 119 119
Subordinated debt
securities (net of Group
holdings) E9(c) 1 034 1 010 2 044
Borrowed funds 1 696 1 613 3 309
Other issues treated as
equity for accounting purposes
US$750 million cumulative
preference
securities F11(b) 458
500 million perpetual
preferred callable
securities F10(b) 338
GBP350 million perpetual
preferred callable
securities F10(b) 350
Gross debt (IFRS basis) 2 842
Nominal value of gross debt 3 162
GBPm
Group At
excluding 31 December
Nedbank Nedbank 2008
Senior debt securities and term loans 557 - 557
Mortgage backed securities - 104 104
Subordinated debt securities (net of
Group holdings) 779 855 1 634
Borrowed funds 1 336 959 2 295
Other issues treated as equity for
accounting purposes
US$750 million cumulative preference
securities 458
500 million perpetual preferred
callable securities 338
GBP350 million perpetual preferred
callable
securities 350
Gross debt (IFRS basis) 2 482
Nominal value of gross debt 3 154
The table below is a maturity analysis of liability cash flows based on
contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year end exchange rates.
GBPm
Group At
excluding 31 December
Nedbank Nedbank 2009
Less than 1 year 219 156 375
Greater than 1 year and less than 5
years 1 413 1 226 2 639
Greater than 5 years 899 1 033 1 932
Total 2 531 2 415 4 946
GBPm
Group At
excluding 31 December
Nedbank Nedbank 2008
Less than 1 year 495 104 599
Greater than 1 year and less than 5
years 1 397 774 2 171
Greater than 5 years 238 666 904
Total 2 130 1 544 3 674
(a) Senior debt securities and term loans
GBPm
Group At
excluding 31 December
Nedbank Nedbank 2009
Floating rate notes1 114 265 379
Fixed rate notes2 548 219 767
Revolving credit facility3 - - -
Term loan and other loans - - -
Total senior debt securities and term
loan 662 484 1 146
GBPm
Group At
excluding 31 December
Nedbank Nedbank 2008
Floating rate notes1 85 - 85
Fixed rate notes2 152 - 152
Revolving credit facility3 294 - 294
Term loan and other loans 26 - 26
Total senior debt securities and term
loan 557 - 557
Senior debt securities and term loan comprise:
1 Floating rate notes
- GBP3 million note repayable in December 2010, with holders having the
option to elect for early redemption every six months with coupon referenced
against six month LIBOR less 0.50%.
- US$50 million repayable September 2011 at 3 month LIBOR plus 0.50%.
- US$10 million repayable September 2009 at 3 month LIBOR plus 0.35% repaid.
- SEK100 million repayable March 2009 at 3 month STIBOR plus 0.20% repaid.
- 22 million repayable January 2010 at 3 month EURIBOR plus 0.35%.
- SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38%.
- R1,000 million unsecured senior debt repayable September 2012 at 3 month
JIBAR + 1.5%.
- R250 million unsecured senior debt repayable September 2015 at JIBAR +
2.20%.
- R1,750 million unsecured senior debt repayable March 2013 inflation linked
(3.9% real yield).
- R98 million unsecured senior debt repayable March 2013 inflation linked
(3.8% real yield).
- R550 million repayable August 2010 at 3 month ZAR JIBAR-SAFEX + 4.5%.
- R100 million repayable February 2011 at 3 month ZAR JIBAR-SAFEX + 4.5%.
2 Fixed rate notes
- 30 million Euro bond repayable July 2010, capital and interest swapped into
fixed rate US dollars at 5.28%.
- 10 million Euro bond repayable December 2010, capital and interest swapped
into floating rate US dollars at 3 month LIBOR + 0.95%.
- 20 million Euro bond repayable August 2013, capital and interest swapped
into floating rate US dollars at 3 month LIBOR + 1.30%.
- 100 million Euro bond repayable December 2009 at 3.46% repaid.
- R130 million unsecured senior debt repayable October 2024 at zero coupon.
- R2,000 million unsecured senior debt repayable September 2015 at 10.55%.
- R400 million unsecured senior debt repayable September 2019 at 11.39%.
- GBP500 million Euro bond repayable October 2016 at 7.125%.
The total fair value of the swap derivatives associated with the Senior notes
is GBP12 million (2008: GBP11 million). These are recognised as assets.
3 Revolving credit facilities and irrevocable letters of credit
The Group has a GBP1,250 million five-year multi-currency revolving credit
facility, which had an original maturity date of September 2010. On 18 August
2007 syndicate banks agreed to extend the maturity date of GBP1,232 million of
the facility until September 2012. At 31 December 2009 GBP480 million (2008:
GBP826 million) of this facility was utilised, GBPnil (2008: GBP294 million) in
the form of drawn debt and GBP480 million (2008: GBP532 million) in the form of
irrevocable letters of credit.
The Group has a SEK1,000 million revolving credit facility, which has a
maturity date of 2 July 2010. At 31 December 2009 this facility was undrawn.
(b) Mortgage backed securities Nedbank
GBPm
At At
31 December 31 December
2009 2008
R291 million notes (class A1) repayable 18
November 2039 (11.467%) 25 22
R1.4 billion notes (class A2A) repayable 18
November 2039 (11.817%) 84 73
R98 million notes (class B note) repayable 18
November 2039 (12.067%) 6 5
R76 million notes (class C note) repayable 18
November 2039 (13.317%) 4 4
119 104
(c) Subordinated debt securities
GBPm
At At
31 December 31 December
2009 2008
Nedbank
US$18 million repayable 31 August 2009 (6 month
LIBOR less 1.5%) repaid 1 - 12
R1.5 billion repayable 24 April 2016 (7.85%) 2 126 108
R1.8 billion repayable 20 September 2018 (9.84%) 3 149 135
R515 million repayable on 4 December 2008
(13.5%) 4 repaid - -
R500 million repayable on 30 December 2010 (8.38%) 5 41 36
R650 million repayable 8 February 2017 (9.03%) 6 55 49
R1.7 billion repayable 8 February 2019 (8.9%) 7 138 125
R2.0 billion repayable 6 July 2022 (3 month
JIBAR plus 0.47%) 8 171 150
R500 million repayable 15 August 2012 (3 month
JIBAR plus 0.45%) 9 42 37
R1.0 billion repayable 17 September 2015 (10.54%) 10 84 77
R500 million repayable 14 December 2017 (3
month JIBAR plus 0.70%) 11 42 37
R120 million repayable 14 December 2017 (10.38%) 12 10 9
R487 million repayable 20 November 2018 (15.05%) 13 41 40
R1,265 million repayable 20 November 2018
(JIBAR plus 4.75%) 14 108 94
R300 million repayable on 4 December 2013
(JIBAR + 2.5%) 15 13 11
US$100 million repayable on 3 March 2022 (3
month USD LIBOR) 16 62 -
1 082 920
Less: banking subordinated debt securities held
by other Group companies (72) (65)
Banking subordinated debt securities (net of
Group holdings) 1 010 855
Group excluding Nedbank
R3.0 billion repayable 27 October 2020 (8.9%)17 252 219
GBP300 million repayable 21 January 2016 (5.0%) 18 252 239
R250 million preference shares repayable
9 June 2011 19 21 18
750 million repayable 18 January 2017 (4.5%) 20 509 303
1 034 779
Total subordinated liabilities 2 044 1 634
The subordinated notes rank behind the claims against the Group depositors and
other unsecured, unsubordinated creditors. None of the Group`s subordinated
notes are secured.
1. This instrument is matched either by advances to clients or covered against
exchange rate fluctuations repaid.
2. Unsecured secondary callable note was issued 24 April 2005 with a call date
of 24 April 2011.
3. Unsecured secondary callable note was issued 20 September 2006 at R1.5
billion with a call date of 20 September 2013. On 18 May 2007 an additional
R0.3 billion was issued.
4. Unsecured callable Bonds issued 10 June 2002.
5. Unsecured callable Bonds issued 30 March 2006.
6. Unsecured secondary callable note was issued 8 February 2007 with a call
date of 8 February 2012.
7. Unsecured secondary callable note was issued 8 February 2007 at R1.0
billion. On 19 March 2007 an additional R0.7 billion was issued.
8. Unsecured secondary capital callable note issued 6 July 2007 and has a call
date of 6 July 2017.
9. This bond issued on 15 August 2007 is an unsecured secondary capital
callable floating rate note with a call date 15 August 2012.
10. This bond issued on 17 September 2007 is an unsecured fixed rate note with
a term of 13 years (non-call 8 year).
11. This bond issued on 14 December 2007 is a 10 year (non-call 5 year)
floating rate note. After its call date on 14 December 2012 its terms
become JIBAR plus 1.70% until maturity.
12. This bond issued on 14 December 2007 is a 10 year (non-call 5 year) fixed
rate note. After its call date its terms become floating 3 month JIBAR plus
initial margin over mid swaps plus 1.0% until maturity.
13. This bond issued on 20 May 2008 is a perpetual (non-call 10 year) fixed
rate note with a call date on 20 November 2018.
14. This bond issued on 20 May 2008 is a perpetual (non-call 10 year) floating
rate note with a call date of 20 November 2018.
15. This bond issued on 4 December 2008 is a floating rate note with a call
date of 4 December 2013.
16. Dated Tier 2 notes issued 3 March 2009 with call date 2 March 2017.
17. These bonds have a maturity date of 27 October 2020 and pay a coupon of
8.92% to 27 October 2015 and 3 month JIBAR plus 1.59% thereafter. The Group
has the option to repay the bonds at par on 27 October 2015 and at 3
monthly intervals thereafter.
18. These bonds, issued on 20 January 2006, have a maturity date of 21 January
2016 and pay a coupon of 5.0% to 21 January 2011 and 6 month LIBOR plus 1.13%
thereafter. The coupon on the bonds was swapped into floating rate of 6 month
STIBOR plus 0.50%. The Group has the option to repay the bonds at par on 21
January 2011 and at 6 monthly intervals thereafter.
19. These preference shares are redeemable on 9 June 2011 and pay a variable
cumulative coupon of 61.0% of the Prime Rate as quoted by Nedbank Limited.
The Group has the option to redeem the shares at par at any time before the
final redemption date but after giving an agreed period of notice.
20. This bond, issued on 16 January 2007, has a maturity date of 18 January
2017 and pays a coupon of 4.5% to 17 January 2012 and 6 month EURIBOR plus
0.96% thereafter. The principal and coupon on the bond were swapped equally
into Sterling and US Dollars with coupons of 6 month LIBOR plus 0.34% and 6
month US LIBOR plus 0.31% respectively. The Group has the option to repay the
bonds at par on 17 January 2012 and at 6 monthly intervals thereafter.
F: Other statement of financial position notes
F1: Provisions
GBPm
At At
31 December 31 December
2009 2008
Surplus property 20 23
Client compensation 30 27
Warranties on sale of business 17 111
Liability for long service leave 49 38
Provision for donations 84 80
Litigation claims - 36
Other provisions 95 165
Post employment benefits 295 480
Total (32) (3)
263 477
GBPm
Warranties Liability for
on sale of long service
Year ended 31 Surplus Client
December 2009 property compensation business leave
Balance at
beginning of the year 23 27 111 38
Unused amounts
reversed - (2) (54) -
Unwind of
discount 1 - - -
Charge to income
statement 3 (3) - 24
Utilised during
the year (7) (2) (26) (20)
Foreign exchange
and other
movements - 10 (14) 7
Balance at end
of the year 20 30 17 49
GBPm
Provision for Litigation
Year ended 31 December 2009 donations claims Other Total
Balance at beginning of
the year 80 36 165 480
Unused amounts reversed - (11) (41) (108)
Unwind of discount - - - 1
Charge to income statement - - 13 37
Utilised during the year - (6) (59) (120)
Foreign exchange and other
movements 4 (19) 17 5
Balance at end of the year 84 - 95 295
GBPm
Warranties Liability for
Surplus Client on sale of long service
Year ended 31
December 2008 property compensation business leave
Balance at
beginning of the year 29 19 87 34
Unused amounts
reversed (1) (5) (5) -
Unwind of discount 1 - - -
Charge to income
statement - 8 22 4
Utilised during
the year (7) (14) (3) 1
Foreign exchange
and other
movements 1 19 10 (1)
Balance at end
of the year 23 27 111 38
Provision for Litigation
Year ended 31 December 2008 donations claims Other Total
Balance at beginning of
the year 82 64 183 498
Unused amounts reversed - - (40) (51)
Unwind of discount - - - 1
Charge to income statement - 37 20 91
Utilised during the year (2) (74) (24) (123)
Foreign exchange and other
movements - 9 26 64
Balance at end of the year 80 36 165 480
2009 provisions in relation to surplus property amounted to GBP20 million
(2008: GBP23 million). These relate to the onerous costs of vacant properties
leased by the Group of which GBP13 million (2008: GBP23 million) is estimated
to be payable after more than 1 year.
Provisions in relation to client compensation were GBP30 million (2008: GBP27
million), primarily relating to possible mis-selling of guarantee contracts in
Wealth Management. GBP5 million (2008: GBP6 million) is estimated to be payable
after more than one year.
Provisions in relation to warranties on the sale of businesses amounted to
GBP17 million (2008: GBP111 million). GBP9 million (2008: GBP9 million) is
estimated to be payable after more than one year. During the year, settlement
was reached in relation to certain outstanding litigations in connection with
the acquisition of Skandia. Corresponding provisions have been accordingly
utilised or released.
The liability for long service leave of GBP49 million (2008: GBP38 million)
relates to provision for staff payments for long serving employees, all of
which estimated to be payable in less than one year.
The provision for donations is held by Emerging Markets. It relates to the
payment of charitable donations in future periods to which the Group is
committed, out of the funds made available on the closure of the Group`s
unclaimed shares trusts, which were set up as part of the demutualisation in
1999 and closed in 2006 of which GBP84 million (2008: GBP80 million) is
estimated to be payable after more than one year.
Other provisions includes provisions for tax on long term staff benefits,
restructuring and legal fees.
At 31 December 2009 provisions in relation to litigation claims amounted to
GBPnil (2008: GBP36 million). During the year GBP36 million of the provision
was utilised, principally in respect of payments made in connection with the
outcome of the Skandia Liv arbitration.
Where material, provisions are discounted at discount rates specific to the
risks inherent in the liability. The timing and final amounts of payments in
respect of some of the provisions, particularly those in respect of litigation
claims and similar actions against the Group, are uncertain and could be result
in adjustments to the amounts recorded. Of the total provisions recorded above,
GBP188 million (2008: GBP271 million) is estimated to be payable after more
than one year.
F2: Non-controlling interests
(a) Income statement
(i) Non-controlling interests ordinary shares
The non-controlling interests charge to profit for the financial year has been
calculated on the basis of the Group`s effective ownership of the subsidiaries
in which it does not own 100% of the ordinary equity. The principal
subsidiaries where a non-controlling interest exists are the Group`s banking
and general insurance businesses in South Africa. For the year ended 31
December 2009 the non-controlling interests attributable to ordinary shares was
GBP158 million (2008: GBP188 million).
GBPm
At At
31 December 31 December
2009 2008
R2,000 million non-cumulative preference shares 16 14
R792 million non-cumulative preference shares 6 5
R300 million non-cumulative preference shares 3 1
US$750 million cumulative preferred securities 38 32
R364 million non-cumulative preference shares 2 2
Non-controlling interests preferred securities 65 54
(ii) Non-controlling interests adjusted
operating profit
The following table reconciles non-controlling interests` share of profit for
the financial year to non-controlling interests` share of adjusted operating
profit:
GBPm
Year ended Year ended
31 December 31 December
Reconciliation of non-controlling interests
share of profit for the financial year 2009 2008
The non-controlling interests charge is
analysed as follows:
Non-controlling interests ordinary shares 158 188
Goodwill impairment and impact of acquisition
accounting 1 -
Profit on disposal of subsidiaries, associated
undertakings and strategic investments - 2
Short-term fluctuations in investment return 1 11
Income attributable to Black Economic
Empowerment trusts of listed subsidiaries 23 30
Fair value gains on group debt instruments - (6)
Income attributable to US Asset Management
non-controlling interests (3) (7)
Non-controlling interests share of adjusted
operating profit 180 218
The Group uses revised weighted average effective ownership interests when
calculating the non-controllable interest applicable to the adjusted operating
profit of its South Africa banking and general insurance businesses. This
reflects the legal ownership of these businesses following the implementation
for Black Economic Empowerment (BEE) schemes in 2005. In accordance with IFRS
accounting rules the shares issued for BEE purposes are deemed to be, in
substance, options. Therefore the effective ownership interest of the
minorities reflected in arriving at profit after tax in the consolidated income
statement is lower than that applied in arriving at adjusted operating profit
after tax. In 2009 the increase in adjusted operating profit attributable to
non-controlling interests as a result of this was GBP23 million (2008: GBP30
million).
(b) Statement of financial position
(i) Ordinary shares
GBPm
Year to Year to
31 December 31 December
Reconciliation of movements in non-controlling
interests 2009 2008
Balance at beginning of the year 1 147 933
Non-controlling interests` share of profit 158 188
Non-controlling interests` share of dividends
paid (80) (111)
Net acquisition of interests 63 25
Foreign exchange and other movements 249 112
Balance at end of the year 1 537 1 147
(ii) Preferred securities
GBPm
At At
31 December 31 December
2009 2008
R2,000 million non-cumulative preference shares 1 140 140
R792 million non-cumulative preference shares 2 71 71
R300 million non-cumulative preference shares 3 12 12
US$750 million cumulative preferred securities 4 458 458
R364 million non-cumulative preference shares 5 25 25
R363 million non-cumulative preference shares 6 17 -
723 706
Unamortised issue costs (13) (13)
Total in issue at 31 December 710 693
Preferred securities are held at historic value of consideration received less
unamortised issue costs.
1. 200 million R10 preference shares issued by Nedbank Limited (Nedbank), the
Group`s banking subsidiary. These shares are non-redeemable and non-
cumulative and pay a cash dividend equivalent to 75% of the prime overdraft
interest rate of Nedbank. Preference shareholders are only entitled to vote
during periods when a dividend or any part of it remains unpaid after the
due date for payment or when resolutions are proposed that directly affect
any rights attaching to the shares or the rights of the holders. Preference
shareholders will be entitled to receive their dividends in priority to any
payment of dividends made in respect of any other class of Nedbank`s shares.
2. 77.3 million R10 preference shares issued at R10.68 per share by Nedbank on
the same terms as the securities described in (1) above.
3. 30 million R10 preference shares issued on 22 June 2006 by Imperial Bank
Limited a subsidiary of Nedbank Limited, on the same terms as the securities
described in (1) above.
4. US$750 million Guaranteed Cumulative Perpetual Preference Securities issued
on 19 May 2003 by Old Mutual Capital Funding L.P., a subsidiary of the Group.
Subject to certain limitations, holders of these securities are entitled to
receive preferential cash distributions at a fixed rate of 8.0% per annum
payable in arrears on a quarterly basis. The Group may defer payment of
distributions at its sole discretion, but such an act may restrict Old Mutual
plc from paying dividends on its ordinary shares for a period of 12 months.
Arrears of distributions are payable quarterly cumulatively only on redemption
of the securities or at the Group`s option.
The securities are perpetual, but may be redeemed at the discretion of the
Group from 22 December 2008. The costs of issue have been amortised over the
period to 22 December 2008.
5. 35 million R10 preference shares issued in 16 April 2007 at R10.27 per share
by Nedbank on the same terms as the securities described in (1) above.
6. 36.3 million R10 preference shares issued by Nedbank in seven instalments
between September 09 and December 09 on the same terms as the securities
described in (1) above.
G: Other notes
G1: Contingent liabilities
GBPm
At At
31 December 31 December
2009 2008
Guarantees and assets pledged as collateral
security 2 375 1 839
Irrevocable letters of credit 605 760
Secured lending 555 383
Other contingent liabilities 49 393
The Group has pledged debt securities amounting to GBP1,253 million (2008:
GBP1,533 million) as collateral for deposits received under re- purchase
agreements. These amounts represent assets that have been transferred but do
not qualify for derecognition under IAS39.These transactions are entered into
under terms and conditions that are standard industry practice to securities
borrowing and lending activities.
Nedbank structured financing
Historically a number of the Group`s South African banking businesses entered
into structured finance transactions with third parties using the tax base of
these companies. Pursuant to the terms of the majority of these transactions,
the underlying third party has contractually agreed to accept the risk of any
tax being imposed by the South African Revenue Service (SARS), although the
obligation to pay in the first instance rests with the Group`s companies. It is
only in limited cases where, for example, the credit quality of a client
becomes doubtful, or where the client has specifically contracted out of the
re-pricing of additional taxes, that the recovery from a client could be less
than the liability that could arise on assessment, in which case provisions are
made. SARS has examined the tax aspects of some of these types of structures
and SARS could assess these structures in a manner different to that initially
envisaged by the contracting parties. As a result Group companies could be
obliged to pay additional amounts to SARS and recover these from clients under
the applicable contractual arrangements.
Nedbank litigation
There are a number of legal or potential claims against Nedbank and its
subsidiary companies, the outcome of which cannot at present be foreseen.
The largest of these potential actions is a claim in the High Court for R1.3
billion against Nedbank by certain shareholders in Pinnacle Point Group
Limited, alleging that Nedbank had a legal duty of care to them arising from a
share swap transaction. Nedbank and its legal advisers are of the opinion that
the claim is without merit and will be defended vigorously.
G2: Events after the reporting date
On 8 February 2010, Nedbank announced that it had received regulatory approval
of the acquisition of Imperial Holdings` 49.9% indirect interest in Imperial
Bank Limited, thereby satisfying all conditions precedent for the acquisition.
The purchase consideration, of approximately GBP153 million will be settled out
the existing cash resources of Nedbank Limited over a period of six months,
commencing from 8 February 2010. Nedbank intends to submit an application to
the South African Reserve whereby it will amalgamate all the assets of Imperial
Bank with those of Nedbank.
On 5 February 2010, the group announced the completion of the acquisition of
the remaining minority shareholdings in Mutual & Federal Insurance Company
Limited, following the fulfilment of all outstanding conditions precedent. On 8
February 2010, 147,313,449 new Old Mutual plc ordinary shares were listed on
the London Stock Exchange in connection with the acquisition.
Group Market Consistent Embedded Value statement of earnings
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Notes
Long-Term Savings
Covered business 554 578
Asset management 26 42
Banking 16 23
Nedbank 596 643
Banking 470 575
Mutual and Federal
General insurance 70 76
US Asset Management
Asset management 83 97
Other operating segments
Finance costs (104) (140)
Interest payable to non-core operations (40) -
Other shareholders` expenses (69) (19)
Adjusted operating Group MCEV
earnings before tax from core operations 1 006 1 232
Bermuda non-core operations
Long-term business 8 (254)
Adjusted operating Group MCEV
earnings before tax* 1 014 978
Adjusting items C1 913 (2 037)
Total Group MCEV earnings before tax
for the financial year 1 927 (1 059)
Income tax attributable to
shareholders (145) 13
Total Group MCEV earnings after tax
for the financial year 1 782 (1 046)
Total Group MCEV earnings for the
financial year attributable to:
Equity holders of the parent 1 562 ( ,284)
Non-controlling interests
Ordinary shares 156 184
Preferred securities 64 54
Total Group MCEV earnings after tax
for the financial year 1 782 (1 046)
Basic total Group MCEV earnings per
ordinary share (pence) 31.3 (25.7)
Weighted average number of shares
millions 4 994 4 995
* For long-term business and general insurance businesses, adjusted operating
MCEV earnings are based on short-term and long-term investment returns
respectively, include investment returns on life funds` investments in Group
equity and debt instruments, and are stated net of income tax attributable to
policyholder returns. For the US Asset Management business it includes
compensation costs in respect of certain long-term incentive schemes defined as
non-controlling interests in accordance with IFRS. For all businesses, adjusted
operating MCEV earnings exclude goodwill impairment, the impact of acquisition
accounting, put revaluations related to long-term incentive schemes, the impact
of closure of unclaimed shares trusts, profit/(loss) on disposal of
subsidiaries, associated undertakings and strategic investments, dividends
declared to holders of perpetual preferred callable securities, and fair value
(profits)/losses on certain Group debt movements.
Adjusted operating Group MCEV earnings per share
For the year ended 31 December 2009
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Notes
Adjusted operating Group MCEV
earnings before tax 1 014 978
Tax on adjusted operating Group MCEV
earnings B2 (209) (135)
Adjusted operating Group MCEV
earnings after tax 805 843
Non-controlling interests
Ordinary shares (179) (214)
Preferred securities (64) (54)
Adjusted operating Group MCEV
earnings after tax attributable to
ordinary equity holders 562 575
Adjusted operating Group MCEV
earnings from core operations 581 813
Adjusted operating Group MCEV
earnings from non-core operations (19) (238)
Adjusted operating Group MCEV
earnings per share from core operations 11.1 15.5
Adjusted operating Group MCEV
earnings per share from non-core operations (0.4) (4.5)
Adjusted operating Group MCEV
earnings per share* (pence) 10.7 11.0
Adjusted weighted average number of
shares millions 5 229 5 230
* Adjusted operating Group MCEV earnings per share is calculated on the same
basis as adjusted operating Group MCEV earnings, but is stated after tax and
non-controlling interests. It excludes income attributable to Black Economic
Empowerment trusts of listed subsidiaries. The calculation of the adjusted
weighted average number of shares includes own shares held in policyholders`
funds and Black Economic Empowerment trusts.
Components of Group MCEV and adjusted Group MCEV
As at 31 December 2009
Components of Group MCEV
GBPm
At At
31 December 31December
2008
2009
Notes
Adjusted net worth attributable to
ordinary equity holders of the parent 4 417 3 462
Equity 8 464 7 737
Adjustment to include long-term
business on a statutory solvency basis:
Long-Term Savings C3 (2 626) (2 244)
Bermuda C3 (6) (217)
Adjustment for market value of life
funds` investments in Group equity and
debt instruments held in life funds 268 173
Adjustment to remove perpetual
preferred callable securities and
accrued dividends (688) (688)
Adjustment to exclude acquisition
goodwill from the covered business:
Long-Term Savings C3 (995) (1 299)
Value of in-force business 3 212 1 800
Present value of future profits 4 255 2 580
Additional time value of financial
options and guarantees (416) (261)
Frictional costs (221) (148)
Cost of residual non-hedgeable risks (406) (371)
Group MCEV 7 629 5 262
Group MCEV value per share (pence) 144.5 99.7
Return on Group MCEV (RoEV) per annum
from core operations 11.1% 11.0%
Return on Group MCEV (RoEV) per annum
from non-core operations (0.4)% (3.2)%
Return on Group MCEV (RoEV) per annum 10.7% 7.8%
Number of shares in issue at the end
of the financial year less treasury
shares millions 5 279 5 277
The adjustments to include long-term business on a statutory solvency basis
reflect the difference between the net worth of each business on the statutory
basis (as required by the local regulator) and their portion of the Group`s
consolidated equity shareholders` funds. In South Africa, these values exclude
items that are eliminated or shown separately on consolidation (such as
Nedbank, Mutual & Federal and inter-company loans). For some European countries
and US Life the value reflected in the adjustment to include long-term business
on a statutory solvency basis includes the value of the deferred acquisition
cost asset which is part of the equity.
The RoEV is calculated as the adjusted operating Group MCEV earnings after tax
and non-controlling interests of GBP562 million (year ended 31 December 2008:
GBP575 million) divided by the opening Group MCEV.
Components of adjusted Group MCEV
GBPm
At At
31 December 31 December
Notes 2009 2008
Group MCEV 7 629 5 262
Pro forma adjustments to bring Group
investments to market value
Adjustment to bring listed
subsidiaries to market value 805 68
Nedbank 623 41
Mutual & Federal 182 27
Adjustment for value of own shares in
ESOP schemes* 71 63
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 221 169
Adjustment to bring external debt to
market value 302 645
Adjusted Group MCEV B1 9 028 6 207
Adjusted Group MCEV per share (pence) 171.0 117.6
Number of shares in issue at the end
of the financial year less treasury
shares millions 5 279 5 277
* Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2008 and 31 December 2009 is
the net effect of the increase in the Old Mutual plc share price, the reduction
in excess own shares following employee share grants in March 2009 and the
reduction in overall shares held due to exercises of rights to take delivery
of, or net settle, share grants during the year.
Reconciliation of movements in Group MCEV (after tax)
GBPm
Year ended 31 December 2009
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Notes
4183 1 079 5 262
Opening Group MCEV
Adjusted operating MCEV
earnings 492 70 562
Non-operating MCEV
earnings 1 191 (191) 1 000
Total Group MCEV earnings 1 683 (121) 1 562
Other movements in IFRS
net equity 161 644 805
Closing Group MCEV C2 6 027 1 602 7 629
GBPm
Year ended 31 December 2008
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
6 349 1 010 7 359
Opening Group MCEV
Adjusted operating MCEV earnings 133 442 575
Non-operating MCEV earnings (2 270) 411 (1 859)
Total Group MCEV earnings (2 137) 853 (1 284)
Other movements in IFRS net equity (29) (784) (813)
Closing Group MCEV 4 183 1 079 5 262
Notes to the MCEV basis supplementary information
For the year ended 31 December 2009
A: MCEV policies
A1: Basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in the
supplementary statements on pages 84 to 132 of the printed version of this
document as `MCEV`) adopts Market Consistent Embedded Value Principles issued
in June 2008 and updated in October 2009 by the CFO Forum (`the Principles`)
as the basis for the methodology used in preparing the supplementary
information.
The CFO Forum announced changes to the MCEV Principles in October 2009 to
reflect inter alia the inclusion of a liquidity premium. These changes affirm
that the risk-free reference rate to be applied under MCEV should include both
the swap yield curve appropriate to the currency of the cash flows and a
liquidity premium where appropriate. The CFO Forum is undertaking further work
to develop more detailed application guidance.
The Principles have been fully complied with for all businesses as at 31
December 2009. The detailed methodology and assumptions made in presenting this
supplementary information are set out in notes A2 and A3.
Where reference is made to `Europe` only, this generally captures the Nordic,
Retail Europe and Wealth Management businesses.
Throughout the supplementary information the following terminology is used to
distinguish between the terms `MCEV`, `Group MCEV` and `adjusted Group MCEV`:
- MCEV is a measure of the consolidated value of shareholders` interests in
the
covered business and consists of the sum of the shareholders` adjusted net
worth in respect of the covered business and the value of the in-force covered
business.
- Group MCEV is a measure of the consolidated value of shareholders`
interests in covered and non-covered business. Non-covered business is valued at
the IFRS net asset value detailed in the primary financial statements adjusted
to eliminate inter-company loans.
- The adjusted Group MCEV, a measure used by management to assess the
shareholders` interest in the value of the Group, includes the impact of
marking all debt to market value, the market value of the Group`s listed
banking and general insurance subsidiaries, marking the value of deferred
consideration due in respect of Black Economic Empowerment arrangements in
South Africa (`the BEE schemes`) to market, as well as including the market
value of excess own shares held in ESOP schemes.
A2: Methodology
Introduction
MCEV represents the present value of shareholders` interests in the earnings
distributable from assets allocated to the in-force covered business after
sufficient allowance for the aggregate risks in the covered business and is
measured in a way that is consistent with the value that would normally be
placed on the cash flows generated by these assets and liabilities in a deep
and liquid market. MCEV is therefore a risk-adjusted measure to the extent that
financial risk is reflected through the use of market consistent techniques in
the valuation of both assets and distributable earnings and a transparent
explicit allowance is made for non-financial risks.
The MCEV consists of the sum of the following components:
* adjusted net worth, which excludes acquired intangibles and goodwill,
consisting of:
free surplus allocated to the covered business; and
required capital to support the covered business.
* value of in-force covered business (VIF)
The adjusted net worth of the covered business is the market value of
shareholders` assets held in respect of the covered business after allowance
for the liabilities of the in-force covered business which are dictated by
local regulatory reserving requirements.
MCEV is calculated net of non-controlling shareholder interests and excludes
the value of future new business.
Coverage
Covered business includes, where material, any contracts that are regarded by
local insurance supervisors as long-term life assurance business, and other
business, where material, directly related to such long-term life assurance
business where the profits are included in the IFRS long-term business profits
in the primary financial statements. For the OMSA business, following the sale
of the remaining stake in Nedlife to Nedbank, Nedlife is excluded from covered
business from 2009 onwards although it is still included in comparative results
for prior periods.
Some types of business are legally written by a life company, but under IFRS
are classified as asset management because `long-term business` only serves as
a wrapper. This business continues to be excluded from covered business, for
example:
* new institutional investment platform pensions business written in the United
Kingdom as it is more appropriately classified as unit trust business; and
* individual unit trusts and some group market-linked business written by the
asset management companies in South Africa through the life Company as profits
from this business arise in the asset management companies.
The treatment within this supplementary information of all business other than
the covered business is the same as in the primary financial statements, except
for the adjusted Group MCEV which includes the impact of marking all debt to
market value, the market value of the Group`s listed banking and general
insurance subsidiaries, marking the value of deferred consideration due in
respect of Black Economic Empowerment arrangements in South Africa (`the BEE
schemes`) to market, as well as including the market value of excess own shares
held in ESOP schemes.
Free surplus
Free surplus is the market value of any assets allocated to, but not required
to support, the in-force covered business. It is determined as the market value
of any excess assets attributed to the covered business but not backing the
regulatory liabilities, less the required capital to support the covered
business.
Required capital
Required capital is the market value of assets that are attributed to support
the covered business, over and above that required to back statutory
liabilities for covered business, whose distribution to shareholders is
restricted. The following capital measures are considered in determining the
required capital held for covered business so that it reflects the level of
capital considered by the directors to be appropriate to manage the business:
* economic capital;
* regulatory capital (ie the level of solvency capital which the local
regulators require);
* capital required by rating agencies in respect of the North American business
in order to maintain the desired credit rating; and
* any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon Old Mutual`s own
internal assessment of risks inherent in the underlying business. It measures
capital requirements on an economic statement of financial position, with MCEV
as the available capital, consistent with a 99.93% confidence level over a
one-year time horizon.
For Emerging Markets and Europe capital determined with reference to internal
management objectives is the most onerous and is the capital measure used. For
US Life the required capital is based on the amount that management deems
necessary to maintain the desired credit rating for the Company, whilst for
Bermuda the required capital is set with reference to internal management
objectives.
The required capital in respect of OMSA`s covered business is partially covered
by the market value of the Group`s investments in banking and general insurance
in South Africa. On consolidation these investments are shown separately.
The table below shows the level of required capital expressed as a percentage
of the minimum local regulatory capital requirements.
GBPm
At 31 December 2009
Required Regulatory
capital (a) capital (b) Ratio (a/b)
Emerging Markets 1 225 930 1.3
Nordic* 104 92 1.1
Retail Europe** 32 52 0.6
Wealth Management 213 119 1.8
US Life*** 462 193 2.4
Bermuda*** 363 - n/a
Total 2 399 1 386 1.7
GBPm
At 31 December 2008
Required Regulatory
capital (a) capital (b) Ratio (a/b)
Emerging Markets 1 075 820 1.3
Nordic* 105 66 1.6
Retail Europe** 64 46 1.4
Wealth Management 197 116 1.7
US Life*** 550 211 2.6
Bermuda*** 34 - n/a
Total 2 025 1 259 1.6
* There has been a large increase in the regulatory capital within the Nordic
region due to the strong correlation with funds under management which have
increased significantly.
** Local regulators within many of the Retail Europe countries allow intangible
assets to be included as admissible regulatory capital. In such cases the
required capital reported for MCEV is net of these items, although each of the
countries continues to be sufficiently capitalised on the local solvency basis.
Skandia Leben in Germany is permitted under local regulations to include the
unallocated policyholder profit sharing liability as admissible capital,
leading to a large decrease in the required capital from 31 December 2008 to 31
December 2009.
*** The Bermudan regulator allows intangible assets to be included as
admissible regulatory capital. The total regulatory capital for US Life and
Bermuda at 31 December 2008 has been restated from GBP245 million to GBP211
million due to refinement of the calculation.
Value of in-force covered business
Under the MCEV methodology, VIF consists of the following components:
* present value of future profits (PVFP) from in-force covered business; less
* time value of financial options and guarantees; less
* frictional costs of required capital; less
* cost of residual non-hedgeable risks (CNHR).
Projected liabilities and cash flows are calculated net of outward risk
reinsurance with allowance for default risk of reinsurance counterparties where
material.
Present value of future profits
The PVFP is calculated as the discounted value of future distributable earnings
(taking account of local statutory reserving requirements) that are expected to
emerge from the in-force covered business, including the value of contractual
renewal of in-force business, on a best estimate basis where assumed earned
rates of return and discount rates are equal to the risk-free reference rates.
It therefore represents a deterministic certainty equivalent valuation of
future distributable earnings. The certainty equivalent valuation approach is
described in more detail in note A3. Any limitations on distribution of such
earnings due to statutory or internal capital requirements are taken into
account separately in the calculation of frictional costs of required capital.
PVFP captures the intrinsic and time value of financial options and guarantees
on in-force covered business which are included in the local statutory reserves
according to local requirements, but excludes any additional allowance for the
time value of financial options and guarantees.
Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of
investment returns (ie asymmetric impact) on future shareholder cash flows of
policyholder financial options and guarantees within the in-force covered
business.
The time value of financial options and guarantees describes that part of the
value of financial options and guarantees that arises from the variability of
future investment returns on assets to the extent that it is not already
included in the statutory reserves. The calculations are based on market
consistent stochastic modelling techniques where the actual assets held at the
valuation date are used as the starting point for the valuation of such
financial options and guarantees. Projected cash flows are valued using
economic assumptions such that they are valued in line with the price of
similar cash flows that are traded in the capital markets. The time value
represents the difference between the average value of shareholder cash flows
under many generated economic scenarios and the deterministic shareholder value
under the best estimate assumptions for the equivalent business. Closed form
solutions are also applied in Europe provided the nature of any guarantees is
not complex.
The time value of financial options and guarantees also includes allowance for
potential burn-through costs on participating business, ie the extent to which
shareholders are unable to recover a loan made to participating funds to meet
either regulatory or internal capital management requirements or the extent to
which reserves are inadequate to cover severely adverse experience.
In the generated economic scenarios allowance is made, where appropriate, for
the effect of dynamic management and/or policyholder actions in different
circumstances:
* Management has some discretion in managing exposure to financial options and
guarantees, particularly within participating business. Such dynamic management
actions are reflected in the valuation of financial options and guarantees
provided that such discretion is consistent with established and justifiable
practice taking into account policyholders` reasonable expectations (eg with
due consideration of the Principles and Practices of Financial Management, or
PPFM, for South African business), subject to any contractual guarantees and
regulatory or legal constraints and has been passed through an appropriate
approval process by the local Executive team and, where applicable, the Board.
Assumptions that depend on the market performance (such as crediting rates or
bonus rates) are set relative to the risk-free reference rates (subject to
contractual guarantees) and assuming that all market participants are subjected
to the same market conditions.
* Where credible evidence exists that persistency rates are linked to economic
scenarios, allowance is made for dynamic policyholder behaviour in response to
changes in economic conditions.
* Modelled dynamic management and policyholders` actions include the following:
changes in future bonus and crediting rates subject to contractual
guarantees, including removing all or part of previously declared non- vested
balances where circumstances warrant such action;
dynamic persistency rates for the US Life and Bermuda businesses, and
dynamic guaranteed annuity option take-up rates for the South African
business driven by changes in economic conditions and management actions;
and
changes in surrender values.
In determining the time value of financial options and guarantees at least
1 000 simulations are run to ensure that a reasonable degree of convergence of
results has been obtained. Where deemed appropriate, the number of simulations
is increased to reduce sampling error.
Europe
Whilst certain products within the European businesses provide financial
options and guarantees, these are immaterial due to the predominantly
unit-linked nature of the business.
Emerging Markets
The financial options and guarantees mainly relate to maturity guarantees and
guaranteed annuity options.
As required by the applicable Actuarial Society of South Africa guidance note,
the time value of the financial options and guarantees included in the
statutory reserves in the Emerging Markets businesses as at 31 December 2009
has been valued using a risk-neutral market consistent asset model, and is
referred to as the `Investment Guarantee Reserve` (IGR). This reserve includes
a discretionary margin as defined by local guidelines to allow for the
sensitivity of the reserve to future interest rate movements. This
discretionary margin is valued in the VIF.
US Life
The financial options and guarantees mainly relate to minimum crediting (bonus)
rates.
Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum
accumulation benefits on Variable Annuity contracts.
Frictional costs of required capital
From the shareholders` viewpoint there is a cost due to restrictions on the
distribution of required capital that is locked in the Company. Where material,
an allowance has been made for the frictional costs in respect of the taxation
on investment return (income and capital gains) and investment costs on the
assets backing the required capital for covered business. The allowance for
taxation is based on the taxation rates applicable to investment earnings on
assets backing the required capital, although such tax rates are reduced, where
applicable, to allow for interest paid on debt which is used partly to finance
the required capital.
The run-off pattern of the required capital is projected on an approximate
basis over the lifetime of the underlying risks in line with drivers of the
capital requirement. The same drivers are used to split the total required
capital between existing business and new business.
The allowance for frictional costs is independent of the allowance for the cost
of residual non-hedgeable risks as described below.
Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the
time value of financial options and guarantees by using techniques that are
similar to the type of approaches used by capital markets. In addition the
modelling of some non-hedgeable non-financial risks is incorporated as part of
the calculation of the PVFP (eg to the extent that expected operational losses
are incorporated in the maintenance expense assumptions) or the time value of
financial options and guarantees (eg dynamic policyholder behaviour such as the
interaction of the investment scenario and the persistency rates).
Residual non-financial risks include, for example, liability risks such as
mortality, longevity and morbidity risks; business risks such as persistency,
expense and reinsurance credit risks; and operational risk. All such risks for
which no or insufficient allowance is made in the PVFP or time value of
financial options and guarantees, together with some allowance for hedge risk
and credit spread risk in the US Life and Bermudan businesses, are considered
within the allowance for the CNHR.
An allowance is made in the CNHR to reflect uncertainty in the best estimate of
shareholder cash flows as a result of both symmetric and asymmetric
non-hedgeable risks since these risks can not be hedged in deep and liquid
capital markets and are managed, inter alia, by holding risk capital.
Considering the Group as a whole, most residual non-hedgeable risks have a
symmetric impact on shareholder value with the exception of operational risk.
The CNHR is calculated using a cost of capital approach, ie it is determined as
the present value of capital charges for all future non-hedgeable risk capital
requirements until the liabilities have run off. The capital charge in each
year is the product of the projected expected non-hedgeable risk capital held
after allowance for some diversification benefits and the cost of capital rate.
The cost of capital rate therefore represents the return above the risk-free
reference rates that the market is deemed to demand for providing this capital.
The residual non-hedgeable risk capital measure is determined using an internal
economic capital model based on appropriate shock scenarios consistent with a
99.5% confidence level over a one-year time horizon. The internal economic
capital model makes allowance for certain management actions, such as
reductions in bonus and crediting rates, where deemed appropriate.
The following allowance is made for diversification benefits in determining the
residual non-hedgeable risk capital at a business unit level:
* Diversification benefits within the non-hedgeable risks of the covered
business are allowed for.
* No allowance is made for diversification benefits between hedgeable and
non-hedgeable risks of the covered business.
* No allowance is made for diversification benefits between covered and
non-covered business.
The table below shows the amounts of diversified economic capital held in
respect of residual non-hedgeable risks.
GBPm
Capital held in respect of non-hedgeable risks
At At
31 December 31 December
2009 2008
Emerging Markets 606 457
Nordic 333 189
Retail Europe 143 145
Wealth Management 640 386
US Life* 661 513
Bermuda* 619 517
Total 3 002 2 207
* The total capital held in respect of non-hedgeable risks for US Life and
Bermuda at 31 December 2008 has been restated from GBP826 million to GBP1 030
million due to refinement of the calculation.
The economic capital included in the calculation of CNHR at 31 December 2008
was calculated with reference to the old European Embedded Value (EEV)
methodology, whilst the economic capital included in the calculation of CNHR at
31 December 2009 was calculated with reference to the MCEV methodology. This
has led to a step change in the calculation for all business units. To the
extent that this change affected operating earnings, the impact is shown under
`other operating variance`.
In addition to the change in the underlying basis used for assessing economic
capital from an EEV to MCEV basis, the increase in capital held in respect of
CNHR for Europe from GBP720 million at 31 December 2008 to GBP1 116 million at
31 December 2009 is largely caused by an increase in the economic capital held
for persistency risk in light of the turbulent economic market conditions and
due to a change in methodology for waiver of premium products in Sweden to
strengthen the economic capital held for morbidity risk.
A weighted average cost of capital rate of 2.0% has been applied to residual
symmetric and asymmetric non-hedgeable capital at a business unit level over
the life of the contracts. This translates into an equivalent cost of capital
rate of approximately 2.6% being applied to the Group diversified capital
required in respect of such non-hedgeable risks.
Participating business
For participating business in Emerging Markets, US Life and Bermuda, the method
of valuation makes assumptions about future bonus or crediting rates and the
determination of profit allocation between policyholders and shareholders.
These assumptions are made on a basis consistent with other projection
assumptions, especially the projected future risk-free investment returns,
established Company practice (with due consideration of the PPFM for South
African business), past external communication, any payout smoothing strategy,
local market practice, regulatory/contractual restrictions and bonus
participation rules.
Where current benefit levels are higher than can be supported by the existing
fund assets together with projected investment returns, a downward `glide path`
is projected in benefit levels so that the policyholder fund would be exhausted
on payment of the last benefit.
Spread-based products
A market consistent valuation of spread-based products (such as Fixed Indexed
Annuities in US Life and Bermuda, where investment returns are earned at one
rate and policyholders` accounts are credited at a different rate with the
difference referred to as `spread`) is dependent on the extent that management
discretion can target a shareholder profit margin and the decision rules that
management would follow in respect of crediting or bonus rates in any
particular stochastic scenario.
Where guaranteed terms are offered at outset of a contract that dictate the
payments to policyholders throughout the term of the contract, these payments
are valued using the certainty equivalent valuation technique. These products,
for example immediate annuities in payment, may therefore show a loss at point
of sale under MCEV as investment margins are not anticipated while currently
pricing practice does anticipate these margins. If returns in excess of the
risk-free reference rates actually emerge in the future, these will be
recognised in the MCEV earnings as they arise.
For business where the crediting (bonus) rate is set in advance, crediting
rates are set by considering management`s target shareholder margins throughout
the contract lifetime (subject to any guarantees). Projected crediting rates
are set equal to the risk-free reference rates less the anticipated margin to
cover profit and expenses (subject to any policyholder guarantees eroding the
shareholder margins). However, during the period following the valuation date
the existing crediting rate is applied until the next point at which it can be
varied. Given the guarantees included within such products (including
consideration of a 0% floor for crediting rates), stochastic modelling is used
to value such contracts.
Valuation of assets and treatment of unrealised losses
The market values of assets, where quoted in deep and liquid markets, are based
on the bid price on the reporting date. Unquoted assets are valued according to
IFRS and marked to model.
No smoothing of market values or unrealised gains/losses is applied.
Asset mix
The time value of financial options and guarantees and PVFP (where relevant)
are calculated with reference to assets that are projected using the actual
asset allocation of the policyholder funds at the reporting date. However, if
the current asset mix is materially different to the long-term strategic asset
allocation as a result of market movements, projected assets are assumed to
revert to the long-term strategic asset allocation in the short to medium term
as appropriate.
Defined benefit pension scheme
Where a defined benefit pension scheme within the covered business is in
surplus or deficit on the liability basis that is used to determine future
employer contributions, the employer pension fund expense assumptions
incorporated within the VIF allow appropriately for the expected release of
surplus or funding of the deficit.
Look through principle
PVFP and value of new business cash flow projections look through and include
the profits/losses of owned service companies, eg distribution and
administration, related to the management of the covered business. Any profit
margins that are included in investment management fees payable by the life
assurance companies to the asset management subsidiaries have not been included
in the value of in-force business or the value of new business on the grounds
of materiality and because a significant proportion of these profits arise from
performance-based fees.
Taxation
In valuing shareholders` cash flows, allowance is made in the cash flow
projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying
current local corporate tax legislation and practice together with known future
changes and taking credit for any deferred tax assets.
No allowance is made for any further additional tax that would be incurred on
the remittance of dividends from the life subsidiaries to Old Mutual plc, apart
from the South African business where full allowance has been made for
Secondary Tax on Companies (STC) that may be payable in South Africa at a rate
of 10% and the impact of capital gains tax. Furthermore, for the South African
business it has been assumed that a reasonable proportion of the shareholder
fund equity portfolio (excluding Group subsidiaries) will be traded each year.
The value of deferred tax assets is partly recognised in the MCEV. Typically
those tax assets are expected to be utilised in future by being off-set against
expected tax liabilities that are generated on expected profits emerging from
in-force business. MCEV may therefore understate the true economic value of
such deferred tax assets because it does not allow for future new business
sales which could affect the utilisation of such assets.
New business and renewals
The market consistent value of new business (VNB) measures the value of the
future profits expected to emerge from all new business sold, and in some cases
premium increases to existing contracts, during the reporting period after
allowance for the time value of financial options and guarantees, frictional
costs and the cost of residual non-hedgeable risks associated with writing the
new business.
VNB includes contractual renewal of premiums and recurring single premiums,
where the level of premium is predefined and is reasonably predictable, and
changes to existing contracts where these are not variations allowed for in the
PVFP. Non-contractual increments are treated similarly where the volume of such
increments is reasonably predictable or likely (eg where premiums are expected
to increase in line with salary or price inflation).
Any variations in premiums on renewal of in-force business from that previously
anticipated including deviations in non-contractual increases, deviations in
recurrent single premiums and repricing of premiums for in-force business are
treated as experience variances or economic variances on in-force business and
not as new business.
VNB is calculated as follows:
* Economic assumptions at the start of the reporting period are used, except
for OMSA`s Non-Profit Annuities and Fixed Bond products and US Life products
where point of sale assumptions are used (where applicable using economic
assumptions at the middle of the reporting period as a proxy).
* Demographic and operating assumptions at the end of the reporting period are
used.
* At point of sale and rolled forward to the end of the reporting period.
* Generally using a standalone approach unless a marginal approach would better
reflect the additional value to shareholders created through the activity of
writing new business.
* Expense allowances include all acquisition expenses, including any
acquisition expense overruns.
* Net of tax, reinsurance and non-controlling interests.
No attribution of any investment and operating variances to VNB.
New business margins are disclosed as:
* The ratio of VNB to the present value of new business premiums (PVNBP); and
* The ratio of VNB to annual premium equivalent (APE), where APE is calculated
as recurring premiums plus 10% of single premiums.
PVNBP is calculated at point of sale using premiums before reinsurance and
applying a valuation approach that is consistent with the calculation of VNB.
Analysis of MCEV earnings
An analysis of MCEV earnings provides a reconciliation of the MCEV for covered
business at the beginning of the reporting period and the MCEV for covered
business at the end of the reporting period on a net of taxation basis.
Operating MCEV earnings are generated by the value of new business sold during
the reporting period, the expected existing business contribution, operating
experience variances, operating assumption changes and other operating
variances:
* The value of new business includes the impact of new business strain on free
surplus that arises, amongst other things, from the impact of initial expenses
and additional required capital that is held in respect of such new business.
* The expected existing business contribution is determined by projecting both
actual assets and actual liabilities (including assets backing the free surplus
and required capital) from the start of the reporting period to the end of the
reporting period using expected real-world earned rates of return. The expected
existing business contribution is presented in two components:
expected earnings on free surplus and required capital and the expected
change in VIF assuming that the assets earn the beginning of period risk-free
reference rates; and
additional expected earnings on free surplus and required capital and the
additional expected change in VIF as a result of real-world expected earned
rates of return on assets in excess of beginning of period risk-free reference
rates.
* Transfers from VIF and required capital to free surplus includes the release
of required capital and modelled profits from VIF into free surplus in respect
of business that was in-force at the beginning of the reporting period,
although the movement does not contribute to a change in the MCEV.
* Operating experience variances reflect the impact of deviations of the actual
operational experience during the reporting period from the expected
operational experience. It is analysed before operating assumption changes, ie
such variances are assessed against opening operating assumptions, and reflects
the total impact of in-force and new business variances.
* Operating assumption changes incorporate the impact of changes to operating
assumptions from those assumed at the beginning of the reporting period to
those assumed at the end of the reporting period. As VNB is calculated using
operating assumptions at the end of the reporting period, this impact only
relates to the value of in-force business at the end of the reporting period
that was also in-force at the beginning of the reporting period.
* Other operating variances include model improvements, changes in methodology
and the impact of certain management actions, such as a change in the asset
allocation backing required capital.
Total MCEV earnings also include economic variances and other non-operating
variances:
* Economic variances incorporate the impact of changes in economic assumptions
from the beginning of the reporting period to the end of the reporting period
as well as the impact on earnings resulting from actual returns on assets being
different to the expected returns on those assets as reflected in the expected
existing business contribution. It therefore also includes the impact of
economic variances in the reporting period on projected future earnings.
* Other non-operating variances include the impact of changes in mandatory
local regulations and changes in taxation legislation.
An analysis of MCEV earnings requires non-operating closing adjustments in
respect of exchange rate movements and capital transfers such as those in
respect of payment of dividends and acquiring/divesting businesses.
Return on MCEV for covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in local currency, except for W
ealth Management, Long-Term Savings and total covered business where the
calculations are performed in sterling.
The anticipated expected existing business contribution for the 12 months
following the year ended 31 December 2009 (at the reference rate as well as in
excess of the reference rate) is provided to assist users of the MCEV
supplementary information in forecasting operating MCEV earnings.
Note that the exchange rates that are used for such disclosure are the same
rates that are used to translate current year earnings for comparability
purposes. Therefore the ultimate expected existing business contribution for
the financial year ending 31 December 2010 may differ from these results.
Analysis of Group MCEV earnings
Presentation of Group MCEV consists of the covered business under the MCEV
methodology and the non-covered business valued as the unadjusted IFRS net
asset value. A mark to market adjustment is therefore not performed for
external borrowings and other items not on a mark to market basis under IFRS
relating to non-covered business.
A3: Assumptions
Non-economic assumptions
The appropriate non-economic projection assumptions for future experience (eg
mortality, persistency and expenses) are determined using best estimate
assumptions of each component of future cash flows, are specific to the entity
concerned and have regard to past, current and expected future experience where
sufficient evidence exists (eg longevity improvements and AIDS-related claims)
as derived from both entity-specific and industry data where deemed
appropriate. Material assumptions are actively reviewed by means of detailed
experience investigations and updated, as deemed appropriate, at least
annually.
These assumptions are based on the covered business being part of a going
concern, although favourable changes in maintenance expenses such as
productivity improvements are generally not included beyond what has been
achieved by the end of the reporting period.
The management expenses attributable to life assurance business have been
analysed between expenses relating to the acquisition of new business,
maintenance of in-force business (including investment management expenses) and
development projects.
* All expected maintenance expense overruns affecting the covered business are
allowed for in the calculations.
* Unallocated Group holding Company expenses have been included to the extent
that they relate to the covered business. The future expenses attributable to
long-term business include 33% of the Group holding Company expenses, with 16%
allocated to Emerging Markets, 15% allocated to Europe and 2% allocated to US
Life (31 December 2008: 35% of the Group holding Company expenses, with 14%
allocated to Emerging Markets, 17% allocated to Europe and 4% allocated to US
Life and Bermuda). The allocation of these expenses aligns to the proportion
that the management expenses incurred by the business bears to the total
management expenses incurred in the Group.
* The MCEV makes provision for future development costs and one-off exceptional
expenses (such as those incurred on the integration of businesses following an
acquisition, restructuring costs and costs related to Solvency II
implementation) that relate to covered business to the extent that such project
costs are known with sufficient certainty, based on three-year business plans.
Legislative changes were introduced in Germany in 2008 specifying the
proportion of miscellaneous profits to be shared with policyholders.
According to the regulations, the revenue on in-force business can be reduced
by various expense items, including those costs arising in respect of new
business acquisition expenses in any year. From 31 December 2008 Skandia Leben
in Germany sets the best estimate assumptions for the amount to be shared with
policyholders in future years after making an allowance for the acquisition
expenses in relation to the new business expected to be written over the next
three years. However note that, as previously mentioned, MCEV excludes the
value of future new business.
Economic assumptions
An active basis is applied to set pre-tax investment and economic assumptions
to reflect the economic conditions prevailing on the reporting date.
Economic assumptions are set consistently, for example future bonus or
crediting rates are set at levels consistent with the investment return
assumptions.
Under a market consistent valuation, economic assumptions are determined such
that projected cash flows are valued in line with the prices of similar cash
flows that are traded on the capital markets. Thus, risk-free cash flows are
discounted at a risk-free reference rate and equity cash flows at an equity
rate. In practice for the PVFP, where cash flows do not depend on or vary
linearly with market movements, a certainty equivalent method is used which
assumes that actual assets held earn, before tax and investment management
expenses, risk-free reference rates (including any liquidity adjustment) and
all the cash flows are discounted using risk-free reference rates (including
any liquidity adjustment) which are gross of tax and investment management
expenses. The deterministic certainty equivalent method is purely a valuation
technique and over time the expectation is still that risk premiums will be
earned on assets such as equities and corporate bonds.
Risk-free reference rates and inflation
The risk-free reference rates, reinvestment rates and discount rates are
determined with reference to the swap yield curve appropriate to the currency
of the cash flows. For Europe the swap yield curve is obtained from a number of
sources including Bloomberg, Nordea Bank and Reuters.
For the Emerging Markets and United States businesses, the swap yield curve is
sourced from a third party market consistent asset model that is used to
generate the economic scenarios that are required to value the time value of
financial options and guarantees.
At 31 December 2009, no adjustments are made to swap yields to allow for
liquidity premiums or credit risk premiums, apart from a liquidity adjustment
to the US Life business and OMSA`s Retail Affluent Immediate Annuity business.
Any other risk premiums are recognised within the MCEV as and when they are
earned.
A wide range of liquidity market data and literature was reviewed at 31
December 2009, such as the Barrie+Hibbert calibration of US corporate bond
spreads using a structural Merton-style model which decomposes the yields of
illiquid assets into their constituent parts and a comparison of the yields of
similar durations on South African government bonds and bonds issues by
state-owned enterprises. It is the directors` view that a significant
proportion of corporate bond spreads at 31 December 2009 is attributable to a
liquidity premium rather than credit and default risk and that returns in
excess of swap rates can be achieved, rather than entire corporate bond spreads
being lost to worsening default experience. For the US Life business and OMSA`s
Retail Affluent Immediate Annuity business the currency, credit quality and
duration of the actual corporate bond portfolios were considered and adjusted
risk-free reference rates were derived at 31 December 2009 by adding 100bps of
liquidity premium for the
US Life business (31 December 2008: 300bps) and adding 50bps of liquidity
premium for OMSA`s Retail Affluent Immediate Annuity business (31 December
2008: zero allowance) to the swap rates used for setting investment return and
discounting assumptions. These adjustments reflect the liquidity premium
component in corporate bond spreads over swap rates that is expected to be
earned on the portfolios. Old Mutual believes that the differences between
market yields on US Life`s and OMSA`s Retail Affluent bond portfolios and the
adjusted risk-free reference rates still provide adequate implied margins for
default. No liquidity adjustment is applied for other regions in light of the
pending liquidity premium application guidance from the CFO Forum.
When the liquidity premium adjustment was calibrated and introduced for US Life
business at 31 December 2008, similar research was not yet concluded for South
Africa to estimate the quantum of the liquidity premiums inherent in South
African corporate bond spreads. In addition, the impact of a liquidity premium
adjustment on US Life business was far more material than for OMSA`s Retail
Affluent Immediate Annuity business as the concentration of US Life`s
investments in the corporate bond market is far greater and the widening of
corporate bond spreads has been more pronounced in the US compared to other
regions. Hence the application of a liquidity premium adjustment was initially
focussed on the US and an adjustment was only introduced for OMSA at 30 June
2009 for consistency in methodology.
At those durations where swap yields are not available, eg due to lack of a
sufficiently liquid or deep swap market, the swap curve is extended using
appropriate interpolation or extrapolation techniques.
Consumer price inflation assumptions are determined as those implied by
index-linked government stocks or real swap yields if a liquid market of
sufficient size exists. In other markets, the consumer price inflation
assumptions are modelled considering a spread compared to swap rates.
However, where modelling system capabilities are restricted (eg US Life),
consumer price inflation is set as a flat assumption. Other types of inflation
such as expense inflation are derived on a consistent basis and, where deemed
appropriate, include a percentage addition to the consumer price inflation
rate, for example as life company expenses include a large element of salary
related expenses.
The risk-free reference spot yields (excluding any applicable liquidity
adjustments) and expense inflation rates at various terms for each of the
significant regions are provided in the table below. The risk-free reference
spot yield curve has been derived from mid swap rates at the reporting date.
Risk-free reference spot yields (excluding any applicable liquidity
adjustments)
%
GBP EUR USD ZAR SEK
At 31 December 2009
1 year 0.9 1.3 0.7 7.3 0.8
5 years 4.7 2.8 3.0 8.9 2.9
10 years 4.8 3.6 3.5 9.2 3.7
20 years 4.0 4.1 4.0 8.2 4.1
At 31 December 2008
1 year 2.0 2.4 1.3 9.3 1.8
5 years 3.1 3.3 2.1 8.0 2.9
10 years 3.4 3.8 2.6 7.8 3.2
20 years 3.5 3.9 2.8 6.7 3.2
Expense inflation %
GBP EUR USD ZAR SEK
At 31 December 2009
1 year 3.3 2.5-3.0 3.0 6.4 1.1
5 years 3.8 2.5-3.0 3.0 7.5 2.6
10 years 4.4 2.5-3.0 3.0 7.7 2.8
20 years 4.8 2.5-3.0 3.0 6.7 3.0
At 31 December 2008
1 year 0.1 2.0-3.0 3.0 6.1 0.2
5 years 1.5 2.0-3.0 3.0 5.4 1.0
10 years 2.8 2.0-3.0 3.0 5.5 1.8
20 years 4.1 2.0-3.0 3.0 4.6 2.1
Volatilities and correlations
Where cash flows contain financial options and guarantees that do not move
linearly with market movements, asset cash flows are projected and all cash
flows discounted using risk-neutral stochastic models. These models project the
assets and liabilities using a distribution of asset returns where all asset
types, on average, earn the same risk-free reference rates.
Apart from the risk-free reference yields specified above, other key economic
assumptions for the calibration of economic scenarios include the implied
volatilities for each asset class and correlations of investment returns
between different asset classes. The volatility assumptions for the calibration
of economic scenarios that are used in the stochastic models are, where
possible, based on those implied from appropriate derivative prices (such as
equity options or swaptions in respect of guarantees that are dependent on
changes in equity markets and interest rates respectively) as observed on the
valuation date. However, historic implied and historic observed volatilities of
the underlying instruments and expert opinion are considered where there are
concerns over the depth or liquidity of the market, eg volatilities for
property returns. W here strict adherence to the above is not possible, for
example where markets only exist at short durations such as the equity option
market in South Africa, interpolation or extrapolation techniques are used to
derive volatility assumptions for the full term structure of the liabilities.
Correlation assumptions between asset classes that are used in stochastic
models are based on an assessment of historic relationships. Where historic
data is used in setting volatility or correlation assumptions, a suitable time
period is considered for analysing historic data including consideration of the
appropriateness of historical data where economic conditions were materially
different to current conditions.
For the Emerging Markets stochastic models, due to the immateriality of
corporate bond and property holdings, corporate bonds are assumed to yield the
same returns as equivalent long-term government bonds and property is assumed
to earn a return equal to a portfolio that is invested 50% in local equities
and 50% in long-term government bonds.
The at-the-money annualised asset volatility assumptions of the asset classes
incorporated in the stochastic models are detailed below.
ZAR volatilities*
1 year 5 year
At 31 December 2009 swap swap 10 year swap 20 year swap
Option term
1 year 18.3 16.2 15.1 14.8
5 years 16.9 15.8 15.3 15.1
10 years 15.7 15.2 14.7 14.1
20 years 14.5 13.8 13.1 12.0
At 31 December 2008
1 year 30.8 32.9 30.8 26.9
5 years 35.1 33.6 30.3 25.1
10 years 32.9 30.2 25.9 19.8
20 years 25.4 22.5 18.7 13.9
%
At 31 December 2009 Equity Property
total return index) (total return index)
Option term
1 year 27.4 17.1
5 years 25.5 14.8
10 years 26.2 14.1
20 years 27.0 14.2
At 31 December 2008
1 year 37.6 23.2
5 years 31.6 19.0
10 years 29.2 15.6
20 years 28.1 15.4
* Due to limited liquidity in the ZAR swaption and equity option market, the
market consistent asset model has been calibrated by extrapolating swaption and
equity option implied volatility data beyond terms of two years and three years
respectively.
USD volatilities %
1 year swap 5 year swap 10 year swap 20 year swap
At 31 December 2009
Option term
1 year 62.3 36.8 30.1 25.9
5 years 26.9 24.7 22.6 20.6
10 years 18.6 18.3 17.9 16.3
20 years 15.6 14.6 14.3 12.8
At 31 December 2008*
1 year 44.9 34.1 27.7 24.7
5 years 23.9 22.8 21.2 20.1
10 years 18.3 17.9 17.1 16.3
20 years 16.1 16.0 15.4 14.5
* Due to limited liquidity in the USD swap market as at 31 December 2008, the
market consistent asset model was calibrated by reference to volatility data as
at 30 September 2008.
International equity volatilities (applicable to Old Mutual Bermuda)*
%
SPX RTY TPX HSCEI TWSE
At 31 December 2009
Option term
1 year 22.1 28.6 28.3 33.5 22.9
5 years 26.7 37.1 30.5 34.7 29.2
10 years 25.2 32.6 31.9 41.2 27.7
At 31 December 2008
1 year 38 46 41 57 36
5 years 35 45 39 51 34
10 years 27 34 31 43 30
%
KOSP12 NIFTY SX5E UKX BCAI
At 31 December 2009
Option term
1 year 23.3 26.5 24.7 23.1 n/a
5 years 24.8 25.4 25.6 24.7 n/a
10 years 31.3 32.3 27.8 26.3 n/a
At 31 December 2008
1 year 42 39 38 37 4
5 years 43 33 37 36 4
10 years 36 31 31 28 4
International equity volatilities (applicable to Old Mutual Bermuda)*
%
At 31 December 2009 EEM USAgg EUAgg APAgg
Option term
1 year 31.6 4.5 12.0 11.6
5 years 29.9 4.5 12.0 11.6
10 years 38.0 4.5 12.0 11.6
At 31 December 2008
1 year n/a n/a n/a n/a
5 years n/a n/a n/a n/a
10 years n/a n/a n/a n/a
* These volatilities, as represented by their Bloomberg codes, refer to price
indices. Due to ongoing enhancements in the fund mapping process, the indices
referenced will vary from period to period
Exchange rates
All MCEV figures are calculated in local currency and translated to GBP using
the appropriate exchange rates as detailed in Note C2 of the IFRS statements.
Expected asset returns in excess of the risk-free reference rates
The expected asset returns in excess of the risk-free reference rates have no
bearing on the calculated MCEV other than the calculation of the expected
existing business contribution in the analysis of MCEV earnings. Real-world
economic assumptions are determined with reference to one- year forward risk-
free reference rates applicable to the currency of the liabilities at the start
of the reporting period. All other economic assumptions, for example future
bonus or crediting rates, are set at levels consistent with the real-world
investment return assumptions.
Equity and property risk premiums incorporate both historical relationships and
the directors` view of future projected returns in each region. Pre-tax
real-world economic assumptions are determined as follows:
* The equity risk premium is 3.5% for Africa and 3% for Europe and the United
States.
* The cash return equals the risk-free reference rate less a deduction of 2%
for Africa and 1% for Europe and the United States.
* The corporate bond return is based on actual corporate bond spreads on the
reporting date less an allowance for defaults.
* The property risk premium is 1.5% in Africa and 2% in Europe.
Tax
The weighted average effective tax rates that apply to the cash flow
projections within the VIF at 31 December 2009 are set out below:
* OMSA 33% (31 December 2008: 33%)
* Namibia 0% (31 December 2008: 0%)
* Nordic 4% (31 December 2008: 3%)
* Retail Europe 28% (31 December 2008: 28%)
* Wealth Management range of 4% to 21% (31 December 2008: 6% to 28%)
* US Life 5% (31 December 2008: 0%)
* Bermuda 10% (31 December 2008: 1%)
B: Segment information
B1: Adjusted Group MCEV presented per business line
GBPm
At At
31 December 31 December
2009 2008
MCEV of the covered business 6 027 4 183
Adjusted net worth* 2 815 2 383
Value of in-force business 3 212 1 800
Adjusted net worth of the asset management
businesses 1 716 1 570
Emerging Markets 216 391
Nordic** (75) (218)
Retail Europe 12 6
Wealth Management 152 204
US Asset Management 1 411 1 187
Value of the banking business 2 948 1 976
Nordic (adjusted net worth) 314 285
Nedbank (market value) 2 634 1 691
Market value of the general insurance business
Mutual & Federal 448 219
Net other business 123 (154)
Adjustment for present value of Black Economic
Empowerment scheme deferred consideration 221 169
Adjustment for value of own shares in ESOP
schemes*** 71 63
Perpetual preferred securities (US$ denominated) (385) (203)
Perpetual preferred callable securities (477) (304)
GBP denominated (224) (174)
Euro denominated (253) (130)
Debt (1 664) (1 312)
Rand denominated (290) (213)
USD denominated (338) (537)
GBP denominated (759) (191)
SEK denominated (256) (252)
Euro denominated (21) (119)
Adjusted Group MCEV 9 028 6 207
* Adjusted net worth is after the elimination of inter-company loans.
** Includes the adjusted net worth of Nordic holding companies that are
classified as non-covered business, net of the holding companies investment in
Group subsidiaries.
*** Includes adjustment for value of excess own shares in employee share scheme
trusts. The movement in value between 31 December 2008 and 31 December 2009 is
the net effect of the increase in the Old Mutual plc share price, the reduction
in excess own shares following employee share grants in March 2009 and the
reduction in overall shares held due to exercises of rights to take delivery
of, or net settle, share grants during the year.
B2: Adjusted operating MCEV earnings for the covered business
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Adjusted operating MCEV earnings before tax for
the covered business 562 324
Long-Term Savings 554 578
Emerging Markets 272 460
Nordic 78 164
Retail Europe (58) 19
Wealth Management (40) 325
US Life 302 (390)
Bermuda 8 (254)
Tax on adjusted operating MCEV earnings for the
covered business (70) (191)
Long-Term Savings (43) (207)
Emerging Markets (60) (117)
Nordic 3 (15)
Retail Europe 14 (5)
Wealth Management 36 (96)
US Life (36) 26
Bermuda (27) 16
Adjusted operating MCEV earnings after tax for
the covered business 492 133
Long-Term Savings 511 371
Emerging Markets 212 343
Nordic 81 149
Retail Europe (44) 14
Wealth Management (4) 229
US Life 266 (364)
Bermuda (19) (238)
Tax on adjusted operating MCEV earnings
comprises
Tax on adjusted operating MCEV earnings for the
covered business (70) (191)
Tax on adjusted operating MCEV earnings for
other business (139) 56
Tax on adjusted operating MCEV earnings (209) (135)
B3: Components of MCEV of the covered business
GBPm
At At
31 December 31 December
2009 2008
MCEV of the covered business 6 027 4 183
Adjusted net worth 2 815 2 383
Value of in-force business 3 212 1 800
Long-Term Savings
Adjusted net worth 2 452 2 007
Free surplus 416 16
Required capital 2 036 1 991
Value of in-force business 3 377 2 225
Present value of future profits 4 156 2 878
Additional time value of financial options and
guarantees (220) (204)
Frictional costs (217) (147)
Cost of residual non-hedgeable risks (342) (302)
Emerging Markets
Adjusted net worth* 1 305 983
Free surplus 80 (92)
Required capital 1 225 1 075
Value of in-force business 1 158 1 090
Present value of future profits 1 424 1 287
Additional time value of financial options and
guarantees - -
Frictional costs** (181) (117)
Cost of residual non-hedgeable risks (85) (80)
Nordic
Adjusted net worth 195 163
Free surplus 91 58
Required capital 104 105
Value of in-force business 1 114 882
Present value of future profits 1 196 943
Additional time value of financial options and
guarantees - -
Frictional costs (11) (8)
Cost of residual non-hedgeable risks (71) (53)
Retail Europe
Adjusted net worth 78 79
Free surplus 46 15
Required capital 32 64
Value of in-force business 453 517
Present value of future profits 507 582
Additional time value of financial options and
guarantees (6) (12)
Frictional costs (7) (12)
Cost of residual non-hedgeable risks (41) (41)
Wealth Management
Adjusted net worth 376 317
Free surplus 163 120
Required capital 213 197
Value of in-force business 1 468 1 461
Present value of future profits 1 540 1 514
Additional time value of financial options and
guarantees (1) -
Frictional costs (12) (8)
Cost of residual non-hedgeable risks (59) (45)
US Life
Adjusted net worth 498 465
Free surplus 36 (85)
Required capital 462 550
Value of in-force business (816) (1,725)
Present value of future profits (511) (1,448)
Additional time value of financial options
and guarantees (213) (192)
Frictional costs (6) (2)
Cost of residual non-hedgeable risks (86) (83)
Bermuda
Adjusted net worth 363 376
Free surplus - 342
Required capital 363 34
Value of in-force business (165) (425)
Present value of future profits 99 (298)
Additional time value of financial options
and guarantees (196) (57)
Frictional costs (4) (1)
Cost of residual non-hedgeable risks (64) (69)
* The required capital in respect of OMSA is partially covered by the market
value of the Group`s investments in banking and general insurance in South
Africa. On consolidation these investments are shown separately.
** For the OMSA business there has been a material change in the asset
allocation of assets backing the Capital Adequacy Requirement (capital
definition to meet internal management objectives) from 31 December 2008 to 31
December 2009. As at 31 December 2009 the asset allocation is 75% cash/25%
equity compared to 60% cash/40% equity at 31 December 2008. This resulted in a
decrease in the Capital Adequacy Requirement, but an increase in frictional tax
costs as interest bearing assets are subjected to higher tax rates than
equities.
B4: Analysis of covered business MCEV earnings (after tax)
GBPm
Year ended 31 December 2009
Total covered business
Free Required Adjusted
surplus capital net worth
Opening MCEV 358 2 025 2 383
New business value (473) 170 (303)
Expected existing business
contribution (reference rate) 7 114 121
Expected existing business
contribution (in excess of reference rate) 32 6 38
Transfers from VIF and required
capital to free surplus 813 (244) 569
Experience variances 54 (111) (57)
Assumption changes (3) (22) (25)
Other operating variance (191) 301 110
Operating MCEV earnings 239 214 453
Economic variances (29) 93 64
Other non-operating variance 39 (20) 19
Total MCEV earnings 249 287 536
Closing adjustments (191) 87 (104)
Capital and dividend flows (189) (1) (190)
Foreign exchange variance (15) 85 70
MCEV of acquired/sold business 13 3 16
Closing MCEV 416 2 399 2 815
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2009
Value of
in-force MCEV
Opening MCEV 1 800 4 183
New business value 470 167
Expected existing business
contribution (reference rate) 142 263
Expected existing business
contribution (in excess of reference rate) 355 393
Transfers from VIF and required
capital to free surplus (569) -
Experience variances (120) (177)
Assumption changes (258) (283)
Other operating variance 19 129
Operating MCEV earnings 39 492
Economic variances 940 1 004
Other non-operating variance 168 187
Total MCEV earnings 1 147 1 683
Closing adjustments 265 161
Capital and dividend flows - (190)
Foreign exchange variance 289 359
MCEV of acquired/sold business (24) (8)
Closing MCEV 3,212 6 027
Return on MCEV (RoEV)% per annum 11.8%
GBPm
Year ended 31 December 2008
Total covered business
Free Required Adjusted
surplus capital net worth
Opening MCEV 515 1,906 2,421
New business value (608) 172 (436)
Expected existing business
contribution (reference rate) 63 117 180
Expected existing business
contribution (in excess of reference rate) 4 15 19
Transfers from VIF and required
capital to free surplus 939 (189) 750
Experience variances 160 (75) 85
Assumption changes (55) - (55)
Other operating variance 172 (156) 16
Operating MCEV earnings 675 (116) 559
Economic variances (722) 5 (717)
Other non-operating variance (111) 43 (68)
Total MCEV earnings (158) (68) (226)
Closing adjustments 1 187 188
Capital and dividend flows (22) - (22)
Foreign exchange variance 23 187 210
MCEV of acquired/sold business - - -
Closing MCEV 358 2,025 2,383
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2008
Value of
in-force MCEV
Opening MCEV 3 928 6 349
New business value 540 104
Expected existing business
contribution (reference rate) 289 469
Expected existing business
contribution (in excess of reference rate) 81 100
Transfers from VIF and required
capital to free surplus (750) -
Experience variances (250) (165)
Assumption changes (375) (430)
Other operating variance 39 55
Operating MCEV earnings (426) 133
Economic variances (1 485) (2 202)
Other non-operating variance - (68)
Total MCEV earnings (1 911) (2 137)
Closing adjustments (217) (29)
Capital and dividend flows - (22)
Foreign exchange variance (217) (7)
MCEV of acquired/sold business - -
Closing MCEV 1 800 4 183
Return on MCEV (RoEV)% per annum 2.1%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances (57) (120) (177)
Persistency (87) (72) (159)
Risk 31 17 48
Expenses (49) 13 (36)
Other 48 (78) (30)
Assumption changes (25) (258) (283)
Persistency (29) (210) (239)
Risk 30 64 94
Expenses 10 (190) (180)
Other (36) 78 42
GBPm
Total covered business Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 14 78 92 170 262
Expected existing
business contribution
(in excess of
reference rate) 1 25 26 163 189
Return on MCEV for total covered business is calculated as the operating MCEV
earnings after tax divided by opening MCEV in sterling.
GBPm
Year ended 31 December 2009
Long-Term Savings (LTS)
Free Required Adjusted
surplus capital net worth
Opening MCEV 16 1 991 2 007
New business value (473) 170 (303)
Expected existing business
contribution (reference rate) 2 113 115
Expected existing business
contribution (in excess of reference rate) (1) 6 5
Transfers from VIF and required
capital to free surplus 818 (240) 578
Experience variances 126 (111) 15
Assumption changes 33 (22) 11
Other operating variance 154 (44) 110
Operating MCEV earnings 659 (128) 531
Economic variances (131) 93 (38)
Other non-operating variance 39 (20) 19
Total MCEV earnings 567 (55) 512
Closing adjustments (167) 100 (67)
Capital and dividend flows (189) (1) (190)
Foreign exchange variance 9 98 107
MCEV of acquired/sold business 13 3 16
Closing MCEV 416 2 036 2 452
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2009
Value of
in-force MCEV
Opening MCEV 2 225 4 232
New business value 470 167
Expected existing business
contribution (reference rate) 146 261
Expected existing business
contribution (in excess of reference rate) 316 321
Transfers from VIF and required
capital to free surplus (578) -
Experience variances (99) (84)
Assumption changes (212) (201)
Other operating variance (63) 47
Operating MCEV earnings (20) 511
Economic variances 773 735
Other non-operating variance 168 187
Total MCEV earnings 921 1 433
Closing adjustments 231 164
Capital and dividend flows - (190)
Foreign exchange variance 255 362
MCEV of acquired/sold business (24) (8)
Closing MCEV 3 377 5 829
Return on MCEV (RoEV)% per annum 12.1%
GBPm
Year ended 31 December 2008
Long-Term Savings (LTS)
Free Required Adjusted
surplus capital net worth
Opening MCEV 494 1 873 2 367
New business value (567) 162 (405)
Expected existing business
contribution (reference rate) 62 116 178
Expected existing business
contribution (in excess of reference rate) 4 15 19
Transfers from VIF and required
capital to free surplus 917 (187) 730
Experience variances 162 (58) 104
Assumption changes 13 - 13
Other operating variance 172 (156) 16
Operating MCEV earnings 763 (108) 655
Economic variances (460) 5 (455)
Other non-operating variance (111) 43 (68)
Total MCEV earnings 192 (60) 132
Closing adjustments (670) 178 (492)
Capital and dividend flows (618) - (618)
Foreign exchange variance (52) 178 126
MCEV of acquired/sold business - - -
Closing MCEV 16 1 991 2 007
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2008
Value of
in-force MCEV
3 869 6 236
Opening MCEV
New business value 563 158
Expected existing business
contribution (reference rate) 281 459
Expected existing business
contribution (in excess of reference rate) 70 89
Transfers from VIF and required
capital to free surplus (730) -
Experience variances (277) (173)
Assumption changes (278) (265)
Other operating variance 87 103
Operating MCEV earnings (284) 371
Economic variances (1 227) (1 682)
Other non-operating variance - (68)
Total MCEV earnings (1 511) (1 379)
Closing adjustments (133) (625)
Capital and dividend flows - (618)
Foreign exchange variance (133) (7)
MCEV of acquired/sold business - -
Closing MCEV 2 225 4 232
Return on MCEV (RoEV)% per annum 5.9%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances 15 (99) (84)
Persistency (35) (59) (94)
Risk 31 17 48
Expenses (39) 12 (27)
Other 58 (69) (11)
Assumption changes 11 (212) (201)
Persistency (29) (145) (174)
Risk 30 64 94
Expenses 10 (161) (151)
Other - 30 30
GBPm
Long-Term Savings (LTS) Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 14 75 89 161 250
Expected existing
business contribution
(in excess of
reference rate) 1 (3) (2) 131 129
Return on MCEV is calculated as the operating MCEV earnings after tax divided
by opening MCEV in sterling.
GBPm
Year ended 31 December 2009
Emerging Markets*
Free Required Adjusted
surplus capital net worth
Opening MCEV (92) 1 075 983
New business value (136) 110 (26)
Expected existing business
contribution (reference rate) (7) 85 78
Expected existing business
contribution (in excess of reference rate) - 5 5
Transfers from VIF and required
capital to free surplus 314 (146) 168
Experience variances (9) (9) (18)
Assumption changes 40 (29) 11
Other operating variance 46 (27) 19
Operating MCEV earnings 248 (11) 237
Economic variances 54 1 55
Other non-operating variance - - -
Total MCEV earnings 302 (10) 292
Closing adjustments (130) 160 30
Capital and dividend flows (146) (3) (149)
Foreign exchange variance 3 160 163
MCEV of acquired/sold business 13 3 16
Closing MCEV 80 1 225 1 305
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2009
Value of
in-force MCEV
Opening MCEV 1 090 2 073
New business value 91 65
Expected existing business
contribution (reference rate) 129 207
Expected existing business
contribution (in excess of reference rate) 16 21
Transfers from VIF and required
capital to free surplus (168) -
Experience variances (35) (53)
Assumption changes (90) (79)
Other operating variance 32 51
Operating MCEV earnings (25) 212
Economic variances (39) 16
Other non-operating variance - -
Total MCEV earnings (64) 228
Closing adjustments 132 162
Capital and dividend flows - (149)
Foreign exchange variance 156 319
MCEV of acquired/sold business (24) (8)
Closing MCEV 1 158 2 463
Return on MCEV (RoEV)% per annum 9.8%
GBPm
Year ended 31 December 2008
Emerging Markets*
Free Required Adjusted
surplus capital net worth
Opening MCEV 315 1 160 1 475
New business value (86) 72 (14)
Expected existing business
contribution (reference rate) 27 101 128
Expected existing business
contribution (in excess of reference rate) 4 14 18
Transfers from VIF and required
capital to free surplus 296 (134) 162
Experience variances 13 (19) (6)
Assumption changes 22 - 22
Other operating variance 160 (156) 4
Operating MCEV earnings 436 (122) 314
Economic variances (154) 51 (103)
Other non-operating variance (1) - (1)
Total MCEV earnings 281 (71) 210
Closing adjustments (688) (14) (702)
Capital and dividend flows (645) - (645)
Foreign exchange variance (43) (14) (57)
MCEV of acquired/sold business - - -
Closing MCEV (92) 1,075 983
Return on MCEV (RoEV)% per annum
GBPm
Year ended 31 December 2008
Value of
in-force MCEV
Opening MCEV 1 204 2 679
New business value 75 61
Expected existing business
contribution (reference rate) 148 276
Expected existing business
contribution (in excess of reference rate) 13 31
Transfers from VIF and required
capital to free surplus (162) -
Experience variances (18) (24)
Assumption changes (20) 2
Other operating variance (7) (3)
Operating MCEV earnings 29 343
Economic variances (139) (242)
Other non-operating variance 17 16
Total MCEV earnings (93) 117
Closing adjustments (21) (723)
Capital and dividend flows - (645)
Foreign exchange variance (21) (78)
MCEV of acquired/sold business - -
Closing MCEV 1 090 2 073
Return on MCEV (RoEV)% per annum 14.4%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances (18) (35) (53)
Persistency (9) (44) (53)
Risk 16 - 16
Expenses (30) 11 (19)
Other 5 (2) 3
Assumption changes 11 (90) (79)
Persistency (29) (55) (84)
Risk 30 20 50
Expenses 10 (55) (45)
Other - - -
GBPm
Emerging Markets Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business contribution
(reference rate) 5 63 68 104 172
Expected existing
business contribution
(in excess of
reference rate) - (3) (3) 14 11
* The MCEV for Emerging Markets is presented after the adjustment for
market value of life fund investments in Group equity and debt instruments.
The decrease in `expected existing business contribution (reference rate)` from
2008 to 2009 is mainly attributable to a lower one-year swap rate at 31
December 2008 (9.3%) compared to 31 December 2007 (11.5%) and a lower opening
MCEV.
Adverse persistency experience resulted from the tough economic conditions
during 2009. Expense experience losses are mainly attributable to one-off
project expenditure. These adverse experience variances were partially off-set
by favourable Retail Mass mortality and longevity experience.
Operating assumption changes were implemented to strengthen persistency
assumptions, part of which are temporary short-term changes, and to capitalise
special project expenditure. These changes were partially off-set by positive
mortality assumption changes due to continued improvement in Retail Mass
mortality experience.
The other operating variances mainly relate to management actions and various
methodology changes and error corrections. The management actions include a
reduction in the rate of future cover increases on certain risk products in the
Retail Mass segment to achieve better alignment between the cost of providing
benefits and the value of the corresponding premium increase, off-set by a
reduction in the equity allocation of shareholder assets which resulted in an
increase in frictional tax costs as interest bearing assets are subjected to
higher tax rates than equities.
The positive economic variances were caused by investment returns on
policyholder and shareholders funds being greater than expected and the
introduction of a liquidity premium for Retail Affluent Immediate Annuity
business. This was partially off-set by economic assumption changes (mainly an
increase in medium- to long-term swap yields).
The capital and dividend flows mainly consist of dividends paid that were
partly off-set by inter-company dividends received.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in rand (including conversion of results for Mexico to rand).
GBPm
Year ended 31 December 2009
Nordic
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 58 105 163 882 1 045
New business value (57) 6 (51) 95 44
Expected existing
business
contribution
(reference rate) 4 - 4 18 22
Expected existing
business
contribution (in
excess of
reference rate) - - - 14 14
Transfers from
VIF and required
capital to free
surplus 81 (17) 64 (64) -
Experience
variances 28 (7) 21 10 31
Assumption changes 3 - 3 (30) (27)
Other operating
variance - - - (3) (3)
Operating MCEV
earnings 59 (18) 41 40 81
Economic variances (5) 17 12 192 204
Other
non-operating
variance 18 - 18 1 19
Total MCEV
earnings 72 (1) 71 233 304
Closing
adjustments (39) - (39) (1) (40)
Capital and
dividend flows (37) - (37) - (37)
Foreign exchange
variance (2) - (2) (1) (3)
Closing MCEV 91 104 195 1 114 1 309
Return on MCEV
(RoEV)% per
annum 8.1%
GBPm
Year ended 31 December 2008
Nordic
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 47 75 122 992 1 114
New business value (50) 3 (47) 79 32
Expected existing
business
contribution
(reference rate) 2 2 4 50 54
Expected existing
business
contribution (in
excess of
reference rate) - - - 23 23
Transfers from
VIF and required
capital to free
surplus 85 1 86 (86) -
Experience
variances 10 18 28 (17) 11
Assumption changes - - - 32 32
Other operating
variance (1) - (1) (2) (3)
Operating MCEV
earnings 46 24 70 79 149
Economic variances 9 (20) (11) (296) (307)
Other
non-operating
variance (85) 19 (66) (3) (69)
Total MCEV
earnings (30) 23 (7) (220) (227)
Closing
adjustments 41 7 48 110 158
Capital and
dividend flows 31 - 31 - 31
Foreign exchange
variance 10 7 17 110 127
Closing MCEV 58 105 163 882 1 045
Return on MCEV
(RoEV)% per
annum 12.9%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances 21 10 31
Persistency (2) 5 3
Risk 6 (1) 5
Expenses 3 (1) 2
Other 14 7 21
Assumption changes 3 (30) (27)
Persistency - (29) (29)
Risk - 19 19
Expenses - (18) (18)
Other 3 (2) 1
GBPm
Nordic Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected
existing
business
contribution
(reference rate) 1 - 1 15 16
Expected
existing
business
contribution (in
excess of
reference rate) - - - 24 24
The `expected existing business contribution (in excess of reference rate)` is
not significant. This is reasonable for business comprised mostly of
unit-linked products where most of the profits emanate from premium charges,
acquisition charges and fund-based fees. Such fees and charges are largely
captured in the `expected existing business contribution (reference rate)`.
The positive experience variances were largely caused by lower than expected
tax payments and higher than expected fee income. In addition, there were
maintenance expense underruns in the Swedish unit-linked business. There were
no one-off expense variances.
Operating assumption changes were made to recognise one-off developmental
project costs and lower mortality experience mainly on drawdown annuity
products. In addition changes were made to persistency assumptions, despite
overall positive persistency experience during the year, to allow further for
higher transfer rates given the change on 1 May 2008 in Swedish legislation to
reinstate pension transfer rights.
The economic variances are mainly due to the positive effect of market
movements on funds under management.
The other non-operating variance mainly results from a release of provisions
following the favourable resolution of certain longstanding litigation matters.
The capital and dividend flows mainly represent dividends, repayment of loans
and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in Swedish kronor.
GBPm
Year ended 31 December 2009
Retail Europe
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 15 64 79 517 596
New business
value (74) 1 (73) 68 (5)
Expected
existing business
contribution
(reference rate) 1 - 1 10 11
Expected existing
business contribution
(in excess of
reference rate) - - - 3 3
Transfers from
VIF and required
capital to free
surplus 97 7 104 (104) -
Experience
variances (20) 1 (19) (4) (23)
Assumption changes - - - (26) (26)
Other operating
variance 18 (19) (1) (3) (4)
Operating MCEV
earnings 22 (10) 12 (56) (44)
Economic variances (1) 4 3 26 29
Other
non-operating
variance 20 (20) - 3 3
Total MCEV
earnings 41 (26) 15 (27) (12)
Closing
adjustments (10) (6) (16) (37) (53)
Capital and
dividend flows (10) (3) (13) - (13)
Foreign exchange
variance - (3) (3) (37) (40)
Closing MCEV 46 32 78 453 531
Return on MCEV
(RoEV)% per annum (7.9)%
GBPm
Year ended 31 December 2008
Retail Europe
Free Required Adjusted Value of
surplus capital net worth In-force MCEV
Opening MCEV 16 38 54 444 498
New business value (80) 1 (79) 89 10
Expected existing
business contribution
(reference rate) - 1 1 20 21
Expected existing
business contribution
(in excess of
reference rate) - - - 4 4
Transfers from VIF
and required
capital to free
surplus 111 2 113 (113) -
Experience
variances (1) - (1) (12) (13)
Assumption changes - - - (13) (13)
Other operating
variance - - - 5 5
Operating MCEV
earnings 30 4 34 (20) 14
Economic variances 10 (12) (2) (30) (32)
Other
non-operating
variance (17) 12 (5) (4) (9)
Total MCEV earnings 23 4 27 (54) (27)
Closing adjustments (24) 22 (2) 127 125
Capital and
dividend flows (25) - (25) - (25)
Foreign exchange
variance 1 22 23 127 150
Closing MCEV 15 64 79 517 596
Return on MCEV
(RoEV)% per annum 2.6%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances (19) (4) (23)
Persistency (1) (1) (2)
Risk 3 1 4
Expenses (5) - (5)
Other (16) (4) (20)
Assumption changes - (26) (26)
Persistency - 2 2
Risk - 1 1
Expenses - (22) (22)
Other - (7) (7)
GBPm
Retail Europe Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business
contribution
(reference rate) - - - 8 8
Expected existing
business
contribution (in
excess of
reference rate) - - - 3 3
The `expected existing business contribution (in excess of reference rate)` is
not significant. This is reasonable for business comprised mostly of
unit-linked products where most of the profits emanate from premium charges,
acquisition charges and fund-based fees. Such fees and charges are largely
captured in the `expected existing business contribution (reference rate)`.
Experience variances are mainly due to higher than anticipated profit sharing
on participating contracts in Germany in 2009 as a result of lower than
expected new business volumes as well as the settlement of profit sharing
liabilities relating to the years 2005-2008. There were no one-off expense
variances. Mortality and morbidity experience was positive across all Retail
Europe countries.
Operating assumption changes were made to recognise one-off developmental
project costs and to make allowance for planned short-term expense overruns
relative to long-term maintenance expense assumptions. In addition, although a
change in methodology was made in 2008 to recognise profit sharing in Germany,
this allowance has been revised upwards given the adverse experience in 2009.
The economic variances are mainly due to the positive effect of market
movements on funds under management.
The capital and dividend flows mainly represent dividends, repayment of loans
and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in euro.
GBPm
Year ended 31 December 2009
Wealth Management
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 120 197 317 1 461 1 778
New business
value (171) 12 (159) 208 49
Expected existing
business
contribution
(reference rate) 7 7 14 34 48
Expected existing
business contribution
(in excess of
reference rate) (1) - (1) 26 25
Transfers from
VIF and required
capital to free
surplus 274 (30) 244 (244) -
Experience
variances (10) 7 (3) (35) (38)
Assumption
changes (10) 7 (3) (96) (99)
Other operating
variance 90 2 92 (81) 11
Operating MCEV
earnings 179 5 184 (188) (4)
Economic variances 2 12 14 38 52
Other
non-operating
variance 1 - 1 164 165
Total MCEV
earnings 182 17 199 14 213
Closing
adjustments (139) (1) (140) (7) (147)
Capital and
dividend flows (142) 5 (137) - (137)
Foreign exchange
variance 3 (6) (3) (7) (10)
Closing MCEV 163 213 376 1 468 1 844
Return on MCEV
(RoEV)% per annum (0.3)%
GBPm
Year ended 31 December 2008
Wealth Management
Free Required Adjusted Value of
surplus capital net worth In-force MCEV
Opening MCEV 56 209 265 1 331 1 596
New business value (215) 3 (212) 279 67
Expected existing
business contribution
(reference rate) 32 1 33 61 94
Expected existing
business contribution
(in excess of
reference rate) - - - 21 21
Transfers from
VIF and required
capital to free
surplus 319 (17) 302 (302) -
Experience
variances 25 (16) 9 3 12
Assumption changes (3) - (3) 51 48
Other operating
variance 13 - 13 (26) (13)
Operating MCEV
earnings 171 (29) 142 87 229
Economic variances (58) (14) (72) 27 (45)
Other
non-operating
variance (8) 12 4 (10) (6)
Total MCEV
earnings 105 (31) 74 104 178
Closing
adjustments (41) 19 (22) 26 4
Capital and
dividend flows (34) - (34) - (34)
Foreign exchange
variance (7) 19 12 26 38
Closing MCEV 120 197 317 1 461 1 778
Return on MCEV
(RoEV)% per annum 14.3%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances (3) (35) (38)
(6) (39) (45)
Persistency
Risk 6 - 6
Expenses (24) 2 (22)
Other 21 2 23
Assumption changes (3) (96) (99)
Persistency - (81) (81)
Risk - 12 12
Expenses - (66) (66)
Other (3) 39 36
GBPm
Wealth Management Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business
contribution
(reference rate) 8 3 11 18 29
Expected existing
business
contribution (in
excess of
reference rate) 1 - 1 11 12
The `expected existing business contribution (in excess of reference rate)` is
not significant. This is reasonable for business comprised mostly of
unit-linked products where most of the profits emanate from premium charges,
acquisition charges and fund-based fees. Such fees and charges are largely
captured in the `expected existing business contribution (reference rate)`.
Adverse persistency and expense variances were partially off-set by positive
risk and other variances. Approximately GBP9 million of the expense variance
relates to development and restructuring costs. The `other` variances include
fee income being higher than expected and a tax variance on the transfer from
VIF to adjusted net worth arising through the removal of dividend tax in
respect of Skandia International.
Operating assumption changes were made to strengthen persistency and expense
assumptions. The expense assumption changes are largely caused by
capitalisation of development expenditure that is expected to arise through the
restructure of Wealth Management and other one-off developmental projects. The
`other` operating assumption change reflects increased recognition of fee
income in the United Kingdom in light of the positive experience.
The other operating variances reflect the impact of modelling and methodology
changes and the impact of the Munich Re treaty that was effected by Skandia
International to finance new business strain and repay internal loans.
The economic variances were driven by market and exchange rate movements.
The other non-operating variance relates to the effect on VIF of the removal of
dividend tax in Skandia International as dividends received by United Kingdom
companies from overseas trading subsidiaries are now exempt from United Kingdom
corporation tax.
The capital and dividend flows mainly represent dividends, repayments of loans
and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV
in sterling.
GBPm
Year ended 31 December 2009
US Life
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV (85) 550 465 (1 725) (1 260)
New business
value (35) 41 6 8 14
Expected existing
business contribution
(reference rate) (3) 21 18 (45) (27)
Expected existing
business
contribution
(in excess of
reference rate) - 1 1 257 258
Transfers from
VIF and required
capital to free
surplus 52 (54) (2) 2 -
Experience
variances 137 (103) 34 (35) (1)
Assumption changes - - - 30 30
Other operating
variance - - - (8) (8)
Operating MCEV
earnings 151 (94) 57 209 266
Economic
variances (181) 59 (122) 556 434
Other
non-operating
variance - - - - -
Total MCEV
earnings (30) (35) (65) 765 700
Closing
adjustments 151 (53) 98 144 242
Capital and
dividend flows 146 - 146 - 146
Foreign exchange
variance 5 (53) (48) 144 96
Closing MCEV 36 462 498 (816) (318)
Return on MCEV
(RoEV)% per annum 22.7%
GBPm
Year ended 31 December 2008
US Life
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 60 391 451 (102) 349
New business
value (136) 83 (53) 41 (12)
Expected
existing
business
contribution
(reference
rate) 1 11 12 2 14
Expected
existing
business
contribution
(in excess of
reference
rate) - 1 1 9 10
Transfers from
VIF and
required
capital to free
surplus 106 (39) 67 (67) -
Experience
variances 115 (41) 74 (233) (159)
Assumption
changes (6) - (6) (328) (334)
Other operating
variance - - - 117 117
Operating MCEV
earnings 80 15 95 (459) (364)
Economic
variances (267) - (267) (789) (1 056)
Other
non-operating
variance - - - - -
Total MCEV
earnings (187) 15 (172) (1 248) (1 420)
Closing
adjustments 42 144 186 (375) (189)
Capital and
dividend flows 55 - 55 - 55
Foreign
exchange
variance (13) 144 131 (375) (244)
Closing MCEV (85) 550 465 (1 725) (1 260)
Return on MCEV
(RoEV)% per
annum (97.6)%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances 34 (35) (1)
Persistency (17) 20 3
Risk - 17 17
Expenses 17 - 17
Other 34 (72) (38)
Assumption changes - 30 30
Persistency - 18 18
Risk - 12 12
Expenses - - -
Other - - -
GBPm
US Life Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business
contribution
(reference rate) - 9 9 16 25
Expected existing
business
contribution (in
excess of
reference rate) - - - 79 79
The segment results of US Life include allowance for Old Mutual Reassurance
(Ireland) Limited (OMRe), which provides reinsurance to the United States Life
Companies.
The operating MCEV earnings were largely caused by the expected existing
business contribution (in excess of reference rate), i.e. by the corporate bond
spread that is expected to be earned over and above the adjusted risk-free
reference rate (inclusive of the liquidity premium adjustment).
The experience variances were largely caused by positive mortality variance,
from the immediate annuity business, and expense variance, which was positive
relative to the additional provision set up at the end of 2008 based on the
overruns at the time. These were partially off-set by an overall increase in
guarantee costs relative to expectations. Persistency experience was roughly
neutral. There were no large one-off items of expense variance.
The operating assumption changes consisted of changes to the persistency
assumptions on the Fixed Indexed Annuity (FIA) business and the slight
weakening of mortality assumptions on the Single Premium Immediate Annuity
(SPIA) business to align with IFRS assumptions.
The other operating variances include a refinement in the calculation of the
time value of financial options and guarantees, changes to the methodology for
calculating the non-hedgeable risk capital and a model revision in respect of
the dynamic lapse methodology.
The economic variances were largely driven by the reduction in corporate bond
spreads during 2009.
The capital and dividend flows were due to a capital injection made in February
2009.
Return on MCEV was calculated as the operating MCEV earnings after tax divided
by the absolute value of the opening MCEV in US dollars.
GBPm
Year ended 31 December 2009
Bermuda
Free Required Adjusted Value of
surplus Capital net worth in-force MCEV
Opening MCEV 342 34 376 (425) (49)
New business
value - - - - -
Expected existing
business contribution
(reference rate) 5 1 6 (4) 2
Expected existing
business
contribution
(in excess of
reference rate) 33 - 33 39 72
Transfers from
VIF and required
capital to free
surplus (5) (4) (9) 9 -
Experience
variances (72) - (72) (21) (93)
Assumption changes (36) - (36) (46) (82)
Other operating
variance (345) 345 - 82 82
Operating MCEV
earnings (420) 342 (78) 59 (19)
Economic variances 102 - 102 167 269
Other
non-operating
variance - - - - -
Total MCEV
earnings (318) 342 24 226 250
Closing
adjustments (24) (13) (37) 34 (3)
Capital and
dividend flows - - - - -
Foreign exchange
variance (24) (13) (37) 34 (3)
Closing MCEV - 363 363 (165) 198
Return on MCEV
(RoEV)% per annum (41.0)%
GBPm
Year ended 31 December 2008
Bermuda
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Opening MCEV 21 33 54 59 113
New business
value (41) 10 (31) (23) (54)
Expected existing
business
contribution
(reference rate) 1 1 2 8 10
Expected existing
business
contribution
(in excess of
reference rate) - - - 11 11
Transfers from
VIF and required
capital to
free surplus 22 (2) 20 (20) -
Experience
variances (2) (17) (19) 27 8
Assumption
changes (68) - (68) (97) (165)
Other operating
variance - - - (48) (48)
Operating MCEV
earnings (88) (8) (96) (142) (238)
Economic
variances (262) - (262) (258) (520)
Other
non-operating
variance - - - - -
Total MCEV
earnings (350) (8) (358) (400) (758)
Closing
adjustments 671 9 680 (84) 596
Capital and
dividend flows 596 - 596 - 596
Foreign exchange
variance 75 9 84 (84) -
Closing MCEV 342 34 376 (425) (49)
Return on MCEV
(RoEV)% per annum (195.3)%
GBPm
Adjusted Value of
net worth in-force MCEV
Experience variances (72) (21) (93)
Persistency (52) (13) (65)
Risk - - -
Expenses (10) 1 (9)
Other (10) (9) (19)
Assumption changes (36) (46) (82)
Persistency - (65) (65)
Risk - - -
Expenses - (29) (29)
Other (36) 48 12
GBPm
Bermuda Year ended 31 December 2010
Free Required Adjusted Value of
surplus capital net worth in-force MCEV
Expected existing
business
contribution
(reference rate) - 3 3 9 12
Expected existing
business
contribution (in
excess of
reference rate) - 28 28 32 60
The experience variances were largely caused by adverse persistency experience,
with fewer surrenders than expected on Variable Annuity contracts with heavily
in-the-money guarantees, an increase in the cost of non-hedgeable risks and a
negative expense variance. There were no large one-off items of expense
variance.
The operating assumptions changes consisted of a strengthening of the
persistency assumptions on the Variable Annuity business with guaranteed rider
benefits, a strengthening of expense assumptions in light of this year`s
adverse expense experience, and some changes to guarantee cost assumptions.
There were no large one-off expense items.
The other operating variance includes a positive variance due to an amendment
of a DAC write-down made in the previous reporting period, a refinement in the
calculation of the time value of financial options and guarantees, changes to
the methodology for calculation of the non-hedgeable risk capital and
improvements to the modelling of guarantee costs.
The economic variances were largely driven by the recovery in equity markets
during the period and the increase in the US swap yield curve.
The increase in required capital to equal the full adjusted net worth as at 31
December 2009 is as a result of a more conservative view, relative to 31
December 2008, of the level of capital considered by the directors to be
appropriate to manage the business.
Return on MCEV was calculated as the operating MCEV earnings after tax divided
by the absolute value of the opening MCEV in US dollars.
C: Other key performance information
C1 Adjustments applied in determining total Group MCEV earnings before tax
GBPm
Year ended 31 December 2009
Covered Non-covered
business business Total Group
Analysis of adjusting items MCEV IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-
covered business acquired
intangible assets
and impact of acquisition accounting - 65 65
Economic variances 1 108 (10) 1 098
Other non-operating variances 18 - 18
Acquired/divested business - (48) (48)
Closure of unclaimed share trust - - -
Dividends declared to holders of
perpetual
preferred callable securities - 45 45
Adjusting items relating to US
Asset
Management equity plans and
non-controlling interests - (1) (1)
Fair value gains on Group debt
instruments - (264) (264)
Adjusting items 1 126 (213) 913
GBPm
Year ended 31 December 2008
Covered Non-covered
business business Total Group
Analysis of adjusting items MCEV IFRS MCEV
Income/(expense)
Goodwill impairment and
amortisation of non-
covered business acquired
intangible assets
and impact of acquisition
accounting - (12) (12)
Economic variances (2 480) (72) (2 552)
Other non-operating variances (79) - (79)
Acquired/divested business - 53 53
Closure of unclaimed share trust - - -
Dividends declared to holders of
perpetual
preferred callable securities - 43 43
Adjusting items relating to US
Asset
Management equity plans and
non-controlling
interests - 7 7
Fair value gains on Group debt
instruments - 503 503
Adjusting items (2 559) 522 (2 037)
C2: Other movements in IFRS net equity impacting Group MCEV
GBPm
Year ended 31 December 2009
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Fair value gains/(losses) - 2 2
Net investment hedge - (41) (41)
Currency translation
differences/exchange
differences on translating foreign
operations 359 197 556
Aggregate tax effects of items
taken directly to
or transferred from equity - 13 13
Correction to transfers* - 316 316
Other movements (8) (7) (15)
Net income recognised directly
into equity 351 480 831
Capital and dividend flows for the
year (190) 145 (45)
Share buy-back - - -
Net issues of ordinary share
capital by the
Company - 2 2
Exercise of share options - 3 3
Change in share-based payment
reserve - 14 14
Other movements in net equity 161 644 805
GBPm
Year ended 31 December 2008
Covered Non-covered
business business Total Group
MCEV IFRS MCEV
Fair value gains/(losses) - - -
Net investment hedge - (281) (281)
Currency translation
differences/exchange
differences on translating foreign
operations (7) 59 52
Aggregate tax effects of items
taken directly to
or transferred from equity - (1) (1)
Correction to transfers*
Other movements - (49) (49)
Net income recognised directly
into equity (7) (272) (279)
Capital and dividend flows for the
year (22) (373) (395)
Share buy-back - (175) (175)
Net issues of ordinary share
capital by the
Company - 5 5
Exercise of share options - 5 5
Change in share-based payment
reserve - 26 26
Other movements in net equity (29) (784) (813)
* Refinement arising from allocation of assets between covered and non-covered
business at December 2008
C3: Reconciliation of MCEV adjusted net worth to IFRS net asset value for the
covered business
The table below provides a reconciliation of the MCEV adjusted net worth (ANW)
to the IFRS net asset value (NAV) for the covered business.
GBPm
Long-Term Emerging
At 31 December 2009 Total Savings Markets Nordic
IFRS net asset value* 6 103 5 734 821 1 222
Adjustment to include long-term
business on a statutory solvency
basis (2 632) (2 626) 153 (841)
Inclusion of Group equity and
debt instruments held in
life funds 339 339 339 -
Goodwill (995) (995) (8) (186)
Adjusted net worth attributable
to ordinary equity holders of the
parent 2 815 2 452 1 305 195
GBPm
Retail Wealth
At 31 December 2009 Europe Management US Life Bermuda
IFRS net asset value* 664 2 141 886 369
Adjustment to include
long-term business on a
statutory solvency basis (382) (1 168) (388) (6)
Inclusion of Group equity
and debt instruments held
in life funds - - - -
Goodwill (204) (597) - -
Adjusted net worth
attributable to ordinary
equity holders of the parent 78 376 498 363
GBPm
Long-Term Emerging
At 31 December 2008 Savings Markets
Total Nordic
IFRS net asset value* 5 907 5 314 620 1 323
Adjustment to include
long-term business on a
statutory solvency basis (2 461) (2 244) 136 (973)
Inclusion of Group equity and
debt instruments held in
life funds 236 236 236 -
Goodwill (1 299) (1 299) (9) (187)
Adjusted net worth attributable
to ordinary equity holders
of the parent 2 383 2 007 983 163
GBPm
Retail Wealth
At 31 December 2008 Europe Management US Life
Bermuda
IFRS net asset value* 934 2 340 97 593
Adjustment to include
long-term business on a
statutory solvency basis (435) (1 340) 368 (217)
Inclusion of Group equity
and debt instruments held
in life funds - - - -
Goodwill (420) (683) - -
Adjusted net worth attributable
to ordinary equity holders
of the parent 79 317 465 376
* IFRS net asset value is after elimination of inter-company loans.
The adjustment to include long-term business on a statutory solvency basis
includes the following:
- The excess of the IFRS amount of the deferred acquisition cost (DAC) and
value of business acquired (VOBA) assets over the statutory levels included in
the VIF.
- When projecting future profits on a statutory basis, the VIF includes the
shareholders` value of unrealised capital gains. To the extent that assets in
IFRS are valued at market and the market value is higher than the statutory
book value, these profits have already been taken into account in the IFRS
equity.
C4: Value of new business (after tax)
The tables below set out the regional analysis of the value of new business
(VNB) after tax. New business profitability is measured by both the ratio of
the VNB to the present value of new business premiums (PVNBP) as well as to the
annual premium equivalent (APE), and shown under PVNBP margin and APE margin
below. APE is calculated as recurring premiums plus 10% of single premiums.
As mentioned earlier for the OMSA business, Nedlife is not recognised as part
of the VNB of covered business in 2009. A similar consideration applies to
other new business measures such as PVNBP and APE in order to provide a better
indication of future expected `normalised` earnings.
However note that in the tables below Nedlife is still incorporated in the
comparative results for the year ended 31 December 2008.
GBPm
Year ended Year ended
31 December 31 December
2009 2008
Annualised recurring premiums
Long-Term Savings (LTS) 699 732
Emerging Markets 249 230
Nordic 183 174
Retail Europe 62 84
Wealth Management 191 211
US Life 14 33
Bermuda - -
Single premiums 699 732
Long-Term Savings (LTS) 6 806 7 327
Emerging Markets 1 437 1 321
Nordic 527 384
Retail Europe 53 75
Wealth Management 4 240 4 520
US Life 549 1 027
Bermuda 15 1 448
PVNBP 6 821 8 775
Long-Term Savings (LTS) 10 202 10 814
Emerging Markets 2 834 2 482
Nordic 1 150 991
Retail Europe 537 555
Wealth Management 5 042 5 540
US Life 639 1 246
Bermuda 15 1 448
PVNBP capitalisation factors* 10,217 12 262
Long-Term Savings (LTS) 4.9 4.8
Emerging Markets 5.6 5.0
Nordic 3.4 3.5
Retail Europe 7.8 5.7
Wealth Management 4.2 4.8
US Life 6.6 6.7
Bermuda n/a n/a
APE
Long-Term Savings (LTS) 1 380 1 466
Emerging Markets 393 362
Nordic 235 213
Retail Europe 67 91
Wealth Management 617 664
US Life 68 136
Bermuda 1 145
VNB 1 381 1 611
Long-Term Savings (LTS) 167 158
Emerging Markets** 65 61
Nordic 44 32
Retail Europe (5) 10
Wealth Management 49 67
US Life 14 (12)
Bermuda - (54)
PVNBP margin 167 104
Long-Term Savings (LTS) 1.6% 1.5%
Emerging Markets*** 2.3% 2.5%
Nordic 3.8% 3.3%
Retail Europe (1.0)% 1.8%
Wealth Management 1.0% 1.2%
US Life 2.2% (0.9)%
APE margin 1.6% 0.8%
Long-Term Savings (LTS) 12% 11%
Emerging Markets**** 16% 17%
Nordic 19% 15%
Retail Europe (8)% 11%
Wealth Management 8% 10%
US Life 20% (8)%
12% 6%
* The PVNBP capitalisation factors are calculated as follows: (PVNBP single
premiums)/annualised recurring premiums
** The comparative result excluding Nedlife is GBP53m for the year ended 31
December 2008.
*** The comparative result excluding Nedlife is 2.2% for the year ended 31
December 2008.
**** The comparative result excluding Nedlife is 16% for the year ended 31
December 2008.
The value of new individual unit trust linked retirement annuities and pension
fund asset management business written by the Emerging Markets long-term
business is excluded as the profits on this business arise in the asset
management business. The value of new business also excludes premium increases
arising from indexation arrangements in respect of existing business, as these
are already included in the value of inforce business.
The value of new institutional investment platform pensions business written in
Wealth Management is excluded as this is more appropriately classified as unit
trust business.
GBPm
Year ended Year ended
31 December 31 December
Gross premium excluded from value of new
business 2009 2008
Emerging Markets* 1 625 458
Wealth Management 153 239
* New business premiums not valued are higher than in 2008, mainly because
single premium new business figures include inflows relating to in-force
business following OMSA`s acquisition of Future Growth and Acsis Life.
C5: Product analysis of new covered business premiums
GBPm
Year ended Year ended
31 December 2009 31 December 2008
Emerging Markets Recurring Single Recurring Single
Total business 249 1 437 230 1 321
Individual business 220 716 216 644
Savings 50 539 58 481
Protection 56 21 68 18
Annuity - 155 - 144
Retail mass market 114 1 90 1
Group business 29 721 14 677
Savings 13 564 6 444
Protection 16 - 8 1
Annuity - 157 - 232
GBPm
Year ended Year ended
31 December 2009 31 December 2008
Nordic Recurring Single Recurring Single
Unit-linked assurance 183 527 174 384
GBPm
Year ended Year ended
31 December 2009 31 December 2008
Retail Europe Recurring Single Recurring Single
Unit-linked assurance 62 53 84 75
GBPm
Year ended Year ended
31 December 2009 31 December 2008
Recurring Single Recurring Single
Wealth Management
Total business 191 4 240 211 4 520
Unit-linked assurance 187 4 039 205 4 260
Life 4 201 6 260
GBPm
Year ended Year ended
31 December 2009 31 December 2008
US Life Recurring Single Recurring Single
Total business 14 549 33 1 027
Fixed deferred annuity - 30 - 228
Fixed indexed annuity - 383 - 611
Variable annuity - - - 6
Life 14 13 33 43
Immediate annuity - 123 - 139
D: Other income statement notes
D1: Drivers of new business value for covered business
%
PVNBP Margin
Year ended Year ended
31 December 31 December
Total covered business* 2008
2009
Margin at the end of comparative period 0.8 1.7
Change in volume 0.8 0.1
Change in product mix - (0.2)
Change in country mix - -
Change in operating assumptions 0.1 (0.3)
Change in economic assumptions - (0.3)
Change in tax/regulation 0.1 -
Exchange rate movements (0.2) (0.2)
Margin at the end of the period 1.6 0.8
Long-Term Savings
Margin at the end of comparative period 1.5 1.6
Change in volume (0.1) 0.1
Change in product mix - -
Change in country mix - -
Change in operating assumptions 0.1 0.1
Change in economic assumptions - (0.2)
Change in tax/regulation 0.1 -
Exchange rate movements - (0.1)
Margin at the end of the period 1.6 1.5
Emerging Markets**
Margin at the end of comparative period 2.5 2.4
Opening adjustment to the margin at the end of
the comparative
period for the removal of Nedlife (0.3) -
Adjusted margin at the end of the comparative
period 2.2 2.4
Change in volume (0.1) 0.2
Change in product mix (0.2) (0.1)
Change in country mix - -
Change in operating assumptions 0.4 0.1
Change in economic assumptions - (0.1)
Margin at the end of the period 2.3 2.5
Nordic***
Margin at the end of comparative period 3.3 3.3
Change in volume (0.1) 0.4
Change in product mix - 0.2
Change in country mix - -
Change in operating assumptions 0.4 (0.5)
Change in economic assumptions 0.2 (0.1)
Margin at the end of the period 3.8 3.3
Retail Europe****
Margin at the end of comparative period 1.8 5.2
Change in volume (2.1) (1.1)
Change in product mix (0.8) (0.5)
Change in country mix (0.1) (0.1)
Change in operating assumptions 0.5 (1.6)
Change in economic assumptions (0.3) (0.1)
Margin at the end of the period (1.0) 1.8
Wealth Management*
Margin at the end of comparative period 1.2 1.2
Change in volume (0.2) -
Change in product mix - -
Change in country mix - -
Change in operating assumptions (0.2) 0.1
Change in economic assumptions - (0.1)
Change in tax/regulation 0.2 -
Margin at the end of the period 1.0 1.2
US Life*****
Margin at the end of comparative period (0.9) (0.5)
Change in volume - -
Change in product mix 1.5 (0.4)
Change in country mix - -
Change in operating assumptions - 1.9
Change in economic assumptions 1.6 (1.9)
Margin at the end of the period 2.2 (0.9)
* The PVNBP margin changes are calculated in sterling.
** The PVNBP margin changes are calculated in rand, and exclude Nedlife for
the comparative year ending 31 December 2008.
*** The PVNBP margin changes are calculated in kronor.
**** The PVNBP margin changes are calculated in euro.
*****The PVNBP margin changes are calculated in dollars.
E1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business
at 31 December 2009 and the value of new business for the year ended 31
December 2009 to changes in key assumptions.
For each sensitivity illustrated all other assumptions have been left unchanged
except where they are directly affected by the revised conditions.
Sensitivity scenarios therefore include consistent changes in cash flows
directly affected by the changed assumption(s), for example future bonus
participation in changed economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder
distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modelling of
dynamic reserves is extremely complex and the effect on value is second order.
Therefore, in performing the sensitivities, reserving bases have been kept
constant whilst only varying future experience assumptions with similar
considerations applying to required capital. However the sensitivities for
South Africa in respect of an increase/decrease of all pretax investment and
economic assumptions, an increase/decrease in equity and property market values
and increases in equity, property and swaption implied volatilities allow for
the change in the time value of financial options and guarantees that form part
of the IGR.
The sensitivities for an increase/decrease in all pre-tax investment and
economic assumptions (with credited rates and discount rates changing
commensurately) are calculated in line with a parallel shift in risk-free
reference spot rates rather than risk-free reference forward rates. However,
the 1% reduction is limited so that it does not lead to negative risk-free
reference rates.
The equity and property sensitivities make allowance for rebalancing of asset
portfolios.
VNB sensitivities assume that the scenario arises immediately after point of
sale of the contract. Therefore no allowance is made for the ability to re-
price any contracts in the sensitivity scenarios, apart from the mortality
sensitivities for the South African business where allowance is made for
changes in the pricing basis for products with reviewable premiums.
Total covered business
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 6 027 3 212 167
Effect of:
Required capital equal to the minimum
statutory requirement 6 076 3 262 172
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 5 746 2 865 161
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 6 346 3 589 167
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate
bonds over the lifetime of the
liabilities, with credited rates and
discount rates changing commensurately 6 080 3 266 169
Equity and property market value
increasing by 10%, with all pre-tax
investment and
economic assumptions unchanged 6 401 3 447 179
Equity and property market value
decreasing by 10%, with all pre-tax
investment and
economic assumptions unchanged 5 671 2 996 157
50bps contraction on corporate bond
spreads 6 360 3 530 167
25% multiplicative increase in equity
and property implied volatilities 5 929 3 190 167
25% multiplicative increase in swaption
implied volatilities 5 906 3 092 161
Voluntary discontinuance rates
decreasing by 10% 6 211 3 492 209
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges 6 269 3 454 188
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in
policy charges 6 166 3 351 185
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 5 989 3 175 167
For value of new business, acquisition
expenses other than commission and
commission
related expenses increasing by 10%,
with no corresponding increase in
policy charges n/a n/a 150
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 153
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 6 160 3 345 173
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model 5 932 3 118 161
Emerging Markets
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 2,463 1,158 65
Effect of:
Required capital equal to the minimum
statutory requirement 2,506 1,201 68
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 2,432 1,125 61
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 2,483 1,179 67
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, with
credited rates and
discount rates changing
commensurately 2,470 1,165 66
Equity and property market value
increasing by 10%, with all pre-tax
investment and
economic assumptions unchanged 2,567 1,225 66
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 2,358 1,090 63
50bps contraction on corporate bond
spreads 2,478 1,157 65
25% multiplicative increase in equity
and property implied volatilities 2,440 1,135 65
25% multiplicative increase in swaption
implied volatilities 2,456 1,150 65
Voluntary discontinuance rates
decreasing by 10% 2,507 1,202 82
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges 2,564 1,258 72
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in
policy charges 2,536 1,231 74
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in
policy charges* 2,451 1,145 64
For value of new business, acquisition
expenses other than commission and
commission related expenses
increasing by 10%, with no
corresponding increase in
policy charges n/a n/a 57
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 60
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 2,482 1,176 66
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model 2,444 1,138 63
* No impact on with-profit annuities as the mortality risk is borne by
policyholders.
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 1,309 1,114 44
Effect of:
Required capital equal to the minimum
statutory requirement 1,309 1,114 44
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 1,284 1,088 43
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately 1,336 1,141 45
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 1,389 1,194 48
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 1,228 1,033 40
50bps contraction on corporate bond
spreads 1,309 1,114 44
25% multiplicative increase in equity
and property implied volatilities 1,309 1,114 44
25% multiplicative increase in swaption
implied volatilities 1,309 1,114 44
Voluntary discontinuance rates
decreasing by 10% 1,348 1,153 52
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges 1,345 1,150 46
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in
policy charges 1,310 1,115 44
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 1,307 1,112 44
For value of new business, acquisition
expenses other than commission and
commission related expenses increasing
by 10%, with no corresponding
increase in policy charges n/a n/a 42
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 47
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 1,324 1,129 45
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model 1,294 1,099 43
Retail Europe
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 531 453 (5)
Effect of:
Required capital equal to the minimum
statutory requirement 528 451 (5)
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 513 436 (8)
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 549 471 (3)
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 541 463 (5)
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 521 444 (5)
50bps contraction on corporate bond
spreads 531 453 (5)
25% multiplicative increase in equity
and property implied volatilities 531 453 (5)
25% multiplicative increase in swaption
implied volatilities 522 444 (5)
Voluntary discontinuance rates
decreasing by 10% 545 468 (4)
Maintenance expense levels decreasing by
10%, with no corresponding decrease in
policy charges 553 476 (3)
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 534 456 (5)
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 531 453 (5)
For value of new business, acquisition
expenses other than commission and
commission related expenses
increasing by 10%, with no
corresponding increase in policy
charges n/a n/a (8)
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a (4)
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between hedgeable and
non-hedgeable risks for covered business 535 458 (5)
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence level which is
targeted by an internal
economic capital model 525 447 (6)
Wealth Management
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 1 844 1 468 49
Effect of:
Required capital equal to the minimum
statutory requirement 1 848 1 472 49
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 1 820 1 460 46
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 1 916 1 521 54
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic assumptions
unchanged 1 900 1 524 56
Equity and property market value
decreasing by 10%, with all pre-tax
investment and economic
assumptions unchanged 1 810 1 434 46
50bps contraction on corporate bond
spreads 1 844 1 468 49
25% multiplicative increase in equity
and property implied volatilities 1 844 1 468 49
25% multiplicative increase in swaption
implied volatilities 1 844 1 468 49
Voluntary discontinuance rates
decreasing by 10% 1 932 1 556 64
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges 1 906 1 530 59
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in
policy charges 1 889 1 513 57
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 1 844 1 468 49
For value of new business, acquisition
expenses other than commission and
commission related expenses
increasing by 10%, with no
corresponding increase in
policy charges n/a n/a 47
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a 54
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 1 853 1 477 51
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model 1 826 1 450 48
US Life
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions (318) (816) 14
Effect of:
Required capital equal to the minimum
statutory requirement (315) (813) 14
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately (575) (1 073) 20
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and
discount rates changing commensurately (67) (565) 3
Recognising the present value of an
additional 10bps of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, with
credited rates and discount rates
changing commensurately (271) (769) 15
Recognising the present value of an
additional 50% of liquidity spreads
assumed on corporate bonds over the
lifetime of the liabilities, with
credited rates and discount rates
changing commensurately* (90) (588) 20
Equity and property market value
increasing by 10%, with all pre-tax
investment and
economic assumptions unchanged (318) (816) 14
Equity and property market value
decreasing by 10%, with all pre-tax
investment and
economic assumptions unchanged (318) (816) 14
50bps contraction on corporate bond
spreads (12) (510) 14
25% multiplicative increase in swaption
implied volatilities (420) (918) 8
Voluntary discontinuance rates
decreasing by 10% (290) (788) 16
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges (302) (800) 14
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in
policy charges (302) (800) 15
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges (342) (840) 14
For value of new business, acquisition
expenses other than commission and
commission
related expenses increasing by 10%,
with no corresponding increase in
policy charges n/a n/a 12
Value of new business calculated on
economic assumptions at the end of
reporting period n/a n/a (4)
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business (269) (767) 16
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model (338) (836) 13
* At 31 December 2009 the size of the base liquidity premium adjustment for US
Life business of 100bps is greater than the base liquidity premium adjustment
for OMSA`s Retail Affluent Immediate Annuity business of 50bps. Therefore in
addition to the 10bps liquidity spread sensitivity, that is also shown for
Emerging Markets, a sensitivity was calculated to illustrate the impact of an
additional 50% of liquidity spreads for US Life business.
Bermuda
GBPm
Value of
in-force Value of new
At 31 December 2009 MCEV business business
Central assumptions 198 (165) -
Effect of:
Required capital equal to the minimum
statutory requirement 202 (163) -
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 272 (171) -
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 130 (158) -
Equity and property market value
increasing by 10%, with all pre-tax
investment and economic
ssumptions unchanged 322 (143) -
Equity and property market value
decreasing by 10%, with all pre-tax
investment and
economic assumptions unchanged 72 (188) -
50bps contraction on corporate bond
spreads 210 (153) -
25% multiplicative increase in equity
and property implied volatilities 123 (164) -
25% multiplicative increase in swaption
implied volatilities 196 (167) -
Voluntary discontinuance rates
decreasing by 10% 170 (97) -
Maintenance expense levels decreasing by
10%, with no corresponding decrease in
policy charges 203 (159) -
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy charges 199 (163) -
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 198 (165) -
Residual non-hedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and non-hedgeable risks for
covered business 235 (128) -
Economic capital for residual
non-hedgeable risks calculated assuming
a 99.93% confidence
level which is targeted by an internal
economic capital model 183 (179) -
GBPm
Total covered business
Value of
in-force Value of new
At 31 December 2008 MCEV business business
Central assumptions 4 183 1 800 104
Effect of: 4 182 1 836 108
Required capital equal to the minimum
statutory requirement
Increasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 4 185 1 810 121
Decreasing all pre-tax investment and
economic assumptions by 1%, with
credited rates and discount rates
changing commensurately 4 134 1 745 58
Equity and property market value
increasing by 10%, with all pretax
investment and economic assumptions
unchanged 4 421 2 000 n/a
Equity and property market value
decreasing by 10%, with all pretax
investment and economic
assumptions unchanged 3 953 1 610 n/a
10bps contraction on corporate bond
spreads 4 249 1 864 n/a
25% multiplicative increase in equity
and property implied volatilities 5 466 3 924 171
25% multiplicative increase in swaption
implied volatilities 3 755 1 373 84
Voluntary discontinuance rates
decreasing by 10% 4 429 2 047 140
Maintenance expense levels decreasing
by 10%, with no corresponding decrease
in policy charges 4 379 1 997 122
Mortality and morbidity assumptions for
assurances decreasing by 5%, with no
corresponding decrease in policy
charges 4 267 1 885 115
Mortality assumption for annuities
decreasing by 5%, with no corresponding
increase in policy charges 4 150 1 768 104
For value of new business, acquisition
expenses other than commission and
commission related expenses
increasing by 10%, with no
corresponding increase in
policy charges n/a n/a 81
Residual nonhedgeable risk capital
reduced to incorporate diversification
benefits between
hedgeable and nonhedgeable risks for
covered business 4 315 1 933 123
Economic capital for residual
nonhedgeable risks calculated assuming
a 99.93% confidence level which is
targeted by an internal
economic capital model 4 095 1 713 96
Shareholder information
Listings and shares in issue
The Company`s shares are listed on the London, Malawi, Namibian and Zimbabwe
Stock Exchanges and on the JSE Limited (JSE). The primary listing is on the
London Stock Exchange and the other listings are all secondary listings. The
Company`s secondary listing on the Stockholm Stock Exchange ended on 7
September 2007, but the Company`s shares may still be traded on the Xternal
list of the Nordic Exchange in Stockholm. The ISIN number of the Company`s
shares is GB0007389926.
Websites
Further information on the Company can be found on the following websites:
www.oldmutual.com
www.oldmutual.co.za
Date: 11/03/2010 09:18:09 Produced by the JSE SENS Department.
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