20th Jun 2005 07:01
Old Mutual PLC20 June 2005 Old Mutual plc Presentation to investors and analysts on European Embedded Value Old Mutual plc ("the Group") is today briefing analysts and investors on thekey impacts resulting from its adoption of the European Embedded Value ('EEV')principles for the enhancement of embedded value reporting and disclosure. In summary, the overall adjusted embedded value of the Group has increasedmarginally as at 31 December 2004. The adjusted net worth increases by GBP141million, in respect of the non-life businesses, reflecting changes arising fromthe adoption of IFRS. The Value of in-force business decreases byGBP116 million reflecting the application of the EEV principles, in respect ofthe life businesses. These changes equate to a net increase of GBP25 millionor 0.5% in the embedded value of the group as at 31 December 2004. The briefingthis afternoon focuses on these changes with particular emphasis on the Group'sapproach to the allowance for risk - a key requirement within the EEVprinciples. The briefing will take the form of a telephone dial-in call starting at 3pm UKtime (4pm SA time, 10am Eastern US time). The slide presentation to be used onthe call will be available to download on the website http://www.oldmutual.comfrom 12pm UK time on Monday.The call details are as follows: SA: Toll-free 0800 994 090UK: Toll-free 0800 953 1444US: Toll-free 1866 220 1452 A copy of the restatement of embedded value supplementary information for theyear ended 31 December 2004, for the six months ended 30 June 2004 and for theyear ended 31 December 2003 is attached. A recording will be available for 14 days following the analyst dial-in on the20th. The details are as follows: Encore Replay Access Number: 6992561 #, UKDial In Number: 0845 245 5205, Std International Number +44 (0) 1452 55 00 00. 20 June 2005 ENQUIRIES:Old Mutual plc UKInvestor Relations:Malcolm Bell + 44 (0) 20 7002 7166 Media Relations:Miranda Bellord + 44 (0) 20 7002 7133 Old Mutual plc SAInvestor Relations:Deward Serfontein +27 (0) 21 509 8709 Media Relations:Nad Pillay +27 (0) 21 504 8026 For further information about Old Mutual plc visit www.oldmutual.com Old Mutual plc RESTATEMENT OF EMBEDDED VALUE SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED 31DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 UNDER THE EUROPEAN EMBEDDEDVALUE PRINCIPLES ("EEV") 20 JUNE 2005 EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THETWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 INDEX 1. INTRODUCTION ...........................................................2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS...........................................................3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE .................4. COMPONENTS OF GROUP EMBEDDED VALUE ..................................5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE ADJUSTED EMBEDDED VALUE ............................................6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS ................7. METHODOLOGY..........................................................8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS ..................9. VALUE OF NEW BUSINESS (after tax) ..................................10. PRODUCT ANALYSIS OF NEW COVERED BUSINESS PREMIUMS ..................11. ASSUMPTIONS ........................................................12. ALTERNATIVE ASSUMPTIONS .............................................13. AUDITORS' REPORT..................................................... EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION RESTATEMENTS FOR THETWELVE MONTHS ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 1. INTRODUCTION The European Embedded Value (EEV) Principles were published in May 2004 by theCFO Forum, a group representing the Chief Financial Officers of major Europeaninsurers. The EEV Principles provide a framework intended to improvecomparability and transparency in embedded value reporting across Europe. OldMutual plc has decided to adopt the EEV Principles in respect of its financialyear ending 31 December 2005 and to re-state financial information for the fullyear 2004 and the six months to 30 June 2004. The restatements are dealt within this document. The restatements additionally detail sensitivities of theembedded value of the covered business to several key factors. The Achieved Profits basis of reporting previously adopted by Old Mutualalready complied with the majority of the EEV Principles. A key requirement ofthe EEV Principles, and the major driver of changes, was the inclusion of anappropriate allowance for the aggregate risk in the covered business (i.e. thelong-term life business in the primary financial statements, which includes thehealthcare business). Risk is allowed for through the level and cost of required capital, explicittime-value (stochastic) reserves to cover the cost of financial options andguarantees and the risk discount rate. The level of required capital for the covered business reflects the level ofcapital considered by the Directors to be appropriate to manage the businessallowing for local or group statutory requirements, capital allocated in termsof our internal capital management and the level of capital required by ratingagencies in respect of our North American business in order to maintain ourdesired credit rating. At 31 December 2004, the levels of required capital wereequivalent to 157% and 282% of the minimum local statutory requirements forAfrica and North America respectively. Allowance has been made for the cost (intrinsic value) of financial options andguarantees to policyholders in the local statutory reserves according to localrequirements. In South Africa an investment guarantee reserve on a stochasticbasis is included in the local statutory reserves. A deduction from the valueof the in-force business has been made to allow for the time-value (stochastic)cost of policyholder financial options and guarantees, to the extent that thisis not already included in the statutory reserves. At 31 December 2004 thisdeduction amounted to GBP74m. Having determined the level and cost of required capital and the shareholders'cost of financial options and guarantees, the risk discount rate is the leverto ensure that appropriate allowance is made for all the risks in the business.Old Mutual, advised by the actuarial consultants Tillinghast, decided to adopta bottom-up market consistent approach for setting its risk discount rates.Under a market consistent valuation, each cash flow is valued on a basisconsistent with the way the market values such cash flows. Thus, risk-free cashflows are discounted at a risk-free rate and equity cash-flows at an equityrate. Allowance is made for non-market risks in the best-estimate assumptionsand frictional cost of capital. Separate risk discount rates have beencalculated for each of the geographic life businesses. The risk margins for theAfrican and North American covered businesses are 2.3% p.a., and 3.2% p.a.respectively. The EEV Principles require best-estimate assumptions, consistency betweenassumptions and active review. The outcome of a review of the economicassumptions was to increase the gross of tax equity risk premium in SouthAfrica from 2% p.a. to 3.5% p.a. to better recognise the level of historicalequity risk premiums and the future growth prospects of the economy there.Following a review of expense assumptions in our North American business, ahigher allocation has been made to maintenance expenses. The expenseassumptions in respect of our South African business now also include an annualallowance for one-off project costs. GBP6.6m of our unallocated head-officeexpenses have been allocated to the covered business and included in the valueof in-force calculations for South Africa and North America. To clarify terminology, the embedded value of the covered business is the sumof the shareholders' net worth in respect of the covered business, and thevalue of the in-force covered business. The group embedded value includes thevalue of all other business at the book value detailed in the primary financialstatements, on an IFRS basis. The adjusted embedded value, a measure used bymanagement to assess the shareholders' interest in the value of the group,includes the group's listed banking and general insurance subsidiaries atmarket value as well as the value of own shares held in policyholders' funds. A comparison of the adjusted embedded value on an achieved profits basis withthat on an EEV basis and a table detailing the impact of the EEV Principles andIFRS on the adjusted embedded value are set out below. The overall impact on adjusted embedded value at 31 December 2004 is a 0.5%increase from 139.1p to 139.7p. The value of the in-force business, which isaffected by the allowance for risk and inclusion of a proportion of unallocatedhead-office expenses, reduces by 7%. The adjusted net worth increases by 4%, asa result of the impact of the adoption of IFRS on our non-life businesses.The changes that have principally caused this increase are the change todividend recognition and the change in goodwill amortisation in respect of theasset management businesses. The adjusted operating profit for 2004 has increased by 3% (2% reduction, inrespect of the covered business), with the return on adjusted embedded value(ROEV) increasing from 19.4% to 19.9%. The most significant items affecting theoperating profit of the covered business resulted from the effect of theincrease of the equity risk premium on the expected return on capital in SouthAfrica, and the lower value of new business in North America. A reconciliation of the value of new business and new business margins showingthe impact of moving from the achieved profits basis to the EEV basis is alsodetailed below. The total value of new business has reduced by 15%, with thenew business margin on an APE basis reducing from 23% to 18%. The mostsignificant factor impacting the value of new business is the allowance forrisk. 1. INTRODUCTION continued Adjusted embedded value on both the achieved profits and EEV basis GBPm At 31 December 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,525 2,911Equity shareholders' funds 3,245 3,264Statutory solvency adjustments:North America (716) (577)United Kingdom (19) (7)Africa - 216South Africa discounting CGT adjustment 15 15 Value of in-force business 1,592 1,476Value of in-force business before items 1,871 1,918listed belowCost of capital (279) (368)Additional cost of financial options and - (74)guarantees Minority interest in value of in-force (2) (2)business Achieved profits equity shareholders' funds/ 4,115 4,385EEV Group embedded value Pro-forma adjustment to bring Groupinvestments to market valueAchieved profits / EEV equity shareholders' 4,115 4,385fundsAdjustment to bring listed subsidiaries to 876 631market valueAdjustment to market value of own shares 368 368held in policyholders' fundsAdjusted embedded value 5,359 5,384 penceAdjusted embedded value per share 139.1 139.7 Number of shares (millions) 3,854 3,854 At 30 June 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,294 2,573Equity shareholders' funds 2,741 2,796Statutory solvency adjustments:North America (433) (370)United Kingdom (18) (13)Africa - 156South Africa discounting CGT adjustment 4 4 Value of in-force business 1,288 1,231Value of in-force business before items 1,466 1,482listed belowCost of capital (178) (185)Additional cost of financial options and - (66)guarantees Minority interest in value of in-force (2) (2)business Achieved profits equity shareholders' funds/ 3,580 3,802EEV Group embedded value Pro-forma adjustment to bring Groupinvestments to market valueAchieved profits / EEV equity shareholders' 3,580 3,802fundsAdjustment to bring listed subsidiaries to 488 272market valueAdjustment to market value of own shares 312 312held in policyholders' fundsAdjusted embedded value 4,380 4,386 penceAdjusted embedded value per share 113.8 114.0 Number of shares (millions) 3,849 3,849 At 1 January 2004 Achieved EEV Profits Shareholders' adjusted net worth 2,178 2,409Equity shareholders' funds 2,754 2,670Statutory solvency adjustments:North America (566) (408)United Kingdom (17) (9)Africa - 149South Africa discounting CGT adjustment 7 7 Value of in-force business 1,276 1,234Value of in-force business before items 1,450 1,464listed belowCost of capital (174) (172)Additional cost of financial options and - (58)guarantees Minority interest in value of in-force (2) (2)business Achieved profits equity shareholders' funds/ 3,452 3,641EEV Group embedded value Pro-forma adjustment to bring Groupinvestments to market valueAchieved profits / EEV equity shareholders' 3,452 3,641fundsAdjustment to bring listed subsidiaries to 288 190market valueAdjustment to market value of own shares 275 275held in policyholders' fundsAdjusted embedded value 4,015 4,106 pence Adjusted embedded value per share 104.6 107.0 Number of shares (millions) 3,837 3,837 1. INTRODUCTION continued Impact of EEV Principles on the adjusted embedded value At 31 December 2004 Africa North UK & ROW Total GBPm AmericaValue of in-force lifebusiness (achieved profits) * 1,050 512 28 1,590Impact of changes in theamount of and cost of requiredcapital (113) (49) (3) (165)Additional time-value cost offinancial options andguarantees (49) (25) (74)Impact of change in the riskdiscount rate and economicassumptions 138 24 162Impact of extending thecovered business to includeHealthcare 14 14Impact of reallocation of headoffice and other expenses (35) (18) (53) Value of in-force coveredbusiness (EEV) 1,005 444 25 1,474Adjusted net worth (achievedprofits) 2,525Adjustments in respect oflisted subsidiaries and ownshares ** 1,244IFRS impact on non-lifebusinesses 141Adjusted embedded value (EEV) 5,384 At 30 June 2004 Africa North UK & ROW Total GBPm AmericaValue of in-force lifebusiness (achieved profits) * 846 415 28 1,289Impact of changes in theamount of and cost of requiredcapital (53) (43) (3) (99)Additional time-value cost offinancial options andguarantees (44) (22) (66)Impact of change in the riskdiscount rate and economicassumptions 128 21 149Impact of extending thecovered business to includeHealthcare 9 9Impact of reallocation of headoffice and other expenses (34) (19) (53) Value of in-force coveredbusiness (EEV) 852 352 25 1,229Adjusted net worth (achievedprofits) 2,294Adjustments in respect oflisted subsidiaries and ownshares ** 800IFRS impact on non-lifebusinesses 63Adjusted embedded value (EEV) 4,386 At 1 January 2004 Africa North UK & ROW Total GBPm AmericaValue of in-force lifebusiness (achieved profits) * 853 393 28 1,274Impact of changes in theamount of and cost of requiredcapital (66) (34) (3) (103)Additional time-value cost offinancial options andguarantees (40) (18) (58)Impact of change in the riskdiscount rate and economicassumptions 149 18 167Impact of extending thecovered business to includeHealthcare 6 6Impact of reallocation of headoffice and other expenses (35) (19) (54) Value of in-force coveredbusiness (EEV) 867 340 25 1,232Adjusted net worth (achievedprofits) ** 2,178Adjustments in respect oflisted subsidiaries and ownshares ** 563IFRS impact on non-lifebusinesses 133Adjusted embedded value (EEV) 4,106 * Net of minority interests** The adjustments in respect of listed subsidiaries and own shares comprisethe Achieved Profits market value uplift in respect of the Group's listedBanking and General insurance subsidiaries and the market value of own sharesheld in policyholders' funds. 1. INTRODUCTION continued Impact of EEV Principles on the adjusted operating profit before tax in respectof the covered business Year to 31 December 2004 Africa North UK & Total America ROW GBPm Adjusted operating profit (achieved 640 104 5 749profits)Impact on:Value of new business (3) (24) - (27)Experience variances - - - -Operating assumption changes 16 - 16Other (1) (3) (1) (5)Adjusted operating profit (EEV) 652 77 4 733 Six months to 30 June 2004 Africa North UK & Total America ROW GBPm Adjusted operating profit (achieved 257 69 0 326profits)Impact on:Value of new business 3 (13) - (10)Experience variances 18 - - 18Operating assumption changes - - - -Other 3 (3) - 0Adjusted operating profit (EEV) 281 53 0 334 Impact of EEV Principles on the value of new business after tax Year to 31 December 2004 Africa North UK & Total America ROW GBPm Value of new business after tax 66 62 (1) 127(achieved profits)Impact of change in the risk discount 3 4 - 7rate and economic assumptionsImpact of changes in the cost of (7) (15) - (22)required capitalAdditional time-value reserves for (1) (7) - (8)policyholder options and guaranteesImpact of extending the covered 4 - - 4business to include HealthcareExpenses (1) 1 - Value of new business after tax (EEV) 64 45 (1) 108 New business APE (achieved profits) 258 274 14 546Add: Healthcare 41 - - 41New business APE (EEV) 299 274 14 587 Present value of new business 1,910 2,433 127 4,470premiums (EEV) New business margins after tax %APE Margin (achieved profits) 26% 23% (7%) 23%APE Margin (EEV) 21% 16% (7%) 18%PVNBP Margin (EEV) 3.4% 1.8% (0.8%) 2.4% Six months to 30 June 2004 Africa North UK & Total America ROW GBPm Value of new business after tax 24 30 (1) 53(achieved profits)Impact of change in the risk discount 2 2 - 4rate and economic assumptionsImpact of changes in the cost of (2) (9) - (11)required capitalAdditional time-value reserves for (3) - (3)policyholder options and guaranteesImpact of extending the covered 3 - - 3business to include HealthcareExpenses (1) 1 - Value of new business after tax (EEV) 26 21 (1) 46 New business APE (achieved profits) 117 138 6 261Add: Healthcare 23 - - 23New business APE (EEV) 140 138 6 284 Present value of new business 863 1,249 55 2,167premiums (EEV) New business margins after tax %APE Margin (achieved profits) 20% 22% (17%) 20%APE Margin (EEV) 19% 15% (17%) 16%PVNBP Margin (EEV) 3.0% 1.7% (1.8%) 2.1% 2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS Year to 31 Six months to December 2004 30 June 2004 GBPm GBPmAfricaCovered business 652 281Asset management 54 22Banking 241 54General insurance 101 52 1,048 409North AmericaCovered business 77 53Asset management 87 47 164 100 United Kingdom & Rest of WorldCovered business 4 -Asset management (12) 7Banking - 11 (8) 18 Other shareholders' net expenses (65) (30) Adjusted operating profit* 1,139 497 Goodwill amortisation and impairments (33) (33)(Loss)/profit on disposal of subsidiaries (27) 12Short term fluctuations in investmentreturn (including economicassumption changes)Covered business 189 (118)Other 39 (16) Other covered business changes ** (148) (98)Income from hedging activities that do notqualify for hedge accounting 31 5Investment return adjustment for own sharesheld in policyholders' funds (94) (22)Fines and penalties (49) (49)Operating profit before tax and minorityinterests 1,047 178 Income tax expenses (291) (53) Profit on ordinary activities after tax 756 125 Minority interests - ordinary shares (74) (24)- preferred securities (59) (27) Profit for the financial periodattributable to equity holders 623 74 2. SUMMARY INCOME STATEMENT ON A EUROPEAN EMBEDDED VALUE BASIS continued The adjusted operating profit on an after- tax and minority interests basis isdetermined as follows: Year to 31 Six months to December 2004 30 June 2004 GBPm GBPmAdjusted operating profit * 1,139 497Tax on adjusted operating profit (235) (133) 904 364Minority interests - ordinary shares (94) (36)- preferred securities (59) (27)Adjusted operating profit after tax andminority interests 751 301 Embedded value earnings attributable toequity shareholders Year to 31 Six months to December 2004 30 June 2004 Earnings per share penceAdjusted operating earnings per share * 20.1 8.1Basic earnings per share 18.2 2.2 Adjusted weighted average number of shares- millions 3,738 3,735Weighted average number of shares - millions 3,422 3,419 Year to 31 Six months to December 2004 30 June 2004 GBPm GBPmAdjusted operating profit for the coveredbusiness * 733 334Africa 652 281North America 77 53United Kingdom & Rest of World 4 -Tax on adjusted operating profit for thecovered business 203 101Africa 180 85North America 23 16United Kingdom & Rest of World - -Adjusted operating profit after tax for thecovered business * 530 233Africa 472 196North America 54 37United Kingdom & Rest of World 4 - Reconciliation of tax on adjustedoperating profitTax on adjusted operating profit forthe covered business 203 101Tax on adjusted operating profit forother business 32 32Tax on adjusted operating profit 235 133 *For life assurance and general insurance business, EEV adjusted operatingprofit is based on the expected investment return and includes investmentreturns on own shares held within policyholders' funds. For all businesses,adjusted operating profit excludes impairments, fines and penalties, incomefrom hedging activities that do not qualify for hedge accounting, and(loss)/profit on disposal of subsidiaries. Adjusted operating earnings pershare are similarly based, but are stated after tax and minority interests,with the calculation of the weighted average number of shares including ownshares held in policyholders' funds.** Refer to analysis of covered business embedded value results in Section 8. All segmental analysis within this Summary Consolidated Income Statement hasbeen prepared on a gross of inter- segment transaction basis. 3. RECONCILIATION OF MOVEMENTS IN GROUP EMBEDDED VALUE Year to 31 Six months to December 2004 30 June 2004 GBPm GBPmGroup embedded value at the beginning ofthe year 3,641 3,641Profit for the financial period 623 74Foreign exchange movements 116 171Dividends paid (166) (106)Purchase/Sale of treasury shares 25 (5)Exercise of share options 15 8Fair Value gains/(losses) 64 40Fair Value equity settled share options 3 1Shadow accounting (9) -Cash flow hedge amortisation (4) (2)Aggregate tax effect of items takendirectly to or transferred into equity - (6)Other 77 (14)Net increase in Group embedded value 744 161 Group embedded value at the end of theperiod 4,385 3,802 4. COMPONENTS OF GROUP EMBEDDED VALUE At 31 December At 30 June 2004 2004 GBPm GBPm Shareholders' adjusted net worth 2,911 2,573Equity shareholders' funds 3,264 2,796Adjustment to include African lifesubsidiaries on a statutory 216 156solvency basisAdjustment to include North American lifesubsidiaries on a (577) (370)statutory solvency basisAdjustment to include UK & Rest of World lifesubsidiaries on (7) (13)a statutory solvency basisAdjustment for discounting CGT 15 4 Value of in-force business 1,474 1,229Value of in-force business before itemslisted below 1,918 1,482Additional time-value reserves for financialoptions and (74) (66)guaranteesCost of required capital (368) (185)Minority interest in value of in-forcebusiness (2) (2) Group embedded value 4,385 3,802 Pro-forma adjustments to bring Groupinvestments to market valueGroup embedded value 4,385 3,802Adjustment to bring listed subsidiaries tomarket value 631 272Adjustment for market value of own sharesheld in policyholders' 368 312fundsAdjusted embedded value 5,384 4,386 p pAdjusted embedded value per share 139.7 114.0Return on adjusted embedded value (ROEV) %p.a. 19.9% 16.2% Number of shares in issue at the end of theperiod including own sharesheld in policyholders' funds - millions 3,854 3,849 The ROEV is calculated as the adjusted operating profit after tax andminorities of GBP751m (GBP301m) together with an expected equity return on thepro-forma adjustment of GBP62m (GBP28m)divided by the opening adjusted embeddedvalue increased/(reduced) by the weighted value of any capitalraised/(dividends paid). 5. RECONCILIATION OF EMBEDDED VALUE OF THE COVERED BUSINESS WITH THE ADJUSTED EMBEDDED VALUE At 31 December 2004 At 30 June 2004 GBPm GBPm Embedded value of the CoveredBusiness 3,555 2,944Adjusted net worth 2,081 1,715Value of in-force business * 1,474 1,229 Adjusted Net Worth Asset ManagementBusinesses 990 969Africa 101 132North America 889 837United Kingdom & Rest of World - - Market value Banking 1,442 1,102Africa 1,442 1,102United Kingdom & Rest of World - - Market value General InsuranceAfrica 486 405 Net other businesses 95 81 Preferred securities (385) (405)Debt (799) (710)Rand denominated (60) (59)USD denominated (687) (651)GBP denominated (52) - Adjusted embedded value 5,384 4,386 * Net of minority interests. The shareholders' adjusted net worth includes goodwill relating to theNorth American subsidiaries of GBP59 million (June 2004: GBP62 million). 6. COMPONENTS OF EMBEDDED VALUE OF THE COVERED BUSINESS At 31 December 2004 At 30 June 2004 GBPm GBPmEmbedded value of the coveredbusiness 3,555 2,944Adjusted net worth 2,081 1,715Value of in-force business 1,474 1,229 AfricaAdjusted net worth 1,537 1,224Required capital (equivalent to157% of Statutory 1,595 1,480minimum capital at 31 December 2004)Free surplus (58) (256) Value of in-force business 1,005 852Value of in-force business beforeitems listed below 1,341 1,011Additional time-value reserves forfinancial options and (49) (44)guarantees *Cost of required capital (287) (115) North AmericaAdjusted net worth 515 468Required capital (equivalent to282% of Statutory 451 406minimum capital at 31 December 2004)Free surplus 64 62 Value of in-force business 444 352Value of in-force business beforeitems listed below 547 441Additional time-value reserves forfinancial options and (25) (22)guaranteesCost of required capital (78) (67) United Kingdom and Rest of WorldAdjusted net worth 29 23Required capital 10 10Free surplus 19 13 Value of in-force business 25 25Value of in-force business beforeitems listed below 28 28Additional time-value reserves forfinancial options and - -guaranteesCost of required capital (3) (3) * These time-value reserves in respect of financial options and guarantees arein addition to those already held within the policyholder liabilities. The required capital at 1 January 2004 in respect of the African, NorthAmerican and UK & ROW covered business was GBP1,608m (equivalent to 157% of theStatutory minimum capital),GBP391m (equivalent to 256% of the Statutory minimumcapital) and GBP10m respectively. 7. METHODOLOGY Basis of preparation This supplementary information has been prepared in accordance with theEuropean Embedded Value (EEV) Principles issued in May 2004 by the EuropeanChief Financial Officers' Forum. The Group has replaced the Achieved Profitsbasis with the EEV basis for the covered business, and figures for 31 December2004 and 30 June 2004 have been restated accordingly. Covered business is currently defined as the long-term business in the primaryfinancial statements. This business covers life assurance, long-term healthcareand accident insurance, savings, pensions and annuity business written by thelife assurance subsidiaries. The results of Group companies providingadministration and distribution services have been included to the extent thatthey relate to the covered business. The results do not include servicesprovided by Group investment management companies. Unallocated Group holdingcompany expenses have been included to the extent that they relate to thecovered business. The Group has prepared the consolidated EEV supplementary information at 31December 2004, in accordance with the EEV Principles ("the preliminarysupplementary information") as set out on pages 1 to 29 to establish the EEVfinancial position and results of operations of the Group necessary to providethe comparative supplementary information expected to be included in theGroup's EEV supplementary information for the year to 31 December 2005. Thepreliminary supplementary information should be read in conjunction with theGroup's preliminary IFRS information contained within its press release dated 3May 2005. The preliminary IFRS financial information is based on the UK GAAP financialstatements approved by the Board on 28 February 2005, and adjusted to complywith IFRS. In accordance with IFRS 1 there have been no adjustments to theestimates made at the time of the preparation of the UK GAAP financialstatements. The Board acknowledges its responsibility for the preparation of thepreliminary supplementary information which has been prepared in accordancewith the EEV Principles using the approaches expected to be adopted when theBoard prepares the Group's first set of EEV supplementary information for theyear to 31 December 2005. The Board delegated approval of the preliminarysupplementary information to its Actuarial Review Committee, which approved thepreliminary supplementary information on 17 June 2005. The preliminary supplementary information may require adjustment before itsinclusion as comparative information in the EEV supplementary information inthe Group's EEV supplementary information for the year to 31 December 2005.This is because of the continuing work of the IASB and possible amendments tothe interpretative guidance and the Group's accounting policies. Any suchchanges or adjustments would affect only the non-covered business, as thetreatment of covered business is governed by the EEV Principles. The treatment within this supplementary information of all business other thanthe covered business is unchanged from the primary financial statements on anIFRS basis. Under the EEV methodology, profit is recognised as it is earned over the lifeof products defined within the covered business. The embedded value of the covered business is the sum of the shareholders' networth in respect of the covered business, and the value of the in-force coveredbusiness. The group embedded value includes the value of all other business atthe book value detailed in the primary financial statements on an IFRS basis.The adjusted embedded value, a measure used by management to assess theshareholders' interest in the value of the Group, includes the Group's listedbanking and general insurance subsidiaries at market value as well as the valueof own shares held in policyholders' funds. The net worth of the covered business is the market value of shareholders'assets held in respect of the covered business, and consists of the requiredcapital and free surplus. The level of required capital of the covered businessreflects the level of capital considered by the Directors to be appropriate tomanage the business allowing for minimum local or Group statutory requirements(or equivalent where there is no local requirement), our internal assessment ofthe market, insurance and operational risk inherent in the underlying productsand the level of capital required by rating agencies in respect of our NorthAmerican business in order to maintain the desired credit rating.The level of required capital is on average equivalent to 157%, and 282% of theminimum local statutory requirements in Africa and North America respectivelyat 31 December 2004. The free surplus comprises the market value of assetsallocated to the covered business in excess of the required capital. Therequired capital in respect of the South African covered business is partiallycovered by the market value of the Group's investments in Banking and GeneralInsurance in South Africa. On consolidation these investments are shownseparately. The value of in-force covered business is the present value at the appropriaterisk discount rate (which incorporates a risk margin) of the statutorydistributable profits to shareholders projected to arise from the in-forcecovered business on a best-estimate basis, less a deduction for the cost ofholding the required level of capital. Statutory distributable profit arises from the difference between amountscharged to policyholders for guarantees, expenses and insurance and the actualexperience of these items, together with the investment return earned onshareholders' assets. Allowance has been made for the cost (intrinsic value) of financial options andguarantees to policyholders in the local statutory reserves according to localrequirements. In South Africa an investment guarantee reserve on a stochasticbasis is included in the local statutory reserves. A deduction from the valueof in-force business has been made to allow for the impact of futurevariability of investment returns on the cost of policyholder financial optionsand guarantees (time- value) to the extent that it is not already included inthe statutory reserves. This time value has been determined using stochasticmodelling techniques and represents the difference between the average value ofshareholder cash flows under many generated economic scenarios and thedeterministic shareholder value under the best-estimate assumptions. In thegenerated economic scenarios allowance is made, where appropriate, for theeffect of management and or policyholder actions in different circumstances. The risk margin in each geography above the risk-free rates for the African andNorth American life covered businesses were 2.3%p.a. and 3.2%p.a. respectively.The Directors believe that the embedded value of the covered business isbroadly market-consistent. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS (after tax) Year to 31 December 2004 GBPmTotal covered business Adjusted Value of Total net worth in-force Embedded value of the covered business 1,832 1,232 3,064at the beginning of the year New business contribution (103) 211 108Expected return on existing business - - 148 148return on VIFExpected return on existing business - 194 (194) -transfer to net worthExperience variances 13 35 48Operating assumption changes 15 48 63Expected return on adjusted net worth 163 - 163Adjusted operating profit after tax 282 248 530 Investment return variances on value of 30 25 55in-forceInvestment return variances on adjusted 72 - 72net worthEconomic assumption changes - 51 51Effect of changes in and cost of required - (143) (143)capitalProfit after tax 384 181 565 Exchange rate movements 104 61 165Capital injected to covered business 164 - 164Amounts released from covered business (122) - (122)Transfer from covered business to other (281) - (281)segments *Embedded value of the covered business 2,081 1,474 3,555at the end of the period Six months to 30 June 2004 GBPmTotal covered business Adjusted Value of Total net worth in-force Embedded value of the covered business 1,832 1,232 3,064at the beginning of the year New business contribution (47) 93 46Expected return on existing business - - 73 73return on VIFExpected return on existing business - 126 (126) -transfer to net worthExperience variances 25 14 39Operating assumption changes - (6) (6)Expected return on adjusted net worth 81 - 81Adjusted operating profit after tax 185 48 233 Investment return variances on value of 3 (28) (25)in-forceInvestment return variances on adjusted (66) - (66)net worthEconomic assumption changes - (61) (61)Effect of changes in and cost of required - - -capitalProfit after tax 122 (41) 81 Exchange rate movements 53 38 91Capital injected to covered business 9 - 9Amounts released from covered business (30) - (30)Transfer from covered business to other (271) - (271)segments *Embedded value of the covered business 1,715 1,229 2,944at the end of the period * The transfer from covered business to other segments includes the purchase ofadditional shares in Nedbank Group Limited and Mutual & Federal InsuranceCompany Limited, as well as head office expenses. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULT (after tax) continued Year to 31 December 2004 GBPm Adjusted Value of in-forceAfrica covered business net worth Individual Group Total Embedded value of thecoveredbusiness at the beginningof the 1,355 512 355 2,222year New business contribution (16) 66 14 64Expected return on existingbusiness 68 50 118- return on VIFExpected return on existingbusiness 147 (102) (45) -- transfer to adjusted networthExperience variances 75 9 (19) 65Operating assumption changes 10 70 (1) 79Expected return on adjustednet 146 - - 146worthAdjusted operating profitafter tax 362 111 (1) 472 Investment return varianceson value 6 16 13 35of in-forceInvestment return varianceson 78 - - 78adjusted net worthEconomic assumption changes - 41 10 51Effect of changes in andcost of - (63) (80) (143)required capitalProfit after tax 446 105 (58) 493 Exchange rate movements 140 59 32 231Capital injected to coveredbusiness - - - -Amounts released fromcovered (122) - - (122)businessTransfer from coveredbusiness to (282) - - (282)other segments *Embedded value of thecovered 1,537 676 329 2,542business at the end of the period Six months to 30 June 2004 GBPm Adjusted Value of in-forceAfrica covered business net worth Individual Group Total Embedded value of thecoveredbusiness at the beginningof the 1,355 512 355 2,222year New business contribution (8) 26 8 26Expected return on existingbusiness - 32 24 56- return on VIFExpected return on existingbusiness 70 (49) (21) -- transfer to adjusted networthExperience variances 28 1 11 40Operating assumption changes - 1 - 1Expected return on adjustednet 73 - - 73worthAdjusted operating profitafter tax 163 11 22 196 Investment return varianceson value 3 (8) (27) (32)of in-forceInvestment return varianceson (56) - - (56)adjusted net worthEconomic assumption changes - (35) (22) (57)Effect of changes in andcost of - - - -required capitalProfit after tax 110 (32) (27) 51 Exchange rate movements 61 26 18 105Capital injected to coveredbusiness - - - - Amounts released fromcovered (30) - - (30)businessTransfer from coveredbusiness to (272) - - (272)other segments *Embedded value of thecovered 1,224 506 346 2,076business at the end of the period * The transfer from covered business to other segments includes the purchase ofadditional shares in Nedbank Group Limited and Mutual & Federal InsuranceCompany Limited, as well as head office expenses. The effect of changes in and cost of required capital for Africa reflectschanges in the amount of required capital required and in the mix of assetsbacking the capital. The African operating assumption changes include (a) an increase in the valueof in-force business resulting from an increase in discretionary mortalitymargins in the Financial Soundness Valuation (FSV), which arose as a result ofa reduction in Individual Business mortality assumptions, reflecting positiveexperience variances, (b) the inclusion of sources of profit not previouslyvalued and, (c) other changes to valuation methodology and assumptions. 8. ANALYSIS OF COVERED BUSINESS EMBEDDED VALUE RESULTS (after tax) continued Year to 31 December 2004 GBPmNorth America covered business Adjusted Value of Total net worth in-force Embedded value of the covered 454 340 794business at the beginning of the year New business contribution (86) 131 45Expected return on existing business - 28 28- return on VIFExpected return on existing business 44 (44) -- transfer to adjusted net worthExperience variances (58) 43 (15)Operating assumption changes - (20) (20)Expected return on adjusted net 16 - 16worthAdjusted operating profit after tax (84) 138 54 Investment return variances on value of 22 (4) 18in-forceInvestment return variances on (6) - (6)adjusted net worthEconomic assumption changes - - -Profit after tax (68) 134 66 Exchange rate movements (36) (30) (66)Capital injected to covered business 164 - 164Transfer from covered business to other 1 - 1segmentsEmbedded value of the covered 515 444 959business at the end of the period Six months to 30 June 2004 GBPmNorth America covered business Adjusted Value of Total net worth in-force Embedded value of the covered 454 340 794business at the beginning of the year New business contribution (39) 60 21Expected return on existing business - 16 16- return on VIFExpected return on existing business 54 (54) -- transfer to adjusted net worthExperience variances (1) - (1)Operating assumption changes - (7) (7)Expected return on adjusted net 8 - 8worthAdjusted operating profit after tax 22 15 37 Investment return variances on value of - 7 7in-forceInvestment return variances on (10) - (10)adjusted net worthEconomic assumption changes - (4) (4)Profit after tax 12 18 30 Exchange rate movements (8) (6) (14)Capital injected to covered business 9 - 9Transfer from covered business to other 1 - 1segmentsEmbedded value of the covered 468 352 820business at the end of the period The segmental results of North America include the operating profit generatedby Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsuranceto the North American life companies, and OMNIA Life (Bermuda) Limited. During2004, all of the deferred annuity business reinsured with OMRe was recapturedRelated Shares:
Old Mutual PLC