oOh!media Annual Report 2008

Plain-text annual report

FOCUSED ON VALUE Annual Report & Accounts 2008 Old Mutual is focused on long-term savings, with valuable asset management and banking assets. Recognising the scale and synergy beneﬁ ts that an aligned structure brings, we apply disciplined controls and governance to all our companies, which are grouped around common business lines. Our key competencies include our skills and experience in long-term savings, our brand and market strength in Sweden and South Africa, and our leading-edge Skandia open-architecture platform. Together, these position us well to respond to the universal savings needs of the markets in which we operate – and to grow with them. Financials 135 Statement of Directors‘ responsibilities 136 Independent auditors’ report 137 Consolidated income statement 138 Reconciliation of adjusted operating proﬁ t to proﬁ t after tax 139 Consolidated balance sheet 140 Consolidated cash ﬂ ow statement 142 Consolidated statement of changes in equity 146 Notes to the consolidated ﬁ nancial statements MCEV 279 Statement of Directors’ responsibilities 280 Independent Auditors’ report 281 Old Mutual Market Consistent Embedded Value Basis supplementary information 284 Notes to the Old Mutual Market Consistent Embedded Value Basis supplementary information Investor information 328 Shareholder information 331 Glossary CONTENTS Overview 01 Highlights 02 Our business at a glance 04 Chairman’s statement 05 Group Chief Executive’s statement Q&A 10 Q&A Risk management 12 Risk management Business review 22 Europe and Latin America 38 Southern Africa 58 North America 72 Asia 76 Group Finance Director’s statement Management 82 Board of Directors 84 Group Executive Committee Corporate responsibility 86 Chairman’s introduction 87 Responsible business principles 88 Customers 90 Employees 93 Suppliers 94 Environment 96 Society Governance 98 Directors’ report on corporate governance and other matters 118 Remuneration report HIGHLIGHTS HIGHLIGHTS 2008 HIGHLIGHTS > > > > i w e v r e v O Solid performance in SA and Europe with challenges in US Life The Group is well capitalised with an FGD surplus of more than £0.7 billion Each of our individual business units has a strong capital surplus – UK: 2.6 times required capital – Nordic: 9.9 times required capital – OMLACSA: 3.8 times required capital – Nedbank: Tier 1 capital at 9.6% – US Life: RBC ratio of 305% in onshore and signiﬁ cant excess capital in offshore Improved business structure, including new long-term savings division Enhanced governance and operational oversight from the centre Net client cash ﬂ ows £bn Adjusted operating earnings per share (IFRS basis) p 2008 1.2 (outﬂ ow) 0,000 2007 23.4 (inﬂ ow) 0,000 2008 2007 12.2 16.9 Funds under management £bn Basic earnings per share (IFRS) p 2008 2007 264.8 278.9 2008 2007 8.6 19.2 Proﬁ t before tax (IFRS) £m Adjusted operating proﬁ t before tax (MCEV basis) £m 2008 2007 595 1,750 2008 2007 978 1,631 Adjusted operating proﬁ t before tax (IFRS basis) £m Adjusted MCEV per share p 2008 2007 999 1,624 2008 2007 117.6 166.3 Page 01 OUR BUSINESS AT A GLANCE Our vision is to become the international long-term savings provider of choice and the premier ﬁ nancial services provider in South Africa. We provide life assurance, asset management, banking and general insurance in our main areas of operation, represented on the map below. * IFRS Adjusted operating proﬁ t (before tax) North America (£270m)* Asset Management Life see page 58 Bermuda Canada USA LATIN AMERICA Chile Colombia Mexico 2008 Group adjusted operating proﬁ t of £999 million** Life Assurance 31% Asset Management 14% Banking 49% General Insurance 6% **Includes -£271m of debt and head ofﬁ ce costs. Page 02 Old Mutual plc Annual Report and Accounts 2008 Useful link: www.oldmutual.com EUROPE Austria Czech Republic Denmark Finland France Germany Hungary Italy Netherlands Norway Poland Spain Sweden Switzerland UK i w e v r e v O Europe and Latin America £266m* Asset Management Banking Life see page 22 southern Africa £1,191m* Asset Management Banking Life General Insurance see page 38 Kenya Malawi Namibia South Africa Swaziland Zimbabwe Asia (£17m)* (ﬁ gure includes Australia) Asset Management Life see page 72 China Hong Kong India Singapore Page 03 CHAIRMAN’S STATEMENT The Board is grateful to all Old Mutual people, who have worked very hard throughout this difﬁ cult year. Christopher Collins Chairman OVERVIEW OF 2008 2008 was a challenging year for Old Mutual. While operations in Europe and our heartland of South Africa were resilient, our US Life onshore business and operations at Old Mutual Bermuda experienced difﬁ culties, particularly in the second half of the year. This led to a disappointing decline in our adjusted operating earnings per share on an IFRS basis, which fell by 28 percent compared to 2007, to 12.2p. Board In September our Group Chief Executive, Jim Sutcliffe, resigned. He was replaced by Julian Roberts, formerly Chief Executive of our European businesses. Jonathan Nicholls, our Group Finance Director, also left us towards the end of the year and was replaced by Philip Broadley, former Finance Director of Prudential plc. Together, they have made a positive start in addressing the challenges that the Group faces. The Board is grateful to all Old Mutual people, who have worked very hard throughout this difﬁ cult year. Dividend The Group’s capital and liquidity positions are being closely monitored. While they are currently satisfactory, we have taken the view, in the light of continuing market volatility and the uncertain economic outlook, that the Company should preserve its capital by not paying dividends during 2009. Although we know this will be Page 04 Old Mutual plc Annual Report and Accounts 2008 disappointing for shareholders, we believe that this is the prudent and correct course for the Company to take at this time of unusual economic stress. Annual General Meeting 2009 This year’s Annual General Meeting (AGM) will be held at our ofﬁ ces in London on Thursday, 7 May 2009. The Notice of AGM is enclosed with this document and includes details of the resolutions to be proposed at the meeting. Future This is my last year as Chairman, as I am planning to step down at the end of December ahead of my seventieth birthday. A process to select my successor, chaired by Rudi Bogni, our Senior Independent Director, is now underway. The Board is determined to do everything in its power during 2009 to establish Old Mutual ﬁ rmly on the road to recovery. Christopher Collins Chairman 4 March 2009 GROUP CHIEF EXECUTIVE’S STATEMENT Julian Roberts Group Chief Executive i w e v r e v O Overall, we delivered a solid set of results with some parts of the Group performing well. The Group and its businesses are well capitalised and our liquidity position remains strong. We have considerably strengthened our risk management and governance from the centre. OVERVIEW 2008 presented major challenges for the Group. The rapid deterioration in global ﬁ nancial markets, most notably in the fourth quarter, resulted in an extremely difﬁ cult operating environment, while we faced a number of speciﬁ c issues in our US Life businesses. Despite these setbacks, we delivered a strong performance across many parts of the Group, especially in the markets where we have signiﬁ cant scale and strong market positions. During the second half of the year, we took major strides to address the issues in our US Life offshore business and, with these largely contained, toward the end of the year we turned our attention to the future and began a full review of the Group’s activities. During that time we welcomed Philip Broadley to Old Mutual as our new Group Finance Director and we are already beneﬁ ting from his experience and skills. The actions following this review are outlined in more detail below. Capital adequacy position The Group’s pro-forma FGD surplus at 31 December 2008 was in excess of £0.7 billion. This is in line with our self-imposed target range which ensures we have sufﬁ cient headroom to cover any capital issues across the Group’s operations. Page 05 GROUP CHIEF EXECUTIVE’S STATEMENT continued Our Nordic and UK businesses are well capitalised with solvency ratios of 9.9 times and 2.6 times the required level respectively. Our European businesses are capital light by their nature and therefore present very little capital risk. In South Africa, we have the strongest capital position and credit rating in the long-term insurance industry, with a surplus in OMLACSA of 3.8 times the required level. Nedbank’s key ratios also demonstrate its capital strength. In the case of US Life, during 2008 we took action to maintain capital in the onshore business at three times its required level. £314 million of cash was injected into the US Life offshore business during 2008. This business now has signiﬁ cant excess capital over its regulatory requirement. We have carried out signiﬁ cant capital stress testing. Historically, the highest global default rates during a recession have averaged 1.6 percent for investment grade (Source: Moody’s). Applying these historical high default rates to our portfolio would generate losses which can be absorbed within our FGD surplus. Actual defaults on our corporate bonds for the year were £85 million resulting in a default rate of approximately 1.3 percent on our corporate bond portfolio. Our FGD surplus would enable us to withstand eight times that rate in a single year. The Group has available cash and facilities of over £600 million as at 31 December 2008. Dividend During 2008 we paid an interim dividend of 2.45p per share. However, in view of the unpredictability of market conditions and continued uncertainty around the performance of ﬁ nancial markets, we believe it is We have carried out a thorough review of the Group’s activities. While we have some valuable businesses with high quality people, there is a fundamental need for change. We will look for opportunities to streamline our portfolio of businesses as market conditions allow and we can create value for shareholders. Page 06 Old Mutual plc Annual Report and Accounts 2008 prudent for us to conserve our capital and retain cash. Accordingly, the Board has determined that in order to conserve cash and capital during the current period of economic stress, no dividends will be paid by the Company during 2009. The Board will consider the position in respect of a ﬁ nal dividend for 2009 at the appropriate time in light of the then prevailing market and economic conditions. Longer term, the Board will look to pay a dividend based on the Group’s capital, cash ﬂ ow and earnings, with a view to maintaining cover of at least two times. Strong sales and earnings growth in South Africa In the markets where our businesses are highly developed and we have strong brands, we delivered excellent growth in both sales and proﬁ t. In South Africa, life and unit trust sales in local currency grew by 14 percent and 33 percent respectively and there was a signiﬁ cant reduction in net client cash outﬂ ows. The boutique model of our South African investment management business has continued to bed down well, with the majority of our boutiques delivering a better investment performance than in 2007. Old Mutual South Africa’s adjusted operating proﬁ t on an IFRS basis was up 14 percent to R8 billion and the return on equity was up nearly four percentage points to 27.8 percent. This is an excellent result given the fall in equity markets and tightened consumer spending, and demonstrates the strength of our diverse product offering and our ability to adapt to an ever-changing market environment. In contrast to the negative forecast GDP in the UK and US, the South African economy is forecast to grow by 1.2 percent in 2009 (Source: South Africa National Treasury) and, while it is facing its own challenges, the South African banking sector remains in good health, with the inter bank lending market continuing to operate efﬁ ciently. Despite an increased level of impairments, Nedbank delivered an adjusted operating proﬁ t on an IFRS basis of R8.8 billion, down just 5 percent on 2007, and a return on equity of 17.7 percent with Tier 1 capital at 9.6 percent. Skandia building market share across Europe Skandia saw positive net client cash ﬂ ows across all its divisions and the drop in funds under management relative to the much larger fall in the equity markets was very pleasing, reﬂ ecting good product innovation and investment performance. In Nordic, strong cash inﬂ ows were driven by a 30 percent increase in life sales to SEK2.6 billion and adjusted operating proﬁ t on an IFRS basis was up 23 percent to SEK1.1 billion. This was largely as a result of the introduction of new products and, in particular, growth in the unit-linked business in Sweden. This was very much against the trend seen in the UK and across the rest of Europe, given the general ﬂ ight from equities which resulted in a signiﬁ cant drop in unit-linked sales. However, across Europe, we increased our market share, which will stand us in good stead when equity markets recover. In the UK, the relative decline in sales was largely due to reduced demand for unit-linked products, especially bonds and single-premium pensions, although Skandia’s market share across the entire pensions market, and especially single-premium personal pensions, remained strong. The core of our business is providing customers with a choice of products which are transparent, ﬂ exible and tailored to their speciﬁ c needs and risk appetite, but which also provide attractive returns. Therefore, unlike many of the UK life insurers, we do not undertake any with-proﬁ ts or bulk annuity business and therefore our capital requirement is much lower. While our sales have been affected by market volatility in the short-term, we believe that Skandia’s open-architecture model is at the forefront of the modern savings and investment market and that this will deliver excellent long-term value. We also launched a re-pricing initiative in order to build our share of the platform market, while increasing the range of investment solutions to create wider customer appeal during this period of market volatility. For example, the Spectrum range of risk-controlled funds launched in April attracted more than £120 million of subscriptions by the year-end and the UK Strategic Best Ideas Fund was the best performing UK fund in the IMA UK All Companies Sector in 2008. Resilient net client cash ﬂ ows in US Asset Management US Asset Management continued to deliver strong long-term investment performance and our diversiﬁ ed asset mix provided resilience in difﬁ cult markets. Fixed income and alternatives make up over half of the total funds under management, which were down 28 percent to $240 billion compared to an overall US market decline of approximately 40 percent. Excluding the cessation of securities-lending at Dwight Asset Management, net client cash ﬂ ows were positive. This is an excellent result at a time when signiﬁ cant net outﬂ ows are being experienced across the industry. However, the equity market decline, especially in the fourth quarter, caused a signiﬁ cant reduction in performance fees, although this was partially offset by a much reduced cost base. Actions to stabilise US Life and return to proﬁ tability Overall, the performance of our US Life businesses were heavily impacted by increased reserves related to certain single-premium immediate annuities, write-downs in relation to deferred acquisition costs and hedge losses related to variable annuity products. Difﬁ cult credit markets resulted in higher impairment losses than in 2007 and market conditions had a major impact on the level of unrealised losses on our ﬁ xed income portfolio, as is the case across the industry. Both oversight and governance have been strengthened considerably and the management team has taken a number of actions in the second half of 2008 aimed at de-risking the business and generating proﬁ table returns. We are in the process of transforming our onshore business into a sustainable operation, based on lower but more proﬁ table sales, from a considerably reduced cost base. We have eliminated unproﬁ table product lines, and are focused on selling less capital-intensive, more customer-centric products through closer relationships with our core distribution partners. We have consolidated a number of locations from which the business operated and reduced headcount. A strong expense discipline has been established along with a more conservative risk culture. In the offshore business more precise fund-mapping has improved our hedging, which was 92 percent effective during the fourth quarter, and we have a much better understanding of sensitivities to further market and currency movements. Whilst sales have fallen dramatically due to the withdrawal of problem products, we are now focused on rebuilding this business through writing sensible, specialist investment products tailored to our international customers’ needs, which will underpin a good recovery in future proﬁ tability. Review of Business Over the last four months, with the help of management consultants, we have conducted a thorough review of every part of our business. Our overriding conclusion is that while we have some valuable businesses with high quality people, there is a fundamental need for change. We have therefore identiﬁ ed ﬁ ve key priority areas. 1. Maintain and strengthen our capital position As outlined above, our capital and liquidity position remains healthy. However, in the current environment, continuing to manage our capital responsibly must be our top priority. 2. Streamline the portfolio over time We recognise that our portfolio of businesses is too broad. We operate in too many geographies and have too many lines of business, a number of which are sub-scale in their respective markets. This makes the Group complex and difﬁ cult to manage on a decentralised basis as we have done in the past. It therefore requires simpliﬁ cation. However, in the current environment, major rationalisation of our portfolio of businesses would be extremely difﬁ cult and, if achievable, would almost certainly destroy value for our shareholders. At this stage, we have therefore concluded that it will take some time to achieve our optimal business structure. That said, we have already taken some actions where it has been sensible to do so, namely: > We have agreed to the sale of our Australian business > We have exited Portugal > We have rationalised our businesses in continental Europe, creating two hubs based in Berlin and Paris for the mass market and afﬂ uent markets respectively i w e v r e v O Page 07 GROUP CHIEF EXECUTIVE’S STATEMENT continued 5. Strengthen governance and risk management In 2008 we started to invest in additional risk resources (people and systems) and, as a result, our risk and governance processes have been signiﬁ cantly strengthened. The next priority is to embed those processes across the Group. One consequence of these initiatives is that we are rolling out a business level risk appetite, which sets the mandatory risk levels each business must adhere to. We have also formed iCRaFT – “integrated Capital, Risk and Financial Transformation”. This programme is essentially aimed at ensuring we become fully compliant with Solvency II, the new regulatory regime being introduced for all European-domiciled insurers. Over and above compliance, our programme aims to implement best practice in the way that we measure and manage risk, capital and ﬁ nancial performance. We then integrate these in the way that we run our businesses, and in the implementation of best practice ﬁ nancial controls. To ensure we manage these various Group initiatives effectively, we have appointed Paul Maddox on secondment from Ernst and Young as Head of Strategic Implementation. Paul will be a member of the Group Executive Committee with responsibility for driving through the change programme. Outlook Many of our businesses have performed well in a very difﬁ cult operating environment. This performance provides us with an excellent base from which to deal with the challenges presented by the current economic climate and the continued ﬁ nancial market volatility. Going forward, I am determined to rigorously drive performance improvement and strengthen governance, while at the same time looking for opportunities to reshape the Group. Julian Roberts Group Chief Executive 4 March 2009 > While we remain committed to our established businesses in India and China, we will scale back signiﬁ cantly our aspirations in the Far East and will therefore close our ofﬁ ce in Hong Kong. We are also moving the governance of our businesses to a more centralised model which we believe will reduce risk and bring better control. We will look for opportunities to make further changes as market conditions allow and we can create value for shareholders. We do not need asset sales in order to raise capital and any streamlining activity will be based on enhancing efﬁ ciency and our strategic focus. 3. Leverage scale in our long-term savings businesses We intend to bring all our long-term savings businesses into a single operating structure. Skandia, OMSA, US Life and Asia Paciﬁ c will report to a single executive, Paul Hanratty, who will relocate to London as Head of Long-Term Savings. We believe that there is a signiﬁ cant amount of value that can be unlocked by these businesses working more closely together. For example: > We can deploy the distinctive technology and capabilities within our South African, UK and Nordic platform businesses more effectively across the Group > We believe there are operational cost efﬁ ciencies that can be achieved > We have product capability that can be used across the business. 4. Drive value creation within, and between our South African businesses We have already created signiﬁ cant value through co-operation between Nedbank and OMSA, delivering synergies in excess of R1 billion in annual pre-tax proﬁ t. We now have a ﬁ rm commitment to all our South African businesses and believe that there is more value that can be achieved through their closer co-operation. Tom Boardman remains a member of my Group Executive Committee and both he and Paul Hanratty will be tasked with delivering greater synergies between Nedbank and OMSA as well as agreeing and delivering on new bancassurance targets. Nedbank, which has several wealth management joint ventures with Old Mutual, may also acquire those joint ventures during the year, in exchange for Old Mutual taking an increased shareholding in Nedbank. Mutual & Federal will focus on increasing proﬁ tability, strengthening the balance sheet and driving greater co-operation with Nedbank and OMSA. Page 08 Old Mutual plc Annual Report and Accounts 2008 A & Q Page 09 Page 09 Philip Broadley Group Finance Director Julian Roberts Group Chief Executive When a complex and diverse group changes tack and begins to redeﬁ ne and simplify itself, it is easy to obscure good intentions with business jargon. In this short Q&A, Julian Roberts, Group Chief Executive, and Philip Broadley, Group Finance Director, clarify some of the strategic decisions. With the announcement of your new priorities and structure, what’s really different? With the focus on long- term savings, how does Nedbank ﬁ t into the Group’s plans? What’s changed most signiﬁ cantly is the formation of a new international division focusing on long-term savings business as our central capability. Of course asset management is very important to us and the new organisational structure makes this clear. We are also measuring success in terms of proﬁ t rather than size. Previously, we had structured around regions and countries, effectively isolating similar businesses in different countries from each other. Now, in identifying and creating the long-term savings structure, we have grouped these homogeneous businesses into a single division under a single head. We believe that this will allow us to leverage and share the capabilities, marketing know-how and people across geographic boundaries and minimise duplication. The operating model has also been revised. To date, the businesses have operated in a federal, decentralised basis, with the centre playing a relatively light role in governance, risk and human resources. That will no longer be the case. Our newly constituted Group Executive Committee reﬂ ects these changes and has the skills and experience to achieve the levels of control required to make this model work. Finally, we are moving to an increasingly streamlined group and will execute on this as and when the market becomes more benign and transactions become economically viable. The particular shape and history of Old Mutual in our heartland, South Africa, makes Nedbank an extremely important element of our comprehensive ﬁ nancial services offering there. Not only are the ﬁ nancial needs of both Old Mutual and Nedbank’s customers comprehensively covered through the products and services of both companies, but the potential for each company to sell to each other’s customer base is enormous. In addition, real annual savings realised through synergies between Mutual and Federal, Nedbank and Old Mutual (South Africa) account for over R1bn. The untapped potential for even further synergies is a prize worth ﬁ ghting for. Tom Boardman sits on the Old Mutual Group Executive Committee precisely because the extraction of this value is too much of a priority not to have the bank represented at the highest levels of the parent company. Nedbank is a very well run business and – within the disciplined and prudent banking environment which is the South African banking regime – has weathered the effects of the global credit crunch well. South Africa this year is predicting a positive rate of GDP growth and the growing middle markets are more and more coming into the banking system. As the needs of this group develop, the broader ﬁ nancial services and products, provided by Nedbank, Old Mutual and Mutual and Federal in a co-ordinated and planned way positions us well to capture a greater share of this market. Page 10 Old Mutual plc Annual Report and Accounts 2008 How do you intend to create value – what’s your investment proposition? inﬂ uence and role of the greater Group are always prominent in this sense of belonging. Incentive structures stress the importance of the Group performance as well as that of local businesses. Being international gives employees the chance to avail themselves of international opportunities across the Group adding to the richness of our diversity and leveraging speciﬁ c talents where we can. We take our Corporate Responsibility very seriously. We believe that personal involvement in causes and issues gives our employees an added sense of purpose and feeling of giving back to the society in which they live. Whether this is building houses for the homeless in South Africa or rowing a boat from Perth to Mauritius in aid of a charitable foundation, Old Mutual encourages and supports its people and their personal and corporate role in society as part of their membership of the Group. What factors inﬂ uenced the ﬁ nal structure of the Group? We are in eye of an unprecedented global ﬁ nancial storm. The choices we make about how we operate and the shape we would like to adopt have been taken in the context of the current market turmoil. One of our priorities is to streamline our portfolio, which means we will have to make tough choices where there are businesses that don’t ﬁ t with our longer-term focus, are subscale with little prospect of achieving critical mass or create a dilution of management focus and create unacceptable risk. But we are not prepared to streamline in an environment where there is little appetite for corporate transactions or when asset sales result in value destruction. So we have to wait until markets stabilise or unusually attractive terms are presented. We will not compromise the creation of shareholder value just for elegant strategic alignment. In the meantime, businesses which may fall into this category continue to be well managed and contribute to the Group. One aspect of creating value will be the building of our core capabilities into markets where we are under- or un-represented. Old Mutual’s brand and reach, and its competencies in the long-term savings arena are highly regarded in South Africa and these can be deployed elsewhere. South Africa itself is a strong and resilient economy and we expect growth there for some time. Africa as a whole is also presenting new opportunities for both banking and long-term savings and there is every reason to believe that Old Mutual can capture a signiﬁ cant share of this. Skandia, also in the long-term savings cluster, has a leading open-architecture platform perfectly suited to the growing swathes of customers and intermediaries requiring ﬂ exibility, transparency, value for money and choice. Skandia is dominant in Sweden and the UK. Our growing presence in selected European countries is encouraging and will develop even further. Value will be created through using the excellent group competencies productively. We are able to use our scale to reduce our unit costs. We are able to deploy our skills developed in one part of the world to bolster capabilities in others. When you buy into the Old Mutual Group you are buying scale, management’s ability to extract value from their own business – and through synergies and co-operation with other businesses. Our incentive structure is designed to encourage this group behaviour. Most companies claim that their people are their most important asset. How important are people in the delivery of your high priority objectives? People are extremely important to Old Mutual. We know no other way of delivering our results. We recognise in particular the contribution that effective teams as well as talented individuals make to Old Mutual. We have built programmes for each and every level of employee to take care of their personal growth and team development as valuable and valued individuals. And while we acknowledge an employee’s ﬁ rst allegiance will always be to his or her local business, the A & Q Page 11 RISK MANAGEMENT The practice of risk management in Old Mutual has improved signiﬁ cantly over the past two years. The risk management team will continue to develop and strengthen oversight of the operating businesses as the Group changes p in the wake of the strategic review. Rosie Harris Group Risk Director, Old Mutual plc, from April 2007 to March 2009 Approach to Risk Management Old Mutual is committed to the objective of increasing shareholder value by operating in a manner consistent with our risk appetite. Risk management is not limited solely to consideration of downside impacts or risk avoidance, but also encompasses taking risk knowingly for competitive advantage. Responsibility for risk management resides at all levels within the Group, from the Board of Directors and Group Chief Executive, to Business Unit Chief Executives through to business managers via a Scheme of Delegated Authority. Rosie Harris, Group Risk Director, left Old Mutual at the end of March 2009. Andrew Birrell has taken up the role of Group Risk Director in addition to his responsibilities as Group Chief Actuary. The primary objective of the Group Risk Director is to facilitate alignment of strategic decisions with risk appetite and to provide the necessary framework and oversight tools to help protect Old Mutual from events that could hinder our objectives. A new role, Head of Governance and Regulatory Compliance, has also been created, which will encompass Rosie Harris’ previous responsibilities for these areas. Susan Crichton, formerly in Skandia International has joined the Group team to take on the role. Both Andrew and Susan are committed to Old Mutual’s enterprise-wide approach to risk management. Our approach is designed so that risk management is not conﬁ ned to the activities of speciﬁ c risk management or specialist departments but incorporated in the day-to-day management of the business. Strengthening Risk Management The issues that emerged in our Old Mutual Bermuda business during 2008 highlighted certain weaknesses in our risk management and business model. Addressing these has been a top priority for the Board and the Group Executive Committee. An independent review of risk management across Old Mutual involving external experts was completed during 2008, and we have implemented a number of initiatives to improve our governance, risk management and internal control processes including implementation of an Enterprise Risk Management programme. These improvements include: > Recruitment of signiﬁ cant additional risk and compliance personnel at Group and Business Unit level > Development and roll-out of a global risk appetite framework > Development of comprehensive and focused risk reporting, including introduction of a risk recording and reporting tool > Implementation of a revised and more comprehensive risk categorisation model > Revision of the Old Mutual policy suite and framework to reﬂ ect increased oversight from Group over Business Units; and > Development of formal standards for internal loss data collection and increased use of Key Risk Indicators. Our priority for 2009 is to embed these enhancements and further strengthen our system of risk management. Page 12 Old Mutual plc Annual Report and Accounts 2008 Risk governance framework Old Mutual Plc Board Group Chief Executive Group Finance Director Group Risk Director Group Audit & Risk Committee Group Executive Committee Group Risk and Capital Committee Group Risk Group Internal Audit Business Unit Chief Executives Business Managers Group Capital Management Committee Sub-committee of the Board Approvals Committee and provides input to Group Risk and Capital Committee Business Unit Audit Committees t n e m e g a n a m k s R i Risk management (1st line of defence) Risk oversight (2nd line of defence) Independent assurance (3rd line of defence) Risk governance The Group’s risk governance framework is based on the three lines of defence model. This model distinguishes between: > functions owning and managing risk > functions overseeing the management of risk; and > functions providing independent assurance. The Board is responsible for setting the Group’s risk appetite and for approving the strategy for managing risk. Risk management > As part of the ﬁ rst line of defence, the Group Chief Executive, supported by the Business Unit Executives, has overall responsibility for the management of risk > Management and staff within each business are responsible for the identiﬁ cation, assessment, management, monitoring and reporting of risks arising within their respective areas. Risk oversight > The second line of defence comprises the Group Risk Director supported by the Group Risk function as well as Business Unit Chief Risk Ofﬁ cers and their risk functions > 2008 saw the creation of the Group Risk and Capital Committee. Its mandate is to support the Group Executive Committee in understanding the exposure and management of risks impacting the Group, having regard to the Group’s risk appetite. The Group Risk and Capital Committee brings together senior executives across the Group functions including Risk, Finance, Actuarial, Capital and Compliance. This Committee is described in further detail in the Directors’ report on corporate governance. Independent assurance > The third line of defence is designed to provide independent assurance on the effectiveness of systems of governance, risk management and internal control in relation to the most signiﬁ cant risks which threaten the achievement of the Group’s business objectives. Group Internal Audit (GIA) plays a key part in the third line of defence and provides assurance to the Group Audit and Risk Committee. GIA is described in further detail in the Directors’ report on corporate governance. Page 13 RISK MANAGEMENT continued RISK CATEGORISATION MODEL Risk Category Deﬁ nition Market risk Credit risk Liquidity risk The risk of loss as a result of adverse changes in the market value of assets and liabilities. The risk of loss as a result of an asset against a counterparty not being repaid at the due and stipulated time. The risk that available liquid assets will be insufﬁ cient to meet changing market conditions, liabilities, funding of asset purchases, or an increase in client demands for cash. Underwriting risk The risk of loss caused by events that result in predetermined exposures being exceeded. Operational risk The risk of loss due to failure of people, process, system and / or external events. Compliance risk The risk that laws, regulations and policies will be breached. Although technically a sub-category of operational risk, compliance risk has been elevated to its own category for reporting purposes due to the focus on and importance of this area. Human Resources risk The risk that the ﬁ rm will not have the human capital to sustain business performance. Business risk The risk that business performance will be below projections as a result of negative variances in new business volumes, margin, lapse experience and expenses. Strategic risk The risk that strategic decisions will adversely affect future sustainable growth. Risk categorisation During 2008, Old Mutual reﬁ ned and implemented an updated risk categorisation model which Business Units have aligned to. Using a common risk language across the Group will enable meaningful comparisons to be made between Business Units and we consider the risk categorisation model a fundamental building block to achieve this. Risk events are categorised as shown in the table above, with more detailed sub-categories used for reporting and analysing. Risk appetite metrics Capital at Risk Earnings at Risk The reduction in Net Asset Value (“capital”) over a one-year forward-looking time horizon that should only be exceeded 1-in-10 years. This category has both a regulatory and economic capital dimension. The 1-in-10 negative deviation from expected (accounting) earnings over a one-year time horizon that should only be exceeded 1-in-10 years. Cashﬂ ow at Risk Operational Risk The reduction in the best estimate of operational cash remitted to plc by Business Units, in a 1-in-10 downside outcome. The negative deviation of Economic Value driven by operational loss events over a one-year forward-looking time horizon that should only be exceeded 1-in-10 years. Page 14 Old Mutual plc Annual Report and Accounts 2008 Risk appetite The risk appetite framework provides a basis for formally reviewing and controlling business activities to ensure that they are aligned to stakeholder expectations and are of an appropriate scale (relative to the risk and reward of the underlying activities). Once fully embedded, the framework will give the Group clearer sight and better control over risk-taking throughout the organisation. The Group’s risk appetite deﬁ nes the Group’s willingness to balance risk exposures with reward, and the management and monitoring of these exposures. During 2008, a Group-wide risk appetite programme was implemented to enable consistent calculation of risk exposure against appetite using a variety of metrics. We are continuing to reﬁ ne our framework and set limits at increasing levels of granularity. We expect to see signiﬁ cant embedding of the use of risk appetite during 2009. During 2009 the risk proﬁ le of the Group will be monitored against agreed limits on an ongoing basis by Group Risk. Business Units report on risk exposure levels on a regular basis and our systems will enable us to proactively identify when we are approaching our risk appetite limits. The use of these early warning triggers and Key Risk Indicators will enable Old Mutual to avoid risk concentrations that could prove a threat to the organisation. Risks or events outside the agreed risk appetite are identiﬁ ed and reviewed, with remedial action agreed with the relevant Business Unit and oversight provided by Group Risk. Depending on the signiﬁ cance of the issue, the remedial action may require the approval Risk management processes Old Mutual Strategy Risk appetite limits, Capital allocation and Policy setting Risk identiﬁ cation Risk and Control Assessments Management Actions Monitoring Risk Reporting Risk adjusted performance measurement Adjust Capital allocation Risk, Actuarial and Treasury systems and tools of the Group Risk and Capital Committee, Group Executive Committee or the Board. The risk appetite limits of the Group will be reviewed regularly for continuing appropriateness in light of changing market conditions and stakeholder expectations. Risk policies Group policies set out the minimum requirements that Business Units must follow and are considered a key entity-level control. Business Units have their own policies, which are more detailed than the Group minimum requirements and take local regulation into account. The Group policies and framework have been reviewed and revised during 2008 to strengthen our Group-wide controls and these revisions will be embedded during 2009. Risk management processes The Group conducts a number of activities as part of the risk management framework. The principal elements are described below. Risk identiﬁ cation Strategic objectives, reﬂ ecting management’s choice as to how the Group will seek to create value for its stakeholders, are translated into Business Unit objectives. Risks that would prevent the achievement of both the strategic and business objectives are then identiﬁ ed. Risk identiﬁ cation is an integral part of our annual business planning process as well as an ongoing activity. Risk and control assessments Various means of assessing, categorising and measuring enterprise risks and risk events are used throughout the Group. These include estimating the impact and the likelihood of risk occurrence, taking into account both ﬁ nancial and qualitative factors such as reputational or regulatory impacts. The Board, Group Audit and Risk Committee and the Group Risk and Capital Committee regularly receive and review reports on risks and controls across the Group. Management teams in each Business Unit perform reviews of the control environment in their business, using techniques such as Risk and Control Self-Assessments. During 2008 we revised our minimum standards for qualitative risk assessments (including the Risk and Control Self-Assessment process) across the Group and will be implementing these during 2009. Management actions Actions to implement the risk management strategy in respect of key risks, risk appetite limit breaches or to remedy a material breakdown in control are recorded on risk and control logs maintained by each Business Unit, along with the expected date for completion of the action and the responsible executive. The outcome of independent reviews, including internal and external audit reviews are integrated into risk management activities and action plans. Monitoring and reporting In addition to the Risk monitoring undertaken at Group and Business Unit level by management and specialised risk functions, the following are some of the other processes for risk monitoring used around the Group: t n e m e g a n a m k s R i Page 15 RISK MANAGEMENT continued We believe that maintaining the trust and respect of our stakeholders is fundamental. Our Board and Group Executive Committee are committed to optimising the ﬁ nancial performance of the Group on a consistent, risk-adjusted basis. Economic capital Old Mutual deﬁ nes its Economic Capital requirement as the value of assets required to ensure that it can meet in full its obligations to policyholders and senior creditors at a 99.93 percent conﬁ dence level, which is the probability placed on a target A-rated bond not defaulting in the next year. Economic Capital plays a signiﬁ cant role in risk monitoring and risk control across the Group and is closely linked with the risk appetite framework. The Group’s Economic Capital framework has evolved considerably over the last few years and has become a valuable management tool that informs and guides risk and capital management strategy. The following are the main areas where Economic Capital impacts are considered: > in risk-based pricing and product development to set pricing terms and charging structures > in reinsurance to help set retention levels for new and renewed reinsurance treaties > for risk-based capital allocation setting across the Group’s business > in decisions regarding portfolio management and optimisation; and > to measure and monitor performance of Business Units, allowing for risk and the cost of Economic Capital to support that risk. The Economic Capital framework is measured, monitored and reported under a rigorous governance process involving senior executives and the Board. > The Group Finance Director provides the Board with monthly performance information, which includes key performance indicators > Items on risk logs and control logs (which contain details of any control failures) are reported via an escalation protocol to the appropriate level of management board or committee, where rectiﬁ cation procedures and progress are closely monitored > Exposure and risk appetite reporting, risk concentrations and solvency and capital adequacy reports are submitted to the relevant Business Unit credit and capital management committees in the normal course of business > Our Quarterly Business Review process acts as a key forum for oversight over Business Units and speciﬁ cally includes discussion and challenge over the risks identiﬁ ed by each Business Unit > The Internal Review Committee, a Group forum which provides a robust assessment of ﬁ nancial reporting from Business Units, is central in managing and monitoring risks associated with the ﬁ nancial reporting process > The Internal Actuarial Review Committee is a Group forum which provides oversight of the actuarial assumptions utilised by Business Units in the determination of their long-term insurance liabilities. We will continue to enhance risk reporting through the development of Key Risk Indicators and introduction of more formal internal and external loss data analysis. Treasury management The Group operates a treasury function which is responsible for recommending and implementing the funding strategy for the Group, including the management of debt facilities, relationships with banks and ratings agencies and Old Mutual plc’s operational cash ﬂ ow requirements. During the course of 2009, Group Treasury will be adopting greater oversight of Business Unit treasury activities. Page 16 Old Mutual plc Annual Report and Accounts 2008 RISK MANAGEMENT Appointment of a new Group Risk Director My ambition is for an integrated global approach to risk management, embedded in everyone’s role and purpose, and demonstrated by the quality of strategic, capital allocation and day-to-day business decisions. Andrew Birrell Group Risk Director and Group Chief Actuary t n e m e g a n a m k s R i During 2009, further work will be carried out in order to prioritise the new activities, align with existing activities and to begin to produce tangible business beneﬁ ts. In addition to our iCRaFT programme, our global ﬁ nance control project, initiated in 2008, is an important part of achieving our ambition to demonstrate best practice capital and risk management. This project aligns existing ﬁ nancial control practices across the Group with best practice principles to ensure uniform standards. The global ﬁ nance control project will deliver a more tightly focused, robust and consistent approach to ﬁ nance reporting, risk and control, and will enhance management oversight in relation to the quality of local and Group ﬁ nancial reporting. One design principle in the development of the ﬁ nancial control framework will be the implementation of technology to support the efﬁ cient oversight and management of ﬁ nancial reporting risk. Our commitment to risk management We believe that maintaining the trust and respect of our stakeholders is fundamental. Our Board and Group Executive Committee are absolutely committed to transforming the way we manage risk and capital and we believe our iCRaFT and ﬁ nance control programmes will take us to new levels of maturity and robustness for our risk management and systems of internal controls. From the 20 March 2009, Andrew Birrell added the Group Risk Director role to his responsibilities as Group Chief Actuary, giving him an overview of ﬁ nancial and non-ﬁ nancial risks and issues. This will be extremely valuable with regard to our ambition to approach ﬁ nance, risk and capital management in an integrated way. Initiatives to transform risk management During 2008, Old Mutual embarked on a new programme called iCRaFT, which stands for “integrated Capital, Risk and Financial Transformation”. iCRaFT will elevate capital, risk, ﬁ nancial and performance management methodologies, their application and integration, to best practice levels by the end of 2012, while ensuring Solvency II and Basel II compliance. We refer to this as a “culture of managing for value”. The programme will build upon and further integrate much of the other work underway across the risk, actuarial, ﬁ nance and business areas in order to help optimise the ﬁ nancial performance of the Group on a consistent, risk-adjusted basis. The end-state vision for iCRaFT has been agreed and a comprehensive gap analysis has been produced for each of the principal subsidiaries. One of the main objectives of iCRaFT is to ensure that the data and systems we use, the tools we are developing and the way in which we organise ourselves come together in order to provide key business applications in the following areas: > Strategic planning and capital allocation > Asset and liability management > Risk optimisation and the allocation of risk budgets > Solvency and liquidity funding > Product design, pricing and underwriting > External communication; and > Performance management and executive compensation. Page 17 RISK MANAGEMENT continued Signiﬁ cant risks facing Old Mutual Business Conditions and General Economic Environment 2008 presented Old Mutual with some extremely challenging market conditions and they are expected to remain difﬁ cult during 2009. The impact on the sectors and geographies in which we operate will continue to be one of our main areas of focus. A detailed analysis of ﬁ nancial risks is provided in Notes 47 and 48 to the Consolidated Financial Statements. The most signiﬁ cant risks, including those connected with the current challenging economic environment, are summarised below. KEY RISKS Risk Description Mitigating actions Liquidity Risk This is the risk that available liquid assets will be insufﬁ cient to meet changing market conditions, liabilities, funding of asset purchases or an increase in client demands for cash. This includes the possibility of market disruption causing normally liquid assets to become illiquid and the risk that counterparties will withdraw or not roll-over funding arrangements. We aim to maintain a prudent level of liquidity consistent with regulatory expectations. Old Mutual has a Group-wide liquidity policy, which sets out the parameters within which all Business Units must operate in order to identify, measure and manage liquidity risk. The Group Capital Management function reviews capital and liquidity positions, with the Group Risk and Capital Committee providing additional oversight and challenge. Credit Risk The Group is exposed to the risk of credit defaults. This includes counterparty risk where an asset (in the form of a monetary claim against a counterparty) is not repaid in accordance with the terms of the contract. Credit risk also encompasses lending risk (for example within our banking businesses) where a borrower defaults on repayments. Market Risk The Group is subject to the risk of falling market values of equities and other assets within the Group’s portfolios. Our risk proﬁ le also includes the risks associated with changing interest rates and their potential impact on the proﬁ tability of products we sell and the value of our investments. Our global reach exposes us to the impact arising from currency ﬂ uctuations, with the most signiﬁ cant exposures being the South African Rand and US Dollar. Some of our life assurance businesses contain investment guarantees and options. A reduction in interest rates and in equity markets can cause more of these guarantees to be in-the-money. Credit exposures are monitored within each Business Unit and limits are in place in each Business Unit, reducing our risk exposure by mandating that counterparties should have a certain credit rating. Credit risk is one of the most signiﬁ cant risk types facing Nedbank and this is managed through Nedbank’s credit risk management framework. Management actions to manage impairments include focusing on collections and reﬁ ning credit assessment policies. The Nedbank Credit Committee is involved with establishing appropriate credit limits and monitoring exposures against these limits. Business Units have policies in place to manage market risk which take account of the structure of their asset and liability portfolios as well as the local regulatory environment and Group policy requirements. The activities used by individual Business Units to manage market risk include asset-liability matching to manage interest rate risk, and reducing currency risk through the use of currency swaps, currency borrowings and forward foreign exchange contracts. Page 18 Old Mutual plc Annual Report and Accounts 2008 KEY RISKS Risk Description Mitigating actions Underwriting Risk We are exposed to underwriting risk by issuing insurance contracts. The Business Units which incur underwriting risk include Skandia, Old Mutual South Africa and US Life which provide long-term insurance, and Mutual & Federal, which provides general insurance. We have a Group liability risk policy which sets out the internal controls and processes that Old Mutual must follow with respect to long-term and general insurance risk. Business Units have more detailed underwriting policies. Actuarial modelling is used to calculate premiums and monitor claims patterns and the internal controls designed to mitigate operational risks help ensure that robust data are fed into our models. t n e m e g a n a m k s R i Business Risk We operate in a highly competitive environment and in the event that we are not able to compete successfully there is a risk of reduced market share, revenues or proﬁ tability. Changes to the distribution environment could have an impact on our business, whether they are driven through regulation or the failure of distribution providers. The proﬁ tability of our businesses could also be adversely affected by a worsening of economic conditions. This could manifest itself as reduced product proﬁ tability or lower levels of customer activity (for example in savings or life products), leading to failure to meet ﬁ nancial targets. Underperformance of investment funds could have a detrimental impact on new and existing business. We offer innovative products to suit different customer needs, enabling us to ﬁ nd opportunities even in these challenging market conditions. Lapse rates and persistency information are closely monitored, enabling us to adapt our business approach. We monitor developments in the distribution sectors across all geographies and, through our strategic planning and research teams, are able to position ourselves to reduce this risk. Each of our Business Units closely monitors investment performance using Key Performance Indicators and in some instances, reports to local Investment Committees as well as to Group executives via a regular business review and challenge process. Old Mutual is diversiﬁ ed across geographies and product lines, minimising the impact of sector or territory-speciﬁ c economic downturns. Strategic Risk Old Mutual expanded to its current size and proﬁ le during a period of relative global economic stability. The future outlook is less clear and it is appropriate to reconsider strategy in that light. Ensuring that our strategy is clear and will deliver shareholder value has been a top priority for the Board and Group Executive Committee. The Group Chief Executive, in conjunction with the Board and the Group Executive Committee, has taken a fresh and objective look at our strategy and identiﬁ ed a number of initiatives to position the Group for sustainability and growth for the future. Signiﬁ cant changes have been made, including changes to the operating model of Old Mutual. Historically our operating model has been decentralised, but stronger central oversight is a feature of our new approach, which will be rolled out during 2009. Page 19 RISK MANAGEMENT continued KEY RISKS Risk Description Mitigating actions Compliance Risk The regulatory landscape across all territories in which we operate has seen signiﬁ cant change during 2008, and this trend is likely to continue. Regulatory change could also signiﬁ cantly impact our businesses (including our costs, capital requirements, distribution or products). Human Resources Risk Attraction and retention of talent is a priority for Old Mutual. Loss of key staff and inadequate succession planning could result in signiﬁ cant business disruption through loss of knowledge and expertise. We closely monitor regulatory developments through our Group and Business Unit Compliance teams. Group Compliance has been signiﬁ cantly strengthened through additional resource and increased oversight and monitoring activities. A dedicated team for Financial Crime Prevention focuses on areas such as Anti-Money Laundering, Anti-Bribery and Corruption, and Sanctions compliance. Our proactive approach to regulatory change includes participating in Quantitative Impact Surveys for Solvency II. We have established a number of Group-wide initiatives including the Management Development Programme and the Business Development Programme (the latter targeting more senior individuals). ‘Rising stars’ are identiﬁ ed through talent reviews and a formal succession planning process is in place. The Executive Remuneration Committee was created during 2008 which enables stronger focus on and oversight of incentivisation across the Group. Operational Risk Our businesses rely on their respective systems, operational processes and infrastructure to help process numerous transactions on a daily basis across various different markets. Our operational risk includes the possibility of a breakdown in an operational process (e.g. human error or employee misconduct), a malfunction of systems, or external events beyond our control (such as a natural disaster). We use scenario analysis to assess our operational risk exposure and progress in mitigating the most signiﬁ cant risks is monitored regularly. Operational risk is one of the four risk appetite metrics and during 2009 all Business Units will report their operational risk exposure against limits set by the Board. An operational risk policy is in place, which sets out methodologies for identiﬁ cation and assessment as well as key principles for speciﬁ c areas such as outsourcing and project management. Page 20 Old Mutual plc Annual Report and Accounts 2008 ONE GROUP STRONG BRANDS MANY SYNERGIES OLD MUTUAL 1.0 Europe and Latin America UK and Offshore Nordic ELAM Skandia Investment Group 1.1 1.2 1.3 1.4 2.0 Southern Africa Old Mutual South Africa Nedbank Mutual & Federal Insurance 2.2 2.3 2.1 3.0 North America 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management 4.0 Asia 4.1 China and India Page 21 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Nick Poyntz-Wright CEO, Skandia UK Bertil Hult CEO, Skandia Nordic Bob Head Regional Director, Old Mutual Europe Rafael Galdón CEO, Skandia ELAM KEY FACTS Adjusted operating proﬁ t (IFRS basis) 2008 Funds under management 2008 £266m 2007: £268m Life sales (APE basis) £52.8bn 2007: £60.6bn Unit trust sales £977m £1,077m £3,626m £4,635m 2008 2007 2008 2007 Number of countries Number employed 14 6,055 Page 22 Old Mutual plc Annual Report and Accounts 2008 The Skandia group of companies, acquired by Old Mutual in 2006, has been led by Bob Head since Julian Roberts’ appointment as Old Mutual Group Chief Executive in September 2008. It is divided into three business units: UK and Offshore, Nordic and Europe and Latin America (ELAM). In addition Skandia Investment Group (SIG) provides investment management services to the three Skandia businesses as well as other businesses across the Group. Skandia’s heritage lies in the Swedish market, where it has operated for over 150 years. It is a strong and well-respected brand. 1.1 UK and Offshore This business provides products that serve the needs of long-term investors in the UK and international offshore markets. With over a million customers and £35 billion of funds under management at 31 December 2008, we are a leading player in the offshore savings market and a major investment platform company in the UK. Our main UK operations are investment-led businesses: a life and pensions operation, Skandia Life; an investment platform company, Skandia Investment Solutions; an asset manager creating multi-manager blended solutions, Skandia Investment Management Ltd; and an adviser distribution and support service company, Bankhall. Skandia’s success in the UK has been built by establishing a strong ﬁ nancial adviser franchise offering excellent service and a distinctive proposition. It introduced the multi-manager concept to the UK and has built a strong position in the high-growth open-architecture segment of the UK market. It has a track record and reputation for bringing innovative ideas to market. Skandia Investment Solutions is an investment platform (often referred to as a fund supermarket). It combines the reputation and strengths of the Selestia business, owned by Old Mutual before we acquired Skandia, with Skandia’s MultiFUNDS platform. This platform gives advisers and their customers access to Individual Savings Accounts (ISAs), PEPs and Collective Investment Accounts, which are provided by Skandia MultiFUNDS Limited. In addition, the platform offers an approved pension wrapper and UK and offshore life assurance bonds. Skandia Investment Management Ltd (SIML) is our asset management company. It provides innovative multi- manager funds created by Skandia Investment Group, the part of the Skandia group that specialises in investment research and the construction of multi- manager funds. The SIML funds make use of the investment research capability of third-party managers by creating ‘blended’ solutions of third-party managers with different styles and processes. Since SIML’s launch in March 2003, funds under management have grown from around £750 million (including funds held on behalf of other Group companies) to £3.2 billion. The number of funds has expanded from 10 to 48, increasing diversiﬁ cation and appealing to a wider customer base. Skandia International is our offshore and cross-border specialist, working in partnership with other Skandia and Old Mutual businesses. It includes Royal Skandia, based in the Isle of Man, Skandia Life Ireland based in Dublin, Old Mutual International based in Guernsey and Skandia Leben based in Liechtenstein. i w e v e r s s e n s u B i Page 23 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Pensions We provide a range of pension wrappers to meet the retirement-planning needs of individuals, employers and trustees. Our pension products offer wide investment choice in funds where the underlying investments are through third-party fund managers: 80 percent of assets are invested directly into funds and 20 percent are invested through its own manager-of-managers blended investment solutions. Pensions business represents £9.4 billion of assets under management. Investment bonds We offer a single-premium investment bond which is tax-efﬁ cient for certain consumer segments. As with pensions, the bond offers access to third-party funds and blended investment solutions, all managed by third-party fund managers. Protection We also offer premium protection solutions in the form of a unit-linked whole life product and critical illness cover and we have signiﬁ cant market share in these markets. Average premium sizes are high and typical customers include the self-employed and entrepreneurs as well as customers seeking protection linked to efﬁ cient inheritance tax solutions. Protection accounts for about 3.4 percent of UK Life sales on an APE basis. Skandia International Skandia International provides a range of award-winning single and regular-premium insurance wrappers designed for private, trustee and corporate investors, local residents in selected markets and expatriates. All its products offer tax efﬁ cient investment growth from secure and stable offshore centres. The business is focused on six core geographic regions: Asia, Middle East, UK, South Africa, South America and Europe. These regions have varying levels of market maturity, competition and consumer needs. The common factor is the target customer base: English-speaking expatriates and selected local nationals from the afﬂ uent advice-seeking sector. The product range includes an award-winning portfolio bond and a number of single and regular-premium savings and investment vehicles. The ﬂ exibility of the portfolio bond enables customers to invest in virtually any tradeable fund and in a variety of currencies. Our products are supported by a comprehensive suite of trust options, e-business facilities and ﬁ rst-class service. Providing investment solutions in more than 25 countries, Skandia International has generated signiﬁ cant sales and proﬁ t growth for almost a quarter of a century. Its continuing high growth potential is based on a number of factors, including the continued growth of its target customer segment, very strong distribution relationships and attractive new market and product development opportunities. In addition to its own growth, Skandia International generates beneﬁ ts within the Group by working in partnership with fellow Skandia and Old Mutual businesses to create growth opportunities in domestic markets using international products and expertise. Bankhall is a standalone division within the UK and Offshore business. It mainly provides support services, including compliance consultancy, to directly-regulated ﬁ nancial advisers. It has maintained a market-leading position by providing demonstrable value to advisers. Through our market-leading platform, a comprehensive range of investment solutions and tax wrappers manufactured in-house, and the competitive advantage achieved through scale, we are well placed to beneﬁ t from the growth in platform business and increasing use of platforms by the UK ﬁ nancial services industry. Markets and products Skandia UK Skandia UK focuses on long-term investments. Unlike traditional with-proﬁ ts providers, it allows each customer to have a personalised and ﬂ exible investment portfolio, suited to their goals and risk appetite. We provide tools for customers to analyse and construct the ideal portfolio using open-architecture solutions which give access to over 1,000 funds from more than 50 top fund management companies – as well as manager-of-managers funds created both in-house and externally. Our buying power enables us to offer these funds to customers at very competitive prices. Since 2003 we have been at the forefront of the UK fund management industry, introducing innovative funds that have proved popular with advisers and investors. Following the launch of the Global Best Ideas Fund in 2006 and UK Strategic Best Ideas Fund in 2007, the range was enhanced in 2008 with the launch of the Skandia Alternatives Investment Fund and the creation of the Spectrum risk-rated funds launched in April 2008 which attracted over £100 million in their ﬁ rst eight months. Our target market in the UK is medium- to high-net worth individuals and products are distributed through independent ﬁ nancial advisers (IFAs). Most customer investments come through consolidation – bringing together investments built up across a number of providers to take advantage of the increased investment ﬂ exibility that we offer. Page 24 Old Mutual plc Annual Report and Accounts 2008 UK and Offshore Financial scale: FUM £35bn Life (APE) sales Unit trust sales £596m IFRS AOP £167m £1,715m Number of employees 2,220 Key geographies > UK > Countries of Asia, Middle East, South Africa, South America and Europe Market overview The UK has a sophisticated ﬁ nancial services market, with a well developed advice channel that accounts for the majority of new business in the market. It is highly regulated by the Financial Services Authority (FSA), which is moving towards a more principles-based regulation regime and a focus on outcomes that demonstrate fair treatment of the customer. In 2006 the FSA began its Retail Distribution Review, a major initiative to review the way ﬁ nancial services are distributed in the UK. Following discussions and consultations, the FSA is proposing to introduce a number of measures over the next four years to build consumer conﬁ dence in ﬁ nancial services. In particular, these aim to clarify the services being provided and have a requirement for charges to be agreed between the adviser and the customer. Our modern solutions already meet some of the new requirements and we will develop our proposition further to offer the necessary ﬂ exibility. Despite the majority of platform assets being equities, which have fallen in value by 35 percent since October 2007, platforms have grown successfully their total assets by 20 percent during the period. This is the result of collectives’ continuing success as investment vehicles, investors’ desire to consolidate their portfolios and the tax-efﬁ cient wrappers now available on platforms. It is estimated that assets on platforms could grow to £300 billion within the next ﬁ ve years (Source: Navigant Consulting). The ﬁ nancial crisis is reducing customers’ appetite for investing new money. However, the majority of investments made into Skandia are consolidations of existing portfolios. It is estimated that in the UK there are £3 trillion of wrappable assets in traditional savings and investments and it is expected that more of this will be moved onto platforms in future. Compared with single domestic markets, the offshore ﬁ nancial services market offers greater diversity of geography, distribution and risk management – as well as the opportunities generated by variable macro and micro conditions. Such diversity gives Skandia International greater resilience against regional market effects. Major brands Skandia > > Skandia International > Skandia Investment Group Investment bonds Products > Pensions > > Premium protection solutions Single and regular-premium > insurance wrappers Skandia International conducts all business through advised intermediary channels and its distribution proposition is structured according to the needs and regulatory environment of its principal markets. Long-term global and local distribution partnerships are critical to its success and remain a core strength of the business. Skandia International’s broad geographic coverage is supported by a robust regulatory and compliance framework which ensures strong and close relationships with all its regulators. As in the UK, regulators throughout the world are expected to heighten their supervision of the ﬁ nancial services industry – which may lead to some convergence of regulations across markets. Strategy for growth We aim to build on our current position as a leader in the UK platform market by maintaining a customer- centred proposition with a full range of investment solutions, simple and transparent charges and ﬂ exible remuneration options. Increasingly, advisers are adopting one platform for the majority of their business. To ensure that Skandia is selected as the preferred platform, our sales force is working closely with advisers to embed the platform into their businesses. Skandia International will continue to provide leading offshore and cross-border investment solutions to afﬂ uent advice-seeking investors worldwide. We will enhance the value proposition by developing a closer relationship with our customers to improve their experience with us. We aim to grow across all core regions through continued strength of service and distribution relationships. Useful link: www.skandia.com i w e v e r s s e n s u B i Page 25 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Performance in 2008 Highlights (£m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on Equity Return on Equity (excluding goodwill) Adjusted operating proﬁ t (covered business) (MCEV basis) (post-tax) Return on embedded value (covered business) Total life assurance sales (APE) UK life assurance sales (APE) Offshore life assurance sales (APE) Unit trust/mutual fund sales Value of new business APE margin PVNBP PVNBP margin Net client cash ﬂ ows (£bn) Funds under management (£bn) *Restated, as now reporting on an MCEV basis. 2008 2007 % Change 167 5.0% 12.0% 235 15.3% 596 335 261 1,715 67 11% 4,902 1.4% 1.7 34.9 173 6.8% 21.4% 206 15.5% 740 468 272 2,275 81* 11%* 6,311* 1.3%* 3.9 41.9 (3) 14 (19) (28) (4) (25) (17) (22) (56) (17) Unit trust performance impacted by volatile markets Unit trust sales were down 25 percent on 2007 as a result of one of the lowest ISA seasons on record for the whole industry and again a reﬂ ection of the turbulent market conditions. Within this, institutional mutual fund business of £239 million was up by 45 percent over 2007. Our market share in platform business fell marginally in the year but there were indications that the re-pricing of the platform business in the latter part of the year was starting to have a positive impact on sales. We continue to increase investment solutions on the platform to create wider appeal, especially during periods of market volatility. New business contribution VNB fell by 17 percent to £67 million due to lower new business volumes. The reduction was partially mitigated by a strengthening of the assumptions for the amount of fee income rebated from fund managers, aligning Skandia more closely to the market. New business contribution was also positively impacted by the mix of business effects, with a shift towards sales of more proﬁ table portfolio bond charging structures within Skandia International. The new business margin ended the year at 11 percent, in line with 2007. Positive net client cash ﬂ ows despite low investor conﬁ dence Skandia UK and Offshore continued to deliver positive net client cash ﬂ ows for the year with net inﬂ ows of £1.7 billion representing four percent of opening funds under management. This comprised strong International net inﬂ ows and positive UK net inﬂ ows which were lower than 2007. The market downturn contributed to a 17 percent decrease in funds under management but this compared favourably with the 31 percent drop in the FTSE 100 in 2008. Investment performance was driven by the diversity of our offering with signiﬁ cant changes in asset mix occurring as investors moved into cash based investments. Foreign currency denominated funds beneﬁ ted from the weakened sterling. Investment volatility affects sales Life assurance sales APE declined in line with the market. The largest relative falls in sales were in the bonds and single-premium pensions products and because the 2007 pensions business ﬁ gure beneﬁ ted from the lingering beneﬁ ts of pensions ‘A-day’ and higher investor conﬁ dence at the time. In 2008 the market for single-premium bonds was affected by the introduction of 18 percent ﬂ at rate of CGT conﬁ rmed in the March 2008 Budget. Skandia’s market share across the entire pensions market remained strong particularly in the core product area of single-premium personal pensions. Regular-premium business held up better, ending the year nine percent up on 2007. Skandia International performed very well in 2008 due to its geographical diversity, full open-architecture proposition, strong distribution relationships and a focus on high net worth customers. Product and e-business developments greatly enhanced our customer proposition in 2008. Page 26 Old Mutual plc Annual Report and Accounts 2008 and continues to be one of the best-selling funds. Amid deteriorating equity markets the UK Strategic Best Ideas Fund has continued to perform exceptionally well, with the fund being the best performing UK fund in the IMA UK ALL Companies Sector during 2008 (a universe of over 320 funds). Skandia supports changes in the UK distribution landscape The FSA published its paper on the Retail Distribution Review on 25 November 2008 moving the Review from the consultation phase into the implementation stage. The paper focused on the clarity of the service (distribution channels), remuneration, professional standards and prudential requirements. We have already started to support our distributors through offering assistance in preparing our businesses for the change and assisting advisers in obtaining the necessary qualiﬁ cations. The intention of the FSA is to consult with the industry on implementing the proposed changes over a period running through to 31 December 2012. On 3 November 2008 we announced that we are ending our membership of the Association of British Insurers (“ABI”). Our proposition is clearly differentiated from old-style life and pensions companies, ﬁ nding little alignment of interests with the broader ABI membership. We announced a new pricing structure in September 2008 removing the initial charge on platform sales. This move not only made our proposition very competitively priced but it also made the charging structure simple and transparent. The price changes have been positively received by ﬁ nancial advisers. Marketing The volume of business placed electronically has continued to increase. Alongside the competitive terms that we negotiate from the fund management groups, this enabled Skandia UK to re-price its proposition in September 2008, making it highly competitive. Skandia International enhanced its proposition by developing a new Swedish pension and adding to its online capability. Adjusted operating proﬁ t (IFRS basis) level with 2007 despite market conditions An excellent adjusted operating proﬁ t (IFRS basis) was generated in spite of the current climate with a decrease of three percent to £167 million for the year, in part reﬂ ecting the reduction in funds under management and sales. This was partially offset by changes to the policyholder taxation basis for Skandia UK following the market falls experienced in 2008. Additional integration costs were incurred in 2007, as previously communicated. A favourable variance of £33 million arose following the implementation of PS06/14 – the prudential reserving requirements that permit non-linked insurance business to be valued on a more realistic basis. Increase in adjusted operating proﬁ t (covered business) (MCEV basis) The adjusted operating proﬁ t (MCEV basis), on covered business after tax, increased by 14 percent to £235 million. This increase includes a positive impact of £56 million from operating assumption changes. This mainly resulted from the recognition of retained unit trust company rebates (referred to above) as we outsource the investment of policyholder funds to unit trust companies. Other operating assumption changes included adjustments to expense assumptions to reﬂ ect current maintenance expense experience and modeling improvements. Experience variances were positive in aggregate at £17 million due to impacts on charges and continued positive experience in relation to retained rebates assumptions. Capital Current levels of statutory capital for Skandia UK and Skandia International are within or above the target ranges set by management. The businesses are well capitalised with a solvency ratio of 2.6 times the required level. Continued investment innovation at Skandia During the year, we continued our track record of innovation in multi-manager investment solutions. The Spectrum range of risk-controlled funds was launched in April 2008 and attracted over £120 million of gross subscriptions by 31 December 2008. In the volatile market, the risk controlled nature of the funds proved very effective from both a return and risk perspective. In June 2008, we launched the Skandia Alternative Investments Fund which has an absolute return focus and has funds under management in excess of £30 million. The high proﬁ le Best Ideas fund range continued to attract new sales with funds under management of over £391 million at 31 December 2008. The UK Strategic Best Ideas Fund had funds under management of £80 million at 31 December, i w e v e r s s e n s u B i Page 27 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Outlook for 2009 Details of the changes to be introduced as part of the FSA’s Retail Distribution Review are still under discussion. Meanwhile, we are already preparing to incorporate the changes that the FSA wishes to include, with the aim of optimising our position in the new model of ﬁ nancial services and the distribution landscape that is likely to emerge. It will be particularly important to secure signiﬁ cant funds under management to ensure scale in the platform market that this review will stimulate. To secure assets on our platform we are running an aggressive campaign of activity which began in 2008 with the removal of the initial margin on platform products to make our costs highly competitive. Our offshore business is geographically diversiﬁ ed, with sales in Europe, the Middle East, the Far East, Africa and Latin America, as well as in the UK. It is well positioned for further growth in 2009 and beyond. Investment in the operating infrastructure to drive efﬁ ciencies and continued excellence in customer services will support further market, product and distribution opportunities. Whilst 2009 will be a challenging year, Skandia International remains conﬁ dent about long-term future growth prospects owing to a growing customer base, robust regulatory and compliance infrastructure and a strong offshore brand. Priorities for 2009 > Continue to build our position as a leading platform by widening customers’ investment choices, offering greater ﬂ exibility and access to more investments, and providing simple, transparent pricing > Work more closely with distributors to help them meet the new requirements of the Retail Distribution Review > Maintain our high level of customer service and continue to improve efﬁ ciency by increasing our ability to process business electronically > Generate growth for Skandia International in new and existing markets through product and distribution efforts and building on the operational infrastructure to facilitate new product development. Customer service We continued to focus on excellent customer service, which is seen as a major differentiator in ﬁ nancial services. In recognition of our outstanding customer service we achieved a ﬁ ve-star rating in the industry Financial Adviser Awards for the eleventh year running and became the ﬁ rst company to win the Outstanding Achievement Award for Pensions and Investments. We have now won more than 30 ﬁ ve-star awards in the 18-year history of the Financial Adviser Awards. We won the MultiManager of the Year award at the annual Investment Life & Pension Moneyfacts Awards in September 2008 and were also Commended in the Best Unit Trust/OEIC Provider category. These awards recognise the outstanding achievements of providers who manage to stand out from the crowd by offering high calibre products and delivering ﬁ rst-class service. Skandia International continues to meet customers’ service expectations through a programme of operational improvements, including establishing an optimum service model for overseas branches. Technological enhancements will support the continuing drive for greater operational efﬁ ciency. Principal risks and uncertainties The principal risks to Skandia UK arise from operational experience, along with market risk as Skandia UK derives income from fees which are charged as a percentage of funds under management. The Broader ﬁ nancial risks are limited. Skandia UK does not offer material investment guarantees. Although we offer protection business, and so have exposure to mortality and morbidity risk, the majority of the risk is transferred to reinsurance counterparties. Credit risk exposures are small; the main exposures are the risk of default on the investment of company assets. Skandia UK has exposure to risk arising from operating experience in respect of factors including persistency and management expenses. These risks are managed within the operational functions which have primary responsibility for the identiﬁ cation, mitigation and monitoring of risks. Risks exceeding pre-determined thresholds are escalated and reported to management and to the Group Chief Risk Ofﬁ cer, along with details of the mitigating management action. Recent falls in investment markets have adversely impacted fund-related revenues and new business volumes. The proﬁ tability and capital position of Skandia UK remain strong. Page 28 Old Mutual plc Annual Report and Accounts 2008 £213m £262m Nordic Financial scale: FUM £8bn Life (APE) sales Unit trust sales IFRS AOP £88m Number of employees 1,912 Key geographies > Sweden, Norway, Denmark Major brands Skandia Link > > Skandia Liv > SkandiaBanken Products > Unit-linked > Traditional life > Banking products > Health and protection 1.2 Nordic This business operates in Sweden, Denmark and Norway, offering a wide range of products for both retail and corporate customers including traditional life, unit-linked, healthcare insurance, banking, ﬁ nancial advisory and mutual funds. Our vision is to have the most satisﬁ ed customers in the Nordic savings market. Our operations focus on four end-customer groups, which we class as Private Sweden, Corporate Sweden, Private Norway and Corporate Denmark. Skandia Liv is a traditional life assurance company serving customers in Sweden and Denmark. It is a wholly owned subsidiary of Skandia but run on a mutual basis. It operates within a strict local legal framework and the beneﬁ ts usually associated with share ownership accrue to Skandia Liv’s policyholders rather than to the holding company. Consequently, Skandia Liv is not consolidated in the Old Mutual Group accounts. In 1990 Skandia launched Sweden’s ﬁ rst fund insurance company, Skandia Link. Today Skandia Link offers savings products for both private and corporate business. SkandiaBanken was initially a niche player in the Nordic banking market but has now become established as a full-range online retail bank serving customers in Sweden and Norway. It is well positioned to take advantage of the growing demand for direct self-service savings products. Together, the Skandia Nordic divisions have a broad product mix, a range of insurance, banking and investment business, market-leading expertise and a proven business model. This combination differentiates us and gives us competitive advantage. Markets and products We have a combined Nordic customer base of around 2.5 million customers and, with our full range of product offerings, are well positioned in a challenging savings market. Our Corporate business operates in Denmark and Sweden, serving small and medium enterprises, large companies, international corporates and the public sector. It distributes its products through independent ﬁ nancial advisers (IFAs), other external partners and a directly employed sales force. Corporate Sweden and Denmark offer products and ﬁ nancial advice from our unit-linked, traditional life and healthcare businesses. The Retail business operates in Norway and Sweden, targeting afﬂ uent and mass afﬂ uent private customers. This market is served mainly through our directly employed advisers, the internet and IFAs. Private Sweden offers savings products and ﬁ nancial advice from our banking, unit-linked, mutual funds and traditional life business. Private Norway offers products and ﬁ nancial advice from our bank and healthcare businesses. Unit-linked We offer a wide range of unit-linked funds in various classes and with varying risk proﬁ les. Funds, including those offered by our own fund companies, are managed externally and managers are selected and monitored using our proprietary evaluation process. Traditional life Traditional life products are an important part of the integrated product offering in the Swedish market. As the market’s largest life company, Skandia Liv is active in both the private and corporate pensions segments of the Swedish traditional life market. We provide insurance products with a security proﬁ le featuring long-term savings with a guaranteed yield plus protection. In 2008 Skandia Liv was ranked top traditional life assurer by independent Swedish consultants and distributors. Mutual funds We offer unit trust products through our banking subsidiary, SkandiaBanken. Skandia Fund Products’ offerings are available to customers via SkandiaBanken for unit-linked savings, direct savings and individual pension savings. Customers can access premium pension savings via the national PremiePensionMyndigheten (PPM) system and decide how they wish their money to be managed by choosing from PPM’s range of funds. i w e v e r s s e n s u B i Page 29 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group The current growth of advisory services in the individual market offers us a huge potential opportunity – but it will be important to manage our relationships with IFAs effectively. The 2008 ﬁ nancial crisis created a move towards more traditional savings products. While the major banks lost customers to small niche banks, SkandiaBanken increased their customer numbers by 24 percent and grew market share from 12 percent to 16 percent by offering new products with high interest rates. The major banks lost funds under management of SEK35 billion in 2008, while the niche banks gained SEK11 billion. In the Nordic countries the crisis led to government-led initiatives including increased bank guarantees and lowered repossession rates. It is expected that further legislative change will follow. Interest in complementary and alternative solutions to national healthcare systems remains great in the Nordic countries. However, competition in this area has intensiﬁ ed considerably. Strategy for growth Our vision is to have the most satisﬁ ed customers in the Nordic savings market. To achieve this, we will move from our current position as a product supplier mainly offering insurance products to become a more customer-oriented ﬁ nancial solutions provider. We will improve and develop our customer interface, enhance our product offering and make our products available to customers via different channels. The principal challenge is to build attractive offerings that provide both end-customers and distributors with advisory tools and top quality advice, innovative products, top-quartile returns and the market’s best customer service. Banking SkandiaBanken offers a full online retail banking service. It is focused on strengthening its offering to small enterprises and private individuals by selling non- insurance products. It also serves as a direct distribution channel, targeting self-service customers with a full range of savings products through a new online platform. In 2008 SkandiaBanken won several awards in Norway and Sweden for outstanding service. During the year the savings offering was further strengthened by the widening of the fund range, introducing discounted share trading and launching new saving products. Private healthcare We offer private healthcare products to companies and their employees. Our healthcare division also provides support to our unit-linked and traditional life business in Sweden and Denmark, adding value to the pension scheme products and providing cross-selling opportunities for further business. Market overview The Swedish savings and pension market has three pillars: individual, employer-generated and state- generated savings. In 2008 the individual market held about 50 percent of assets while employer-generated and state-generated savings each held about 25 percent. The ﬁ gure for state-generated savings includes only the PPM part, as this is the only part of the public pension system where the individual decides on the investment. Traditionally, we have been very strong in corporate pensions, the dominant segment of the Swedish life market. However, the corporate market is changing. Our strategies to increase sales in this segment must now take account of pricing pressures and collective agreement procurements. Swedish brokers are shifting their focus to small- and mid-size companies and individuals. The individual market is expected to continue growing in signiﬁ cance. Factors such as reduced state and employer pension beneﬁ ts will require people to take more responsibility for their future ﬁ nancial security. We see this growth and the demand for advice and self-directed solutions in the private business area as major business opportunities. The individual market is characterised by multiple savings instruments and varying customer preferences. The main savings forms are insurance (SEK700 billion), bank deposits (SEK700 billion), mutual funds (SEK600 billion), equity (SEK600 billion) and bonds (SEK100 billion). Revenue in the total individual savings market is expected to grow from SEK40-50 billion in 2008 to SEK70-80 billion by 2015, driven primarily by market appreciation, increasing disposable income and asset reallocation. Page 30 Old Mutual plc Annual Report and Accounts 2008 Performance in 2008 Highlights (SEKm) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on Equity Return on Equity (excluding goodwill) Adjusted operating proﬁ t (covered business) (MCEV basis) (post-tax) Return on embedded value (covered business) Life assurance sales (APE) Unit trust/mutual fund sales Value of new business APE margin PVNBP PVNBP margin Net client cash ﬂ ows (SEKbn) Funds under management (SEKbn) *Restated, as now reporting on an MCEV basis. 2008 2007 1,076 5.6% 17.0% 1,839 12.9% 2,599 3,207 397 15% 12,108 3.3% 7.0 91.9 874 4.3% 16.3% 880 7.6% 1,992 3,474 313* 16%* 9,329* 3.3%* 2.7 116.7 % Change 23 109 30 (8) 27 30 159 (21) Strong net client cash ﬂ ows Net client cash ﬂ ows for the year were an exceptional SEK7.0 billion, representing six percent of opening funds under management. The positive performance was largely driven by strong net inﬂ ows in the life business beneﬁ ting from an excellent sales performance and reduced outﬂ ows. However, volatile equity markets negatively impacted asset growth during the year, with funds under management at 31 December 2008 down 21 percent to SEK91.9 billion. Sales performance continued to improve We delivered excellent growth in sales during 2008 with life sales on an APE basis up 30 percent mainly due to strong sales in Sweden. The broker sales channel accounted for the majority of this increase as a result of strengthened relationships, supported by the new investment portfolio product and faster introduction of new funds to the market. A focus on the selling of unit-linked products has continued throughout the internal sales force which together with several sales initiatives, contributed to the improved sales. The very strong upward trend in new sales continued throughout 2008 and so far there have been no negative effects on sales performance from the volatile markets. Mutual fund sales were down eight percent on 2007, mainly due to lower inﬂ ows to fund deposits within our bank offering, partially offset by growth through other channels. This growth was mainly through deposits in ﬁ xed income and money market funds and through a hedge fund launched in the third quarter. VNB grew strongly in 2008 VNB of SEK397 million for the year was up 27 percent on 2007, in line with the excellent life sales. In addition to strong volume growth, the APE margin beneﬁ ted from the introduction of currency spreads and tighter cost controls. These largely offset the business mix impact in Sweden, particularly from the removal of Kapitalpension product tax advantages as well as the strengthened retention assumptions in 2008 and the negative economic changes in 2007. The life new business margin ended the year at 15 percent just below the margin in 2007. In the medium term, the new business margin is expected to improve to reach the high teens. Strong underlying adjusted operating proﬁ ts despite market turbulence Adjusted operating proﬁ t (IFRS basis) increased 23 percent over 2007 despite the equity market downturn. This was largely due to excellent cost control and SkandiaBanken continuing to beneﬁ t from an improved interest margin. The adjusted operating proﬁ t (MCEV basis) was up 109 percent on 2007, mainly due to strong VNB growth and the positive effect from assumption changes. In 2007 there was a negative effect of SEK526 million relating to strengthened retention assumptions and lower fund charges on “tick-the-box” collective agreements and tendered corporate business. In 2008 the effect from operating assumption changes was SEK391 million. This was mainly attributable to the introduction of currency spreads and increased assumption for the take-up rate for unit-linked contracts on retirement, partly offset by strengthened retention assumptions. Experience variances in 2008 of SEK142 million were driven by a higher level of fee income than assumed and tax and proﬁ ts not valued within the value of in-force (e.g. Healthcare Business). Both were partly offset by a negative retention effect mainly caused by premium reductions due to a Swedish legislative change relating to the level of tax deductible pension savings contributions. i w e v e r s s e n s u B i Page 31 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Continued growth in banking business beneﬁ ting from market conditions with improved interest margin SkandiaBanken is completely funded by deposits and therefore has a unique liquidity position enabling it to beneﬁ t from the current market situation with an improved interest margin and increased business volumes. SkandiaBanken has sufﬁ cient surplus liquidity and management continue to ensure that the liquidity position remains strong. The capital ratio as at 31 December 2008 was 14.1 percent (Basel II, pillar one). SkandiaBanken’s lending portfolio has been built on sound lending practices and comprises of 95 percent mortgages which have excellent credit worthiness with the remaining ﬁ ve percent comprised of unsecured loans. The average loan-to-value in the portfolio at the end of the year was approximately 40 to 45 percent. As a consequence, the bank has been only marginally affected by the market turbulence. The credit loss ratio (credit losses as a percentage of the opening lending balance) remains low at only 0.13 percent. The net interest margin was 1.67 percent in 2008 compared to 1.32 percent in 2007. We are conﬁ dent that SkandiaBanken’s conservative lending policy means it is well positioned to respond to any adverse market developments. Both deposit and loan books at SkandiaBanken increased in 2008. Excluding the divested car ﬁ nance business, lending increased to SEK43.8 billion, up nine percent since 2007. The increase related mainly to successful mortgage campaigns during the year in Sweden, together with a highly competitive ﬂ oating interest rate which led to increased lending volumes. As a consequence of the turbulent market conditions, customers have been switching funds from ordinary saving accounts with variable interest rates to saving accounts with ﬁ xed interest rates. Deposits of SEK52.0 billion were up three percent since 2007 and the number of customers increased seven percent over 2007. SkandiaBanken’s operating proﬁ t for 2008 was SEK283 million, 48 percent higher than 2007. Capital Skandia Nordic’s capital position is stable with sufﬁ cient surplus equity exceeding both external requirements and internal buffers. The businesses are well capitalised with a surplus 9.9 times the required level. Other Our integration of Skandia, Skandia Liv and SkandiaBanken continued during 2008. We implemented a new operating structure in the private and corporate business areas where there are strong potential synergies in terms of scale, brand, cross-selling and administration. Restructuring and other activities resulted in cost reductions of SEK150 million in 2008, making a signiﬁ cant contribution to the year’s good result. During the year we announced that Skandia and Livfösäkringsaktiebolaget Skandia (publ) (Skandia Liv) are reviewing the potential beneﬁ ts to both the Group and to Skandia Liv policyholders of demutualising Skandia Liv. The review is at a very preliminary stage and a conclusion is not likely before late 2009. As announced on 3 October 2008, a ruling has been passed in respect of the arbitration proceedings between Skandia AB and Skandia Liv. The arbitration board did not accept Skandia Liv’s claim to any part of the purchase price paid, but ruled that Skandia AB is obliged to pay Skandia Liv a total sum of SEK580 million (£47 million) plus interest by way of compensation in relation to fees under the asset management agreement which Skandia Liv deemed to be higher than prevailing market rates. Old Mutual had already set aside SEK500 million (£41 million) to cover the arbitration within our pre-acquisition balance sheet. Skandia AB will also have to compensate Skandia Liv for future payments to DnB NOR that are higher than prevailing market rates until the contract with DnB NOR expires in 2013. A new provision of SEK426 million has therefore been set up. In 2008, Skandia Link won the Risk & Försäkring award for Best Average Return to Clients Over Three and Five Years in the Swedish Market, and SkandiaBanken Sweden won Privata Affärer’s Initiative of the Year award. Marketing We successfully launched a number of innovative market-facing products including the insurance-wrapper Skandia Investment portfolio, unit-linked mutual funds such as Swedish Stars and Skandia Global Hedge, Skandia Lifeline child insurance and a number of banking products. Customer service Our focus on enhancing customer service delivery earned SkandiaBanken Sweden the runner-up position in the award for Best Home Loan Institute and SkandiaBanken Norway the award for Most Client- Friendly and Service-Minded Internet Bank for the seventh year running. Skandia Sweden also reclaimed top position in the broker satisfaction index. Page 32 Old Mutual plc Annual Report and Accounts 2008 EUROPE AND LATIN AMERICA Financial scale: FUM £10bn Life (APE) sales £168m Unit trust sales £1,649m IFRS AOP £11m Major brands Skandia > Products > Unit-linked life insurance > Mutual Funds Number of employees 1,923 Key geographies > Germany, Austria, Switzerland, Poland, Italy, France Colombia, Mexico, Chile > Principal risks and uncertainties Nordic’s main risks relate to strategic and operational risks as well as market risks. The market risks mainly relate to asset based income which reduces when the value of the unit-linked funds declines. Having a diversiﬁ ed product range and a wide range of investment options addresses some of the market risks. Risks arising from operating experience (e.g. persistency and management expenses) are managed through the risk framework which includes a three-lines-of-defence model and risks exceeding pre-deﬁ ned risk tolerance levels are escalated to the Group Chief Risk Ofﬁ cer. Political and regulatory changes which could have an impact on the businesses are continuously monitored and managed. Outlook for 2009 The continuing ﬁ nancial crisis will make 2009 a challenging year. In addition, there will be more legislative changes that will impact on our business. Our corporate customers have been affected by the economic downturn and the effects of that will start to be seen in 2009. The private client market is now already under pressure and customer behaviour will be impacted. This could lead to lower customer activity during the year, however we continue to focus on developing innovative ﬁ nancial product solutions to address customer needs in the current economic climate. We continue to beneﬁ t from a combination of a broad product mix, a range of insurance, banking and investment business, market-leading expertise and a proven business model. We believe ourselves to be well positioned to handle the challenges ahead, as demonstrated by the delivery of excellent results in 2008 despite the market turbulence. Priorities for 2009 > Top quality customer service > High quality, innovative offers for our end-customers and distributors through advisory tools and top quality advice, innovative products, top quartile returns and excellent customer service > New investment portfolio products > Cost control. 1.3 EUROPE AND LATIN AMERICA Our Europe and Latin America business (ELAM) provides long-term insurance and savings products across continental Europe and in Latin America. Our entrepreneurial approach and leadership style has enabled us to deliver strong growth since start-up in the late 1990s. We have a strongly local distribution focus, while continuously seeking to exploit the scale and revenue enhancement opportunities that come from being part of the Old Mutual Group. From January 2009 we have restructured the business in continental Europe to reﬂ ect our principal customer segments in order to leverage capabilities and operational efﬁ ciencies across geographies. The transition to two main business structures will take place throughout 2009: > Afﬂ uent: targets the afﬂ uent segment and currently comprises the businesses in France, Italy and Spain > Mass Retail: meets the savings needs of this signiﬁ cant part of the population and comprises the businesses in Germany, Austria, Switzerland, Poland and Eastern Europe. This foundation for efﬁ ciency in Central Europe and the integration of the Southern European businesses will allow us to take advantage of further efﬁ ciency opportunities in the future in the Mass Retail and Afﬂ uent businesses. Latin America continues to serve a mix of customer segments, primarily through tied ﬁ nancial planners. Markets and products Our products include both unit-linked insurance and mutual funds. These are invested through a wide range of open-architecture funds in various asset classes, including funds selected and tracked using our 4P (Philosophy, Process, People, Performance) process. Our managed funds allow asset allocation in line with customers’ risk proﬁ les. To meet customer demand our offer includes both regular-premium products with optional top-ups and single-premium products. Regular-premium products create a steady ﬂ ow of lower-value premium amounts with a high embedded value, while single-premium products create larger but more volatile net client cash ﬂ ows. i w e v e r s s e n s u B i Page 33 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Technology continues to offer interesting opportunities for reaching and serving customers and distributors. While online direct sales are not a big driver of life insurance sales, the servicing and communication opportunities should allow providers to reduce operational costs while delivering improved service and convenience. Effective use of technology linking distributors and suppliers to make product delivery simpler is a cornerstone of the open-architecture model. Strategy for growth We believe that success comes from serving customers and distributors effectively through constant innovation. Our strategy is to place the customer at the centre of what we do and to fully focus the business on meeting customer needs. Focusing our product and service offer on speciﬁ c customer segments will allow us to meet their expectations better. The key drivers for success in the Afﬂ uent segment are breadth of offer and quality of advice and service. Mass Retail business is driven by efﬁ ciency and simplicity. Institutional business is driven by investment performance and access to products. We remain focused on building scale in funds under management through net client cash ﬂ ows and increased market share, as well as securing proﬁ tability through cost efﬁ ciency. We sell through a number of channels. In Europe we distribute via independent ﬁ nancial advisers (IFAs), sales organisations, banks and networks. In Latin America most of the business is distributed via our tied ﬁ nancial planners. We employ a segmentation approach to distribution, understanding that each channel has different needs, objectives and drivers. Market overview Our external market environment is strongly regulated. Over recent years government policy has driven growth in private long-term savings as well as improved transparency for customers. This has generally been favourable to us – though some regulations aimed at the market as a whole, such as Germany’s Mindestuzführungsverordnung, have not matched our niche offering well. We believe the fundamentals of the European market remain positive over the long term. Shortfalls in public pension systems and transfer of wealth to the next generation provide opportunities for investment from individuals. Similar opportunities should emerge in Latin America as its economies mature. In the short term, the global economic crisis is offsetting these positive market fundamentals. Government interventions in European ﬁ nancial markets in 2008 dampened the demand for long-term savings products through the securing of bank deposits and stimulation of private spending rather than savings. The unit-linked segment continues to attract competition from traditional players – an indication of its relevance and future potential. In the short term, traditional life has increased its relative importance as investors seek guarantees. We believe that this is a temporary effect and that the unit-linked segment will regain ground as the market recovers. The IFA channel remains important and is expected to continue growing, with banks and sales organisations continuing to be strong players. Consolidation in these channels will change the landscape over the longer term and will make strong relationships even more important. Page 34 Old Mutual plc Annual Report and Accounts 2008 Performance in 2008 Highlights (€m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on Equity Return on Equity (excluding goodwill) Adjusted operating proﬁ t (covered business) (MCEV basis) (post-tax) Return on embedded value (covered business) Life assurance sales (APE) Unit trust/mutual fund sales Value of new business APE margin PVNBP PVNBP margin Net client cash ﬂ ows (€bn) Funds under management (€bn) *Restated, as now reporting on an MCEV basis. 2008 2007 % Change 14 (0.3%) (1.3%) 5 0.6% 211 2,077 13 6% 1,559 0.8% 1.1 10.3 43 1.5% 7.3% 13 1.5% 276 3,071 57* 20%* 2,182* 2.6%* 1.8 13.0 (67) (62) (24) (32) (77) (29) (39) (21) Strongly positive net client cash ﬂ ow during market volatility Net client cash ﬂ ows were robust considering the market volatility, especially in the highly unstable fourth quarter of 2008. With the market in some of our operating countries, for example France and Italy, showing substantial outﬂ ows during the fourth quarter, our own performance compares strongly. Strong persistency, driven by pro-active retention campaigns and the ability for clients to switch to more conservative portfolios, provided support to strong net client cash ﬂ ows. Funds under management ended the year 15 percent below 2007 on a like-for-like basis (net of Palladyne which was divested during 2008). This included negative market movements on portfolio values of 27 percent of opening funds under management, reﬂ ecting the fall in ﬁ nancial markets across the globe throughout 2008. In comparison, the majority of European equity indices fell between 30 percent and 50 percent in 2008. Funds under management were partially supported by the effective asset mix of the portfolio which incorporates non-equity asset classes and reﬂ ects the investment appetite of customers that shifted further during 2008 towards guaranteed funds and other less risky asset classes. Life sales impacted by constrained sales environment Life sales on an APE basis were down throughout the year but especially in the fourth quarter due to negative investor sentiment. This effect was stronger in single- premium business, where investors typically have access to a wider range of investment opportunities and seem to have been taking a “wait-and-see” approach to investing under the current conditions. Regular-premium business has been relatively more stable, reﬂ ecting the smaller premium sizes and habitual nature of saving on a regular-premium basis. Nevertheless, regular-premium sales have also been under pressure during the year, and the market volatility had a dampening effect on the traditional European seasonal ramp-up in sales in the ﬁ nal quarter, with the fourth quarter falling short of prior year levels. Focused activity to support mutual fund sales Given the market volatility and our core differentiator of this business line being international equities, mutual fund sales provided a solid contribution, although down 20 percent compared with 2007 on a like-for-like basis. We continued our efforts to deliver innovative products and quality service. During 2008, much focus was placed on improving the productivity of ﬁ nancial planners in Latin America. Increased training, new product offers and planning tools assisted ﬁ nancial planners in generating sales in the current conditions. Value of new business and proﬁ t margins down VNB of €13 million was down 77 percent over 2007, mainly as a result of lower sales in 2008 in light of the market crisis. In addition, VNB was negatively affected by changes in operating assumptions, where in particular the changed regulation on policyholder proﬁ t participation reduced German VNB. The APE margin deteriorated to six percent from 20 percent in 2007. This was attributed to lower APE sales, which for the more recently established businesses was aggravated by a relatively ﬁ xed expense base leading to acquisition expense over-runs. In addition, the strong sales of high margin business in Poland in 2007 was not sustained in 2008. i w e v e r s s e n s u B i Page 35 1.0 BUSINESS REVIEW EUROPE AND LATIN AMERICA 1.0 2.0 3.0 4.0 1.1 UK and Offshore 1.2 Nordic 1.3 ELAM 1.4 Skandia Investment Group Adjusted operating proﬁ t (IFRS basis) impacted by wider market environment We generate a signiﬁ cant element of our revenues from funds under management and these fees were lower in line with reduced levels of funds under management. This negative impact was partially offset by the growth of the in-force book of business during the year. Furthermore the revised policyholder participation regulations implemented in Germany during 2008 both widened the deﬁ nition of revenues to be shared with policyholders and increased the level of participation. This had a €20 million impact on the IFRS adjusted operating proﬁ t for the year. This calculation is net of acquisition expenses and these were lower, in line with new sales levels, and so policyholder participation levels were relatively high. To protect the bottom line, we maintained our expense base at 2007 levels, identifying efﬁ ciencies to offset growth in sales force and inﬂ ationary impacts. Adjusted operating proﬁ t (MCEV basis) suffered from weak new business contribution and negative experience variances MCEV adjusted operating proﬁ t was €5 million for 2008, 62 percent lower than 2007. This was largely due to lower VNB and poorer experience variances which included divisional restructuring costs. The operating assumption changes had a negative impact on the adjusted operating proﬁ t, but not to the same magnitude as for 2007. Changes have been made to persistency rates and expense levels, both of which have been strengthened. Capital ELAM’s businesses continue to measure and monitor their capital resources on an ongoing basis to ensure compliance with the minimum capital requirements of the regulators in each territory in which we operate. Internally we manage our businesses to maintain a buffer of at least 25 percent in excess of the local requirements. Due to the decrease in funds under management levels, solvency requirements across our markets reduced while our capital employed increased, and therefore solvency coverage increased signiﬁ cantly over the year. Marketing The volatility of international ﬁ nancial markets increased the importance of marketing to reinforce our sales message in three areas: Product innovation Innovation focused on protecting investments to retain existing business and generate new sales. Examples included launching our own traditional life fund in France offering customers capital security and a product with annuity features in Germany. Expansion of distribution We continued to grow our distribution base across all our markets. In Italy we added a number of large distributors and in Spain we launched an internal sales force. Branding All our businesses operate under the Skandia brand name in their local markets. We carried out the ﬁ rst wave of rebranding to the new Skandia green brand in several markets; this enabled us to re-emphasise the beneﬁ ts of our offer even in the current negative ﬁ nancial market environment. Customer service We continued to focus strongly on our customers, delivering a number of new products and service innovations throughout the year. Examples include annuity features in Germany, a second Easy Plan product in Switzerland, various distributor products in Italy and France, dollar-cost averaging and rebalancing features in Europe and new investment alternatives in Latin America. We also improved service to our customers and distributors through differentiated service offers to top distributors, pro-active service and retention campaigns, and improved distributor tools. These innovations have been well received by the market, as can be judged from the various product and service awards won during the year, including: > Austria: FONDS Professionell Service Award > Germany: Runner-up, AssCompact Fondspolicen Award > France: Gold Pyramid, Investissement Conseils Awards > Spain: Winner, Expansion Mutual Funds Portfolio Competition > France: Gold Medal, Dossiers de l’Epargne Awards > France: Bronze Trophy, Le Revenu Awards. Page 36 Old Mutual plc Annual Report and Accounts 2008 Priorities for 2009 > Rapid transition to the new business structure, building on existing expertise and improving operational scale efﬁ ciencies while retaining day-to-day focus on customers and distributors > Further develop the platform for reaching and servicing the Afﬂ uent segment, including products, distribution, advice and service > Improve efﬁ ciency in the Mass Retail business, focusing on simpliﬁ cation and matching the offer to the market, improving proﬁ tability and increasing market share > Innovative solutions for customers and distributors to support them through the difﬁ cult times. 1.4 Skandia Investment Group Skandia Investment Group (SIG) is our investment management organisation. It brings together all Skandia’s investment research, analysis, portfolio management, open-architecture and investment product expertise. SIG encompasses Skandia’s three in-house investment management companies: Skandia Global Funds, Skandia Fonder and Skandia Investment Management Limited (SIML). The formation of SIG created one of the world’s largest multi-manager investment organisations, managing assets of around £53 billion across a variety of multi- manager and open-architecture investment products. Principal risks and uncertainties ELAM’s business model carries limited guarantee and liability risk. Strategic and operational risk is reviewed regularly and managed through our risk framework. Our ongoing focus to build and diversify distribution aims to reduce concentration risk. The existing concentration levels remain within a reasonable range and we expect that future planned activities will assist us to manage this risk further. ELAM’s business mix, which includes regular- and single-premium, retail and institutional business, provides mitigating support to impacts on business results in the current volatile market conditions. However, uncertainty about the future extent and length of a global recession remains and market trends remain difﬁ cult to predict. ELAM’s geographic diversity reduces the economic, market political and legal/regulatory risks that would typically exist in single-market businesses. The transition to our new business line structure carries some change risk. A strong change management programme has been deﬁ ned to reduce impacts to new and existing business. Outlook for 2009 The global ﬁ nancial crisis and recessionary pressures are expected to be the main inﬂ uence on the market in 2009. We expect new business to be constrained as investor conﬁ dence remains suppressed. Guaranteed products are likely to remain important to investors in 2009, temporarily slowing the growth of the unit-linked segment compared with traditional life. Products such as our traditional life fund in France and our rebalancing features will help us win sales in the current climate. Regular-premium business – which has been relatively unaffected by the market crisis – is expected to help our sales development in 2009, as the averaging effect of regular-premium investments should support our sales propositions. Our strong performance in net client cash ﬂ ow and client asset values compared to the market has been positive for our market share. We believe that we will be able to capitalise on this further once conﬁ dence returns and markets return to growth. i w e v e r s s e n s u B i Page 37 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Paul Hanratty Head, Long-Term Savings and Managing Director, Old Mutual South Africa Keith Kennedy Managing Director, Mutual & Federal Tom Boardman CEO, Nedbank KEY FACTS Adjusted operating proﬁ t (IFRS basis) 2008 Funds under management 2008 £1,191m 2007: £1,245m £41bn 2007: £41.7bn Life sales (APE basis) Unit trust sales £353m £336m £1,534m £1,138m 2008 2007 2008 2007 Number of countries Number employed 7 48,072 Page 38 Old Mutual plc Annual Report and Accounts 2008 We operate the largest ﬁ nancial services business in South Africa, providing wealth management, investment products, retirement savings, life, disability and health insurance to individuals and groups. We also offer ﬁ nancial services in other parts of Africa through operations in Namibia, Zimbabwe, Malawi, Kenya and Swaziland. Our banking business in Africa is conducted by Nedbank Group, in which we have a 55 percent controlling interest. Nedbank is one of the four largest banks listed on the Johannesburg Stock Exchange (JSE). We also have a 74 percent controlling interest in Mutual & Federal Insurance Company Limited, the South African general insurance company. 2.1 Old Mutual South Africa (OMSA) Old Mutual South Africa (OMSA) comprises asset management and life operations and has one of the largest advice-based distribution capabilities in the South African industry. The Retail division covers both the Afﬂ uent and Mass markets, while the Corporate division provides products and services to corporate, institutional and public sector customers. Our asset management operations in South Africa are represented by Old Mutual Investment Group South Africa (OMIGSA). This multi-boutique asset management business, currently comprising 13 individual boutiques, was formed in 2007 in response to a growing demand for core and specialist investment capabilities. Our boutiques provide a range of investment capabilities designed to meet a variety of retail and institutional customer needs. We offer investment capabilities to the pension fund and corporate market, as well as managing a range of retail portfolios which individuals can access through the various Old Mutual products. The Old Mutual brand has very high awareness, trust and loyalty among South African consumers across all market segments. In 2008 it was rated number one for life assurance (2008 Markinor Brands Survey) and for after-sales service (2008 Ask Afrika Orange Index). Established in 2003, Old Mutual Service Technology and Administration (OMSTA) provides a single, cost-effective point of service, technology and administration for the Retail Afﬂ uent, Retail Mass and Corporate customer- facing businesses. It services all our customers, intermediaries and retirement fund members across our full product range through our extensive branch network, call centres, web capabilities and back ofﬁ ce. In addition it offers technological infrastructure for OMSA, along with application development for both OMSA and other Old Mutual Group companies internationally. i w e v e r s s e n s u B i Page 39 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Markets and products Retail Our Retail division covers both the Afﬂ uent and Mass markets, offering life, disability, retirement annuities, savings and investment products. We distribute these through independent brokers (IFAs), bank brokers, tied distribution (personal ﬁ nancial advisers for the Afﬂ uent segment and salaried sales force for the Mass segment), a direct distribution channel and other retail partnerships. Bancassurance through Nedbank’s ﬁ nancial advisers and staff is another important channel. Asset management Old Mutual Investment Group (South Africa) (OMIGSA) investment boutiques collectively span all major asset classes and employ unique strategies to meet our customers’ different needs and risk proﬁ les. Together, they give customers access to a comprehensive range of savings and investment solutions. We are building on our traditional South African customer base by offering property, exchange traded funds (ETFs) and hedge-fund solutions that also meet the needs of international investors. Our key Retail product offerings include Greenlight, a ﬂ exible and comprehensive range of life, disability, and future-needs cover. We provide a range of retirement savings plans, annuities, investment and income products through different wrappers – including the Max, Investments Frontiers and Galaxy product ranges. In the Mass segment we offer customers savings, retirement and funeral cover products. To ensure products are appropriate for today’s environment, our more recent investment and savings products feature signiﬁ cantly lower charges and capital requirements and have greater transparency and ﬂ exibility. Our investment offering is open-architecture, but Old Mutual managed funds form a large part of the underlying assets managed for Retail customers. Corporate Our Corporate division sells investment, retirement, insurance, structured products and advisory services to corporate, institutional and public sector customers. Under a life wrapper, we provide underwritten investment products for retirement funds, and group life and disability insurance to retirement funds established by employers for their employees and by trade unions for their members. Group assurance products provide life cover to employees in the event of death, funeral cover and funeral support services, and a full range of disability solutions. We customise investment products to meet our individual customers’ requirements. These include smoothed bonus portfolios, absolute return portfolios, structured solutions and annuity products, and third-party asset management. We offer other multi- managed asset management solutions and administer a range of retirement schemes for corporates and umbrella arrangements. Many of these schemes are deﬁ ned contribution and open-architecture. Our investment boutiques include: > Specialist equity businesses > Futuregrowth (ﬁ xed income) > Umbono Fund Managers (index tracking) > OMIG Property Investments (property asset management and property management) > SYmmETRY (multi-manager portfolios for institutional investors across multiple asset classes) > Private equity and infrastructure investment > Old Mutual Specialised Finance (corporate advisory, corporate lending, securities lending and structured products). Market overview In 2008 local markets followed a similar pattern to international markets, with a dramatic fall followed by a marginal recovery at the end of the year. The Johannesburg All Share index lost over a quarter of its value, with dramatic variances between sectors. Inﬂ ation continued to rise through the ﬁ rst three quarters of the year but fell back in the last quarter, prompting a reduction in interest rates at the end of the year. These factors, combined with slower global growth and lower demand for South African exports, slowed local economic growth in 2008 – after four years of strong expansion. The ﬁ nancial services sector has so far remained largely unaffected by the global ﬁ nancial crisis. Competition has continued to increase as banks, life assurers and asset managers expand their product ranges in an effort to grow market share. New entrants challenge existing practices without the burden of legacy issues. Following the changes in the leadership of the African National Congress (ANC) at the end of 2007, 2008 was an eventful year on the political front. The most notable change was the replacement of Thabo Mbeki by Kgalema Motlanthe as State President in the second half of 2008. We view the peaceful change in ANC and state leadership and the subsequent emergence of a new political party as encouraging signs of the development of democracy in the country. Page 40 Old Mutual plc Annual Report and Accounts 2008 Major brands Old Mutual > Old Mutual Investment Group > Products > Retirement savings plans > Annuities > > Savings products > Group life and disability insurance > Group assurance products Investment products OLD MUTUAL SOUTH AFRICA Financial scale: FUM £34bn Life (APE) sales £336m Unit trust sales £1,350m IFRS AOP* £522m Number of employees 15,970 Key geographies South Africa > * This includes the long-term investment return (LTIR) plus other shareholder income and proﬁ t from OMSTA. The LTIR is the long-term return that we assume can realistically be earned on investible shareholder assets when deriving a smoothed operating result. The regulatory regime has been evolving to provide greater transparency and protection to the consumer. New commission regulations, effective from 1 January 2009, represent one of the most profound changes to the long-term insurance sector for many years. The overall savings rate in South Africa remains low, and a large proportion of savings is being channelled into non-ﬁ nancial investment vehicles such as property. The economic growth of recent years has fuelled growth in the emerging and middle-income market segments; these segments will continue to present opportunities going forward, albeit with growth at lower levels. The long-term outlook for the savings and investment environment is positive for a number of reasons: > The prudent ﬁ scal and monetary policies of recent years are expected to continue and to guide the economy back to robust growth > The growing black middle class and afﬂ uent markets supported by economic expansion and Black Economic Empowerment efforts will sustain growth in consumer spending > The Government is continuing to invest in infrastructure > There are Government plans for a mandatory retirement savings framework > The level of ﬁ nancial awareness and the transparency of ﬁ nancial products is improving. Strategy for growth Our strategic aim is to move from being a traditional life insurer to become a leading provider of investment and savings solutions to each and every South African. To achieve this, we are working to become a consistently top-performing asset manager in every asset class through our range of investment boutiques – which we will expand to cover more niche positions. We are already recognised as the number 1 long-term insurance brand in the market and are building recognition and awareness as a leading savings and investment brand. We will broaden our ﬁ nancial services offerings, and update existing products, to satisfy a demanding customer base and new regulations. We will also add products aimed at the Foundation Market. At a time when others are expected to make cutbacks, we will unlock competitive advantage by growing access to customers and distribution ahead of our competitors. And we will use our strong operating position in southern Africa to expand selectively into other parts of Africa that offer high growth potential. Operational excellence and cost control are essential if we are to provide our customers with affordable and competitive products at a sustainable margin. Through OMSTA, we will continue reducing the operational cost of the business, making better use of IT to improve customer service and provide a solid platform for growth. We also want to position Old Mutual as the leading South African corporate citizen in ﬁ nancial services. OMSA has always played a leading role in supporting the economy and people of South Africa. We will continue doing this through broad-based initiatives aimed at creating opportunities for disadvantaged people and businesses alike. Useful links: www.oldmutual.co.za www.omigsa.com i w e v e r s s e n s u B i Page 41 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Performance in 2008 Highlights (Rm) Long-term business adjusted operating proﬁ t Asset management adjusted operating proﬁ t Long-term investment return (LTIR) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on allocated capital Adjusted operating proﬁ t (covered business) (MCEV basis) (post-tax) Return on embedded value (covered business) (post-tax) Life assurance sales (APE)* Unit trust/mutual fund sales** Value of new business APE margin PVNBP PVNBP margin Net client cash ﬂ ows (Rbn) SA client funds under management (Rbn) 2008 2007 % Change 3,390 1,078 3,521 7,989 27.8% 4,972 14.4% 5,145 20,648 831 16% 35,440 2.3% (5.5) 443.0 3,082 946 2,988 7,016 24.0% 3,857 11.7% 4,516 15,547 694^ 15%^ 32,010^ 2.2%^ (18.7) 445.0 10 14 18 14 29 14 33 20 11 71 – *Life sales now exclude healthcare business. 2007 sales have been restated from R4,699m. **Unit trust/mutual fund sales now include Marriott. ^Restated as now reporting on MCEV basis. Funds under management were ﬂ at over 2007 mainly due to lower asset values in volatile markets and improved net client cash outﬂ ows of R5.5 billion offset by the inclusion of Futuregrowth’s R35 billion of funds under management. The acquisition of Futuregrowth has resulted in an expanded set of ﬁ xed income products available to the Old Mutual customer base. Retention of third-party assets has improved signiﬁ cantly with the bedding down of the OMIGSA boutique structure leading to the overall reduction in client outﬂ ows relative to 2007. Outﬂ ows remained a challenge, affected by higher bonuses declared in 2007 and early 2008, which increased the level of normal beneﬁ t payments, particularly in Employee Beneﬁ ts (EB), as well as higher member withdrawals from pension funds as a result of the deteriorating economic environment. Life assurance sales increased 14 percent in 2008. This improvement was particularly pleasing considering the effect of the current economic climate on consumer spend. We achieved excellent growth in life single- premium sales of 26 percent compared to 2007, but we experienced a slow down in single-premium sales in the fourth quarter. Savings products sales grew by 12 percent as investors opted for more conservative fund options under the life wrapper in response to volatile investment markets, particularly in the Retail Afﬂ uent market. Annuity sales were up 85 percent with some good ﬂ ows in the Corporate Segment’s new guaranteed-term annuity product as well as with-proﬁ t annuities. Our focus on working closely with consultants advising institutional investors has helped us grow our sales pipeline, although the sales process is longer as investors are more cautious in the current markets before deciding to move assets. Life recurring-premium sales were strong, up eight percent over 2007. Sales of recurring-premium savings products increased by 16 percent compared to 2007 driven by an expansion in the Retail Mass segment sales force. High interest rates adversely affected our credit life sales through the banking channel as loan advances dropped. Sales of risk products to the Retail Afﬂ uent market were largely ﬂ at over 2007 as customers faced affordability problems. In December 2008 we reached an agreement to sell our healthcare business to Lethimvula. As a result we now exclude healthcare sales from our life sales and from our embedded value calculations. Unit trust sales of R20.6 billion were 33 percent higher than in 2007, showing excellent growth, albeit from a low base with investors moving to lower risk money market funds. We continue to focus on improving investment performance, as well as focus on the alignment of our unit trust fund offering to our boutique capability and allowing the OMIGSA boutiques to operate with independent investment philosophies and processes. VNB grew 20 percent over 2007 driven by the increase in sales and the increase in the margin as a result of strong with-proﬁ t annuity sales in the Corporate Segment where the APE margin increased from 15 percent in 2007 to an outstanding 23 percent for 2008. The contribution of the with-proﬁ t annuity sales to the APE margin was partly offset by the higher frictional tax costs after reducing the proportion of capital invested in equities. The Retail Afﬂ uent margin also declined as a result of the lower proportion of high margin risk business following the fall in credit life sales. Page 42 Old Mutual plc Annual Report and Accounts 2008 Adjusted operating proﬁ t (IFRS basis) increased strongly, up 14 percent over 2007. Despite challenging markets, our long-term business proﬁ ts increased 10 percent, driven by lower costs due to sound management of expenses with the lower Old Mutual plc share price impacting incentive costs. In addition we gained some signiﬁ cant non-repeating items including a reduction in employee beneﬁ t obligations of R128 million, interest on SARS refund of R64 million and an insurance claim of R37 million. We also saw improved general experience variances. Although we increased our allowance for worsening persistency and we increased our investment guarantee reserve (IGR) by R409 million during the year, these assumption changes were not as adverse as in 2007 when we determined the IGR on a market- consistent basis for the ﬁ rst time. These positive factors were partially offset by lower capital charges as a result of lower asset values and the move to lower margin products such as the move by Old Mutual Staff Fund to Absolute Growth Portfolios as well as negative termination experience especially in the mass market segment. Our asset management adjusted operating proﬁ t was up 14 percent due to lower expenses attributable to the impact of a lower Old Mutual plc share price on incentive costs. The impact of the move to performance based income in the current environment resulted in lower asset management fee income which was offset by strong performance in our credit operation (OMSFIN). The LTIR increased by 18 percent after increasing the rate applied at the beginning of the year by 100bps to 16.6 percent, reﬂ ecting the high investment returns on shareholder funds achieved in 2007 and higher investible asset balances. Adjusted operating proﬁ t (MCEV basis) increased by 29 percent over 2007, mainly due to higher expected return (based on higher one-year swap rates), higher new business contribution and the higher adjusted operating proﬁ ts (IFRS basis) discussed above. These positive factors were partly offset by the impact of adverse termination experience particularly in the Retail segments as a result of the tougher economic environment. Capital position Rm 2008 % 2007 Change Admissible capital Statutory capital adequacy 42,582 45,039 requirement (SCAR) Statutory capital cover 11,176 11,739 3.8 times 3.8 times (6) (4) OMSA’s life company capital position remains strong in spite of turbulent markets. The statutory capital cover remained stable at 3.8 times since December 2007. Admissible capital was lower than December 2007 levels due to a fall in market values, offset by the effect of our hedging programme and increased cash holdings. At 31 December 2008 the statutory capital requirement reduced four percent to R11,176 million as a result of a decision to hold more cash and reduce our exposure to equities. The impact of lower equity markets and the new regulatory requirement to include allowance for operational risk, credit risk and investment guarantee reserve sensitivity in capital requirements, were offset by higher assumed management actions in the investment resilience scenario used for calculating the capital requirement. Retail Mass Rm Life sales (APE) Savings Protection Total 2008 % 2007 Change 736 576 613 477 1,312 1,090 20 21 20 13 5 Value of new business APE margin Net client cash ﬂ ows (Rbn) 270 21% 2.0 240^ 22%^ 1.9 ^Restated, as now reporting on an MCEV basis. Retail Mass sales were up a pleasing 20 percent over 2007 largely due to strong growth in salaried adviser manpower. The broker and direct channels also delivered strong sales growth. Net client cash ﬂ ows were ﬁ ve percent ahead of last year. The impact of higher surrenders (indicative of the current economic conditions) and greater volumes of maturing savings business (introduced ten years ago and short-term savings business introduced ﬁ ve years ago) was offset by favourable mortality experience. VNB increased at a slower rate than sales due to the re-pricing of our protection product range and the impact of lower expected returns (based on assumed lower future swap yields) on the value of future proﬁ ts on the segment’s protection products. i w e v e r s s e n s u B i Page 43 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Retail Afﬂ uent Rm Life sales (APE) Savings Protection Annuity Total Life sales (APE) Single Recurring Non-life sales Unit trust/ mutual fund sales Other non-life sales Value of new business APE margin Net client cash ﬂ ows (Rbn) 2008 % 2007 Change 1,428 996 219 1,321 1,056 197 2,643 2,574 907 1,736 868 1,706 17,978 13,339 4,871 336^ 13% (2.7) 4,782 320 12% (1.1) 8 (6) 11 3 4 2 35 (2) (5) 59 ^Restated, as now reporting on an MCEV basis. Net client cash outﬂ ows improved over 2007 but remained negative, as the prevailing adverse economic environment increased client withdrawals. Total Retail Afﬂ uent life sales on an APE basis increased a solid three percent. Recurring-premium sales experienced challenges, with inﬂ ationary pressures and higher interest rates which impacted negatively on consumer disposable income. Recurring-premium savings sales grew by 13 percent with Max Investment recurring-premium sales up six percent and a full year contribution from Nedlife’s Dreammaker, launched in the middle of 2007, producing a 112 percent increase albeit off a low base. The shift from life-wrapped savings business to other wrappers continues with non-life recurring-premiums up 32 percent from a relatively low base. Greenlight sales grew by one percent as a result of affordability issues among customers and credit life sales declined on 2007 after the reduction in loan volumes as a result of the high interest rate regime and the impact of the National Credit Act. Life single-premium sales were up four percent with living annuities up 20 percent on 2007. Conventional annuity sales were also solid as a result of the continued competitiveness of our annuity rates, enhanced by a recent repricing exercise. Total annuity sales including living annuities were up 11 percent on 2007. However, Max Investment and Investment Frontiers single- premium sales were down 10 percent and one percent respectively on 2007 as a result of the impact of market volatility on single-premium investments. Non life single-premium savings business was up 25 percent on 2007 due to investors moving to money market funds in the volatile investment markets and the relaunch of Galaxy Elite, an upgrade to our existing investment platform. VNB decreased by ﬁ ve percent despite the overall increase in sales. In addition to the higher frictional tax costs following the change in shareholder investment mandate (more cash, fewer equities) the decline was also caused by the lower credit life sales, which have high margins. Corporate Segment Rm Life sales (APE) Savings Protection Annuity Total Life sales (APE) Single Recurring Value of new business APE margin Net client cash ﬂ ows (Rbn) 2008 2007 % Change 386 125 350 861 671 190 201 23% (4.0) 346^ 145 111 602 393 209 91^ 15%^ (4.1) 12 (14) 215 43 71 (9) 121 2 ^Restated, as now reporting on an MCEV basis. Corporate life sales on an APE basis were 43 percent higher in 2008, driven by higher sales in Employee Beneﬁ ts savings and annuity products. Single-premiums were excellent. The introduction of the Guaranteed Term Certain product boosted annuity sales, and there were also good ﬂ ows into Smoothed Bonus products. Sales of protection products were below 2007 as insurers stepped up efforts to retain business thereby reducing potential new business. Our retention of protection business also improved in 2008. Page 44 Old Mutual plc Annual Report and Accounts 2008 VNB increased signiﬁ cantly in 2008 relative to the increase in sales. This was because of higher sales volumes in EB combined with the favourable mix of sales, notably the higher proportion of with-proﬁ t annuity sales. This had a ﬂ ow on impact in the new business margin improving relative to 2007. Net client cash ﬂ ows in the EB arena were marginally better than in 2007. Higher inﬂ ows were almost offset by higher outﬂ ows. Terminations were similar to 2007 levels, but beneﬁ t payments were much higher. Higher bonus declarations during 2007 (smoothed bonus) and early 2008 (annuities) increased the level of normal beneﬁ ts. In addition to this, a trend of increased beneﬁ t withdrawals from funds as a result of current economic pressures contributed to increased outﬂ ows. Life sales were ahead of 2007 as a result of good repeat investments by existing customers in SYmmETRY. Non-life sales were higher than 2007 as a result of better unit trust ﬂ ows on the back of improved stability of our investment professional teams in the boutiques. Net client cash outﬂ ows were largely from institutional customers to fund beneﬁ t payments. As our boutique structure has bedded down, our teams have stabilised. We have set strong foundations over the last two years and are seeing improving levels of acceptance and conﬁ dence in individual boutique investment philosophies and processes. The acquisition of Futuregrowth and merger of the OMIGSA Fixed Income and Futuregrowth teams has proceeded smoothly, with minimal disruption to their investment processes. Customers continued to transfer from the old smoothed bonus products to the Absolute Growth Portfolios launched in 2007. Transfers of R21 billion occurred during the year. These transfers are not counted as new business. Old Mutual Investment Group South Africa (OMIGSA) Rm 2008 2007 % Change Life sales (APE) Unit trust/mutual fund sales Value of new business APE margin Net client cash ﬂ ows (Rbn) 329 250 2,669 40 12% (2.4) 2,208 28 11% (13.8) 32 21 43 83 Funds under management Rbn Life Unit trusts Third party Total OMIGSA managed assets 2008 2007 % Change 296 45 110 319 48 88 (7) (6) 25 451 455 (1) Funds managed by external fund managers 29 34 (15) Total OMSA funds under management Less: managed by Group companies for OMSA Total OMSA client funds managed in SA 480 489 (2) (37) (44) (16) 443 445 – The South Africa equity market (JSE All Share Index) fell 26 percent during 2008. The outperformance of resources during the six months to the end of June reversed abruptly in the second half of the year, with resources down 46 percent relative to a -1 percent return from ﬁ nancial stocks. Compelling valuations in the ﬁ nancial sector meant that a number of OMIGSA boutiques were underweight resources and overweight ﬁ nancials from the last quarter of 2007. This positioning led to improved performance over the second half of 2008, with some of the ground lost since September 2007 regained. Performance in our ﬁ xed income area was very good. The Old Mutual Income Fund and Mining and Resources Fund won certiﬁ cates for top straight performance in their respective categories for the three years ended 31 December 2008 at the Raging Bull Awards. Investment performance across our diverse boutiques was mixed. Our relative fund performance across the majority of boutiques nevertheless ended the year better than at the end of 2007, albeit below our target levels. Over one year to the end of 2008, 57 percent of peer group funds outperformed the median (compared to 39 percent as at the end of 2007). Over three years to the end of 2008, we improved from 31 percent outperforming to the end of 2007 to 40 percent above median at end 2008, and similarly measured over ﬁ ve years improved from 36 percent to 54 percent above median. Compared to industry median, overall, 55 percent of unit trust funds were above median over one year, 35 percent over three years and 45 percent over ﬁ ve years to the end of December 2008. i w e v e r s s e n s u B i Page 45 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank On the benchmark performance front, the difﬁ culty of beating inﬂ ation and cash-plus benchmark in an environment where growth assets are very negative, weighed heavily on the delivery of funds which are measured mostly against an absolute benchmark. At the end of 2008, 38 percent of funds measured against benchmark were outperforming over one year, compared to 50 percent at the end of 2007. However, over the longer term period of ﬁ ve years we improved slightly, with 55 percent of funds outperforming benchmarks compared to 50 percent for the ﬁ ve years to end 2007. Marketing Recognising the increasingly competitive environment and the need to reach new markets, we increased our marketing investment – improving our brand presence and product support, making progress in promoting the new OMIGSA boutique model, and reaching the previously under-serviced Foundation Market which we see as central to the success of the South African economy in years to come. We launched Max II, our recurring-premium product range, to meet new commission regulations. Our aim in product development is to exceed customer expectations: hence Galaxy Elite, an investment product that delivers excellent value for high net worth retail customers, and our Absolute Growth Portfolios product, which is now a market leader in the corporate segment. We also used the uncertainty in the ﬁ nancial markets towards the end of the year to highlight the beneﬁ ts of our smoothed bonus and guarantee products as well as our strong capital position and credit rating through the ‘Certain friend in uncertain times’ campaign. This above-the-line activity supports our extensive face-to-face distribution in the retail and corporate markets. Customer service Customers are at the heart of our business. In 2008 we revitalised our retail sales and customer services branches. We set a new benchmark in convenient ﬁ nancial services by moving into retail shopping areas and opening 19 Greenzones – one-stop shops offering banking, assurance, insurance and investment products. We extended our reach by signiﬁ cantly growing tied distribution and increasing our activity in both the broker and direct markets. In the corporate segment, focus on relationships with consultants is building our pipeline and sales. We have combined all customer servicing for our Retail Afﬂ uent, Mass Retail and Corporate customer-facing businesses into OMSTA. We continually drive service levels higher through LEAN process re-engineering methodology. Customers and intermediaries are serviced via a combination of call-centres, web capabilities and the extensive branch infrastructure. By applying OMSTA’s IT expertise we reduced servicing cost per policy while improving service levels and were voted No1 for after-sales service in the 2008 Ask Afrika Orange Index. Principal risks and uncertainties As we go into 2009 we face a number of risks from the economic environment. These include a weak equity market and the possibility of further equity falls adversely affecting our earnings, our embedded value and our sales (as customers avoid investment and savings products with equity content). In addition, increased terminations due to the current economic climate put more pressure on the net client cash ﬂ ow position, earnings and embedded value. Lower sales may eventuate as a result of job losses and concerns about the global economic outlook. Further decline in longer-term swap yields and further increase in equity and swaption volatilities, which would increase the size of the Investment Guarantee Reserve. Outlook for 2009 National Treasury expects growth in the economy for 2009 to be 1.2 percent. This growth rate is vulnerable to demand for South African exports from developed markets and how that will impact on manufacturing output as well as levels of commodity prices and their impact on our mining sector. Growth will continue to be supported by the Government’s infrastructure drive. The current economic environment has led to a signiﬁ cant decline in consumer conﬁ dence in the investment markets and increase in concerns about job security. There has been a shift in demand from investment vehicles with high levels of market exposure to more traditional smoothed bonus and guaranteed products, which will beneﬁ t OMSA. However, the overall pressure on the consumer will restrict sales growth until concern over the market settles and consumers start feeling the beneﬁ ts of falling inﬂ ation and interest rates. We have received notiﬁ cation to terminate early in 2009 the existing mandate to manage the Public Investment Corporation’s (PIC) assets worth about R25 billion. This will adversely affect net client cash ﬂ ows and reduce operating proﬁ t by approximately R21 million for 2009. Page 46 Old Mutual plc Annual Report and Accounts 2008 New regulations on commission, implemented at the start of 2009, are revolutionising the retail market. Changes include minimum early termination values on long-term savings contracts and a move to spread commission over the term of a policy, rather than the current front-loaded structure. We have already launched a set of products that meet the new requirements and have been working with intermediaries to help them move to the new environment. The legislation presents us with opportunities as our infrastructure is well equipped to deal with changes of this magnitude. Malawi The operation in Malawi was established in 1930. We are the market leader in asset management, life assurance, third-party asset management, pension fund administration and management, and property investment. Historically, we have focused on the corporate segment of the market and sell group life cover and annuities, pension fund management, credit life and funeral cover. We currently sell life cover to individuals in the retail segment and are developing additional products to meet the needs of this segment. The year ahead will challenge consumers, businesses and policymakers to adapt their thinking and behaviour to a changing and more challenging economic environment. OMSA’s strong capital position, brand loyalty and dominant presence will allow us to compete more aggressively in a market with declining margins and capital restrictions. Our capital position, at 3.8 times the required level, and our AAA credit rating are the best in the long-term insurance industry. As a result, we still see opportunities for growth, albeit at lower levels than in the recent past. Namibia Old Mutual Namibia was launched over 80 years ago and is the country’s leading ﬁ nancial services company, dominating both the life assurance and asset management industries. We are a leader in pension fund administration and are developing the property investment side of the business. Our unit trust business offers solutions to both corporate and retail customers. We provide life, disability, retirement savings and investment products to individuals in the Retail market segment. Priorities for 2009 > Continue our transition from a traditional life insurer to a modern savings and investment business > Continue to grow the business and net client cash ﬂ ows > Focus on growing distribution while improving investment performance, service levels and managing our costs. Zimbabwe Our business in Zimbabwe has operated for just over 100 years and is the largest ﬁ nancial services company in the country, having captured the largest market share of the life assurance and asset management industries. We also own the country’s largest building society. We provide life, disability, retirement savings and investment products for both corporate and retail customers. Rest of Africa Kenya Launched eighty years ago, Old Mutual pioneered unit trusts and offshore investments in Kenya. We continue to lead the market in both asset management and unit trusts and have been the fastest growing life assurer in Kenya. We offer a diverse product set, ranging from unit trusts, group life cover and annuities, pension fund management and third-party administration in the corporate segment, to private wealth management, unit trusts, risk products and annuities in the Retail segments. We recently launched Kenya’s ﬁ rst ever low-cost mass market risk product, ensuring that it remains relevant to this market’s ﬁ nancial needs. Swaziland We launched our business in Swaziland in May 2008. With ambitious plans, the business strives to be the leader in asset management, life assurance and property investment by providing relevant goal-based advice and value-for-money products. While the business launched with a focus on the retail segment of the Swazi market, solutions for the corporate market will be introduced in the near future. i w e v e r s s e n s u B i Page 47 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank 2.2 Nedbank Nedbank Group Limited (Nedbank) is a bank holding company 55 percent owned by Old Mutual. It is one of South Africa’s four largest banking groups through its principal banking subsidiaries, Nedbank Limited and Imperial Bank Limited, in which Nedbank has a 50.1 percent interest. Its shares have been listed on the JSE since 1969. Nedbank focuses on southern Africa, positioned as a bank for all. It offers a wide range of wholesale and retail banking services through four main divisions: Nedbank Corporate, Nedbank Capital, Nedbank Retail and Nedbank Business Banking – which separated from Nedbank Corporate in January 2009. Nedbank is based in Sandton, Johannesburg, with large operational centres in Durban and Cape Town complemented by a regional network throughout South Africa. It also has facilities in other southern African countries which are operated through its 10 subsidiary and/or afﬁ liated banks, and branches and representative ofﬁ ces in key global ﬁ nancial centres that exist to serve the international banking requirements of its South African-based multinational customers. Markets and products Nedbank Corporate This comprises the Corporate Banking, Property Finance and Nedbank Africa businesses, and the specialist Transactional Banking and Corporate Shared Services businesses. These provide lending, deposit-taking and transactional banking services to Nedbank’s Wholesale banking customers. Nedbank Corporate has a strong customer base and is well placed to take advantage of opportunities, both internally through cross-selling services offered by other divisions of Nedbank and the wider Old Mutual Group, and externally in the private and public sector markets. Nedbank Business Banking Business Banking focuses on businesses with turnover between around R7.5 million and R400 million. It provides a full spectrum of banking products and solutions as well as advisory services and specialist solutions. To make Business Banking easily accessible to its customers, its 14 regions and over 70 area ofﬁ ces are organised around four geographically deﬁ ned business units run as decentralised, regional, customer- centered businesses. Nedbank Capital Nedbank’s investment banking business consists of divisions that together manage structuring, lending, underwriting, corporate ﬁ nance, private equity and trading operations. It provides a full product range, from equity research to long-term project ﬁ nancing, enabling it to compete effectively in southern Africa and in niche areas throughout Africa. It seeks to provide seamless specialist advice, and debt and equity raising, execution and trading in all the major South African business sectors. Principal customers include a signiﬁ cant number of the top 200 domestic corporates, as well as public sector bodies, leading ﬁ nancial institutions, non-South African multinationals and customers undertaking major infrastructure and mining projects in Africa, and emerging Black Economic Empowerment consortia. Nedbank Retail This division provides transactional, credit card, lending, investment and insurance products and services to individuals and small businesses. It groups its customers into ﬁ ve primary segments: high net worth, afﬂ uent, middle, mass and small business. It is further organised around its principal product areas: card, home loans, personal loans, bancassurance and wealth, vehicle and asset-based ﬁ nance, and transactional banking. Imperial Bank Imperial Bank focuses on motor vehicle ﬁ nance, marketed through its Motor Finance Corporation brand. It also offers property, medical, aviation and supplier asset ﬁ nance. Market overview South African banking is currently impacted by a slowing domestic economic cycle coupled with political change and the secondary effects of the global ﬁ nancial crisis. Increased infrastructure spending and moderate ﬁ scal stimulus are expected to provide some opportunities for growth. The outlook for domestic inﬂ ation has improved, with the ﬁ rst interest rate cut of 50 basis points since April 2005 providing some relief for consumers. Operating conditions have become increasingly difﬁ cult for Nedbank Retail, with signs of slowing growth extending to the small and medium size business sector. The tough trading conditions have also affected investment banking and debt and equity trading, resulting in lower earnings in Nedbank Capital. The principal challenges for local banking come from pressure on margins due to the industry’s reliance on wholesale funding; the increased cost of funding in international debt capital markets; rising non-performing loans and weaker recoveries in retail banking as household ﬁ nances remain strained and house prices come under increased pressure; and sharply slower Retail advances, partly offset by robust Wholesale advances. But there are also opportunities, driven by growth in the mass, black middle and SME markets; growth in Africa generally; growth in retail deposits and other funding; increases in transactional banking fees; and improving asset margins. Page 48 Old Mutual plc Annual Report and Accounts 2008 Nedbank Financial scale: FUM £6.4bn IFRS AOP Number of employees 27,570 £575m Key geographies southern Africa > Major brands > Nedbank, BOE Products > Transactional banking services > Lending > Investment banking Useful link: www.nedbankgroup.co.za Strategy for growth Nedbank’s strategy is based on growing its share of economic proﬁ t in South African ﬁ nancial services and making the most of the increasing opportunities that emerge in selected African markets. It concentrates resources on the businesses best positioned to increase economic proﬁ t based on their capabilities and related industry growth. Businesses with lower economic proﬁ t characteristics are managed for value through strong focus on proﬁ tability. Initiatives across the various divisions include selectively growing assets, passing increased funding costs onto customers, managing risks, increasing cross-selling and transactional income, smart cost management and reacting ﬂ exibly and nimbly to opportunities. Nedbank will also continue to investigate opportunities to expand into the southern African Development Community region. This work will be supported by its recently established regional ofﬁ ces in Angola and Kenya, along with its new strategic alliance with Ecobank which has operations in 25 countries mainly in Western, Central and Eastern Africa. In addition, Nedbank will continue to grow its Retail franchise, strive for leadership in business banking, gain more public sector business and remain a top three player in the Wholesale banking market. Performance in 2008 For key ﬁ gures see highlights table on page 50. Banking environment The local banking environment faced a number of challenges in 2008. These included, ﬁ rstly, pressure on margins as the overall cost of longer-term funding increased. It was pleasing to note that, throughout the year, rand liquidity remained stable, with the interbank lending market continuing to operate efﬁ ciently. Local banks have been able to ﬁ nance new assets in the normal course of business. Secondly, reduced capacity and increased cost of funding in the domestic debt capital markets. Thirdly, rising non-performing loans and lower levels of recoveries, especially in the Retail environment as household ﬁ nances remained strained and asset prices came under pressure. This trend intensiﬁ ed in the second half of 2008 and has been increasingly affecting small and medium-sized businesses, and will undoubtedly also impact some larger corporates going forward. Finally, sharply slower retail advances growth, partly offset by reasonable Wholesale advances growth. The progress made during the recovery programme and over the recent past to build a sustainable business continues to beneﬁ t Nedbank and has resulted in a number of factors including ongoing growth in the Retail Mass and middle-income segments and Corporate markets, solid growth in Retail deposits, pleasing growth in transactional banking volumes, improved margins on new advances through risk-based pricing and increased client activity in foreign exchange and interest rate markets as well as an intensiﬁ ed focus on improving client service levels. The Competition Commission inquiry into bank charges issued a detailed report in December 2008. Industry stakeholders have been given an opportunity by National Treasury to comment on the recommendations contained in the report. This input will be discussed by National Treasury with the Department of Trade and Industry, the South African Reserve Bank and the Competition Commission and it is anticipated that the ﬁ nal outcome of the banking inquiry process and the impact on the banking industry will be ﬁ nalised during 2009. Nedbank remains committed to an outcome that provides real beneﬁ t to consumers and ensures the ongoing competitiveness and stability of the ﬁ nancial services industry. Basel II was successfully implemented on 1 January 2008 and was used as a catalyst to enhance the management of risk and capital across the industry. Financial performance Given the turmoil in the global ﬁ nancial markets and the slower domestic economy Nedbank is currently adopting a more conservative approach across its operations. We have intensiﬁ ed our focus on increasing capital levels, growing deposits and liquidity, proactive risk management, selectively growing assets in businesses that are well positioned to increase economic proﬁ t, continuing to manage for value in those businesses that have lower economic proﬁ t proﬁ les and managing down positions in riskier lines of businesses. At the same time we continue to invest for the future and we are not seeking to maximise short-term proﬁ tability at the expense of longer-term sustainability at this point in the cycle. i w e v e r s s e n s u B i Page 49 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Highlights (Rm) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Headline earnings* Net interest income* Non-interest revenue* Net interest margin* Cost to income ratio* ROE* ROE* (excluding goodwill) *As reported by Nedbank in their report to shareholders as at 31 December 2008. 2008 2007 % Change (5) (3) 14 3 8,800 5,765 16,170 10,729 3.66% 51.1% 17.7% 20.1% 9,220 5,921 14,146 10,445 3.94% 54.9% 21.4% 24.8% Adjusted operating proﬁ t (IFRS basis) was down ﬁ ve percent to R8,800 million with headline earnings down three percent to R5,765 million. Basic earnings grew by six percent to R6,410 million (2007: R6,025 million). Diluted headline earnings per share (EPS) decreased by two percent from 1,429 cents to 1,401 cents. Diluted EPS grew seven percent from 1,454 to 1,558 cents, driven largely by the R622 million after-tax proﬁ t on the sale of Visa shares in the ﬁ rst half of the year. Nedbank’s return on average ordinary shareholders’ equity (ROE), excluding goodwill, decreased from 24.8 percent to 20.1 percent. ROE dropped from 21.4 percent to 17.7 percent for the year. These declines were caused by slightly lower headline earnings, mainly as a result of increasing Retail impairment levels that reduced the return on assets, together with higher capital levels as capital adequacy ratios increased during 2008. Credit quality deteriorated throughout 2008 with Nedbank Retail’s impairments worsening signiﬁ cantly, while the Wholesale banking portfolios showed a moderate deterioration in the second half of 2008. Overall impairments have increased, although the impact on earnings was partially offset by controlled cost growth. The momentum built from disciplined cost management over the past few years continued into 2008 and contributed towards the efﬁ ciency ratio improving from 54.9 percent in 2007 (54.3 percent excluding Bond Choice) to 51.1 percent in 2008 and the ‘jaws’ ratio growing to 7.5 percent (2007: 6.9 percent). We continued to see a steady inﬂ ow of customer deposits, resulting in Retail deposits growing in line with Retail advances. Pressure on short-dated maturities has been partially alleviated by market expectations of decreasing interest rates and a strategy of increasing deposit duration, particularly in the second half of the year. Given our domestic focus and small foreign- funding requirements (foreign deposits are 1.3 percent of total Nedbank deposits), our funding and liquidity levels have remained sound with limited impact from the global ﬁ nancial crisis. Net interest income (NII) NII grew 14 percent to R16,170 million on the back of growth in average interest-earning banking assets of 23 percent. Nedbank’s net interest margin for the year was 3.66 percent, down from 3.94 percent in 2007. The positive endowment impact of interest rate increases on capital and current and savings accounts was offset by a number of factors including liability margin compression, reﬂ ecting the higher cost of term funding, and asset margin compression from a changing asset mix. Asset pricing continues to be a key focus for improving margins, with higher margins being generated on new assets. Further offsets include the cost of holding additional liquidity buffers deemed prudent in the current environment; and debits relating to the accounting for historic structured-ﬁ nance transactions with related credits offset in taxation. Page 50 Old Mutual plc Annual Report and Accounts 2008 Impairments charge on loans and advances The credit loss ratio increased from 0.62 percent in 2007 to 1.17 percent for the year. The growth in advances and the increase in the credit loss ratio are reﬂ ected in a 123 percent increase in the impairments charge from R2,164 million to R4,822 million. Retail credit loss ratios have deteriorated since June 2008 and remain above expected through-the-cycle levels, largely as a result of continuing increases in defaulted advances in the Nedbank Retail Home Loan and Vehicle and Asset Finance divisions. Wholesale banking credit loss ratios remain below expected through-the-cycle levels, although the credit loss ratio in Business Banking increased as expected. The credit quality in the Corporate and Investment Banking books remains good but is expected to be impacted by worsening credit quality in the year ahead, resulting in increased credit loss ratios on these books. Notwithstanding seasonal effects, the unsecured Retail portfolio reﬂ ected encouraging signs of improvement in the latter part of 2008. Defaulted advances increased by 75 percent from R9,909 million to R17,301 million and total impairment provisions increased by 29 percent from R6,078 million to R7,859 million. Non-interest revenue (NIR) NIR, excluding Bond Choice’s commission and sundry income from the 2007 base, grew by nine percent on a like-for-like basis. Total NIR (including Bond Choice in the 2007 base) increased by three percent to R10,729 million. Commission and fee income grew by 14 percent on a like-for-like basis (ﬁ ve percent including Bond Choice), mainly from volume growth and transactional price increases. Cheque processing fees continue to decrease with the NetBank electronic banking system now implemented for all Business Banking clients and a process of migration initiated for Corporate Banking clients. Cash handling fees and transactional banking volumes grew strongly due to the growth in customer numbers, reﬂ ecting the success of Nedbank’s strategy to increase delivery channels, improve customer service and strengthen brand positioning. The sale of Bond Choice reduced commission and fee income by R578 million. Trading income increased by 16 percent from R1,334 million in 2007 to R1,553 million in 2008, reﬂ ecting good trading activity in the foreign exchange and global market businesses, although equity and debt trading both had a disappointing year. Adjusting for the loss in the ﬁ rst six months of 2007 in respect of the Macquarie business alliance, trading income would be at similar levels year-on-year. The sharp fall in equity markets resulted in historic unrealised gains in mark-to-market private equity positions reducing. In spite of these challenging markets Nedbank managed to record a positive NIR of R303 million from its private-equity portfolios on the back of revaluations, realisations and dividend income. Expenses Nedbank continues to invest in its franchise while maintaining a disciplined approach to expenses. Despite high inﬂ ation and the increased distribution footprint, expenses continued to be tightly controlled, increasing by two percent to R13,741 million (2007: R13,489 million). On a like-for-like basis, excluding Bond Choice, expenses increased by ﬁ ve percent. Taxation The taxation charge decreased by 25 percent from R2,336 million in 2007 to R1,757 million. The effective tax rate decreased from 26.3 percent in 2007 to 21.6 percent, mainly due to a reduction in the corporate taxation rate in South Africa from 29 percent to 28 percent, a change in tax legislation impacting investments held in private equity portfolios and increase dividend income. Non-trading and capital items Income after taxation from non-trading and capital items increased from R104 million in 2007 to R645 million for the year. The main contributions were the R622 million after-tax proﬁ t on the sale of Visa shares and the R15 million proﬁ t on the sale of 33.5 percent in Bond Choice. Capital adequacy Nedbank has strengthened capital ratios signiﬁ cantly, with a Tier 1 capital adequacy ratio of 9.6 percent (December 2007: 8.2 percent pro-forma Basel II) and a total capital adequacy ratio of 12.4 percent (December 2007: 11.4 percent pro-forma Basel II). These ratios are now above the Group’s historic target ranges. The core Tier 1 capital adequacy ratio was 8.2 percent (December 2007: 7.2 percent pro forma Basel II). Nedbank currently holds a surplus of R9.5 billion against its regulatory capital adequacy requirements. i w e v e r s s e n s u B i Page 51 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Advances and deposits Total assets increased by 16 percent to R567 billion (2007: R489 billion). Growth in average interest-earning banking assets slowed to 23 percent (2007 growth: 29 percent). Advances increased by 16 percent, reﬂ ecting ongoing growth in Nedbank Corporate but slower growth from Nedbank Retail and a drop in advances in Nedbank Capital. Nedbank Capital’s client loan book grew strongly, but this growth was more than offset by a reduction in the advances in the trading portfolio. Imperial Bank showed strong growth through most of the year. Overall deposits increased by 21 percent from R385 billion to R467 billion at December 2008, with higher interest rates increasing demand for savings and investment products. Despite strong growth in Retail funding, deposit growth was still largely concentrated in the Wholesale market. Management has remained focused on optimising the funding mix and proﬁ le of the Group through utilising alternate funding sources, concentrating especially on the Retail and Business Banking deposit bases, while pricing competitively for term deposits. Nedbank’s liquidity remains sound. The impact of the global ﬁ nancial crisis on South African markets has, to date, been largely limited to an increased cost of international funding as a result of the reduction in international liquidity. This decreased the bank’s ability to access such funding and has led to an increase in the cost of – and decrease in appetite for – capital market debt. Given Nedbank’s domestic focus, international funding has traditionally not been a large portion of the Group’s funding base, while the increase in the pricing of capital market debt has increased the cost of rolling over conduit paper and new subordinated-debt issues, with volumes issued in this market also being lower. During 2008 Nedbank successfully issued hybrid debt, raising R1.75 billion. In addition, to diversify the funding base, raise further foreign funding and lengthen the bank’s existing funding proﬁ le Nedbank issued foreign syndicated club loans of $165 million and €165 million; registered a $2 billion European medium-term note (EMTN) programme; obtained a $100 million credit line from African Development Bank; and continues to focus on the Retail deposit base through competitive products and pricing. Key performance indicators The global economic crisis and cyclical downturn in the South African market prevented Nedbank from achieving some of its medium-term targets. The fact that it still met its targets relating to efﬁ ciency ratio, capital adequacy ratios and dividend cover reﬂ ects the conservative and risk-averse stance it has taken in these challenging times. Marketing Nedbank supported its positioning as a bank for all through soccer sponsorship and expanded further into the mass market by locating over 60 percent of all new ATMs and branches in previously under-serviced areas. It continues to be the most affordable bank at the lower end of the market as a result of fee cuts in 2005 and 2006. Medium- to long-term ﬁ nancial target Performance in 2008 Return on shareholders’ equity (excluding goodwill) Efﬁ ciency ratio 10% above monthly weighted average cost of ordinary shareholders’ equity (New target: 5% above) Maintain ratio below 55% (New target: below 50%) Fully diluted headline earnings per share (HEPS) CPIX plus GDP growth plus 5% Growth in fully diluted HEPS of at least average 20.1% 51.2% (1.7%) Impairment charge Between 0.55% and 0.85% of average advances 1.17% Capital adequacy ratios Tier 1: 8.0% to 9.0% Total: 11.0% to 12.0% (New targets: Core Tier 1: 7.5%-9.0%; Tier 1: 8.5%-10.0%; Total: 11.5%-13.0% Tier I: 9.6% Total: 12.4% Economic capital adequacy Adequately capitalised to a 99.9% conﬁ dence interval on economic capital basis (target debt rating A- including 10% buffer) A- Dividend cover 2.25 to 2.75 times cover 2.29 times Page 52 Old Mutual plc Annual Report and Accounts 2008 market, with counterparty credit risk being restricted to non-complex, vanilla banking transactions. We have a strong, well-diversiﬁ ed funding deposit base (including a strong retail deposit franchise) and limited offshore funding, low securitisation risk exposure compared to global banks, low leverage ratio compared to global banks and higher ratio of risk-weighted assets to total assets ratio than that of peers, indicative of our appropriately conservative measurement of risk. In addition, we have a low level of assets and liabilities exposed to the volatility of IFRS fair value accounting, our small market trading risk in relation to total bank operations, we have a low interest rate risk in the banking book and we have low equity (investment) risk exposure, having successfully completed our non-core asset disposal strategy in 2007. We have low currency translation risk and an optimal offshore capital structure. Our earnings streams across our full commercial banking activities are well-diversiﬁ ed and our well- diversiﬁ ed subordinated debt proﬁ le has maturities of existing Tier 2 regulatory capital until 2011. We undertake comprehensive stress and scenario testing to conﬁ rm the adequacy of our capital ratios and accompanying capital buffers. Against this background, we believe that capital levels (both regulatory capital and internal capital assessment, based on economic capital) and provisioning for credit impairments are appropriate and conservative, and that Nedbank and its subsidiaries are appropriately capitalised relative to our business activities, strategy, risk appetite, risk proﬁ le and the external environment in which we operate. Additionally, Nedbank is currently not holding excess capital for acquisitions. To attract more deposits, it launched a new deposit account for individuals and small businesses Park-It, offering extremely competitive interest rates and short-term accessibility. Nedbank’s positioning as a caring brand is important to its commercial success. It continued to demonstrate this aspect of the brand through its Local Heroes programme – through which it supports causes that its customers and staff are involved in – and its Ask Once service promise (“You only have to ask once. The person you talk to will take responsibility for ensuring your request is resolved”). Customer service Initiatives such as the Nedbank Retail Ask Once service promise are helping to position Nedbank as a leader in customer service. To ensure that it is equipped to deliver on its promises, it has employed Client Management Assessment Tool (CMAT) methodology since 2006. This framework allows it to benchmark its capability against some 700 other organisations using CMAT worldwide, and to identify and address weaknesses. In 2008 its CMAT scores remained in the top quartile for ﬁ nancial services companies worldwide – and for the second year running Nedbank was ranked number one among South African banks for customer service in the 2008 Ask Afrika Orange Index. The move to a more decentralised decision-making process in Business Banking is also being appreciated by customers: customer satisfaction surveys showed upward trends in relationship quality and loyalty. Principal risks and uncertainties The appropriate level of capital for a bank is a function of its strategy, individual risk appetite and risk proﬁ le. This aligns with one of the key objectives of Basel II which is to differentiate capital requirements and capital buffers above the regulatory minimum, to reﬂ ect the unique risk proﬁ le on a bank-by-bank basis, rather than following the “one-size-ﬁ ts-all” approach that Basel I engendered. Nedbank has cultivated and embedded a prudent and conservative risk appetite, primarily focused on the basics of banking in southern Africa. This is illustrated by reference to a number of factors including having neither direct exposure to US sub-prime credit assets nor associated credit derivative transactions and having conservative credit underwriting practices which have culminated in a high-quality, well-collateralised Wholesale book and further tightening of credit criteria in our Retail book since 2007 in anticipation of the economic downturn and resulting from the introduction of the National Credit Act. We have reasonable credit concentration risk levels in relation to the South African i w e v e r s s e n s u B i Page 53 2.0 BUSINESS REVIEW SOUTHERN AFRICA 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Outlook for 2009 The global ﬁ nancial crisis and resultant recessionary conditions will place more pressure on an already slowing domestic economy. Weaker international trade, lower commodity prices and continued volatility on major ﬁ nancial markets are expected to restrict corporate activity. Consumer ﬁ nances are likely to remain strained as a result of continued pressure on disposable income, falling asset prices, increasing unemployment and the weaker rand. Lower economic activity is also placing increasing strain on corporates. Further interest rate cuts are anticipated during the course of 2009. The beneﬁ ts of these would be expected to impact positively on the South African banking environment only in 12 to 18 months’ time. In the short term the decrease in interest rates will have a negative endowment effect on banking interest margins, while impairments are likely to continue to deteriorate. Priorities for 2009 > Focus on liability growth and the bank’s strong depositor franchise > Slow down growth in advances and focus on more proﬁ table business > Increase capital levels to the top end of the target ranges > Price for risk and increased cost of funding > Reﬁ ne credit and risk parameters > Focus on growing primary customer and transactional income > Strengthen cross-selling > Emphasise smart cost management > Stay agile and alert to opportunities. 2.3 Mutual & Federal Old Mutual plc owns 74 percent of Mutual & Federal Insurance Company Limited (Mutual & Federal), whose shares are publicly listed on the JSE. Mutual & Federal is one of the leading insurance companies in southern Africa, providing tailored short-term insurance services to the personal, commercial, corporate and agricultural markets in South Africa, Namibia, Botswana and Zimbabwe. The business has three main portfolios: Commercial, Personal and Risk Finance. The Commercial portfolio comprises Large Corporate, Credit and Agricultural accounts. Markets and products Mutual & Federal offers insurance products and advice to individual and corporate customers, mainly via brokers. Our professional and highly experienced brokers offer customers personal service and advice on purchasing policies, and practical assistance with claims. Commercial The Commercial portfolio provides comprehensive insurance services – including domestic and export credit risk, insurance against property, accident, marine, engineering, liability and motor risks and crop insurance services – to a diverse range of customers for small- and medium-sized businesses to large corporations. Personal The Personal portfolio provides domestic household, motor, and all-risks short-term insurance products to individual customers through white-labelled intermediary-branded and in-house products. One of our in-house products, Allsure, offers comprehensive cover by combining homeowners, household goods, personal accident and motor insurance into one policy. The portfolio also offers hospital cash plans and personal accident policies. For the budget end of the personal market it offers policies covering livestock and informal dwellings. Risk Finance The Risk Finance portfolio has a signiﬁ cant position in the South African market. It continues to enjoy a positive proﬁ le within the industry and is one of the largest suppliers of risk ﬁ nancing solutions in Africa, providing all types of alternative risk transfer products. Market overview The southern African short-term insurance market remained competitive during 2008. There was strong growth in the direct channels, driven by individuals’ and small companies’ growing preference for dealing with direct channel insurers. Broker-based insurers lost business to this channel, albeit more slowly than in Page 54 Old Mutual plc Annual Report and Accounts 2008 Major brands > Mutual & Federal Products > Short-term insurance including: domestic; household; motor; personal Mutual & Federal Financial scale: IFRS AOP £76m Number of employees 2,703 Key geographies South Africa > Namibia > Botswana > Zimbabwe > previous years. Growth in the overall insurance market was reduced by a slowdown in economic activity, particularly in the sale of new motor vehicles. Lower sales of furniture and other luxury items meant that the personal market in particular did not keep pace with inﬂ ation. Overall underwriting returns reduced slightly for the third year running, after the record levels achieved in 2004 and 2005. Although current levels have allowed participants to deliver satisfactory returns overall, a number of sectors of the industry remain substantially underrated. Signiﬁ cant remedial measures and rate increases are required to return these portfolios to proﬁ tability and it is hoped that 2009 will see a return to responsible underwriting standards. The motor books of most broker-based insurers have been either unproﬁ table or marginally proﬁ table, and correction of the motor book remains a strong challenge for insurers. An increase in the number and severity of large corporate ﬁ res has made this portion of every insurer’s portfolio unproﬁ table: ﬁ re risks remain underrated and correction will be required in 2009. Strategy for growth Our vision is to be the strongest and most successful short-term insurer in our chosen markets. These include all classes of general insurance except those that carry long-tail claims liabilities. To achieve this, we are focusing on proﬁ tability while pursuing growth through new and existing markets and channels, new regions and acquisitions, and new products. We remain committed to continued development of the intermediary channel and the further development of relationships with brokers. We will continue to focus on our key ﬁ nancial targets of sustaining a long-term average underwriting ratio of ﬁ ve percent and delivering a return on capital above 20 percent, while maintaining service excellence to intermediaries and policyholders. To enhance underwriting proﬁ t we will apply responsible underwriting standards in setting rates commensurate with risks. We will be rigorously disciplined in managing expenses and will carefully control claims costs through strict monitoring and management of the claims supply chain. The operational improvements following the restructuring of operations during 2008 will help us meet these goals. Performance in 2008 For key ﬁ gures see highlights table on page 56. Proﬁ ts impacted by ﬁ nancial turmoil in the investment environment negatively impacting investment returns Adjusted operating proﬁ t (IFRS basis) declined following the lower underwriting margin, but was partially offset by the impact of a higher LTIR. This added R57 million to our Adjusted operating proﬁ t. The proﬁ t attributable to equity shareholders declined 117 percent, primarily as a result of a reduction in the value of listed equities. The underwriting surplus for the year declined by 18 percent but the 2007 result was positively impacted by the release of R96 million from reserves following reﬁ nements to estimation methods. Without this adjustment, underwriting proﬁ t increased by 11 percent. Although there were further increases in the frequency and severity of industrial ﬁ re claims in the ﬁ rst half of the year, trading conditions improved during the second half. This, together with corrective measures on the underperforming group schemes portfolio resulted in satisfactory levels of underwriting proﬁ tability being achieved for the full year. Gross premium income declined by two percent as growth in the commercial portfolios was offset by the cancellation of a number of personal group schemes and a contraction in the risk ﬁ nance portfolio. Investment income reduced sharply during the year following a decline of approximately 27 percent in the value of listed equities which was in line with the JSE. Whilst dividend income declined slightly, interest income increased strongly as a result of higher levels of cash holdings during the year and higher interest rates. Restructuring undertaken during the year During the year Mutual & Federal undertook a substantial restructure to promote customer service and operating efﬁ ciency. Staff numbers declined by more than 600 as a result of the restructure and R55 million in retrenchment costs were paid. A further non-recurring expense of R147 million was incurred from the closure of a channel development project. This project was undertaken to seek growth opportunities from a number of different channels but was prudently abandoned when it proved to be too ambitious and ill-timed. Useful link: www.mf.co.za i w e v e r s s e n s u B i Page 55 2.0 BUSINESS REVIEW SOUTHERN AFRICA Highlights (Rm) 1.0 2.0 3.0 4.0 2.1 Old Mutual South Africa 2.2 2.3 Mutual & Federal Insurance Nedbank Adjusted operating proﬁ t (IFRS basis) (pre-tax) Gross premiums* Earned premiums* Claims ratio* Combined ratio* Solvency ratio* Return on capital* (3 year average) *As reported by Mutual & Federal in their report to shareholders as at 31 December 2008. 2008 2007 % Change (7) (2) (4) 1,169 9,159 7,669 67.1% 96.1% 41.0% 33.9% 1,256 9,323 7,948 65.8% 95.4% 42.0% 31.7% Solvency margin in the target range As a result of the decline in the value of investments, the net asset value per share declined by 13 percent during the year to R10.92 at 31 December 2008. The solvency margin (being the ratio of net assets to net premiums) declined to 41 percent at 31 December 2008 but remains in the target range adopted by Mutual & Federal. Marketing Our business restructuring aimed to provide better service to customers, more customer-facing sales staff and cost efﬁ ciencies that allow us to price more competitively. We have been working to make signiﬁ cant inroads into specialist insurance markets, and appointed two new underwriting agencies specialising in classes of business that we had previously not underwritten. We appointed a new advertising agency, which also took over the Company’s PR function. An entirely new advertising strategy has been devised with the intention to enhance Mutual & Federal’s brand proﬁ le in the market. Work began on refreshing the Company brand for launch in 2009 and 2010. We also established a dedicated team to grow our share of the growing black consumer market. Customer service A speciﬁ c goal of the business restructuring was to enhance customer service and shorten turnaround times for settling claims and issuing policies. New business processing systems introduced in 2008 are moving us rapidly towards becoming paperless, and in 2009 a state-of-the-art underwriting system will further enhance our service levels. Principal risks and uncertainties There are two main risks and uncertainties facing the business. The ﬁ rst is operational risk and the second is a credit risk item. Operational risk arises from the introduction of a new computer system across all operations and branches taking place in 2009. A smooth transition and introduction of the new operating environment is critical to the future proﬁ tability and success of the business, to the degree that some business may be lost if the conversion fails. While the re-insurance panel of the Company is graded on average ‘A’ and above (Standard and Poors), the failure of a re-insurer could cause signiﬁ cant solvency strain and going-concern problems to the business. Outlook for 2009 The impact of the turmoil experienced at the end of 2008 in Europe and the United States is expected to be felt in South Africa in 2009. Economic growth will be challenged as commodity prices continue to fall. This will further dampen South African consumer spending in 2009 and inevitably inhibit growth in the short-term insurance industry. While Government infrastructure spending and the anticipated 2010 FIFA Football World Cup may provide some growth opportunities, much of this business is inadequately rated and will decline. As consumers are stretched, we are unlikely to see meaningful growth in existing personal portfolios. Page 56 Old Mutual plc Annual Report and Accounts 2008 If commodity prices stay low the local currency will remain weak, particularly if the Reserve Bank follows the example of Europe and the United States with aggressive interest rate cuts. Any decline in the value of the rand threatens to increase claims costs because of the large imported component in motor vehicles and replacement plant and equipment. Despite these factors, we remain committed to producing underwriting proﬁ ts in 2009 and, although the economic downturn may subdue growth, our streamlined structure should provide us with a competitive advantage. Priorities for 2009 > New products and exploration of alternative distribution channels and emerging markets > Proﬁ table premium growth; cancel persistently unproﬁ table portfolios > Evaluate opportunities in the direct insurance market, where we do not currently compete. Growth in this market has outpaced the broker-based market in recent years, and margins are higher as direct insurers can select risks more rigorously and apply policy conditions more strictly > Achieve operational efﬁ ciencies through new business processes and technology: our new systems and revised structure should signiﬁ cantly reduce the cost of delivering products and time taken to implement new products > Improve employee satisfaction and realise signiﬁ cant transformation in the workplace > Rejuvenate the brand to meet the challenges of the current and future markets. i w e v e r s s e n s u B i Page 57 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Tom Turpin President and CEO, Old Mutual Asset Management (US) Chris Chapman CEO, US Life KEY FACTS Adjusted operating proﬁ t (IFRS basis) 2008 Funds under management 2008 (£270m) 2007: £260m Life sales (APE basis) £167.5bn 2007: £170.1bn Unit trust sales £281m £335m £1,022m £1,891m 2008 2007 2008 2007 Number of countries Number employed 2 1,952 Page 58 Old Mutual plc Annual Report and Accounts 2008 Our activities in North America span annuities, life insurance and asset management. Headquartered in Baltimore, US Life offers a diverse portfolio of annuities and life insurance products distributed through agents across the United States. Old Mutual (Bermuda), part of US Life, is an offshore business that develops and distributes investment products to non-US customers in a variety of markets around the world. US Asset Management, based in Boston, comprises 20 investment boutiques offering high-quality, actively managed investment products in all the major asset classes and investment styles for individual and institutional customers. 3.1 US Life Our US Life business consists of two businesses: US Life onshore, and our offshore, Bermudan, business. They serve different customer groups, offering different products to each as detailed in the relevant sections below. We entered the US life insurance market in 2001 by acquiring several established insurance companies, the largest being Fidelity and Guaranty Life Insurance Company (now OM Financial Life Insurance Company). Our Bermudan business enjoys a progressive regulatory environment. Bermuda is a major offshore ﬁ nancial centre with a reputation for high quality business. It offers a well-developed legal framework, providing certainty and effectiveness in accordance with international standards of best practice and offers a highly sophisticated infrastructure with efﬁ cient banking, trust, investment, accounting, custodial and legal services. Performance in 2008 For key ﬁ gures see highlights table on page 60. Decrease in funds under management driven by unprecedented equity and credit market movements Despite the turbulent markets, net client cash ﬂ ows were four percent of opening funds under management. Funds under management ended the year at $20.7 billion, down 14 percent from the opening position primarily due to a 21 percent decrease in the market value of funds under management. The net unrealised loss on the ﬁ xed income portfolio increased by $2.3 billion to $2.6 billion and Old Mutual Bermuda (OMB) variable annuity separate account asset values decreased by $2.4 billion. The market value decrease was mainly the result of widening credit spreads in the bond markets and dramatic declines in global equity markets. Sales driven by variable annuities Total life sales on an APE basis were $519 million, down 23 percent from 2007. Sales by OMB were the largest contributor to APE. However as a consequence of the high cost of guarantees in the volatile environment, we withdrew products during the year and therefore the OMB sales in the last four months of the year were signiﬁ cantly lower. Fixed indexed annuity sales, down 40 percent from 2007, were affected by difﬁ cult market conditions. However, ﬁ xed annuity sales of $60 million were up 216 percent from 2007, following the industry trend as customers seek ﬁ xed interest guarantees during this period of extreme equity market volatility and economic instability. i w e v e r s s e n s u B i Page 59 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Highlights ($m) 2008 2007 Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on equity Adjusted operating (loss)/proﬁ t (covered business) (MCEV basis) (post-tax) Return on embedded value (covered business) Life assurance sales (APE) Value of new business APE margin PVNBP PVNBP margin Net client cash ﬂ ows ($bn)** Funds under management ($bn)** *Restated, as now reporting on an MCEV basis. **Stated on a start manager basis as USAM manages funds on behalf of US Life. (679) (50.0%) (1,112) (121.4%) 519 (122) (23.0%) 4,990 (2.4%) 1.0 20.7 195 5.9% 65 4.1% 671 63* 9.0%* 6,375* 1.0%* 1.6 24.1 % Change (448) (1,811) (23) (294) (22) (38) (14) Underlying adjusted operating proﬁ t (IFRS basis) results Adjusted operating proﬁ t (IFRS basis) decreased $874 million from the level at 2007 to a loss of $679 million for 2008. The 2008 loss reﬂ ects $436 million of additional mortality reserves related to life SPIAs, a $295 million charge in the fourth quarter for revisions to estimates of future gross proﬁ ts which resulted in an ‘unlocking’ of the deferred acquisition cost asset (DAC), and $126 million of hedge losses related to variable annuity product guarantees. The latter was part of a total IFRS pre-tax and pre-DAC charge of $508 million relating to the variable annuity product with $382 million ﬂ owing through the short-term ﬂ uctuations line. Difﬁ cult credit markets resulted in higher impairment losses and volatile equity markets increased the costs associated with the guaranteed beneﬁ ts on our variable annuity contracts. Value of new business (VNB) VNB reduced by $185 million in 2008 compared to 2007, with a margin of negative 23 percent compared to nine percent in 2007. The decrease in margin was mainly due to (a) the reduction in swap rates which reduces the investment returns relative to guaranteed minimum crediting rates in US Life onshore; and (b) the additional provisions for non-modelled risks and higher guarantee costs in respect of the offshore variable annuity business. Review of reserving basis We continually monitor our assumptions and make adjustments based on experience as appropriate. During 2008 we lowered the mortality assumption for life contingent single-premium immediate annuities (SPIA), which increased the IFRS reserve and reduced embedded value. We modiﬁ ed the expected lapse rates for deferred and indexed annuities to reﬂ ect higher expected surrenders when the contracts exit the surrender charge period, which resulted in the unlocking of a portion of deferred acquisition costs (DAC). We also included a non-performance risk factor in discount rates used to determine the indexed annuity embedded derivative liability and the variable annuity guaranteed minimum accumulation beneﬁ t (GMAB) liability, which decreased the liabilities. Finally, we updated the variable annuity GMAB assumptions related to fund indices, mortality, free partial withdrawal utilisation, services fees and volatility, which resulted in a net decrease in the liability. Page 60 Old Mutual plc Annual Report and Accounts 2008 Useful link: www.omfn.com i w e v e r s s e n s u B i Many large, high proﬁ le ﬁ nancial ﬁ rms suffered failures and regulatory interventions during the year, resulting in creditor losses, almost completely illiquid credit markets, dramatically wider credit spreads and lower bond prices in all sectors. In line with other US insurers, our ﬁ xed income portfolio aggregate credit experience and current unrealised loss position have been affected by these events and market conditions. US Life’s ﬁ xed income portfolio recorded impairments of $237 million in the fourth quarter of 2008, contributing to total impairments of $768 million for the 2008 year. The main components of this were public ﬁ xed income security losses principally in respect of Washington Mutual ($78 million), Lehman Brothers ($50 million), three foreign ﬁ nancial institutions ($98 million), several structured securities ($165 million), three monoline insurers ($38 million) and losses on preferred stocks ($225 million) of which Freddie Mac and Fannie Mae was the majority ($151 million). US Life’s net unrealised losses on the ﬁ xed income security portfolio was $2.6 billion at 31 December 2008 reﬂ ecting the market-wide repricing of credit spreads and continuing fallout from the sub-prime mortgage crisis. Actual defaults on our corporate bonds for the year were $158 million resulting in a default rate of approximately 1.3 percent on our corporate bond portfolio. The value of our US investment portfolio at 31 December 2008, after recognition of these impairments, totalled $20,347 million. Market Consistent Embedded Value (MCEV) results Adjusted operating proﬁ t (MCEV basis) was signiﬁ cantly lower in 2008 than in 2007, mainly due to the large negative assumption changes made in 2008: strengthening of SPIA mortality reduced the VIF by $280 million, an increase in expense assumptions reduced the VIF by a further $291 million, and the strengthening of OMB GMAB reserves reduced the ANW by $126 million. Experience variances were also signiﬁ cantly adverse, due largely to higher than expected lapses and the impact of reinsurance deals which had been priced to be broadly cost-neutral on a real world basis. Other negative experience variances included lighter than expected SPIA mortality and an expense overrun, which resulted in the operating assumption changes already outlined. Credit update The markets ﬁ nished the year on a slightly positive note, as credit spreads tightened from historical wide levels in November. Overall, the markets remained fragile as continued ﬁ nancial sector rescue and economic stimulus initiatives were required to boost economic activity and conﬁ dence. The recessionary environment projected for 2009-2010 depressed all market sectors. US Life’s ﬁ xed income portfolio aggregate credit experience continued to be affected by poor economic and ﬁ nancial market conditions. For 2008, impairments total $768 million on 43 securities with three of the 43 being subprime asset-backed securities and another 15 indirectly linked to sub-prime or monoline insurer exposures. 3.4 percent of US Life’s ﬁ xed income portfolio has direct exposure to sub-prime mortgage collateral. The majority of the sub-prime exposure remains highly rated but has experienced several ratings downgrades. Of sub-prime holdings at 31 December 2008, 67 percent was rated AAA, 80 percent AA and higher, 93 percent A and higher with an aggregate 68 percent fair value-to-book value ratio. Approximately 2.9 percent of US Life’s ﬁ xed income portfolio has exposure to monoline insurers, of which $508 million (89 percent of the total exposure) is indirect (wrapped) exposure, with an 82 percent fair value-to- book value ratio, and $64 million is direct (unsecured) exposure, with a 56 percent fair value-to-book value ratio. The indirect exposures include $197 million of sub-prime asset-backed securities which are wrapped by monoline guarantees. Page 61 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Highlights (US Life onshore) ($m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Life assurance sales (APE) Value of new business APE margin PVNBP PVNBP margin Funds under management ($bn) 2008 2007 % Change (425) 251 (21) (8%) 2,307 (0.9%) 14.9 111 312 (13) (4%) 2,778 (0.5%) 18.1 (483) (20) (62) (17) (18) 3.1.1 US Life onshore Our US Life onshore business consists of OM Financial Life Insurance Company and its subsidiary, OM Financial Life Insurance Company of New York. US Life’s ﬁ xed income investments are managed by our US Asset Management business on a commercial basis. The majority of its administrative functions are outsourced to third-party service providers. Markets and products Implementation of our core product strategy was completed by the beginning of 2009. We have pared back the range of ﬁ xed annuity products we offer and stopped selling seven life products and our US variable annuity product, to focus our range on indexed annuities, ﬁ xed annuities including immediate annuities, and protection products such as indexed universal life and mortgage term life. These are designed to deliver higher proﬁ tability while providing customers with transparency and value-driven beneﬁ ts. Fixed indexed annuities (FIAs) Our FIA product has been rated in the top ﬁ ve of its US product segment by LIMRA International for most of the past few years. It guarantees the policyholder no loss of principal due to market risk, with a return derived from the greater of a guaranteed ﬁ xed rate or a formula relative to equity market index movements. The potential equity index upside is hedged using equity index options and futures, enabling us to provide the potential for gains while managing exposure to loss of principal. Fixed annuities Under these ﬁ xed-rate contracts we invest in a portfolio of bonds that earn a spread above the rate guaranteed to the policyholder. There are two main types of ﬁ xed annuities: one aims primarily to offer a tax-efﬁ cient way of saving money for retirement, and the other to provide an income stream for life. Protection products We offer two principal protection product lines: term life protection and ﬁ xed indexed universal life products. These provide ﬂ exible life assurance protection in the event of death or disability. Quick underwriting turnaround times and the introduction of product features such as return of premium beneﬁ ts enabled these products to maintain market share in 2008 despite the rapidly declining housing market. The indexed universal life designs specialise in providing supplementary retirement income options for customers who use preferred loan features on a tax advantaged basis. Our products are distributed through various channels. The majority of sales are generated through established groups of managing general agents (MGAs) who typically offer agents a range of annuity and life assurance products from various providers. Market overview Although the economic downturn has hit sales of high net worth and middle market products, US life insurance remains a fundamentally attractive market with signiﬁ cant prospects. Demographic and economic changes (increasing life expectancy and earlier retirement) will continue to generate new customers and new needs and to increase the average time people spend in retirement. The Baby Boomer generation represent a huge opportunity for the next 20 to 30 years as they head towards retirement and look for products with income and risk management features. While discretionary spending is likely to fall in 2009, 75 percent of middle- income consumers see life insurance and retirement savings as necessary. US sales of individual annuities continued at a record pace in 2008, reaching $197.1 billion through the ﬁ rst three quarters. Variable annuities were down 18 percent on the previous year but ﬁ xed annuity sales rose dramatically, up 46 percent. Traditional ﬁ xed annuities saw the most dramatic increases (81 percent) while ﬁ xed indexed annuity gains were more modest (ﬁ ve percent). Page 62 Old Mutual plc Annual Report and Accounts 2008 Major brands Old Mutual > £135m (£229m) Products > Fixed indexed annuities > Fixed annuities > Term life insurance > Fixed indexed universal life products US Life onshore Financial scale: FUM £10bn Life (APE) sales IFRS AOP Number of employees 329 Key geographies > > All 50 states of the USA District of Columbia Most ﬁ xed annuities are sold through independent agents and banking channels, but the channel mix is changing: bank sales in 2008 increased by 90 percent from the previous year while sales through independent agents increased by only 16 percent. The cost structure was re-engineered for lower sales volumes, with speciﬁ c action to consolidate locations, comprehensively restructure the organisation and reduce headcount. With these changes made, the business is on a better footing to tackle the challenges ahead in 2009. Performance in 2008 For key ﬁ gures see highlights table on page 62. We are focused on transforming and scaling our business to improve performance by drawing back to reduced volume but more proﬁ table sales, lowering new business capital strain and reducing operating expenses while creating a more efﬁ cient foundation for potential future business growth. The key focus will be on the successful implementation of the business transformation strategy. The new product proﬁ le will be less capital intensive through streamlining the current product portfolio and eliminating unproﬁ table lines. The sales strategy will centre on core distribution partners to produce more effective relationships. In addition to the consolidation of locations and reduced headcount, a strong expense discipline will be employed throughout the organisation. We will embed a risk management framework that reinforces a conservative risk culture into the business operations. An additional capital injection of $225 million was made in February 2009 to US Life onshore from the Group to maintain the Risk Based Capital in line with the operating target. The total capital injection for 2008 and early 2009 was $325 million, resulting in a RBC ratio of 305 percent. Although demand for the guarantees offered by insurance products is growing, the capital available to support them is not. This has led many signiﬁ cant insurance industry players to apply to buy regional banks so as to qualify for Troubled Asset Relief Program (TARP) funds. The difﬁ culties insurance companies face in hedging guarantees has led many to restructure their products by repricing them and simplifying product features. There is a push for federal regulation of the insurance business to assure consistency across the various states. This could offer companies and agents economies of scale in compliance; but a more onerous regime similar to that for securities dealers could drive out companies and agents that sell primarily or only ﬁ xed products and do not wish to entertain the expense (upfront cost and new business strain) involved. A regulatory change that could reduce the viability of indexed life and annuity products is currently being challenged in the US Court of Appeals. In effect it would mean that indexed products would be treated like securities and could only be sold through agents who have securities licences. Strategy for growth We are well placed to take advantage of current demographic trends and are striving to develop innovative product solutions, deliver strong investment performance and enhance our retail presence. In the fourth quarter of 2008 we launched a major transformation initiative to improve proﬁ tability and dramatically reduce our cost structure. We streamlined product offerings to focus on proﬁ table core products, and revised sales targets downwards to achieve capital management and proﬁ tability goals. i w e v e r s s e n s u B i Page 63 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Marketing Throughout 2008, US Life collaborated with US Asset Management in a drive to make Old Mutual a household name in the US. Targeting key distribution segments, prospective partners and, for the ﬁ rst time, consumers, this integrated approach signiﬁ cantly increased visibility with the target audiences. The two business units also teamed-up on several high proﬁ le sponsorships including the 2008 Tavistock Cup, 2008 Masters Champion Trevor Immelman and all the Triple Crown Thoroughbred events. These events doubled as hospitality opportunities for our key distribution partners, afﬁ liates and strategic partners – and we achieved signiﬁ cant efﬁ ciencies by building milestone and planning meetings into the event timetables. A US Life roadshow, which visited over 30 cities, allowed leaders from the sales and compliance areas to demonstrate best sales practices, dos and don’ts, suitability examples and motivational techniques. It attracted higher attendance by existing and prospective distributors than the previous two years’ roadshows. Customer service A service platform that fosters exceptional customer experiences is the foundation for attracting and retaining customers. Our 2008 operational initiatives aimed to provide an ‘experience’ rather than merely service for customers calling our service centres. Competitive benchmarking studies show that service levels have improved on average by 17 percent since 2007. Our reputation for treating all customers professionally and fairly continues to improve, and we are conﬁ dent that this will aid the growth and retention of customers. At the same time, we continued to improve our monthly unit costs in respect of our one million in-force policyholders. As part of enhancing the services we provide to our MGAs, we implemented online self-service capabilities for key distribution partners, allowing them to aggregate data from our systems and present a consolidated portfolio for their customers. Our distribution partners can now also contract and license new agents electronically via our secure internet portals. Principal risks and uncertainties US Life onshore is exposed to a number of risks, including the attraction and retention of key staff during the business restructure, retaining the capital required to meet target risk-based capital levels, funding and meeting product guarantees, and asset liability management, including the need to maintain sufﬁ cient liquidity to protect the bond portfolio from crystallising losses in the current volatile market. In addition, defaults, downgrades or other events impairing the value of our ﬁ xed maturity securities portfolio may reduce our earnings. Changes in market interest rates may signiﬁ cantly affect our proﬁ tability and a downgrade in our ﬁ nancial strength or credit rating could result in a loss of business. A further decline in equity markets or a sustained increase in volatility may adversely affect sales of our investment products and our proﬁ tability. Outlook for 2009 Despite the economic conditions we remain optimistic about our core products, which offer customers guarantees, ﬂ exibility and transparency as we work with them to meet their risk and retirement needs. Experience in previous recessions suggests that this economic downturn may have only a limited effect on sales in the life industry. During the last recession, total new premiums for individual life insurance dipped but were trending upward again before the recession ended. We expect traditional insurance sales to small businesses to be strong as companies recognise the need for asset protection and indemniﬁ cation and look for simpler solutions to meet their objectives. We will continue working proactively to improve capital efﬁ ciency and investment portfolio performance. Measures to do this include the defensive restructuring of the asset portfolio, reducing the concentration of exposures to corporations in recession prone sectors, reducing ﬁ nancial credit exposures, upgrading commercial mortgage-backed security and sub-prime portfolios and increasing treasury and liquidity balances. Priorities for 2009 > Continue the transformation of the business > Maintain current risk-based capital levels, aided by the streamlined and less capital-intensive product proﬁ le > Focus sales strategy on core distribution partners to build more effective relationships > Consolidate locations, reduce headcount, and maintain strong cost discipline throughout the organisation > Embed into the business a risk management framework that reinforces a conservative risk culture > Continue to concentrate on the most appropriate markets and distribution channels to create a foundation for future growth. Page 64 Old Mutual plc Annual Report and Accounts 2008 Old Mutual Bermuda Financial scale: FUM £4bn Life (APE) sales £145m IFRS AOP (£137m) Number of employees 23 Key geographies > 150 countries worldwide Major brands > Old Mutual Bermuda Products > Universal Investment Plan > Guaranteed Investment Plan > Guaranteed Rate Plan 3.1.2 Old Mutual (Bermuda) Limited Old Mutual (Bermuda) Limited (OMB) provides investment products to international, non-US and non-US resident customers seeking a wide range of investment choices including ﬁ xed rate accounts and international mutual funds quoted in US dollars. A signiﬁ cant attraction for customers is the fact that the assets are held in segregated accounts and the investment plans are held within a trust structure outside their own country. Our core competency lies in building and developing relationships with large ﬁ nancial institutions, meeting their needs by providing innovative and competitive products on an open-architecture platform. Markets and products We distribute through over 70 institutions, primarily international banks, as well as serving a range of private and institutional customers in over 150 countries. As a leading and innovative provider of investment products for international banks’ high net worth and afﬂ uent customers, we focus on developing customised products. Customisation generally involves tailoring a proprietary product to each distributor’s branding guidelines, giving it the look and feel of the institution’s own products. The current product mix comprises three investment plans: > The Universal Investment Plan (UIP): an international investment plan which offers long-term growth potential with a variety of investment options including international equity, bond, hedge and money market funds, as well as ﬁ xed rate accounts. The plan also offers strategies to help protect and potentially grow the investment > The Guaranteed Index Plan (GIP): an investment plan with index options that link returns to the values of the world’s major indices, while guaranteeing a minimum of 105 percent of the amount invested. The plan provides investors with full participation in any upside subject to an annual cap > The Guaranteed Rate Plan (GRP): an investment plan offering a ﬁ xed rate solution that allows control over maturity and ﬂ exibility of return. The plan enables investors to diversify by allocating into multiple guarantee periods. Market overview Record low levels of consumer and business conﬁ dence are creating a difﬁ cult operating environment with consumers switching their investments away from equity-based products into safer deposit options. Weak equity markets, lower bond yields and higher volatility have reduced variable annuity (VA) proﬁ tability in the marketplace – highlighting that companies have not been effectively hedging all risks associated with associated guaranteed rider products. The largest unhedged risk that companies providing such products are facing is that of policyholder behaviour. As expected, there has been an increase in the use of guaranteed withdrawals to help distressed customers meet their cash needs. Lower equity markets and yields, coupled with increased hedge costs, are likely to lead to signiﬁ cant changes to VA pricing and product design. This could signiﬁ cantly change the competitive landscape and weaken overall consumer demand. Trust needs to be rebuilt through leadership, with a clear focus on delivering the right products to meet changing market needs. Strategy for growth While falling asset values and actions to de-risk the existing book have adversely affected sales and funds under management in the short-term, we believe our open-architecture platform and distribution capability place us in a strong position for the future. We have a number of strategies for building our market presence and enhancing proﬁ tability. We aim to rebuild distribution with a more customer-centred focus on increasing sales to institutions. Increased use of index funds and ﬁ xed income options, as well as the introduction of asset allocation and/or volatility- controlled funds, will enable effective hedging and help us to provide cost-effective guarantees. Our newly- developed multi-currency capability will allow customers to invest in currencies other than the US dollar, and we are introducing products speciﬁ cally designed to meet retirement needs. We are also undertaking a range of cost management initiatives. i w e v e r s s e n s u B i Page 65 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Performance in 2008 Highlights ($m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Life assurance sales (APE) Value of new business APE margin PVNBP PVNBP margin Funds under management ($bn) During the year, continuing market volatility and signiﬁ cant strengthening of the US dollar led to further increases in guarantee reserves in respect of variable annuity contracts. In 2008, we recognised a total loss in respect of this business of $508 million, of which $126 million was recognised in adjusted operating proﬁ t. Cash of $582 million was transferred to OMB during 2008; it now has a signiﬁ cant excess to the minimum Bermuda regulatory capital requirement. The Universal Guarantee Option (UGO), launched in January 2007, was an optional beneﬁ t connected to the Universal Investment Plan (UIP). It provided a Guaranteed Minimum Accumulation Beneﬁ t (GMAB), guaranteeing that the policyholder’s account value would grow by at least ﬁ ve percent over ﬁ ve years (i.e. if the fund is below 105 percent of the initial premium, we would “top it up”) and by 20 percent over 10 years. There was also in some cases a Highest Anniversary Value (HAV) guarantee on death and/or maturity. The UGO was withdrawn from the Hong Kong book in May, and from the rest of the market on 15 August 2008. The death and living beneﬁ t guarantees, which are embedded within the variable annuity products issued by OMB, mean that OMB bears the risk associated with market downturns. In addition, since the guarantees are deﬁ ned in US dollars but are backed by funds that are invested in foreign currency denominated securities, OMB bears foreign currency exchange risk in connection with these exposures. The funds backing the guarantees are not directly hedgeable, and therefore linear combinations of liquid market indices are used to proxy the return of every fund in a technique known as fund mapping. For effective hedging, the correlation between the funds and the chosen set of hedgeable indices should be as high as possible. 2008 2007 % Change (254) 268 (101) (38%) 2,683 (3.8%) 5.8 84 359 76 21% 3,597 2.1% 6.0 (402) (25) (233) (25) (3) The turbulent economic conditions and failure to fully hedge certain risks, coupled with hedge ineffectiveness, meant that the cost of providing the guarantees increased substantially in 2008. This resulted in swift and decisive action in the second half, including senior management changes, the withdrawal of the UGO, strengthening of governance and risk management practices, the adoption of more conservative assumptions, implementation of improved fund mapping and the launch of the “Accelerated Universal Guarantee Option (UGO)” offer. Improved fund mapping has enabled us to have a much clearer understanding of our exposures in terms of the guarantees we have offered. Whilst it is not possible to eliminate risk entirely, we have been able to improve signiﬁ cantly hedge effectiveness, from around 75 percent measured over the full year, to around 92 percent in the fourth quarter of 2008. We have also taken action which has given us a better understanding of the sensitivity of our reserves to changes in the underlying markets. As a general guidance: a one percent decrease in equity markets results in a loss of approximately $10 million; a one percent strengthening in the US dollar results in an adverse impact of around $4 million; and a one percent parallel increase in volatility costs approximately $15 million. Better asset and liability management of the margin and bank accounts was instituted in the fourth quarter of 2008 to help increase yields, reduce counterparty exposure and minimise unintentional currency exposure. As market turmoil increased worldwide, we introduced 24-hour monitoring and trading in October 2008 to improve our reaction time. We enhanced our valuation methodologies to ensure assets and liabilities are calculated on a consistent basis, reducing unnecessary proﬁ t and loss volatility. A new product development process has been implemented, which includes the sign-off of products by the Group Chief Actuary, as well as the sign-off of the hedging strategy and hedge cost by the Chief Investment Ofﬁ cer and risk tolerance by the Chief Risk Ofﬁ cer. Page 66 Old Mutual plc Annual Report and Accounts 2008 Many customers who had opted for UGO guarantees had seen their initial investments fall substantially as a result of market falls. In November we offered to accelerate these guarantees for direct customers (i.e. excluding the Hong Kong book, on which OMB is the reinsurer). The offer was to restore their account value to 85 percent of their initial investment, less any subsequent redemptions. In return, all guarantees would be terminated and the associated fees would no longer be charged. In little over three weeks, 14 percent of policyholders receiving the offer accepted. This was a further step in de-risking the business. It resulted in a cash payout of $94.5 million, and a release of reserves of $133.4 million. We also delivered signiﬁ cant operational improvements, including the development of a multi-currency facility and the implementation of process improvements that will substantially eliminate breakage (costs arising from a mismatch in the pricing contractually agreed with a customer and the actual price achieved, resulting from inefﬁ ciency of systems and/or processes). Looking forward, further action will be taken on a number of fronts, including restructuring the business to further improve governance, risk management and accountability; further de-risking the existing book through improved hedge performance and regular monitoring of fund performance and the soft closing of funds that exhibit poor hedging characteristics. Further action will also be taken in the development of new investment and insurance products that meet customers’ needs, such as Shariah compliant funds and guaranteed funds based on quoted indices, asset allocation models or volatility-controlled funds that facilitate effective hedging. Marketing We continue to target international bank customers interested in wealth accumulation, wealth preservation, estate planning and trust management, primarily through our relationships with global banks and ﬁ nancial intermediaries. We are also committed to serving the needs of our distribution partners: partnering with them enables us to deliver our promise of creating innovative products aimed at meeting the needs of international investors. Customer service We made major service improvements during the year, including the enhancement of websites catering for seven languages, and the offshore hosting of our production web portal in Geneva. Having confronted the challenges of 2008 we are able to return to our global bank partners who have, themselves, been addressing the consequences of the global economic crisis with new offerings that provide the security of conﬁ dential investment in a wide selection of underlying assets. One of the beneﬁ ts of our approach is that accumulated investments can be passed on from generation to generation, with guarantees that can be delivered whatever the economic environment. Principal risks and uncertainties OMB is primarily exposed to risks which include basis risk, being the risk that customers’ investments in the underlying mutual funds underperform relative to the liquid market indices used to hedge the exposure, or the assumptions as to currency exposure prove to be inaccurate; and credit risk in connection with its ﬁ xed account assets. Another risk is an increase in the cost of hedging as a result of increased market volatility. OMB does not currently hedge volatility, but would look to hedge on a strategic basis, should this be deemed appropriate. One further risk is that of further reductions in terms of fee income should the value of the assets under management upon which the company earns fees continue to fall. Outlook for 2009 In 2009, we aim to rebuild our position as a leading distribution platform while maintaining high levels of customer service. A return to more normal market conditions and the launch of a range of new hedgeable products will underpin a good recovery in proﬁ tability, although we still expect some modest volatility in earnings in the medium term. Priorities for 2009 > Restructure to further improve governance, risk management and accountability > Further de-risk the existing book through better hedge performance, supported by improved fund mapping, regular monitoring of fund performance and the soft closing of funds that exhibit poor hedging characteristics > Develop new investment and insurance products that meet customers’ needs, such as Sharia-compliant funds and guaranteed funds based on quoted indices, asset allocation models or volatility-controlled funds, which facilitate effective hedging. i w e v e r s s e n s u B i Page 67 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management 3.2 US Asset Management We have built a signiﬁ cant asset management business in North America through acquisitions as well as strong organic growth over the past seven years. We have created an environment in which unique, entrepreneurial asset management boutiques can thrive. US Asset Management, based in Boston, consists of 20 distinct boutique ﬁ rms, including asset managers who specialise in high-quality, active investment strategies for institutional customers, high net worth individuals and retail investors around the world. Our boutiques are located mainly throughout North America, with two in London. Dwight Asset Management, a ﬁ xed income manager, is the largest with 27 percent of total funds under management. Barrow, Hanley, Mewhinney & Strauss, a value equity manager accounts for 19 percent and Acadian Asset Management, an international equities ﬁ rm, holds another 18 percent. Over time, the size rankings within the business may change, depending on the market environment and investment styles in favour at the time. Collectively, we offer over 100 distinct investment strategies. Individually, each boutique has its own vibrant, entrepreneurial culture and capabilities focused on its own area of expertise. Our structure combines the investment focus of boutique managers with the stability and resources of a large, international ﬁ rm. This delivers signiﬁ cant beneﬁ ts – for example, offering a diversity of investment styles which minimises exposure to the changing preferences of investors. It provides the efﬁ ciency savings that come from central capabilities in product development, infrastructure and distribution. The boutiques themselves are free to focus on delivering strong investment performance and customer service. Most of the boutiques now operate under proﬁ t-sharing arrangements under which we pay them a percentage of operating proﬁ t, after overheads and salaries. Long-term equity plans have also been implemented within most of them, with ﬁ nal implementation planned for 2009. This model differentiates us from competitors and the combination of proﬁ t-sharing and equity plans ensures that the interests of the boutiques are closely aligned with those of our shareholders and customers. Markets and products Institutional accounts We offer actively managed investment products in all the major asset classes and investment styles. Our investment capabilities span US and global equities, ﬁ xed income, property and alternative asset classes. Separate accounts and actively managed commingled accounts are offered across a range of asset classes and investment strategies. We have been a pioneer in 130/30 and similar strategies that seek to enhance the alpha produced through active management. Several of our afﬁ liates manage assets in this fast- growing area for investors, where products typically command higher fees. Our customer base is now diversifying, with a signiﬁ cant proportion of our net client cash ﬂ ows coming from investors outside the US. Retail accounts The Old Mutual Advisor Funds offered through our retail distribution arm (Old Mutual Capital) allow individual investors access to institutional-quality management in a mutual fund format. We offer individual mutual funds in a wide range of asset classes and investment styles. Funds are offered as single-strategy mutual funds, or alternatively as diversiﬁ ed asset allocation funds under the Pure Portfolio brand. We currently offer single-strategy mutual funds in US equities, ﬁ xed income, international equities, emerging markets, property investment trusts and money markets. In addition, we offer multi-strategy funds that draw on the capabilities of our boutiques as well as those of selected outside managers. Market overview The current market environment presents signiﬁ cant challenges for the asset management industry. Earnings pressure exists across the industry due to the steep drop in asset levels resulting from depressed global markets. Few indexes have remained positive and most of the major indexes have had negative three- and ﬁ ve-year returns as a result of 2008 market performance. A general lack of conﬁ dence and liquidity continues to inhibit recovery. Investment ﬁ rms with undiversiﬁ ed portfolios, heavy equity weightings or performance fees with high thresholds are the most susceptible to earnings pressure. A signiﬁ cant number of asset management ﬁ rms restructured during the fourth quarter of 2008 to alleviate anticipated margin pressure. But many are wary of cutting deeper than necessary in the short term and so risking their market positioning for the next wave of growth. Page 68 Old Mutual plc Annual Report and Accounts 2008 US Asset Management Financial scale: FUM £165bn Unit trust sales £1,022m IFRS AOP £97m Number of employees 1,600 Competition in North America is strong, and each of our boutiques faces signiﬁ cant competition from other specialist providers. The differentiating factors between ﬁ rms are often investment performance and product capabilities. Our investment managers have a record of excellent long-term performance, and by applying the diverse styles of our individual ﬁ rms we can target new investment opportunities to broaden our product offering. The signiﬁ cant losses incurred by investors as a result of hedge fund strategies are prompting pressure for tougher regulation of the asset management industry. The new US Presidential Administration is expected to push for a signiﬁ cant overhaul of the US ﬁ nancial regulatory framework. As a result, fringe strategies and non-transparent hedge strategies are experiencing great market pressure – which presents opportunities for traditional asset management models to gather assets and institutionalise alternative offerings for clients. Strategy for growth We are focused on optimising the multi-boutique investment management model to deliver high-quality investment solutions to our customers, grow proﬁ tably and deliver exceptional returns to shareholders. Our business is well placed to take advantage of market, demographic and other related trends as we continue working to develop innovative products, deliver strong investment performance and grow our business. We continue to maintain expertise in sourcing, cultivating and integrating investment talent and capabilities within our business. We have also concentrated effort on delivering thought leadership in product development, packaging and distribution while enabling our investment professionals to focus on investment management and delivering superior investment results for customers. Performance in 2008 For key ﬁ gures see highlights table on page 70. Key geographies North America > Major brands > Acadian; Analytic Investors; Ashﬁ eld Capital Partners; Barrow, Hanley, Mewhinney & Strauss; Clay Finlay; Copper Rock Capital Partners; Dwight Asset Management Company; Heitman; Investment Counselors of Maryland; Larch Lane Advisors; Lincluden; Old Mutual Asset Managers (UK); Rogge; The Campbell Group; Thompson Siegel & Walmsley; Thomson Horstmann & Bryant, Inc; 2100 Xenon; 300 North Capital. Products > Actively managed investment products in all major asset classes and geographies. Investment performance strong through a difﬁ cult investing environment Aggregate long-term investment performance from our boutiques remained strong. Over three years, 53 percent of institutional assets had outperformed their benchmarks and 54 percent of institutional assets were ranked above the median of their peer group over the trailing three-year period. These numbers represent signiﬁ cant improvement from the third quarter and demonstrate that our afﬁ liates’ disciplined investment processes, based on sound valuation and business fundamentals, continue to deliver for clients. Net ﬂ ows and funds under management impacted by market turbulence Net client cash ﬂ ows for the year were a solid $1.5 billion. Including securities lending at Dwight Asset Management, which we suspended in the third quarter, total outﬂ ows were $5.2 billion. Given the difﬁ cult market conditions and the net outﬂ ows being experienced across the industry, our result for the year was encouraging and compares favourably to our peers. Our track record of investment performance coupled with our diverse multi-boutique model positions us well to continue to attract net inﬂ ows despite the current market climate. Funds under management ended the year at $240.3 billion, a 28 percent decrease from 2007. $89 billion (96 percent) of the reduction was due to negative market returns. Our diversiﬁ ed asset mix helped to lessen the impact with ﬁ xed income and alternatives being less volatile and uncorrelated in periods of market instability. Such asset classes represented over half of the total funds under management at year end. On 1 July 2008, Rogge Global Partners acquired ING Ghent, which contributed $1.5 billion to funds under management during the year. Retail sales challenges Like most of our competitors, retail sales faced a challenging year in 2008. OMAM UK unit trust sales and Old Mutual Capital mutual fund sales for the year were $1.1 billion and $831 million, respectively, down a combined $1.9 billion (50 percent) from 2007. At 31 December 2008, 12 of Old Mutual Capital’s mutual funds carried four- or ﬁ ve-star rankings by Morningstar, and we remain conﬁ dent in the competitiveness of the underlying products we offer. Useful link: www.oldmutualus.com i w e v e r s s e n s u B i Page 69 3.0 BUSINESS REVIEW NORTH AMERICA 1.0 2.0 3.0 4.0 3.1 US Life 3.1.1 US Life onshore 3.1.2 Bermuda 3.2 US Asset Management Highlights ($m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Return on capital Operating margin Unit trust/mutual fund sales Net client cash ﬂ ows ($bn) Funds under management ($bn) Adjusted operating proﬁ t (IFRS basis) down 44 percent Adjusted operating proﬁ t for the year was down 44 percent from 2007. The decrease was primarily a result of lower management fees as well as performance fees, both of which were negatively impacted by the volatile markets. In addition, while we recorded $11 million in realised gains on seed investments in 2008, we also recorded $35 million of unrealised losses in adjusted operating proﬁ t. The operating margin, which is calculated inclusive of minority interest expense, also declined from 2007. Actions were taken to reduce costs across the business in the fourth quarter, and we remain committed to managing expenses through the current operating climate. Continued focus on product development and distribution We remain committed to the delivery of unique and innovative investment options. Recent product focus has included asset allocation and risk-adjusted return objectives which have positioned us well in the current market environment. Speciﬁ cally, we recently launched Old Mutual Target Plus Portfolios, the only target- retirement mutual funds with three risk-speciﬁ c asset allocation strategies. These funds enable Old Mutual to capitalise on the trend of target date funds as retirement plan default options. To capitalise on the movement of asset ﬂ ows towards both global and alternative products we launched the following strategies: Copper Rock International Small Cap Growth (managed by a newly acquired team), Barrow Hanley International Value, Thompson Siegel & Walmsley Global Equity, Acadian Emerging Market Debt, 2100 Managed Futures, and 300 North Capital Long/Short. 2008 2007 181 7.2% 20% 1,892 (5.2) 240.3 324 11.3% 27% 3,782 35.2 332.6 % Change (44) (50) (115) (28) In addition to our continued focus on product quality we have begun to build out the next generation distribution model adding several new team members covering Alternatives, Deﬁ ned Contribution Investment Only, and Wall Street and Global Distribution. This is an example of our commitment to grow the business and bring in talented experienced people to serve the evolving needs of our customers. Marketing In addition to partnering with US Life on a number of sponsorships, we hosted industry events showcasing our boutiques’ investment capabilities in key market areas. We hosted a 130/30 conference in February to showcase several of our boutiques and emphasise our leadership in this ﬁ eld. We also continued to seed new investment strategies to broaden our capabilities in areas of high demand and support continued growth. Customer service Our boutiques enhanced their customer service and took extra steps in communicating with customers during the market volatility. The success of these efforts is evident in our net client cash ﬂ ows relative to our peers. Principal risks and uncertainties The broad market downturn had, and will continue to have, an impact on the US asset management business (OMAM). The exposure to current market ﬂ uctuation continues to impact assets under management, revenues and earnings targets, thereby affecting our ability to execute against the overall business strategy. In addition, given activities over the last year, there is a high likelihood of regulatory reform across the ﬁ nancial services industry. In aggregate, these factors create an environment that could result in OMAM facing continuing pressure on earnings as well as higher than normal levels of litigation and reputational risks. Page 70 Old Mutual plc Annual Report and Accounts 2008 Outlook for 2009 We see good potential both in the US and globally. Difﬁ culties within ﬁ nancial institutions have created a signiﬁ cant opportunity to attract investment talent within the US. Market volatility also creates opportunities for managers to provide outperformance for customers at a time when the gap between the top and bottom quartile performers has widened. Before the current market difﬁ culties, client cash ﬂ ows were driving asset allocation decisions towards international, global and alternative strategies. We believe these trends will continue in 2009, but many customer searches have been halted given the recent volatility. Search activity should return with client cash ﬂ ow as the volatility in the ﬁ nancial markets subsides, but customers will remain wary. They will put a premium on companies that are truly institutional in quality and offer effective risk management, continuity of staff, strong ownership structures, transparency of investment process and longevity of performance. Until global equity markets recover, our earnings growth will be restricted. However, our investment track record has positioned us well relative to competitors, and our diversiﬁ ed asset mix will continue to help us weather market volatility. Priorities for 2009 > Maximise the value of the multi-boutique portfolio and maximise its value by delivering consistently high- quality investment performance and retaining assets with consistently active management > Maintain a co-ordinated strategy aimed at managing the portfolio of companies to meet the changing demands of the market > Continue to build on existing global success by sharing best practice in managing boutique investment ﬁ rms and driving greater global distribution for our existing boutiques > Continually energise excellence in our distribution and customer service model by supporting the boutiques’ distribution efforts; augment those efforts for products – such as investment-only deﬁ ned contribution – or distribution channels that are not easily serviced by traditional institutional asset management ﬁ rms > Continue to diversify the core of our business, which is based in institutional asset management, by sourcing investment teams and ﬁ rms, identifying new distribution channels and creating innovative products > Achieve all this within a framework of strong ﬁ nancial and capital management focused on cost management, prioritising efﬁ cient capital spending, and our seed capital programme. i w e v e r s s e n s u B i Page 71 4.0 BUSINESS REVIEW ASIA 1.0 2.0 3.0 4.0 4.1 China and India Steffen Gilbert President, Asia KEY FACTS Adjusted operating proﬁ t (IFRS basis) 2008 (£17m) 2007: £2m Unit trust sales Funds under management 2008 £3.5bn 2007: £6.5bn £418m £719m 2008 2007 Number of countries Number employed 2 467 Page 72 Old Mutual plc Annual Report and Accounts 2008 The Asia region consists of operations in two countries, China and India, which are managed through joint ventures. In 2008 the region also included operations in Australia but in March 2009 Old Mutual announced the sale of its Australian businesses. 4.1 Asia China Our business in China, Skandia:BSAM is a 50:50 life insurance joint venture established in 2004 with the Beijing State-Owned Asset Management Company (BSAM). It provides retail unit-linked assurance solutions for high net worth individuals and operates in Beijing, Shanghai, Jiangsu Province and Guangdong Province. Distribution is exclusively through third parties including banks, securities houses and brokers. India Kotak Mahindra Old Mutual Life Insurance Ltd, our joint venture with Kotak Mahindra Bank (one of India’s leading ﬁ nancial services groups), was established in 2001 and is expanding rapidly. It has nearly 200 branches in 142 cities across India and more than 5,500 employees. It sells predominantly unit-linked investment policies and offers a complete range of traditional life assurance products. We currently own a 26 percent stake, with an option to increase this to 48 percent when legislation permits. In July 2008 we established an ofﬁ ce in Bangalore to support the development of wealth management and asset gathering opportunities in India under the Old Mutual brand. Markets and products China In China, we sell retail unit-linked and universal life products through banks and independent advisers. We continue to expand our distribution footprint, geographically as well as by channel, and are broadening our product range. India Kotak Mahindra Old Mutual Life Insurance offers a full range of assurance products although, in common with the rest of the industry, most of its sales over the past few years have been unit-linked investment products. It distributes through multiple channels – a large tied-agency force, exclusive bancassurance relationships with local banks, and other alternative and direct channels. i w e v e r s s e n s u B i Page 73 4.0 BUSINESS REVIEW ASIA 1.0 2.0 3.0 4.0 4.1 China and India Highlights (£m) 2008 2007 % Change Adjusted operating (loss)/proﬁ t (IFRS basis) (pre-tax) Australia unit trust/mutual fund sales Australia institutional sales Skandia:BSAM (China) Gross Premiums* KMOM (India) Gross Premiums* Net client cash ﬂ ows (£bn) Funds under management (£bn) *This represents 100 percent of the businesses; OM owns 50 percent of Skandia:BSAM and 26 percent of KMOM. **Includes Bermuda Asset Management (now included in USAM). (17) 418 123 28 279 (1.6) 3.5 2** 719 115 122 163 – 6.5 (950) (42) 7 (77) 71 (100) (46) Market overview China China’s economy is already the world’s second largest in terms of purchasing power parity. A number of studies have already predicted that Asia, particularly China, will signiﬁ cantly outpace the rest of the world in growth in GDP and power consumption. A recent Economist Intelligence Unit study forecast that by 2020, China’s economy measured at purchasing power parity exchange rates will be on a par with the US and Asia’s overall share of the global economy will rise to 43 percent from about 30 percent today. China’s industry assets under management (AUM) grew by 5.2 percent over the ﬁ nal quarter of 2008 to RMB1.94 trillion after three consecutive quarters of double-digit declines. This was however, well below the 2007 year-end AUM of RMB3.27 trillion. India India has one of the world’s fastest growing economies, achieving over 8.5 percent GDP growth in both 2006 and 2007. In terms of purchasing power parity, it is the fourth largest global economy. It has a large and growing middle to upper income population and well-developed money, debt, foreign exchange and equities markets. The Insurance Amendment Bill, which would increase the foreign direct investment limit from 26 percent to 49 percent, has already been introduced to Parliament – although its adoption remains uncertain. Funds under management across the industry have shown compound annual growth of 47 percent over the past ﬁ ve years – consistently outgrowing the stock market index, indicating a signiﬁ cant ﬂ ow of funds into the mutual fund industry. Strategy for growth Our strategy in Asia aims to maximise the performance and potential of our existing businesses and to seek new opportunities to extend our portfolio in India and the Greater China region. Our existing businesses in India and China are making good progress but are still young and, like all start-ups, have some ground to cover before becoming signiﬁ cant contributors to the Group’s overall proﬁ tability. In India, we increased our KMOM business branch network with 197 branches now open across the country compared to 106 in 2007. Performance in 2008 For key ﬁ gures see highlights table above. Results impacted by current market conditions A combination of stock market volatility and increased competition resulted in tough business conditions for the year. Sales and net client cash ﬂ ows were disappointing with total outﬂ ows of £1.6 billion, primarily as a result of the lower equity markets and the impact of large institutional client redemptions in Australia. Funds under management reduced accordingly, partially offset by the strengthening of local underlying currencies against sterling. We incurred an adjusted operating loss (IFRS basis) for the year of £17 million. This was largely due to lower revenues which were impacted by weakened sales and signiﬁ cant market value depreciation caused by the market downturn. Non-recurring expenses relating to the new regional ofﬁ ce set-up and the inclusion of costs for new initiatives contributed to the higher operating losses. Page 74 Old Mutual plc Annual Report and Accounts 2008 Major brands > > Skandia:BSAM Kotak Life Insurance (joint venture) £418m Products > Unit linked assurance > Unit linked investment products > Universal life products Asia Financial scale: FUM £4bn Life (APE) sales £0m Unit trust sales IFRS AOP (£17m) Number of employees 467* Key geographies > > China India * Not including Kotak Life Insurance. Outlook for 2009 Although we believe there is good long-term growth potential in the Asia Paciﬁ c region, we have decided for the foreseeable future to scale back our aspirations for this area. We have therefore reached an agreement to sell our Australian businesses (Skandia Australia and Intech Investments) and intend to rein back our expansion plans to focus on our established businesses in India and China. Priorities for 2009 > Continue to support organic growth of our existing businesses in China and India > Seek to distribute more Old Mutual products in India and capture a greater share of total assets under management > Evaluate opportunities to extend our portfolio in the Greater China region. Marketing Skandia:BSAM established a three-year branding strategy and launched a new investment education brand – SWV (Skandia Wealth Vision). We produced our ﬁ rst TV commercial for China. We enhanced the Company’s brand inﬂ uence and set up distribution marketing, investment marketing and product marketing functions which gave great support to both internal communication and external business. Following the Sichuan earthquake in 2008 we made a substantial donation to the affected areas. Customer service Throughout 2008, we won awards for customer service and staff engagement. In September we were recognised as one of the 10 Best Industrial Employers in China and in early December we were rated among the top ﬁ ve in the CIRC’s 2008 Life Insurance Customer Satisfaction Survey. Principal risks and uncertainties As uncertainties in market and economic conditions persist, the market downturn may continue to impact on the growing economies of emerging markets. The Chinese local regulator, CIRC, has placed stricter regulations on the distribution of unit-linked products and has also suspended all new branch openings, new products and funds, placing further strain on business performance. Given that some of our businesses or investments in the region are with joint venture partners, our challenges remain on managing risks through adequate representation on the relevant boards, audit committees and working reports from internal and external auditors. Useful link: www.oldmutual.com i w e v e r s s e n s u B i Page 75 GROUP FINANCE DIRECTOR’S STATEMENT The Group has a sound capital footing and we are well placed to withstand the risks to which our business is exposed. Each of our businesses has sufﬁ cient capital to continue writing new business and growing according to its current plans. Philip Broadley Group Finance Director Funds under management held up well during year of market volatility During 2008, Old Mutual delivered robust investment performance in challenging markets. Although net client cash ﬂ ows were negative overall, we produced positive ﬂ ows of £3.2 billion in our Skandia businesses and £0.1 billion in our combined South Africa businesses. However, these were offset by outﬂ ows in our US and Asia Paciﬁ c businesses. Excluding the outﬂ ows due to a cessation of securities lending which one of our US Asset Management afﬁ liates suspended during the year, net client cash ﬂ ows were £2.4 billion for the year. The result is pleasing, considering the challenges of delivering on absolute investment performance in the extremely volatile markets in 2008. This is demonstrated through our closing funds under management, which held up well in the year overall, down ﬁ ve percent to £264.8 billion, in a period when markets such as the FTSE 100, the JSE Africa All Share Index and S&P 500 all fell more than 25 percent. Breadth of sales product offering in diverse geographic markets Overall life sales on an APE basis held up well, supported by our businesses in Nordic and South Africa. We continued to see the beneﬁ ts of our investment in the Nordic sales channel, where life APE sales were up 30 percent in local currency. South Africa life sales were up 14 percent in rand terms. Page 76 Old Mutual plc Annual Report and Accounts 2008 GROUP RESULTS Group Highlights (£m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Adjusted operating earnings per share (IFRS basis) Proﬁ t before tax (IFRS) Basic earnings per share (IFRS) Adjusted operating proﬁ t (MCEV basis) (pre-tax) Adjusted operating proﬁ t (MCEV basis) (post-tax) Adjusted operating earnings per share (MCEV basis) Adjusted group embedded value (£bn) Adjusted group embedded value per share Life assurance sales (APE) Unit trust/mutual fund sales Value of new business PVNBP Net Client Cash Flows (£bn) Funds under management (£bn) Total shareholders equity Return on equity*** Return on embedded value Full dividend in respect of the ﬁ nancial year 2008 2008 2007 % Change (38) (28) (66) (55) (40) (38) (35) (31) (29) (8) (21) (55) (13) (105) (5) 999 12.2p 595 8.6p 978 575 11.0p 6.2 117.6p 1,611 6,600 104 12,262 (1.2) 264.8 9,577 9.0% 7.8% 2.45p 1,624 16.9p 1,750 19.2p 1,631 922 17.0p 9.0* 166.3p* 1,748* 8,383** 230* 14,046* 23.4 278.9 9,597 13.2% 13.7% 6.85p *Restated, as now reporting on an MCEV basis. **Restated net of Institutional sales in Australia. *** Return on equity is calculated using adjusted operating proﬁ t after tax and minority interests on an IFRS basis with allowance for accrued coupon payments on the Group’s hybrid capital. The average shareholders’ equity used in the calculation excludes minorities and hybrid capital. However in the US, sales were constrained, down 23 percent in local currency. UK and Offshore sales were disappointing, down 19 percent, with single-premium sales being impacted by the market conditions mainly through lower pension sales. Southern Africa unit trust sales were up an impressive 46 percent in local currency with investors moving to lower risk money market funds, but declines in unit trust sales in all other regions more than offset these gains due to the ongoing tough market conditions. Value of new business The value of new business (VNB) was down 55 per cent to £104 million but excluding US Life, at negative £66 million, was down 15 percent for the year on a like-for-like basis. Excellent volumes in Nordic and a strong contribution from OMSA were offset by lower volumes in the UK, ELAM and US Life. The APE proﬁ t margin was six percent. The margin was steady in the UK and South Africa compared with 2007, but down marginally in Nordic and to a greater extent in ELAM, where it fell to six percent mainly due to lower volumes and a change in product mix. The US Life margin was negative because of a reduction in the margin of variable annuities as a result of increased guarantee costs and the exclusion of capitalised corporate bond spreads in the Old Mutual MCEV methodology. Adjusted operating earnings (IFRS basis) Adjusted operating proﬁ t for the year held up in most regions with good contributions from our African, European and US Asset Management businesses, however, proﬁ ts were adversely impacted by adjustments in our US Life businesses. Credit markets remained under stress at the end of 2008. Following review of our asset portfolio we impaired a total of £414 million, of which £28 million affected the 2008 adjusted operating proﬁ t as the total impairments are amortised over ﬁ ve years through adjusted operating proﬁ t. We are reviewing this policy for US Life and expect to move to an “expected return” approach for impairments from 2009 onwards. We also reviewed our deferred acquisition costs balances and accelerated amortisation by £159 million for the combined US Life businesses. Further, in our onshore business we stopped selling the single-premium immediate annuities (SPIA) block of business and made a £235 million adjustment in respect of additional mortality reserves where we have increased our life expectancy assumption to over 90 years. Finally in our offshore business we incurred a charge of £68 million which reﬂ ects the inefﬁ ciency of hedge mapping. A further charge of £206 million was made below the line which reﬂ ects market volatility, in line with standard industry practice. i w e v e r s s e n s u B i Page 77 GROUP FINANCE DIRECTOR’S STATEMENT continued Group Highlights (£m) Adjusted operating proﬁ t (IFRS basis) (pre-tax) Europe Africa United States Asia Paciﬁ c Finance costs Other shareholders’ expenses 2008 2007 2007 restated at 2008 rates 266 1,191 (270) (17) 1,170 (140) (31) 268 1,254 260 2* 1,784 (119) (41) 280 1,157 281 2 1,720 (119) (41) Adjusted operating proﬁ t before tax and minority interests 999 1,624 1,560 Tax Minority interests Adjusted operating proﬁ t after tax and minority interests Adjusted operating EPS (pence) *Includes Bermuda Asset Management (now included in USAM). Rand currency depreciation substantially contributed to lower earnings however, this was partially offset by US dollar, Euro and Swedish Krona strengthening and in total the Group delivered adjusted operating proﬁ t before tax and minority interests 38 percent below 2007 and 36 percent below on a constant currency basis. Assuming constant exchange rates, 2007 adjusted operating EPS would have been 16.4p with the currency impact being negative 0.5p. Financing costs increased over 2007 mainly due to foreign exchange as the sterling value of non-sterling-denominated debt payments increased. Other shareholders’ expenses principally comprise head ofﬁ ce costs. (86) (272) 641 12.2 (418) (292) 914 16.9 (401) (271) 888 16.4 Taxation The Group’s effective adjusted operating proﬁ t (IFRS basis) tax rate decreased to nine percent from 26 percent in the comparative period. This tax rate is anomalously low due to the unprecedented market conditions in 2008 coupled with a reduced adjusted operating proﬁ t which magniﬁ es the rate effect of any adjustment. The reduction in the tax rate is due to a number of factors. These include releases of tax provisions as a result of the closing of issues being agreed with tax authorities, consistent levels of tax exempt dividend income now representing a greater proportion of the reduced adjusted operating proﬁ t, the effect of the different basis of taxation of life tax companies, non-taxable foreign exchange gains, reduction in tax rates and more proﬁ ts being earned in lower taxed jurisdictions and the utilisation of previously unrecognised deferred tax assets. These factors were partially offset by increased secondary tax on companies’ charges and a decreased adjusted operating proﬁ t, non-recognition of deferred tax assets arising in US Life and adjustments in respect of prior periods. In the longer term, it is expected that the tax rate would tend to return to the 2007 level. Page 78 Old Mutual plc Annual Report and Accounts 2008 Return on equity Return on equity for the Group declined to 9.0 percent in 2008 from 13.2 percent in 2007, primarily due to losses from the US Life businesses. This contained some very satisfactory performances from our South African businesses where OMSA achieved a return on allocated capital of 27.8 percent, Nedbank a return on equity (excluding goodwill) of 20.1 percent and Mutual & Federal achieved a return on capital of 33.9 percent. Shareholders’ equity Throughout the year, shareholders’ equity remained steady with retained proﬁ ts and foreign exchange gains on consolidation being offset by unrealised losses in the US Life businesses and the payment of dividends. Old Mutual Market Consistent Embedded Value (MCEV) The Market Consistent Embedded Value Principles (the “Principles”) were published in June 2008 by the CFO Forum, a group representing the Chief Financial Ofﬁ cers of major European insurers, and compliance with these Principles is mandatory in 2009. These Principles provide a framework intended to improve comparability and transparency in Embedded Value reporting across Europe. Old Mutual plc has published European Embedded Value (EEV) results since 2004. The Principles have been fully complied with for all businesses as at 31 December 2008, with the exception of the use of an adjustment of 300 basis points in the risk free rate due to current market conditions for the US Life onshore business. This adjustment reﬂ ects a liquidity premium as at 31 December 2008, and has been determined after reviewing published and proprietary literature and data relating to corporate bond spreads within the US Life corporated bond portfolio. The Group has replaced the EEV basis with the MCEV basis for the covered business and ﬁ gures for 31 December 2007 have been restated accordingly, and comply fully with all of the Principles. The MCEV supplementary information provides details on the methodology, assumptions and results of the MCEV for the Old Mutual Group in accordance with the disclosure requirements of the Principles and includes conversion of comparative supplementary information for 2007, previously prepared on the EEV basis, to a MCEV basis. The impact as at 31 December 2007 of moving from an EEV to a MCEV methodology is a reduction in Embedded Value of the covered business of 7.5 percent from £6,861 million to £6,349 million. Within the European and southern African businesses, the aggregate allowance for risk within the EEV and MCEV approaches is broadly aligned and hence relatively minor impacts were experienced on these businesses when moving from an EEV to a MCEV approach. Most of the reduction in Embedded Value was attributable to the United States business which decreased by 57 percent from £1,069 million to £462 million. For this business the aggregate allowance for risk under EEV is not aligned with the requirements under the Principles and a number of factors contribute to the difference in approaches as explained in detail in the supplementary information. However, it should be noted that compared to EEV reporting, MCEV reporting merely changes the timing of recognition of proﬁ ts and not the ultimate proﬁ tability that will emerge on covered business. Adjusted Group MCEV per share 117.6p The adjusted Group MCEV per share was 117.6p and adjusted Group MCEV was £6.2 billion at 31 December 2008 (31 December 2007: 166.3p and £9.0 billion respectively). The 48.7p decrease in adjusted Group MCEV per share was driven by the fall in equity markets and the impact of lower global interest rates and higher volatility which increased the cost of policyholder ﬁ nancial options and guarantees. Return on Group MCEV Return on Group MCEV declined to 7.8 percent from 13.7 percent at 31 December 2007. The lower adjusted operating MCEV earnings in 2008 were the net effect of higher earnings in the South African and European life businesses driven by positive operating assumption changes and the reduction in the number of shares following the share buy-back programme, offset by lower new business contributions, adverse persistency, higher ﬁ nancial guarantee costs, hedge losses and impairments in the United States, impairments in Nedbank and lower asset based charges in the asset management companies. i w e v e r s s e n s u B i Page 79 GROUP FINANCE DIRECTOR’S STATEMENT continued Total net debt at start of period Operational ﬂ ows Operational receipts Operational expenses Other expenses Capital ﬂ ows Capital receipts Acquisitions Organic investment Debt and equity movements Old Mutual plc dividend paid Share repurchase New equity issuance Other non-cash movements Total net debt at end of period £m 2008 (2,420) 631 (249) (225) (2,263) 822 (191) – 316 – (565) (353) (175) 5 298 £m 2007 (2,407) 645 (217) (441) (2,420) 868 (152) (71) 69 (66) (220) (333) (177) 12 57 Capital position The Group’s gearing level remains within our target range, with senior debt gearing at 31 December 2008 of 4.0 percent (2.0 percent at 31 December 2007) and total gearing, including hybrid capital, of 26.7 percent (21.2 percent at 31 December 2007). Capital requirements are set by the Board, taking into account the need to maintain desired credit ratings and to meet regulatory requirements at both the Group and local business level. Our share buy-back programme announced at the beginning of October 2007 was completed in May 2008. A total of approximately 239 million shares were repurchased through the London and Johannesburg markets at a total cost of £351 million. The Group is in compliance with the Financial Groups Directive (FGD) capital requirements, which apply to all EU-based ﬁ nancial conglomerates. Our pro-forma FGD surplus was in excess of £0.7 billion at 31 December 2008. The FSA requirement is to maintain a positive surplus at all times. Sensitivities to market movements, although not linear, are that a one percent fall in South African rand against sterling is broadly equivalent to a £14 million reduction in FGD, a one percent gain in the US dollar against sterling is broadly equivalent to a £4 million fall in FGD and a one percent fall in the JSE is broadly equivalent to a £4 million decline in FGD. The level of defaults, impairments and realised losses in our US corporate bond portfolio also impact on the FGD surplus. We improved the pro-forma FGD sensitivity to the dollar since our Q3 Interim Management Statement as a result of hedging activities undertaken. Unrealised losses In our US Life onshore business, as at 31 December 2008, 97 percent of our investment portfolio is cash, government backed or investment grade securities of triple B and higher. Concentration risk is low as the top ten holdings account for 5.5 percent of the portfolio. The portfolio is well-matched since the assets have an average duration of 6.0 years against an average duration of 5.9 years for the liabilities. US Life’s net unrealised losses increased over the year to £1.8 billion at 31 December 2008 reﬂ ecting the market-wide re-pricing of credit spreads and other risks which do not relate to speciﬁ c factors within the US Life portfolio. The unrealised losses account for 13 percent of our total portfolio on an IFRS basis. We have the ability and we intend to hold these ﬁ xed income securities to maturity, which in economic terms limits the impact of the current market dislocation. We have adopted the reclassiﬁ cation amendment to IAS 39 and have elected to classify around 150 securities from the “available-for-sale” category to the “loans and receivables” category as at 1 July 2008. This is on the basis that the securities in question are no longer regarded as being traded in the active market. For “available-for-sale” investments, the securities are re-valued and the unrealised losses are accounted for in shareholders’ equity whereas for “loans and receivables” no revaluations are recorded. Page 80 Old Mutual plc Annual Report and Accounts 2008 The Board of Directors has the expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the ﬁ nancial statements contained with this announcement. Related party transactions There have been no related party transactions or changes in the related party transactions described in the Company’s latest Annual Report during 2008 that could have a material effect on the ﬁ nancial position or performance of the Group. Philip Broadley Group Finance Director 4 March 2009 i w e v e r s s e n s u B i Holding company net debt The table (on page 80) shows the net reported debt of the Old Mutual plc holding company and its sub-holding companies. Total net debt within the holding company at the end of 2008 was £2,263 million. A total of £1,138 million of operational and capital receipts were received from business units during 2008. £565 million was invested in the businesses and £353 million was used to pay the 2007 ﬁ nal and the 2008 interim dividend. In addition, £175 million was spent on repurchasing shares during the year. Other movements of £298 million mainly reﬂ ect a positive impact of the marking to market of our debt liabilities. 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. We have included our view of these principal risks as well as the impact of current economic and business conditions in the Business Review sections of this report. The current economic conditions create uncertainty particularly over the future levels of world equity markets, defaults in corporate bond portfolios, particularly in the United States, currency ﬂ uctuations, demand for the Group’s products and other economic factors. These uncertainties have been considered individually and in combination in the Group’s forecasts and projections, taking account of reasonably possible changes in trading performance and economic conditions in the markets in which the Group operates. The results show that the Group should be able to operate within the level of its available credit facilities and with an adequate level of capital, both at a Group level and within each of its major regulated Group entities. To the extent that changes in trading performance and economic conditions prove to be more severe than thought reasonably possible, the Group has evaluated and concluded on feasible management actions that would be possible in such circumstances so as to ensure adequate levels of liquid and capital resources are maintained. The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group’s available credit facilities. The Company’s primary existing revolving current facility of £1.25 billion does not mature until September 2012. Page 81 BOARD OF DIRECTORS From left to right: Richard Pym Christopher Collins Bongani Nqwababa Julian Roberts Nigel Andrews Philip Broadley Russell Edey Reuel Khoza Rudi Bogni Lars Otterbeck Key: 1 Member of the Group Audit and Risk Committee 2 Member of the Nomination Committee 3 Member of the Remuneration Committee Christopher Collins (69), F.C.A. 2 Mr Collins has been non-executive Chairman of the Company since May 2005 and a non-executive director since March 1999. He also chairs the Nomination Committee. He was formerly Chairman of Hanson PLC from 1998 until April 2005. He is also Chairman of Forth Ports plc. Julian Roberts (51), B.A., F.C.A., M.C.T. 2 Mr Roberts succeeded Jim Sutcliffe as Group Chief Executive in September 2008. He was previously Chief Executive of the Group’s Skandia businesses and originally joined the Company as Group Finance Director in August 2000. Prior to joining the Company, he was Group Finance Director of Sun Life & Provincial Holdings plc. Before that, he was a director and Chief Financial Ofﬁ cer of Aon UK Holdings Limited. Philip Broadley (48), M.A., F.C.A. Mr Broadley joined the Company as Group Finance Director on 10 November 2008, succeeding Jonathan Nicholls. He was previously Group Finance Director of Prudential plc from 2000 until March 2008. Prior to joining Prudential, he was a Partner of Arthur Andersen from 1993 to 2000. He has been Chairman of the 100 Group of Finance Directors, a founding member and trustee of the CFO Forum of European Insurance Company Finance Directors, and a member of the IASB’s Insurance Working Group. He is a member of the Code Committee of the Takeover Panel. Nigel Andrews (61), B.Sc., M.B.A. 1, 2, 3 Mr Andrews has been an independent non-executive director of the Company since June 2002. He is also non-executive Chairman of the Company’s principal US holding company, Old Mutual (US) Holdings, Inc. He is a non-executive director of Chemtura Corporation, a governor of the London Business School and a trustee of the Victory Funds. Previously he was an Executive Vice President and member of the ofﬁ ce of the CEO of GE Capital, having spent 13 years with The General Electric Company, Inc. Rudi Bogni (61), D.Econ. (Bocconi) 1, 2, 3 Mr Bogni has been senior independent non-executive director since May 2008, having served on the Board since February 2002. He also chairs the Remuneration Committee. Mr Bogni is Chairman of Medinvest International SCA, Luxembourg. He is also a member of the boards of the LGT Foundation, Common Purpose International Limited and Prospect Publishing, of the Governing Council of the Centre for the Study of Financial Innovation and of the International Advisory Board of Oxford Analytica. He served previously as a member of the Executive Board and Chief Executive, Private Banking, of UBS AG, and before that he was Group Treasurer and a member of the Executive Committee of Midland Bank plc. Page 82 Old Mutual plc Annual Report and Accounts 2008 Russell Edey (66), F.C.A. 1, 2, 3 Mr Edey has been an independent non-executive director of the Company since June 2004. He is Chairman of Anglogold Ashanti Limited, a member of the Conseil de Surveillance of Paris-Orléans, SA and a non-executive director of a number of companies in the Rothschild Group. He previously served on the boards of English China Clays plc, Wassall plc, Northern Foods plc and Express Dairies plc. His career began in the Finance Division of the Anglo American Corporation of South Africa Limited in Johannesburg. In the 1970s he was General Manager – Corporate Finance of Capel Court Corporation in Melbourne. He joined Rothschild in 1977 and was Head of Corporate Finance from 1991 to 1996. Reuel Khoza (59), Eng.D., M.A. Mr Khoza has been a non-executive director of the Company since January 2006 and Chairman of Nedbank Group since May 2006. Mr Khoza is Chairman of AKA Capital, which is 25 percent owned by Old Mutual (South Africa) and the single largest participant in Nedbank’s Corporate Client Scheme established as part of its BEE ownership arrangements. He is also a non-executive director of the Nampak Limited, Protea Hospitality Holdings Limited and Corobrik (Pty) Limited. His previous appointments include Chairmanship of Eskom and non-executive directorships of Glaxo Wellcome SA, IBM SA, Vodacom, the JSE, JCI, Standard Bank Group and Liberty Life. Bongani Nqwababa (42), B.Acc., C.A., M.B.A. 1 Mr Nqwababa has been an independent non-executive director since April 2007. He became Chief Financial Ofﬁ cer of the South African mining group, Anglo Platinum Limited, in January 2009, having previously been Finance Director of the South African electricity utility group, Eskom Holdings Limited, from 2004. Prior to joining Eskom, he had been Treasurer and CFO of Shell southern Africa. He is currently Chairman of the South African Revenue Services (Receiver of Revenue) Audit Committee. Lars Otterbeck (66), Dr. Econ. Mr Otterbeck has been an independent non-executive director of the Company since November 2006. He is also Chairman of Skandia Insurance Company Limited, Hakon Invest AB, The Free Enterprise Foundation and Näringslivets Börskommitté (Industry and Commerce Stock Exchange Committee). He is Vice Chairman of the Swedish Corporate Governance Board and of the Third AP Fund as well as a non-executive director of AB Svenska Spel. Richard Pym (59), B.Sc., F.C.A. 1, 2, 3 Mr Pym has been an independent non-executive director since September 2007. He chairs the Group Audit and Risk Committee. Mr Pym is Chairman of Bradford & Bingley plc. He was Group Chief Executive of Alliance & Leicester plc from 2002 until his retirement in 2007. He is also Chairman of BrightHouse Group Limited and is a former Vice President of the British Bankers Association and former Chairman of Halfords Group plc. t n e m e g a n a M Page 83 GROUP EXECUTIVE COMMITTEE From left to right: Paul Maddox Julian Roberts Andrew Birrell Philip Broadley Tom Boardman Paul Hanratty Tom Turpin Don Hope In addition to the Group Chief Executive and the Group Finance Director, there are 7 other positions of the Group Executive. The Committee meets regularly to address strategic issues, to review the Group’s progress against its business plan for the year and to discuss other high-level matters affecting the Group’s performance or prospects. Julian Roberts (51), B.A., F.C.A., M.C.T. 2 Group Chief Executive Julian succeeded Jim Sutcliffe as Group Chief Executive in September 2008. He was previously Chief Executive of the Group’s Skandia businesses and originally joined the Company as Group Finance Director in August 2000. Prior to joining the Company, he was Group Finance Director of Sun Life & Provincial Holdings plc. Before that, he was a director and Chief Financial Ofﬁ cer of Aon UK Holdings Limited. Philip Broadley (48), M.A., F.C.A. Group Finance Director Philip joined the Company as Group Finance Director on 10 November 2008, succeeding Jonathan Nicholls. He was previously Group Finance Director of Prudential plc from 2000 until March 2008. Prior to joining Prudential, he was a Partner of Arthur Andersen from 1993 to 2000. He has been Chairman of the 100 Group of Finance Directors, a founding member and trustee of the CFO Forum of European Insurance Company Finance Directors, and a member of the IASB’s Insurance Working Group. He is a member of the Code Committee of the Takeover Panel. Andrew Birrell (39), B.Bus. Sc (Hons), FASSA, FFA, ASA Head, Risk and Actuarial Andrew joined Old Mutual in August 2007, as Chief Risk Ofﬁ cer and was appointed Group Chief Actuary in July 2008. Previously he was Chief Operating Ofﬁ cer and Chief Financial Ofﬁ cer at Investec Securities. Prior to this he was Chief Financial Ofﬁ cer at Capital Alliance Holdings. His early career was at Metropolitan Life, where he held various positions. Andrew is a Fellow of the Faculty of Actuaries, Fellow of the Actuarial Society of South Africa and an Associate of the Society of Actuaries. Thomas Boardman (59), B.Com, CA(SA) Chief Executive, Nedbank Group Tom was appointed Chief Executive of Nedbank Group Limited and Nedbank Limited in October 2003. He was previously Chief Executive and an executive director of BoE Limited. He was the founding shareholder and Managing Director of retail housewares chain Boardmans. Prior to this he was a director of Blaikie Johnson Limited, Managing Director of Sam Newman Limited and worked for the Anglo American Corporation for three years. He is a non-executive director of Mutual & Federal Insurance Company Limited and The Banking Association of South Africa, and serves as a trustee of a number of charitable foundations. Page 84 Old Mutual plc Annual Report and Accounts 2008 Paul Hanratty (47), B.Bus Sc. (Hons), FIA Head, Long-Term Savings and Managing Director, Old Mutual South Africa Paul has been with Old Mutual South Africa (OMSA) since 1984. He is a fellow of the Institute of Actuaries and has held a number of roles at Old Mutual. These included Head of Product Development, General Manager, Finance and Actuarial and Head of the Retail business of OMSA. He joined the Board of the OMSA life business in 2003 and became the Managing Director in 2006. Don Hope (52) Head, Strategy Development Don joined Old Mutual as Group Treasurer in May 1999, with responsibility for developing the Group’s international treasury function. He was appointed to the current role of CEO of Old Mutual (Bermuda) Limited in August 2008. Don was Chairman of the Intech Fiduciaries Ltd and the Old Mutual Australia Ltd boards until their sale from the Old Mutual Group, a role he assumed in November 2007. Before joining Old Mutual, Don was Group Treasurer of Eagle Star Holdings plc, a subsidiary of B.A.T. Industries plc. Paul Maddox (48), M.A., FSA Head, Strategic Implementation Paul joined Old Mutual in February 2009 (on a long- term secondment) from Ernst & Young where he was the Partner in charge of the Programme Advisory Services practice. Paul has spent the last 20 years as a management consultant delivering major change programmes in Financial Services. From 2002 to 2005, Paul led the trial and rollout of the highly successful Chip & PIN Programme for all of the UK’s banks and retailers, and the Home Ofﬁ ce. Paul started his career by qualifying as a Chartered Accountant with Deloitte Haskins and Sells. Tom Turpin (48), BS (Accounting) President and Chief Executive Ofﬁ cer, Old Mutual Asset Management (US) Tom was appointed President and Chief Executive Ofﬁ cer, Old Mutual Asset Management (US) in June 2008. He previously served as Chief Operating Ofﬁ cer of Old Mutual (US). Prior to that, he was Managing Director and Head of Deﬁ ned Contribution Plans as well as Chief Administrative Ofﬁ cer for Institutional Management, Deﬁ ned Contribution, and Retail Businesses of Putnam Investments. From 1982 to 1993 he held a variety of leadership positions with The Boston Company. He is a member of the board of directors of several afﬁ liated companies and investment fund structures. The process for appointing a Group Human Resources Director is ongoing. The person appointed will join the Group Executive Committee. t n e m e g a n a M Page 85 CHAIRMAN’S INTRODUCTION Highlights In 2008 we: > Completed our ﬁ rst open submission for the Carbon Disclosure Project > Held over 100 investor meetings > Won 2 customer service awards > Invested £7.7 million in local community programmes Christopher Collins Chairman, Board sponsor of Corporate Responsibility Commitment To demonstrate our real commitment to manage CR issues we intend during 2009 to establish a forum to provide Group focus on social and environmental impact areas that are material to our business. Engaging with others Much of our progress so far has been informed by the stakeholder engagement work that we completed in 2008. This included customer roadshows, employee feedback surveys, supplier workshops and thought leadership conferences. Our progress in 2008 has been recognised by external audiences. Old Mutual retains its membership of the FTSE4Good Index, while Nedbank and Old Mutual are both included in the JSE’s Socially Responsible Investment Index. Nedbank has also been listed on the Dow Jones World Sustainability Index for the fourth year. 2009 and beyond There is still much for us to do in 2009 and beyond to build up our reputation as a trusted business and corporate citizen. However, the tools we have now put in place should enable us to manage our risks and impacts more effectively into 2009. Christopher Collins Chairman A difﬁ cult year In 2008, the global economic crisis created extremely difﬁ cult market conditions for Old Mutual. With a new senior management team in place, we have begun refocusing our strategic direction and approach to our risks and responsibilities. We have begun a project to strengthen our operating model. This involves revisiting our processes for product approval, our risk appetite and our governance structures. Establishing new Group benchmarks As part of this, we are looking afresh at the processes we have in place to embed responsible business practices across our business units. As a Group, we are composed of many companies at different stages of development in their corporate responsibility activities. For example, in most of our businesses in southern Africa and the Nordic regions, our management of social and environmental issues is well developed. But in regions where we are relatively new to the market, there is still scope to improve these structures. Through their daily decisions and actions, our people have a crucial role to play in making us a truly responsible business. Ensuring that these decisions and actions meet the same high standards in all markets is a considerable challenge as we employ 57,000 people and operate in 40 different countries. We have a clear set of values that provide us with a good starting point. But what really matters is how we live those values. In 2008 we developed an overall Group Responsible Business Policy, incorporating all of our CR areas. The principles which underpin this policy provide a benchmark for our individual business units, who are responsible for delivering against them at a local level. This section of our Annual Report shows some examples of how the principles are being applied across the Group. Page 86 Page 86 Old Mutual plc Old Mutual plc Annual Report and Accounts 2008 Annual Report and Accounts 2008 RESPONSIBLE BUSINESS PRINCIPLES In 2008 we developed a set of principles that outline our commitment to operating responsibly in all our interactions with stakeholders. Outlined below, these principles form the basis of our report. Helen Wilson Head of Corporate Responsibility OUR STAKEHOLDERS AND RESPONSIBLE BUSINESS PRINCIPLES Employer of choice > Developing employee potential > Ensuring employee rights > Providing a safe and healthy environment Purchase of choice > Providing high level of service > Providing sound ﬁ nancial advice > Preventing ﬁ nancial crime Our Stakeholders Shareholders Customers Employees Local communities Regulators Suppliers NGOs Supplier of choice > Developing strong supplier relationships > Inﬂ uencing environmental and societal responsibility through our supplier relationships Respectful of environment > Minimising environmental impact > Managing impact of investments > Engaging employees in our efforts Respected in local communities > Supporting development in our communities > Promoting ﬁ nancial education and inclusion y y t t i i l l i i i i b b s s n n o o p p s s e e r r e e t t a a r r o o p p r r o o C C Page 87 Page 87 Page 87 CUSTOMERS Our ability to manage and grow our customers’ savings and wealth is the primary source of our value as a business. We do this most effectively when we build long-term relationships that allow us to better understand individuals’ or organisations’ changing needs and respond to them accordingly. RESPONSIBLE BUSINESS PRINCIPLES: CUSTOMERS Our ability to manage and grow our customers’ investments is the source of our value as a business. Across our business units we will: > > > > > > Deal with all our customers and clients in a way that is open, honest and respectful Give the best advice that we can, to grow our customers’ assets in a way that meets their needs Sell and promote our ﬁ nancial products in a way that is transparent and never misleading Ensure that we provide clear information to customers about how our funds are invested Seek and listen to customer feedback and act on it Rectify any mistakes that affect customers as quickly as possible Throughout 2008 we continued to invest time and resources in the way we deal with our customers – making sure the products and services we sell are marketed responsibly, ensuring our customers’ money is safe from ﬁ nancial crime or simply ensuring that our customers receive a high quality of service whenever they come into contact with us. In 2008, we faced challenges quite unlike any that we had encountered before. Volatile market conditions made it more important than ever to ensure we met our customers’ needs. Below we outline some of the key areas on which we focused our efforts in 2008. Transparent marketing and selling As a Group, we market and sell a wide array of different products and services. These range from life assurance and property and casualty insurance to savings and pensions. Ensuring we sell and market these products across the Group in an honest and transparent way is vital to building trust with our customers and retaining their business. This is reﬂ ected in our Responsible Business Principle that states that we will: > Sell and promote our ﬁ nancial products in a way that is transparent and never misleading. To ensure this principle is followed, each business unit has its own process for signing-off all external marketing and communications materials. For example, Old Mutual Financial Network in the US has an Advertising Review Committee that must sign-off all written and electronic forms of communication before they can be published. The guidelines it uses require, amongst other things, that all sources are cited, that testimonials are backed up and that details are not hidden in the small print. These sign-off processes at business unit level help us prevent the publication of material that could mislead our customers. Preventing ﬁ nancial crime We are committed to protecting our shareholders’ funds and our customers’ money from all forms of ﬁ nancial crime. The most important issues for us are preventing the Group from involvement in money laundering, fraud or bribery and corruption. Page 88 Old Mutual plc Annual Report and Accounts 2008 Awards won for customer service Nedbank Ranked number one for customer service in South Africa for the second year running by the independent Ask Africa Orange Index Skandia-BSAM Given the Best Customer Service Award by the China Information Association and China Service Trade Association Volatile market conditions made it more important than ever to ensure that we met our customer needs. At Group level we have emphasised our commitment to meeting the challenge posed by rising levels of ﬁ nancial crime worldwide by expanding and strengthening our Group risk and forensic policies. In addition, many business units have taken an innovative approach to combating ﬁ nancial crime. For example, to help protect against card fraud, Nedbank provides conﬁ rmation of transactions to cardholders on their mobile phones. This contributed to a 26 percent decrease in card fraud in 2008, compared with an increase of 39 percent for the South African card industry over the same period. To tackle ﬁ nancial crime effectively, our employees are fully informed about their responsibilities and the role they play. Business units across the Group provided training to employees on ﬁ nancial crime issues during 2008. In addition, a conference in November 2008 enabled business unit ﬁ nancial crime experts to share experiences and increase their knowledge with input from industry experts. Providing high-level customer service Ensuring customers receive the best possible service from us not only helps retain customers, but also builds their conﬁ dence in the business. Below are some examples of initiatives we have taken in 2008 to improve the service our customers receive. > Skandia-BSAM (China): To improve access to our services we set up a centralised customer service hotline, available 24 hours a day, 7 days a week. This enabled customers to obtain assistance whenever they need it > Nedbank: To improve the coverage to our customers, in 2008 we formed a strategic business partnership with Ecobank Transnational Incorporated (ETI), the parent company of the Ecobank Group. This has given our customers access to a combined pan-African banking network covering 30 countries, including South Africa, with over 1,000 branches and banking outlets across the continent > Old Mutual Financial Network: We employed a third-party company to evaluate and help improve customers’ satisfaction with our call centres. This enabled us to develop new benchmarks, create an improved set of call scripts and start a new training programme for call centre staff > Skandia UK: We helped improve customer service by enabling our ﬁ nancial advisers (FAs) and customers to learn more about the ﬁ nancial industry and the market. We used channels such as Skandia Magazine for customers, and Informer, a monthly publication for FAs. We also ran seminars and developed a website – informerLive! – targeted at FAs. y t i l i i b s n o p s e r e t a r o p r o C Page 89 EMPLOYEES The success of our business relies on developing relationships with a broad range of stakeholders, from customers and suppliers to government and media. Our employees sustain these relationships and are therefore central to our success. Kevin Stacey Acting Group HR Director RESPONSIBLE BUSINESS PRINCIPLES: EMPLOYEES We want Old Mutual to be an organisation that people are proud to work for. To attract and retain the best people, we work hard to create an environment in which they can ﬁ t and ﬂ ourish. Across our businesses, we will: > > > > > > Recruit and reward employees fairly and according to merit. This principle is balanced against the need to ensure that we advance transformation in the unique context of our southern African operations Promote the health and wellbeing of our employees in a work environment conducive to personal and team growth Provide opportunities for employee dialogue, listen actively and encourage participation in the resolution of issues Invest in employee development to enable each individual to reach his or her full potential and provide opportunities for career and personal advancement, including involvement in community activities Safeguard employee rights, including rights to freedom of association and collective bargaining Embrace and encourage the diversity that exists amongst our employees while respecting each persons special individuality We work hard to ensure that we attract, engage and develop the best people. Page 90 Old Mutual plc Annual Report and Accounts 2008 The success of our business rests on our relationships with a broad range of stakeholder groups, from customers and suppliers to government and media. Our employees sustain these relationships and are therefore central to our success. We work hard to ensure that we attract, engage and develop the best people by creating an environment where our employees feel supported, challenged and rewarded. We believe that our Business Units are best positioned to manage issues relating to their employees, so speciﬁ c policies for employees are set at local level. But this local ﬂ exibility is complemented by a strong Group framework that helps shape the way we relate to our employees. Our Group values and our Responsible Business Principles (see box) provide a broad overview of our approach, while our Group HR Policy sets out in more detail the standards of what we expect from business units. Some of the areas where we made progress in 2008 are detailed below. > Skandia-BSAM was recognised as a ‘Top 10 Best Employer of the Industry’ > Skandia UK was highlighted as ‘one to watch’ in the 2008 Sunday Times ‘100 Best Companies to Work For’ list. Developing our people To help employees fulﬁ l their potential, we have a formal process to identify training needs and create individual development plans. As part of this process, in 2008 we continued to roll-out our Career Choices model. This framework helps employees to identify the right career path for them and clariﬁ es the knowledge and skills they will need at different management levels. It also ensures that they know what is expected of them at each level of the business. To be a successful business, we need managers with the ability to develop the talent of individuals and build strong teams. In 2008, 17,500 employees took part in our ongoing Management Development Programme. Feedback from these courses has been very positive; our employees tell us that they value the opportunity to focus on developing the skills that matter most for their role. In addition to the programmes and courses on offer around the Group, we are extending access to eLearning programmes. In 2008 we formed a Employee data Gender representation Nearly half of all our employees are women. In the top leadership group the proportion of women rose from 20 percent in 2007 to 24 percent in 2008. Useful links: www.nedbank.co.za Total number of employees = 57,000 Male 51% Female 49% Top Leadership Group = 96 Male 76% Female 24% y t i l i i b s n o p s e r e t a r o p r o C relationship with Harvard University to provide business school eLearning to employees in the UK, southern Africa, the United States and Europe. Managing succession risk In an extremely challenging year, voluntary turnover amongst senior management rose to an annual rate of 10 percent (for voluntary leavers) and to 19 percent overall. The loss of key staff can cause signiﬁ cant disruption in any company, and we see this as a key risk to the business. We have mitigated this risk by strengthening our succession planning and our processes for growing talent within the business. In 2008 we developed the Global Leadership Potential Programme to identify individuals with leadership potential and give them as early as possible the support they need to accelerate their progression. We will roll this programme out globally in 2009. We carefully monitor the degree to which we have successors for key roles identiﬁ ed and ready over the short, medium and long term. In 2008 we introduced a talent database to help us analyse and measure our succession coverage index, which draws on a variety of indicators from across the business. This enabled us to improve our level of coverage: our strong talent pipeline meant that we were able to ﬁ ll 65 percent of our leadership vacancies internally. Increasing diversity We are committed to increasing diversity throughout the Group: the different backgrounds, experiences and perspectives of our employees are a great asset. Our policies ensure that no employee receives less favourable treatment on grounds of their gender, age, sexual orientation, race, disability, religion or any other factor unrelated to the requirements of their position. In southern Africa, recognising the unique circumstances, we balance these principles against our commitment to address employment equity and transformation issues. As part of our focus on increasing diversity we closely monitor our employee proﬁ le, particularly at higher management levels. In 2008 the proportion of women in the top leadership group rose from 20 percent to 24 percent. We are committed to working towards our goal of 30 percent female representation during 2009. Page 91 EMPLOYEES continued Having strong company values helps us to develop a motivated and committed team and is the ‘glue’ which binds employees across the Group. But values only become meaningful when employees can see their relevance in their day-to-day role. At Skandia UK we created a team of Values Champions to focus on exploring what values mean for actual behaviour in the workplace. They were then given the tools and responsibility to start encouraging these behaviours in their own departments. Through our Your Recognition programme, individuals at Skandia UK can nominate any employee, whatever level or department, to be recognised for their contribution to any one of the Old Mutual values. Each quarter, the panel chooses 10-12 employees to be formally acknowledged by the Company and given a special prize in recognition of their efforts. In 2008, Nedbank received the African Banker Gender Sensitivity Award in recognition of its commitment to improving gender equality and advancing women in the workplace. Nedbank’s host of gender-based initiatives includes the Nedbank Women’s Forum: more information on this is given in its sustainability report, available online from April 2009 at www.nedbank.co.za. As a result of these initiatives, women make up more than 60 percent of Nedbank’s workforce – and more than 50 percent of middle and senior managers are female. Engaging our employees Maintaining high levels of commitment becomes all the more important in difﬁ cult times. We measure how well we are engaging our employees through our annual engagement survey. The 2008 survey placed us in the top quartile of our sector for both emotional and rational commitment, and we outperformed the international ﬁ nancial services benchmark overall. Communication is a key component of employee engagement. We invest signiﬁ cant resources in internal communications tools such as our magazines and newsletters. In 2008, Old Mutual South Africa’s internal staff magazine, Amicus, won the Best Internal Magazine trophy and Best Communication Award at the South African Publication Forum. Page 92 Old Mutual plc Annual Report and Accounts 2008 SUPPLIERS At both Group and business unit level we work with many different suppliers. It is vital that we show consistency across the Group in the way we manage our relationship with all our suppliers. Here we outline some of the steps we have taken in 2008 to improve our procurement processes. RESPONSIBLE BUSINESS PRINCIPLES: SUPPLIERS Developing long-lasting relationship with suppliers is good for our business. We will: > > > Treat our suppliers as partners and strive to create long-term relationships Act fairly and honestly in all our dealings with suppliers Factor the environmental and social impact of our suppliers into our procurement decisions, in accordance with our Group procurement policy Developing a Group-wide procurement policy We recognise that our procurement activities have an impact on the environment and the wider community. So it is important that they not only reﬂ ect our values as a company but also consider ethical implications, security of supply, future costs, efﬁ ciency savings and local legislation. In 2008, to help us manage all these considerations, we developed our ﬁ rst Group-wide procurement policy. This commits the Group and our employees to: > Act legally and with integrity at all times to safeguard our employees, resources, and tangible and intangible assets – particularly our reputation > Create and maintain a trust-based and inclusive internal culture in which bribery and corruption are not tolerated > Conduct all business relationships in an ethical and lawful manner > Co-operate fully with law enforcement and regulators locally within the bounds of local legislation. In addition to these commitments, the policy outlines speciﬁ c expectations from our suppliers relating to human rights, child and forced labour, environmental impact and ethical standards. In 2009 this Group-wide policy will be used to help ensure we have a consistent approach in all our supplier relationships. y t i l i i b s n o p s e r e t a r o p r o C An illustration of the difference we can make through our procurement is the Black Economic Empowerment (BEE) programme. This programme was launched by the South African government in 1994 to redress the inequalities of apartheid by giving disadvantaged groups economic opportunities previously not available to them. BEE is intended to transform the economy so that it better reﬂ ects the country’s demographic make-up. It includes measures such as employment equity, skills development, ownership, management, socio-economic development and preferential procurement. In accordance with the South African Financial Sector Charter, our South African businesses are committed to using BEE partners in their procurement. This commitment is set out in a joint procurement policy that covers Old Mutual South Africa, Nedbank and Mutual & Federal. Nedbank, for example, has a dedicated BEE Procurement Management unit in its central Group Procurement area. This unit sets the framework rules for BEE procurement based on Nedbank’s agreed Procurement Policy, and engages all parts of the business in achieving its BEE goals and targets. Developing strong relationships with suppliers Making sure we have strong relationships with our suppliers is important for us, as it ensures we have a reliable, high-quality and fairly priced source of goods and services. If these relationships beneﬁ t our suppliers as well as us they will grow and thrive. One example of how we do this is Nedbank’s regular supplier forums. During 2008 we used these to highlight issues and discuss potential solutions. As part of our development as a Group we plan in 2009 to introduce more integrated Group-wide processes that foster greater feedback from our supply chain. This will help us improve the way we work with suppliers and increase the overall efﬁ ciency of the business. Page 93 ENVIRONMENT It is inevitable that the scale of our global operations has an impact on the environment, both directly and indirectly. As the full extent of the challenge posed by climate change becomes evident, we are taking action to address and mitigate these impacts. RESPONSIBLE BUSINESS PRINCIPLES: ENVIRONMENT As a ﬁ nancial services group, we recognise that we have two types of environmental impact: our direct impacts that arise from the running of our ofﬁ ces and branches, and our indirect impacts through the investment decisions that we make. To minimise our environmental impacts where possible we will: > > > Take measures to reduce our energy and water use and the waste we generate in each of our locations Ensure that employees are trained to understand our impacts and their role in minimising these Consider environmental impacts as part of our investment decision process where possible Climate change is an issue that we believe requires collaborative action between companies, as well as action by individual companies. That is why we signed the Poznan Communiqué at the end of 2008, and will continue to support it in 2009. This initiative, led by the Prince of Wales and the EU Corporate Leaders Group on Climate Change, calls for a comprehensive, legally binding UN framework to tackle climate change. As a business we have direct environmental impacts – for example, through our ofﬁ ces and business travel – and indirect impacts, through the investments that we make. In our revised Responsible Business Principles we have tried to reﬂ ect both types of impact. In this section we describe some of the work we have done, and continue to do, to minimise the impact of our operations, manage the impact of our investments and engage our employees in our environmental efforts. Minimising the impact of our operations Over the past year we have worked to improve our understanding of our operational impacts and to reduce them where possible. The ﬁ rst step is to be clear about what they are. We have identiﬁ ed our main impacts as energy use, water consumption and waste creation. During 2008 we started to develop a full set of measurements that will give us a baseline against which to measure performance in the future. We plan to have completed this data collection in 2009 and will use it as a basis for setting targets going forward. As part of the measurement process in 2008 we undertook our ﬁ rst publicly available Group submission to the Carbon Disclosure Project. This included details of our views on the risks and opportunities climate change presents the business, our greenhouse gas emissions accounting, our strategy to reduce emissions and our corporate governance relating to climate change. In addition to the Group submission, Nedbank completed its own submission. More details about these submissions can be found at www.cdproject.net To help us manage our direct environmental impact, many of our sites now have their own structured Environmental Management System (EMS) in place. In 2008 over 50 percent of our employees worked in ofﬁ ces covered by an externally recognised EMS. Although each one is site-speciﬁ c, many of these systems follow the internationally recognised ISO 14001 EMS guidelines. Managing the impact of investment decisions As a Group we try, wherever possible, to ensure that we are aware of the environmental impact of our investment decisions. Ensuring this happens can be a complicated process. We offer a range of ﬁ nancial products and the structure of our products means that our teams’ investment decisions are governed by a variety of restrictions. For example, many of our fund managers have strict mandates from their customers which limit the ﬂ exibility of the investments they can make, whereas for project ﬁ nance there can be much more autonomy over the investment decision. In 2008 we took the ﬁ rst step towards formalising the way we manage the environmental impact of our investment decisions as a Group. We developed our ﬁ rst Group Investment Statement to reﬁ ne the overall product offering provided by Old Mutual companies. While this represents a clear step forward for the Group, we plan to reﬁ ne the statement further in 2009 to reﬂ ect the structure of our business and the changes that we have undergone. Page 94 Old Mutual plc Annual Report and Accounts 2008 Following our data collection exercise we can now start to demonstrate our environmental impact more clearly. ELECTRICITY, WATER AND WASTE Electricity (KWh) Water (m3) Waste (Kg) Old Mutual plc 9,038,851 southern Africa 155,902,225 Europe 18,748,508 North America 3,065,163 Asia Paciﬁ c 2,255,859 Old Mutual plc 30,656 southern Africa 559,159 Europe 21,010 North America 1,371 Asia Paciﬁ c 1,605 Old Mutual plc 173,960 southern Africa data unavailable Europe 216,370 North America 273,300 Asia Paciﬁ c 14,826 Total usage (KWh) Total usage (m3) Total waste (Kg) 189,010,606 613,801 678,456 y t i l i i b s n o p s e r e t a r o p r o C A good example of how our business units are already taking action in this area is Nedbank’s involvement in the Equator Principles. These social and environmental benchmarks enable ﬁ nancial institutions to classify projects according to the level of risk associated with them and then to manage these risks in a structured way. We were the ﬁ rst African bank to sign-up to the Equator Principles in 2003. During 2008 we provided ongoing training on the Principles for key employees and awareness-raising sessions for top management. We also engaged with NGOs through the Nedbank/ WWF-SA conservation partnership and continued learning and interaction with other Equator Principles ﬁ nancial institutions. More information on Nedbank’s implementation of the Equator Principles can be found at www.nedbankgroup.co.za Engaging employees in our environmental efforts We actively encourage our employees to join in our efforts to minimise the environmental impact of our operations. Our aim as a Group is to reduce our environmental impact; but it is often the individual actions taken at a business unit level that help achieve real change. Here are just a few examples of such action in 2008: > Skandia Nordic (Sweden): As part of the building programme for our new head ofﬁ ce we carried out a sustainability workshop to help improve our environmental practices within ofﬁ ces > Skandia-BSAM: Throughout the year we ran campaigns to encourage employees to reduce their carbon footprint. These included campaigns to reduce the number of days employees drive to work, and to help employees reduce their energy, water and paper usage in the ofﬁ ce > Old Mutual plc: As part of the Group’s support for environmental initiatives we supported World Environment Day in June 2008. Talks and information provided during the day showed employees how they could reduce their personal carbon footprint and what they could do at work > Skandia UK: We launched an ofﬁ ce-wide recycling programme in 2008, removing all desk bins and replacing them with central recycling facilities. Page 95 SOCIETY Businesses must earn the trust and respect of their stakeholders. We see ourselves as an integral part of the societies in which we operate. Playing a proactive role in society is a key way to build that trust and respect – so we strive to ensure the impacts we have on society are positive ones. RESPONSIBLE BUSINESS PRINCIPLES: SOCIETY We recognise that good relations and long-term partnerships with local communities are fundamental to our success. Wherever we operate, we will: > > > Consider social impacts as part of our investment decision process where possible Give our time and resources to projects that promote education, health and economic development in the communities that we serve Use our position as a ﬁ nancial services company to improve levels of ﬁ nancial education and to promote ﬁ nancial inclusion Page 96 Old Mutual plc Annual Report and Accounts 2008 We do this not only by conducting our core business in a responsible way, but also by taking account of many of the wider impacts that we have as an organisation. For us as a Group this means: > Making responsible investment decisions > Promoting ﬁ nancial education and inclusion > Supporting development in our communities. Making responsible investment decisions We are aware that our investments can have a huge consequence for society, both directly (e.g. through ﬁ nancing a project in a community) and indirectly (e.g. through trading shares in a company whose activities subsequently impact on a community). Maximising positive impacts and minimising negative ones, while still ensuring a good return to our customers, is a constant but necessary balancing act. In 2008 we created our ﬁ rst Group Investment Statement – see this online at www.oldmutual.com/csr. This has been another step in the direction of reﬁ ning our overall product offering and living up to the Group’s new Responsible Business Policy. In 2009 we plan to revisit this statement to reﬂ ect any changes to the business, and the marketplace, since its inception. An important element of our approach is to help our customers make responsible investment decisions, too. Through Skandia UK, for example, we offer our customers a choice of more than 25 ethical and environmental funds. Promoting ﬁ nancial education and inclusion Access to basic ﬁ nancial products and advice is essential for people to function fully in society. But it is just as important for people to understand these products, and how they can be used beneﬁ cially. These are some examples of initiatives we took in 2008 to help address these issues. > Skandia-BSAM: In China we launched a ﬁ nancial education brand, Skandia-BSAM Wealth Vision, to promote ﬁ nancial education for our customers and the general public. Under this initiative we produced quarterly magazines outlining general investment principles and arranged customer seminars on investment themes in Beijing, Shanghai, Nanjing, Guangzhou and Shenzhen Maximising positive impacts and minimising negative ones, while still ensuring a good return to our customers, is a constant but necessary balancing act. y t i l i i b s n o p s e r e t a r o p r o C > Old Mutual South Africa: Poor ﬁ nancial education is a particular challenge in South Africa, where the savings ratio is very low and levels of personal debt are climbing steadily. In response, as part of our Masisizane Fund, we established a Financial Education Trust which provides ﬁ nancial education and advice for individuals > Nedbank: In 2008 we became the ﬁ rst South African bank to open a million Mzansi accounts – designed for people on low incomes who may not previously have had access to ﬁ nancial services > Skandia ELAM (Colombia): Employees volunteered Useful links: to mentor 40 children as part of the Mentoreo Intergenerational Dialogue programme > Old Mutual South Africa: We continued to invest in local communities through the Masisizane Fund and the Old Mutual Foundation. Through the Fund we committed over R21.9m in 2008 to projects focused on developing enterprise, supporting women in business and skills development. More details can be found at www.oldmutual.co.za/about-us/ transformation/masisizane.aspx www.cdproject.net www.nedbankgroup.co.za www.oldmutual.com/csr www.oldmutual.co.za/ about-us/transformation/ masisizane.aspx > Skandia ELAM: In Colombia we worked with > Nedbank: During 2008 Nedbank contributed R43.5 million to projects through donations and employee volunteering > Old Mutual Financial Network: We matched employee donations to charitable organisations, raising $20,500 for almost 50 initiatives > Old Mutual Asset Management: We donated $193,000 to local community programmes focused on four areas: community, crisis intervention, healthcare and culture > Skandia-BSAM: As part of the relief effort following the huge earthquake in the province of Sichuan, we donated RMB1 million to China Red Cross. a major national newspaper, El Tiempo, to sponsor a special section with articles about saving, personal ﬁ nance and ﬁ nancial planning. We also ran similar initiatives in two business newspapers. Supporting development in our communities During 2008 we supported a wide range of community projects across the world. Through these we invested in education, health and welfare, local economic development, the environment and the arts. In total we put £7,717,102 into our local communities. These are just a few examples from 2008 – more information on our community investment programmes in each region is available online at www.oldmutual.com/csr > Old Mutual plc: We donated £350,000 to a range of organisations including Thames 21, Kidz, Crisis, the Deaf Children’s Society, Willow Foundation, Children with Leukaemia and the Alzheimer’s Society > Skandia Nordic: Our ‘Ideas for Life’ Foundation donated SEK5.7 million to 326 different projects > Skandia UK: We continued to focus on employee volunteering, giving over 500 working hours to community initiatives, including the Bobby Moore Fund for Cancer Research UK and our Saints in the Community partnership with Southampton Football Club > Old Mutual Zimbabwe: Despite another very difﬁ cult year in Zimbabwe we continued our support for local community initiatives including Business Council on AIDS, Emerald Hill School for the Deaf and the Harare International Festival of the Arts Page 97 DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS Governance is about managing the company effectively and showing that we have a transparent, consistent and effective way of governing ourselves. Martin Murray, Group Company Secretary Index to this section of the Report Introduction and Combined Code compliance Board of Directors > Membership and directors’ interests > Rotation and re-election of directors > Skills, experience and review > Mandate, governance and Scheme of Delegated Authority > Executive and non-executive roles > Independence of non-executive directors > Directors’ conﬂ icts of interest > 2008 operations Group Executive Committee Board Committees > Group Audit and Risk Committee > Remuneration Committee > Nomination Committee > Approvals Committee Management Committees > Group Risk and Capital Committee > Group Capital Management Committee Terms of reference Attendance record Auditors General Meetings > Results of the Annual General Meeting 2008 Internal control environment > Responsibility for internal control > Assessment of the system of internal control > Group Internal Audit 98 99 103 103 106 107 107 107 108 110 111 Other Directors’ Report matters > Relations with shareholders and analysts > Directors’ shareholdings and share dealings > Directors’ indemnities > Supplier payment policy > Charitable contributions > Environmental matters > Political donations > Dividend policy > Share capital > Rights and obligations attaching to shares > Signiﬁ cant agreements > Substantial interests in voting rights > Going concern > Disclosure of information to the auditors Governing law 117 Introduction and Combined Code compliance The Group is committed to achieving high standards of corporate governance. The organisation is directed and controlled by its Board of Directors and through systems of delegation and escalation, so as to achieve its business objectives responsibly and in accordance with high standards of accountability and integrity. The principal governance rules that apply to UK companies listed on the London Stock Exchange are set out in the Combined Code appended to the Listing, Prospectus, Disclosure and Transparency Rules of the Financial Services Authority (the Combined Code). As the Company’s primary listing is on the London Stock Exchange, this report mainly addresses the matters covered by the Combined Code, but the Company also has regard to governance expectations in the four other territories where its shares are listed (South Africa, Malawi, Namibia and Zimbabwe). Page 98 Old Mutual plc Annual Report and Accounts 2008 In the year ended 31 December 2008 and in the preparation of this Annual Report and these Accounts, the Company has complied with the main and supporting principles and provisions set out in the Combined Code as described in the following sections of this Report. The Company’s compliance with Combined Code provisions C1.1, C2.1, C3.1 to C3.7, and the statement relating to the going concern basis adopted in preparing the ﬁ nancial statements, have been reviewed by the Company’s auditors, KPMG Audit Plc, in accordance with guidance published by the Auditing Practices Board. Board of Directors Membership and directors’ interests The Board currently has 10 members, with two executive and eight non-executive directors. All of the current directors except for Mr P Broadley (who was appointed to the Board in November 2008) served throughout the year ended 31 December 2008. Mr N Broadhurst retired from the Board and as a member of the Group Audit and Risk, Nomination and Remuneration Committees at the end of Annual General Meeting on 8 May 2008. Mr J Sutcliffe resigned as Group Chief Executive and ceased to be a member of the Board and of the Nomination Committee on 9 September 2008, when he was replaced as Group Chief Executive by Mr J Roberts. Mr J Nicholls ceased to be Group Finance Director and resigned from the Board with effect from 10 November 2008, when he was replaced by Mr P Broadley. Details of the directors’ interests (including interests of their connected persons) in the share capital of the Company and quoted securities of its subsidiaries at the beginning and end of the year under review are set out in the following tables, while their interests in share options and restricted share awards are described in the section of the Remuneration Report entitled ‘Directors’ interests under employee share plans’. There have been no changes to any of these interests between 31 December 2008 and 4 March 2009. At 31 December 2008 Mr N Andrews Mr R Bogni Mr P Broadley Mr C Collins Mr R Edey Mr R Khoza Mr B Nqwababa Mr L Otterbeck Mr R Pym Mr J Roberts Old Mutual plc Number of shares Nedbank Group Limited Number of shares 7,000 19,000 – 100,000 25,000 – – – 20,000 1,089,6042 – – – – 2,604 2,0621 – – – – Old Mutual plc Number of shares Nedbank Group Limited Number of shares At 1 January 2008 (or date of appointment as a director, if later) Mr N Andrews Mr R Bogni Mr P Broadley Mr C Collins Mr R Edey Mr R Khoza Mr B Nqwababa Mr L Otterbeck Mr R Pym Mr J Roberts Former directors Mr N Broadhurst (at 1 January 2008 and at date of resignation) Mr J Nicholls (at 1 January 2008) Mr J Nicholls (at date of resignation) Mr J Sutcliffe (at 1 January 2008) Mr J Sutcliffe (at date of resignation) 7,000 19,000 – 75,000 25,000 – – – 20,000 806,5462 2,416 106,7642 214,5662 1,692,7692 2,130,4342 – – – – 2,604 2,0621 – – – – – – – – – 1This ﬁ gure does not include shares in the Aka-Nedbank Eyethu Trust, one of Nedbank’s Eyethu BEE trusts. 2These ﬁ gures do not include rights to restricted shares that have not yet vested, which are described in the Remuneration Report. No director had a material interest in any signiﬁ cant contract with the Company or any of its subsidiaries during the year. Additional details of various non-material transactions between the directors and the Group are reported, on an aggregated basis along with other transactions by senior managers of the Group, in note 45 to the Accounts. Page 99 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued OUR GOVERNANCE FRAMEWORK Policies Board and Committees Culture Roles and Responsibilities Incentivisation Governance Management Information Scheme of Delegated Authority Governance Processes Risk Appetite What does Governance mean at Old Mutual? It is the articulation of the way we run the business. Governance is about managing the company effectively, providing accountability to shareholders and showing all our external stakeholders (regulators, shareholders, ratings agencies, analysts) that we have a transparent, consistent and effective way of governing ourselves. Governance is broader than just thinking about committee structures and manuals; it covers every aspect of the organisation including how we make strategic decisions, how we incentivise people, how we manage our risks and most importantly how we create the culture to build shareholder value. The adjacent diagram illustrates what we see as the key components of a framework. All of these components are interconnected and all are necessary for robust governance and the effective function of Old Mutual’s three-lines-of-defence risk governance model. Rotation and re-election of directors The Articles of Association of the Company require that any newly appointed directors should be subject to election at the next following Annual General Meeting and also that at least one third of the directors (excluding those appointed by the Board during the year) should retire by rotation each year. These provisions are applied in such a manner that each director submits himself for election or re-election at regular intervals and at least once every three years. The Nomination Committee considered the candidates who are standing for election or re-election at this year’s Annual General Meeting (as referred to in Ordinary Resolutions 2 (i) to (iv) in the Notice of Annual General Meeting) at its meeting in March 2009. In accordance with its ﬁ ndings, it recommends to shareholders the election of Mr P Broadley, and the re-election of Mr R Bogni, Mr R Khoza and Mr J Roberts as directors based on their respective professional qualiﬁ cations, prior business experience and contribution to the Board. Biographical details of each of the candidates are contained in the Board of Directors section of this document. Skills, experience and review Plans for refreshing and renewing the Board’s composition are managed proactively by the Nomination Committee so as to ensure that changes take place without undue disruption and that there is an appropriate balance of experience and length of service. That Committee also has regard, in making recommendations, to independence of candidates and their suitability and willingness to serve on other Committees of the Board. All of these aspects are currently believed by that Committee to be satisfactory and appropriate for the requirements of the Group’s business. While there are currently only two executive directors, members of the Board have regular contact with the other senior executive management (including the most senior executives of the main business units of the Group), through the periodic participation in Board meetings and other brieﬁ ng sessions by those executives. Mandate, governance and Scheme of Delegated Authority The Board’s role is to provide entrepreneurial leadership to the Company within a framework of prudent and effective controls that enable risk to be assessed and managed. The Board sets the Company’s strategic aims, ensures that the necessary ﬁ nancial and human resources are in place for it to meet its objectives and reviews management performance. It regularly reviews strategic issues through the Group Chief Executive’s report and also holds one or more strategy sessions each year at which high-level strategic matters are debated. The Board sets the Company’s values and standards, and ensures that its obligations to shareholders and others are understood and met. The Board receives a wide array of information on the Group’s businesses on a regular basis. Monthly management accounts are circulated to each member of the Board within three weeks of the month-end. These contain detailed analysis of the businesses’ ﬁ nancial performance, including comparisons against budget. Any issues arising from these are addressed at Board meetings or can be raised directly with management. The Board calendar ensures that all key matters are scheduled for attention over the course of the year, including presentations on each of the Group’s major businesses. Board meetings are held regularly in the principal overseas territories where the Group operates, at which local management makes detailed presentations of business and strategic issues affecting those businesses. Page 100 Old Mutual plc Annual Report and Accounts 2008 The Board has oversight of the Group’s wholly-owned businesses, but also: The Company maintains directors’ and ofﬁ cers’ liability insurance in respect of legal action against its directors. > Delegates speciﬁ c responsibilities for certain matters to its committees (Approvals, Nomination, Remuneration, and Group Audit and Risk), subject to their respective terms of reference, which provide for reports on their activities to be made to the Board > Delegates decision-making relating to wholly-owned subsidiary businesses to the boards of the Group’s principal subsidiaries, subject to speciﬁ ed escalation criteria that require higher-level authorisation based on the materiality of the matter concerned. The governance relationships with the Group’s majority- owned subsidiaries, Nedbank Group Limited and Mutual & Federal Insurance Company Limited, are somewhat different from those that apply to wholly-owned subsidiaries, in recognition of their own governance expectations as separately-listed entities on the JSE Limited and the fact that they each have minority shareholders. With respect to Nedbank Group, the Company entered into a relationship agreement in February 2004 setting out the Company’s requirements and expectations as its majority shareholder. The full text of that relationship agreement is available on the Company’s website. Among the matters covered are: > Transactions involving members of the Nedbank Group that require prior consultation with or agreement by the Company > Provision of information, including that required for assuring the Company about various aspects of corporate governance > Consultation over senior appointments > Business co-operation. The policyholders’ funds of the Group’s African life assurance operations have holdings representing in aggregate more than 20 percent of the issued share capital of companies listed on the stock exchanges of the countries in which those businesses operate. These are held purely as investments, and the companies concerned are not subject to the governance or control structures of the Group. The Chairman and Company Secretary are both involved in ensuring good information ﬂ ows within the Board and its committees and between senior management and the non-executive directors, as well as in facilitating induction and encouraging non-executive directors to attend courses at the Company’s expense to update their skills and knowledge. On appointment, new directors receive induction, including information about matters of immediate importance to the Group, such as the current budget and strategy documents, management accounts, the Scheme of Delegated Authority and details of the Company’s directors’ and ofﬁ cers’ liability policy. They also have a series of meetings with other directors, senior management and external advisers (such as the auditors). Processes are in place for any potential conﬂ icts of interest to be disclosed and for directors to avoid participation in any decisions where they may have any such conﬂ ict or potential conﬂ ict. The directors may take independent professional advice at the Company’s expense for the furtherance of their duties, whether as members of the Board or of any of its committees. Directors have access to the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. There is an agreed list of matters reserved for the Board’s decision. These are set out in the Company’s Scheme of Delegated Authority and currently include, among other things, the following: > Payment or recommendation of dividends > Approval of results announcements, Annual Reports and any other public statements relating to the Group’s ﬁ nancial position likely to have a material impact on the Group’s reputation > Approval of the Group’s budgets and the formulation of medium and long-term direction and strategy for the Group > Establishment of committees of the Board, their constitution and terms of reference > Monitoring of compliance with the Group’s environmental policies > Approval of the acquisition or disposal of any business or investment for a consideration of £25 million or more > Approval of capital expenditure by a principal subsidiary exceeding its delegated expenditure authority > Approval of signiﬁ cant changes to the accounting policies or practices of the Group > Approval of any proposal as a result of which either Nedbank Group Limited would cease to be a majority-owned subsidiary of the Company > Approval of appointments to the Board and renewal of non-executive directors’ appointments, following prior review by the Nomination Committee > Approval of any major decision relating to the conduct or settlement of any material litigation involving the Company or its subsidiaries > Appointment and removal of the Company Secretary > Appointment or termination of appointment of key professional advisers to the Group > Any other matters that are likely to have a material effect on the Group’s ﬁ nancial position, future strategy or reputation. Executive and non-executive roles The executive element of the Board is balanced by a strong independent group of non-executive directors so that no individual or small group of individuals can dominate the Board’s decision-making. The non-executive directors scrutinise the performance of management in meeting agreed goals and objectives, and monitor the reporting of performance. Procedures are in place to enable them to satisfy themselves about the integrity of the Group’s ﬁ nancial information and to ensure that ﬁ nancial controls and systems of risk management are robust and sustainable. Non-executive directors on the Remuneration Committee are responsible for determining appropriate levels of remuneration for the executive directors. Members of the Nomination Committee have a primary role in recommending the appointment and, where necessary, removal of executive directors. The Board as a whole receives and considers regular reports on talent management and succession planning. Page 101 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued Separately from the formal Board meeting schedule, the Chairman holds meetings with the other non-executive directors, without any executives being present, to provide a forum for any issues to be raised. He also conducts an annual performance evaluation of each of the other non-executive directors, with any resulting action points being reported to the Nomination Committee. These are designed to ensure that each director is continuing to contribute effectively and to demonstrate commitment to the role (including commitment of time for Board and Committee meetings and any other duties). The outputs from these performance evaluations are taken into account by the Nomination Committee in deciding whether to recommend to the Board the extension of engagement of non-executive directors and also whether to recommend to shareholders the re-election of any non-executive directors who are due to retire by rotation at the Annual General Meeting. They would also form the basis, if the need arose, for the Chairman to act to address any weaknesses identiﬁ ed in the Board by seeking the resignation of underperforming directors or proposing, through the Nomination Committee, that additional directors should be appointed. Informal meetings among the non-executive directors, without the Chairman or any executive being present, are also facilitated by the Company. Among the activities carried out at such meetings is the annual review of the Chairman’s own performance, under the aegis of the senior independent director, who also obtains such input as he considers appropriate for such purpose from the executive directors. Where directors have concerns that cannot be resolved about the running of the Company or a proposed action, they are encouraged to make their views known and these are recorded in the minutes of the Board meeting. No written statements on resignation containing matters of concern, such as are referred to in paragraph A.1.4 of the Combined Code, were received by the Chairman during 2008. The assignment of responsibilities between the Chairman, Mr C Collins, and the Group Chief Executive is documented so as to ensure that there is a clear division between the running of the Board and executive responsibility for running the Company’s business. This, together with the Scheme of Delegated Authority and the matters reserved for decision by the Board, ensures that no single individual has unfettered powers of decision. The responsibilities of Mr C Collins as Chairman include those contained in the Supporting Principle to paragraph A.2 of the Combined Code, namely leadership of the Board, ensuring its effectiveness in all aspects of its role and setting its agenda; ensuring that the directors receive accurate, timely and clear information; ensuring effective communication with shareholders; facilitating the effective contribution to the Board of non-executive directors in particular; and ensuring constructive relationships between the executive and non-executive directors. The Board has determined that, in the absence of exceptional circumstances, no non-executive director’s three-year cycle of appointment (which is itself subject to re-election and to Companies Act provisions relating to the removal of a director) should be renewed more than twice, i.e. that non-executive directors should serve a maximum of nine years in that role. The renewal of non-executive directors’ terms for successive three-year cycles is not automatic and the continued suitability of each non-executive director is assessed by the Nomination Committee before renewal of his appointment takes place. A particularly searching review is carried out at the end of six years. The section of the Remuneration Report entitled ‘Non-Executive Directors’ Terms of Engagement’ describes the current position of each of the non-executive directors with respect to their maximum three terms of three years and how the extension process has been applied to them. The Board conducts an annual self-assessment exercise to evaluate the effectiveness of its procedures. In 2008, this process was carried out through a detailed questionnaire, with returns being submitted to the Company Secretary, who collated a report for the Chairman and the Board. The Chairman took these into account in one-to-one meetings with the other directors, to ensure that any concerns about Board processes or capabilities were aired. Various action points were identiﬁ ed, and the Board has agreed processes to address and track progress against these during 2009. Independence of non-executive directors Six of the seven current non-executive directors other than the Chairman (Messrs N Andrews, R Bogni, R Edey, B Nqwababa, L Otterbeck and R Pym) are considered by the Board to be independent within the meaning of, and having regard to the criteria set out in, paragraph A.3.1 of the Combined Code – i.e. independent in character and judgement and there being no relationships or circumstances which are likely to affect, or could appear to affect, their judgement. Mr N Broadhurst, who retired during the year, was also considered to be independent. The Board decided in February 2006, following a review by the Nomination Committee, that it was not appropriate to classify Mr R Khoza as independent in view of the business interests between his company, Aka Capital, and the Company’s banking subsidiary, Nedbank. Mr R Bogni succeeded Mr N Broadhurst as the senior independent director in May 2008. The senior independent director is available to shareholders if they have concerns that are unresolved after contact through the normal channels of the Chairman, Group Chief Executive or Group Finance Director or where such contact would be inappropriate. The senior independent director’s contact details can be obtained from the Company Secretary (martin.murray@omg.co.uk). Page 102 Old Mutual plc Annual Report and Accounts 2008 The terms and conditions of engagement of each of the non-executive directors are available in the Corporate Governance section of the Company’s website. These include details of the expected time commitment involved (which each of the non-executive directors has accepted). Other signiﬁ cant commitments of potential appointees are considered by the Nomination Committee as part of the selection process and are disclosed to the Board when recommendation of an appointment is submitted. Non-executive directors are also required to inform the Board of any subsequent changes to such commitments, which must be pre-cleared with the Chairman if material. Directors’ conﬂ icts of interest The executive directors are permitted to hold one external (non-Group) non-executive directorship (but not a chairmanship) of another listed company, subject to prior clearance by the Board and the directorship concerned not being in conﬂ ict or potential conﬂ ict with any of the Group’s businesses. Neither Mr J Roberts nor Mr P Broadley currently holds any external non-executive directorships of other publicly quoted companies. The Company’s procedures for dealing with directors’ conﬂ icts of interest have operated effectively during 2008. 2008 operations Board meetings are held regularly, with scheduled meetings being co-ordinated with the Company’s reporting calendar to allow for detailed consideration of interim and preliminary results and quarterly business updates. Sessions are also devoted speciﬁ cally to strategy and business planning. The Board also meets ad hoc to deal with speciﬁ c matters requiring its consideration. In all, 17 Board meetings were held during 2008. The scheduled Board meetings in 2008 included visits to the Group’s businesses in South Africa and the USA. These included presentations to the Board by the senior management teams of the local businesses. Group Executive Committee The Group Executive Committee is the executive management committee through which the Company exercises its co-ordination and stewardship of the Group. In addition to the executive directors of the Company (Mr J Roberts and Mr P Broadley), the other members of the Group Executive Committee are now (following changes announced by Mr Roberts on 4 March 2009), Mr A Birrell (Head of Risk and Actuarial), Mr T Boardman (Chief Executive of Nedbank), Mr P Hanratty (Head of Long-Term Savings), Mr D Hope (Head of Strategy), Mr P Maddox (Head of Strategic Implementation) and Mr T Turpin (Chief Executive of US Asset Management). It is also envisaged that the new Head of Group HR, when appointed, will join this Committee. Board Committees The Board has a number of standing committees or sub-committees, to which various matters are delegated in accordance with their respective terms of reference. The Board also establishes committees on an ad hoc basis to deal with particular matters. In doing so, it speciﬁ es a remit, quorum and appropriate mix of executive and non-executive participation. Further information on the main standing committees and sub-committees of the Board is set out below. Group Audit and Risk Committee Members and years of appointment: Mr R Pym (Chairman) (2007), Mr N Andrews (2003), Mr R Bogni (2002), Mr R Edey (2004), Mr B Nqwababa (2007). Other member during part of the year: Mr N Broadhurst (who served as Chairman of the Committee from 1999 to May 2008). Secretary and year of appointment: Mr M Murray (1999). All members of the Group Audit and Risk Committee are independent non-executive directors. The Chairman, Mr Pym, is a chartered accountant with a wide range of recent and relevant ﬁ nancial experience, being Chairman of Bradford & Bingley plc and formerly Chief Executive of the major UK banking group, Alliance & Leicester plc, until July 2007. All members of the Committee are expected to be ﬁ nancially literate and to have relevant corporate ﬁ nance experience. The Committee: > Monitors the integrity of the ﬁ nancial statements of the Company and any formal announcements relating to the Company’s ﬁ nancial performance, including reviewing signiﬁ cant ﬁ nancial reporting judgements contained in them > Reviews the Company’s internal ﬁ nancial controls > Monitors and reviews the independence and effectiveness of the Company’s internal audit function and its activities. An internal audit charter, reviewed and approved by the Committee, governs internal audit activity within the Group and such activities are conducted in accordance with an annual audit plan. Progress against that plan is reported regularly to the Committee > Receives and reviews reports on risk and governance matters > Makes recommendations to the Board, for it to put to shareholders for their approval in general meeting, in relation to appointment, reappointment and removal of the external auditors and approving their remuneration and terms of engagement Page 103 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued > Reviews and monitors the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements > Develops and implements policy on the engagement of the external auditors to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit ﬁ rm, reporting to the Board any matters where it considers that action or improvement is needed and making recommendations on the steps to be taken > Reviews the Group’s whistleblowing arrangements. The Committee is responsible for the development, implementation and monitoring of the Group’s policy on external audit. The policy assigns overall responsibility for monitoring the independence and objectivity of, and compliance with ethical and regulatory requirements by, the external auditors to the Committee and day-to-day responsibility to the Group Finance Director. The Group’s policy on external audit sets out the categories of non-audit services that the external auditors may and may not provide to the Group. Further details of this policy are set out under the heading ‘Auditors’ later in this report. At its meetings during 2008, the Committee received reports covering, among other things: To fulﬁ l its responsibility regarding the independence of the external auditors, the Committee reviewed: > The accounting principles, policies and practices adopted in the Group’s accounts > Reports from the external auditors, including their audit plans for the year > Signiﬁ cant accounting and actuarial issues > Economic Capital principles that are being adopted by the Group > Tax, litigation and contingent liabilities affecting the Group > Any signiﬁ cant ﬁ ndings or control issues arising from internal audits carried out around the Group > Environmental and corporate responsibility matters > Signiﬁ cant risks and related risk management practices across the Group. A number of audit or audit and risk committees operated at subsidiary level during 2008, including at Old Mutual Life Assurance Company (South Africa) Limited, Old Mutual (US) Holdings, Inc., Skandia UK, Skandia Nordic, Skandia Europe & Latin America, Nedbank Group Limited and Mutual & Federal Insurance Company Limited, with terms of reference (in relation to the businesses under their respective remit) broadly equivalent to those of the Committee. The Committee received minutes of the proceedings and reports from subsidiary audit committees on a regular basis and several of their Chairmen were invited to attend meetings of and report to the Committee periodically. A planning meeting was held between the Chairman of the Committee and the Chairmen of the main subsidiary audit committees, the regional heads of internal audit, the Group Risk Director and representatives of the Group’s auditors during December 2008, to co-ordinate the audit committees’ activities and to review and approve the scope of internal audit plans for 2009. Such planning meetings take place annually. The Group operates Internal Review Committees through which Group Finance reviews in detail the results of the major businesses half-yearly with their Chief Executives and Finance Directors, including, where applicable, the actuarial aspects of the results of the life businesses around the Group. Findings from these meetings are incorporated into reports to the Group Audit and Risk Committee. > Changes in key external audit staff in the external auditors’ plan for the year > The arrangements for day-to-day management of the audit relationship > A report from the external auditors describing their arrangements to identify, report and manage any conﬂ icts of interest > The overall extent of non-audit services provided by the external auditors, in addition to their case- by-case approval of the provision of non-audit services by the external auditors. To assess the effectiveness of the external auditors, the Committee reviewed: > The external auditors’ fulﬁ lment of the agreed audit plan and variations from the plan > The robustness and perceptiveness of the auditors in their handling of the key accounting and audit judgements. To fulﬁ l its responsibility for oversight of the external audit process, the Committee reviewed: > The terms, areas of responsibility, associated duties and scope of the audit as set out in the external auditors’ engagement letter for the year > The external auditors’ overall work plan for the year > The external auditors’ fee proposal > Any major issues that arose during the course of the audit and their resolution > The key accounting and audit judgements > The levels of errors identiﬁ ed during audit > Any recommendations made by the external auditors in their management letter and the adequacy of management’s response. Based on its satisfaction with the results of the activities outlined above, the Committee has recommended to the Board that the external auditors should be reappointed for 2009. Page 104 Old Mutual plc Annual Report and Accounts 2008 The Committee’s role in relation to monitoring of risk is explained in more detail in the ‘Internal control environment’ section of this report. In relation to internal audit, the Committee reviewed: > Internal audit’s terms of reference, reporting lines and access to the Committee and members of the Board > Internal audit’s plans and resources and its achievement of the activities planned as part of its agreed programme for the year > The results of key audits and other signiﬁ cant ﬁ ndings, the adequacy of management’s responses and the timeliness of resolution > Statistics on staff numbers, qualiﬁ cations and experience and timeliness of reporting. The Group’s whistleblowing arrangements enable employees of the Group and others to report complaints on accounting, risk issues, internal controls, auditing issues and related matters. They can do this in conﬁ dence, using a dedicated hotline operated by an independent ﬁ rm of accountants. Any reports are investigated and escalated to the Committee as appropriate. Efforts are also made to educate staff around the Group about the existence of the whistleblowing facility and to help them detect the signs of possible fraudulent or improper activity. The Committee holds private meetings with the external auditors twice yearly (or more often, if requested by the auditors) to review key issues. The Chairman of the Committee also has regular interaction with the external auditors, the Group Internal Audit Director and the Group Risk Director, as well as with the Chairmen of subsidiary audit committees and the Group Finance Director, to remain abreast of issues as they arise during the year. Remuneration Committee Members and years of appointment: Mr R Bogni (Chairman) (2005), Mr N Andrews (2002), Mr R Edey (2007), Mr R Pym (2008). Other member during part of the year: Mr N Broadhurst (appointed 1999, ceased May 2008). Secretary and year of appointment: Mr M Murray (1999). Details of the role and activities of the Remuneration Committee and how the Remuneration Committee and the Board have applied the main and supporting principles and the Code Provisions in Section B of the Combined Code relating to remuneration matters are provided in the Remuneration Report. Nomination Committee Members and years of appointment: Mr C Collins (1999, became Chairman in May 2005), Mr N Andrews (2005), Mr R Bogni (2003), Mr R Edey (2005), Mr R Pym (2008), Mr J Roberts (2008). Other members during part of the year: Mr N Broadhurst (appointed 1999, ceased May 2008), Mr J Sutcliffe (appointed 2003, ceased September 2008). Secretary and year of appointment: Mr M Murray (1999). The Nomination Committee makes recommendations to the Board in relation to the appointment of directors, the structure of the Board and membership of the Board’s main standing committees. It also reviews development and succession plans for the most senior executive management of the Group and proposed appointments to the boards and standing committees of principal subsidiaries where these are material in the context of the Group as a whole. It is chaired by the Chairman of the Board, Mr C Collins, and a majority of its members (four out of six) are independent non-executive directors. The Nomination Committee seeks to ensure that its process for identifying candidates for recommendation to the Board as new directors is formal, rigorous and transparent. Vacancies generally arise in the context of either planned refreshing and renewal of the Board, replacing directors who are due to retire, or adjusting the Board’s balance of knowledge, skills or independence. Mr J Roberts’ appointment as Group Chief Executive in succession to Mr J Sutcliffe (which took effect from 9 September 2008) was recommended by the Committee in line with existing succession-planning arrangements, and having regard to the merits of stability and continuity in the context of the challenges then facing the Group. Mr P Broadley was appointed as Group Finance Director following a search for a candidate with appropriate ﬁ nancial services and accounting experience. In identifying candidates, appropriate regard is paid to ensuring that they will have sufﬁ cient time available in the light of their other commitments to discharge their duties as directors of the Company. Approvals Committee Members: Mr P Broadley, Mr J Roberts. The Approvals Committee (formerly known as the Executive Committee) is a committee of the Board comprising the executive directors of the Company, to which executive control and decision-making are delegated, subject to reservation of matters that require approval by the Board itself. A quorum comprises two of the executive directors. The Committee met 11 times during 2008. Page 105 i l e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued Management Committees The Board Group Chief Executive Group Executive Committee Group Audit and Risk Committee Group Risk and Capital Committee Group Risk and Capital Committee Members and years of appointment: Mrs R Harris (Chairman) (2008), Mr A Birrell (2008), Mr P Broadley (2008), Mr G Cookman (2008), Mr A Darfoor (2008), Mr A Duncan (2008), Mr P Keynes (2008), Mr S Lock (2008). Secretary and year of appointment: Mrs D Loxton (2008). The Group Risk and Capital Committee (GRCC) was established in July 2008 as part of our work to strengthen risk governance and oversight and to align risk and capital management more closely. The GRCC supports the Group Executive Committee in understanding the exposure and management of risks impacting the Group, having regard to our risk appetite and the allocation of that appetite to the Group’s business units. The GRCC is also responsible for the approval and monitoring of the Group’s enterprise risk management framework. The GRCC brings together senior executives across Group functions including risk, ﬁ nance, actuarial, capital and compliance. The external and internal auditors, as well as the Company Secretary, have standing invitations to these meetings. Other key Group or business unit executives are invited to attend meetings where appropriate. The GRCC receives reports from risk, ﬁ nance and treasury and provides input to the Group Executive Committee and the Group Audit and Risk Committee. It met four times in 2008. Key governance developments during 2008 > Group Risk and Capital Committee established > New employee share schemes approved at the Annual General Meeting > Mr R Bogni succeeded Mr N Broadhurst as senior independent director in May > Mr R Pym appointed as Chairman of the Group Audit and Risk Committee in May > Executive Remuneration Committee established (see the Remuneration Report). Group Capital Management Committee Members and years of appointment: Mr P Broadley (Chairman) (2008), Mr A Birrell (2008), Mr A Duncan (2006), Mrs R Harris (2007), Mr J Roberts (2008). Secretary and year of appointment: Mr J Simpson (2007). The Group Capital Management Committee is a sub-committee of the Approvals Committee. Its role is to: > Agree capital allocation up to the delegated authority of the Approvals Committee, or make recommendations to the Board for allocations beyond the Approvals Committee’s authority > Recommend to the Board the most appropriate capital structure for the Group having regard to long-term strategic objectives, the current business plan, risk appetite parameters and target credit ratings > Sign off a capital plan for the Group as part of the annual business planning process > Allocate capital in accordance with the business plan > Approve the overall investment strategy of the Group’s shareholders’ funds > Set an appropriate framework for managing capital and issue guidelines and/or recommend targets to ensure the appropriate management of capital > Receive reports from Group Finance, Group Risk and business units so that it can monitor performance against agreed criteria > Consider and approve any changes in required capital outside that agreed in the business plan, including the remittance or withdrawal of capital from business units. Page 106 Old Mutual plc Annual Report and Accounts 2008 Terms of reference The terms of reference of each of the principal committees of the Board are available in the Corporate Governance section of the Company’s website. The membership and chairmanship of the Board’s standing committees are regularly reviewed by the Nomination Committee to ensure that they are refreshed and that undue reliance is not placed on particular individuals. Each of the Group Audit and Risk, Remuneration and Nomination Committees conducted a self-assessment exercise during 2008 to address, among other things, whether their respective terms of reference had been fulﬁ lled satisfactorily during the year, whether the Committees had the necessary skills and resources and were receiving a satisfactory level of information in order to discharge their responsibilities, and whether their processes and methods could be improved. These were each conducted via questionnaires to members of the Committee concerned and other key participants in that Committee’s activities (including the external auditors, in the case of the Group Audit and Risk Committee). The results were collated by the Company Secretary and reported to the Committees for consideration. Attendance record The table below sets out the number of meetings held and individual directors’ attendance at meetings of the Board and its principal standing committees (based on membership of those committees, rather than attendance as an invitee) during 2008. The Chairman, Group Chief Executive and Group Finance Director attended all the Group Audit and Risk Committee meetings held during the year at the invitation of the Chairman of that Committee (but members of management were absent for the private sessions between members of that Committee and the auditors). Mr C Collins and the Group Chief Executive also attended all the Remuneration Committee meetings at the invitation of the Chairman of that Committee, Number of meetings held Mr N Andrews Mr R Bogni Mr P Broadley Mr C Collins Mr R Edey Mr R Khoza Mr B Nqwababa Mr L Otterbeck Mr R Pym Mr J Roberts Former directors Mr N Broadhurst Mr J Nicholls Mr J Sutcliffe but absented themselves for any matters relating to their own respective remuneration arrangements. Attendance at Committee meetings by persons other than the members is always at the invitation of the Chairman of the Committee concerned. Auditors During the year ended 31 December 2008, fees paid by the Group to KPMG Audit Plc, the Group’s auditors, and its associates totalled £11.0 million for statutory audit services (2007: £9.6 million), £0.5 million for other audit and assurance services relating to Old Mutual Market Consistent Embedded Value reporting (2007: £0.4 million), and £4.3 million for tax and other services (2007: £3.9 million). In addition to the above, Nedbank Group paid a further £2.6 million (2007: £2.5 million) to Deloitte in respect of joint audit arrangements. The following guidelines have been approved by the Group Audit and Risk Committee as part of the Group’s policy on non-audit services: > Before accepting a proposed non-audit engagement, the lead audit engagement partner and management will assess the threats to objectivity and independence and consider safeguards to be applied. Such assessment will be repeated whenever the scope and objectives of the non-audit service change signiﬁ cantly. Before accepting a proposed engagement to provide a non-audit service to the Group and its subsidiaries, the audit engagement partner and management will: – Consider whether it is probable that a reasonable and informed third party would regard the proposed engagement as being inconsistent with the objectives of the audit of the ﬁ nancial statements – Identify and assess the signiﬁ cance of any related threats to the ﬁ rm’s objectivity including any perceived loss of independence – Identify and assess the effectiveness of the available safeguards to eliminate or reduce threats to an acceptable level. Board Group Audit (scheduled and Risk Remuneration Nomination and ad hoc) Committee Committee Committee 17 16/17 16/17 2/2 17/17 14/17 16/17 15/17 17/17 16/17 17/17 4/6 14/15 8/8 6 5/6 6/6 – – 5/6 – 4/6 – 6/6 – 2/2 – – 6 5/6 6/6 – – 6/6 – – – 4/4 – 1/2 – – 5 5/5 5/5 – 5/5 5/5 – – – 4/4 1/1 2/2 – 4/4 Page 107 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued the Group demutualised in 1999 and that appropriate arrangements have been in place for the rotation and renewal of key audit personnel. The Company has not entered into any contractual restriction preventing it from considering a change of auditors and the choice of auditors is kept under review by the Board from year to year, taking into account appropriate benchmarking data. Arrangements have been made, in conjunction with KPMG Audit Plc, for appropriate audit partner rotation in accordance with recommendations of the Institute of Chartered Accountants in England and Wales. The current lead audit director in the UK, Mr A Barbour, has been in place since 2005. General Meetings The Board uses the Annual General Meeting (AGM) to comment on the Group’s trading performance during the ﬁ rst quarter of the year. A record of the AGM proceedings is made available on the Company’s website shortly after the end of the Meeting. All items of formal business at the AGM are conducted on a poll, rather than by a show of hands. The Company’s registrars, Computershare Investor Services, ensure that all validly submitted proxy votes are counted, and a senior member of Computershare’s staff acts as scrutineer to ensure that votes cast are properly received and recorded. Each substantially separate issue at the AGM is dealt with by a separate resolution and the business of the AGM always includes a resolution relating to the approval of the Report and Accounts. The Chairmen of the Group Audit and Risk, Remuneration and Nomination Committees are available to answer any questions on the matters covered by these Committees at AGMs. All the directors in ofﬁ ce at the date of the meeting attended the AGM in 2008. The notice of AGM and related materials contained in the Report and Accounts or Summary Financial Statements are sent out to shareholders in time to arrive in the ordinary course of the post at least 20 working days before the date of the AGM. Results of the Annual General Meeting 2008 The results of the polls on the resolutions at the Annual General Meeting held on 8 May 2008 were as follows: > Where it is felt probable that an informed party would regard the proposed service as being inconsistent with the objectives of the ﬁ rm as auditors, the ﬁ rm will not be permitted to undertake the non-audit service > Reports are tabled quarterly at Group Audit and Risk Committee meetings setting out the details of the non- audit services being provided by the Group’s auditors > The Company and its auditors have agreed that they will not, directly or indirectly, solicit the employment of key senior staff and management of their respective organisations without prior written mutual consent. Partners and directors of the audit ﬁ rm who have acted as lead partner or as a key audit partner for the Group will not be permitted to join Old Mutual Group as a director or in a senior management position until at least two years after the partner/ director ceased to be associated with the audit. The following process governs the provision of non-audit services provided by the auditors: > There is a schedule of non-audit services that need to be approved in principle on an annual basis and are reported, as and when provided, on a regular basis. This is in line with the SEC’s guidelines on auditor independence > All non-audit work costing less than £50,000 placed with the external auditors is to be approved by the Head of Group Finance or Business Unit Chief Financial Ofﬁ cer > All non-audit work costing over £50,000 placed with the external auditors is to be agreed by the Group Finance Director or his designate > All non-audit work costing over £300,000 placed with the external auditors is to be subject to competitive tender and agreed by the Group Finance Director and Group Chief Executive > All non-audit work costing over £1 million placed with external auditors is to be approved by the Group Audit and Risk Committee > Cumulative fees for non-audit services in any ﬁ nancial quarter should not exceed £500,000 without approval of the Group Audit and Risk Committee or its Chairman > Cumulative fees for non-audit work for the Group should not exceed total statutory audit and audit- related fees in any one year without the approval of the Group Audit and Risk Committee. KPMG Audit Plc has expressed its willingness to continue in ofﬁ ce as auditor to the Company and, following a recommendation by the Group Audit and Risk Committee to the Board, a resolution proposing its reappointment will be put to the Annual General Meeting (Resolution 3 in the Notice of Annual General Meeting). In reaching its decision to recommend the reappointment of KPMG Audit Plc as auditors, the Board took into account the fact that the ﬁ rm had been the Company’s auditors since Page 108 Old Mutual plc Annual Report and Accounts 2008 Ordinary resolutions Resolution 1 To receive and adopt the directors’ Report and Accounts for the year ended 31 December 2007 In favour Against % in favour Votes withheld* 2,648,735,322 3,663,707 99.86 15,970,248 Resolution 2 To declare a ﬁ nal dividend of 4.55 pence per ordinary share In favour Against % in favour Votes withheld* 2,654,352,414 506,106 99.98 13,510,757 Resolution 3 (i) Election of Mr R Pym as a director of the Company In favour Against % in favour Votes withheld* 2,634,737,531 5,684,447 99.78 27,947,299 Resolution 3 (ii) Re-election of Mr N Andrews as a director of the Company In favour Against % in favour Votes withheld* 2,633,494,884 6,296,949 99.76 28,577,444 Resolution 3 (iii) Re-election of Mr R Edey as a director of the Company In favour Against % in favour Votes withheld* 2,632,716,511 5,579,468 99.79 30,073,298 Resolution 3 (iv) Re-election of Mr J Sutcliffe as a director of the Company In favour Against % in favour Votes withheld* 2,629,561,219 18,233,058 99.31 20,575,000 Resolution 4 Reappointment of KPMG Audit Plc as auditors to the Company In favour Against % in favour Votes withheld* 2,616,824,765 14,464,287 99.45 37,080,225 Resolution 5 Authority to the Group Audit and Risk Committee of the Company to settle the remuneration of the auditors In favour Against % in favour Votes withheld* 2,637,621,957 5,087,039 99.81 25,658,981 Resolution 6 Approval of the Remuneration Report in the Company’s Report and Accounts In favour Against % in favour Votes withheld* 2,492,057,299 105,813,396 95.93 70,498,581 Resolution 7(i) Approval of the Old Mutual plc Performance Share Plan In favour Against % in favour Votes withheld* 2,380,177,848 156,971,157 93.81 131,220,271 Resolution 7(ii) Approval of the Old Mutual plc Share Reward Plan In favour Against % in favour Votes withheld* 2,486,491,219 102,053,749 96.06 79,824,308 Resolution 7(iii) Approval of the Old Mutual plc 2008 Sharesave Plan In favour Against % in favour Votes withheld* 2,559,361,429 61,813,634 97.64 47,194,214 Resolution 8 Authority to allot relevant securities up to a maximum aggregate nominal amount of £53,262,000 In favour Against % in favour Votes withheld* 2,434,406,236 202,322,809 92.33 31,640,232 Special resolutions Resolution 9 Authority to allot equity securities up to a maximum nominal aggregate amount of £26,631,000 In favour Against % in favour Votes withheld* 2,513,313,456 119,715,791 95.45 35,340,030 Resolution 10 Authority in accordance with section 166 of the Companies Act 1985 to purchase up to 532,620,000 Ordinary Shares of 10 pence each in the Company by way of market purchase In favour Against % in favour Votes withheld* 2,632,549,754 5,486,372 99.79 30,333,151 Resolution 11 Approval of contingent purchase contracts to enable shares to be bought back on the overseas stock exchanges where the Company’s shares have secondary listings In favour Against % in favour Votes withheld* 2,610,885,835 24,958,228 99.05 32,525,214 Resolution 12 Adoption of new Articles of Association In favour Against % in favour Votes withheld* 2,617,637,427 3,258,242 99.88 47,473,608 * A vote withheld is not a vote in law and is therefore not counted in the calculation of votes. Each of the resolutions at the 2008 AGM was accordingly duly passed. Page 109 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued Internal control environment Responsibility for internal control The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness, while the implementation of internal control systems is the responsibility of management. Executive management has implemented an internal control system designed to help ensure: > The effective and efﬁ cient operation of the Group and its business units by enabling management to respond appropriately to signiﬁ cant risks to achieving the Group’s business objectives > The safeguarding of assets from inappropriate use or from loss and fraud and ensuring that liabilities are identiﬁ ed and managed > The quality of internal and external reporting > Compliance with applicable laws and regulations, and with internal policies on the conduct of business. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. Assessment of the system of internal control An ongoing process for identifying, evaluating and managing the signiﬁ cant risks faced by the Group has been in place for the year ended 31 December 2008 and up to the date of approval of this Report. The process accords with the Turnbull guidance set out in ‘Internal Control Guidance for Directors on the Combined Code’ and is regularly reviewed by the Board. The Group’s actions to review the effectiveness of the system of internal control include: > An annual review of the risk assessment procedures, control environment considerations, information and communication and monitoring procedures at Group and within each Business Unit. This review covers all material controls, including ﬁ nancial, operational and compliance controls and the risk management systems > A certiﬁ cation process, under which all Business Units are required to conﬁ rm that they have undertaken risk management in accordance with the Group risk framework, that they have reviewed the effectiveness of the system of internal controls, that internal policies have been complied with and that no signiﬁ cant risks or issues are known which have not been reported in accordance with policy > Regular reviews of the effectiveness of the system of internal control by the Group Audit and Risk Committee, which receives reports from Group Risk and Group Internal Audit. The Committee also receives reports from external auditors, KPMG Audit Plc, which include details of signiﬁ cant internal control matters that they have identiﬁ ed during the course of their work. These activities are in addition to the regular risk management activities which are performed on an ongoing basis (as described in more detail in the Risk Management section of this document). The certiﬁ cation process described above does not apply to certain joint ventures where the Group does not exercise full management control. In these cases, Old Mutual monitors the internal control environment and the potential impact on the Group through representation on the board of the entity concerned. The Board reviewed the effectiveness of the system of internal control during and at the end of the year. Material control weaknesses in connection with our US life offshore business were highlighted during the year and reported publicly as part of our Interim Results 2008 and Interim Management Statement for Q3 2008. Within the offshore business (Old Mutual Bermuda), the emergence of earnings volatility in 2008, largely caused by the turbulent economic conditions, highlighted the need for a better hedging process. This issue has led to the creation of additional guarantee reserves and capital injections to support the ongoing capital needs of the Bermudan business. A number of management actions have been taken to limit the exposures including: > Withdrawal of the Universal Guarantee Option > Implementation of improved fund-mapping, allowing quantiﬁ cation of our liabilities and improved hedge effectiveness. Further actions have been taken to strengthen governance and risk management practices and to reduce the risk of similar issues occurring again. They include: > Senior management changes, including the appointment of a new CEO for Old Mutual Bermuda > Revised guarantee policies and new product development sign-off procedures > A review of all product lines, covering their potential and their risks > The signiﬁ cant re-engineering (which is currently in progress) of our oversight functions and the level of supervision over business units > An independent review by Group Internal Audit. We are in the process of implementing the recommendations and sharing the lessons learned. During November 2008, an offer was made to holders of guaranteed products in Old Mutual Bermuda to surrender their guarantees in exchange for their account values being topped up to 85 percent of their initial investment. This offer, which was taken up in relation to approximately 15 percent of the eligible policies, was a further step in the de-risking of the Bermudan book of business. Other than the issue above, our annual internal control assessment has not highlighted any material failings. We remain committed to having a robust internal control environment across the Group. Page 110 Old Mutual plc Annual Report and Accounts 2008 Group Internal Audit Group Internal Audit (GIA) provides independent, objective assurance on the effectiveness of Old Mutual’s systems of governance, risk management and internal control. The work of GIA is focused on the areas of greatest risk to Old Mutual as determined by a comprehensive, risk-based planning process. The Group Audit and Risk Committee (GARC) approves the annual internal audit plan and any subsequent amendments. There are internal audit teams in each of our major business units. The heads of internal audit in our wholly-owned subsidiaries report directly to the Group Internal Audit Director (GIAD). The GIAD reports functionally to the Chairman of the GARC and administratively to the Group Risk Director. The GIAD attends all meetings of the GARC, and has unrestricted access to the Group Chief Executive as well as open invitations to attend any Business Unit Audit Committee meetings and meetings of the Group Risk and Capital Committee. GIA teams across Old Mutual use a single audit methodology which meets the standards set by the Institute of Internal Auditors (IIA). Issues raised by GIA during the course of their work are communicated to management, who are responsible for taking action to address the issues identiﬁ ed within an appropriate and agreed timeframe. Formal reports are submitted by the GIAD to each meeting of the GARC, summarising the results of internal audit activity, management’s progress in addressing issues and other signiﬁ cant matters. An extensive independent review of GIA by external experts was carried out in 2007, which concluded that GIA complied with the requirements of the Standards of Professional Practice of the Institute of Internal Auditors. In 2008, under the leadership of a new GIAD appointed in April 2008, and continuing in 2009, GIA has continued to seek opportunities for enhancing internal audit practices, and an enhanced quality assurance function was established at the beginning of 2009. Other Directors’ Report matters Relations with shareholders and analysts The Company places considerable importance on regular, clear and direct communication with its shareholders, institutional investors and sell-side analysts. The Chairman makes contact with major investors during the year and meets them as required. The Company has a dedicated Investor Relations team, which responds to a variety of enquiries from investors and analysts. The team also runs a programme to facilitate communication between executive management and a wide range of institutional investors worldwide within the constraints of the Listing, Prospectus, Disclosure and Transparency Rules. In 2008 the programme included over 100 meetings with investors in the UK, South Africa, North America and Continental Europe. In most cases the meetings involved the Group Chief Executive, Group Finance Director or another member of senior management. In addition, the Company presented at a number of major investor conferences around the world. It also hosted and webcast two events for institutional investors and analysts: a presentation on the Company’s North American businesses, which was given by members of US management, and a presentation by the Chief Economist of Nedbank, who talked about the South African economy and outlook. Copies of all presentations and, where appropriate, transcripts are posted on the Company’s website so that they are accessible to shareholders generally. The Board is updated regularly by the Investor Relations team on issues arising from any shareholder communications and from analyst research. In May 2008, the Company commissioned an independent survey of major investors in the UK, South Africa, the US and Continental Europe in order to obtain a better understanding of their views. The survey ﬁ ndings were reported directly to the Board. Currently 12 sell-side analysts from the UK and South Africa actively publish research on the Company. Other sell-side analysts are encouraged to cover the Company to help investors assess the Group’s valuation, its performance and the business environment in which it operates, and also to make meaningful comparisons with peers. Page 111 i l e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued The lists of persons discharging managerial responsibilities and other employee insiders are regularly reviewed. Currently all members of the Group Executive Committee, together with certain other heads of major businesses, are regarded as persons discharging managerial responsibilities. Directors’ indemnities Following a change in applicable UK law introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004, the Company has entered into formal deeds of indemnity in favour of each of the directors. These are dated as follows: Messrs N Andrews, R Bogni, C Collins, R Edey and J Roberts – 19 October 2005; Mr R Khoza – 24 February 2006; Mr L Otterbeck – 15 November 2006; Messrs B Nqwababa and R Pym – 17 December 2008; Mr P Broadley – 10 November 2008. A specimen copy of the indemnities is available in the Corporate Governance section of the Company’s website. Supplier payment policy In most cases suppliers of goods or services to the Group do so under standard terms of contract that lay down terms of payment. In other cases, speciﬁ c terms are agreed to beforehand. It is the Group’s policy to ensure that terms of payment are notiﬁ ed in advance and adhered to. The Company has signed the Better Payment Practice Code, an initiative promoted by the Department for Business, Enterprise and Regulatory Reform in the UK to encourage prompt settlement of invoices. The total outstanding indebtedness of the Company (and its service company subsidiary, Old Mutual Business Services Limited) to trade creditors at 31 December 2008 amounted to £5,230,801, corresponding to 36 days’ payments when averaged over 2008. Charitable contributions The Group made a wide range of signiﬁ cant donations to charitable causes and social development projects during 2008, as described in more detail in the Responsible Business section of this document. The Company, its subsidiaries in the UK, and the Old Mutual Bermuda Foundation collectively made charitable donations of £672,000 during the year (2007: £352,000). Information on strategy, Group activities, operational and ﬁ nancial performance and outlook are communicated to ﬁ nancial markets through regular reports, regulatory news releases, speeches and presentations. The Company holds two results meetings each year, at the time of its preliminary and interim results, which are hosted and webcast simultaneously in London and Johannesburg. In May and November each year, the Company issues interim management statements in accordance with the requirements of the Disclosure and Transparency Rules. These statements also include an update on sales performance in the previous quarter and are accompanied by a teleconference call for analysts and institutional investors. The Company’s website contains a range of up-to-date information for shareholders as well as useful tools relating to share price and dividend calculations. For individual shareholders, a dedicated shareholder centre within the investor relations section of the site provides information about the Company’s registrars, a number of downloadable forms and the facility for shareholders to register for electronic communications. The Company’s public announcements, statements and presentations to the investor community are posted on the website in a timely fashion. Directors’ shareholdings and share dealings The Remuneration Committee has established guidelines on shareholdings by executive directors of the Company. Under these, the Group Chief Executive is expected to build up a holding of shares in the Company equal in value to at least 150 percent of annual base salary within ﬁ ve years of appointment; the equivalent ﬁ gure for other executive directors is 100 percent of annual base salary. Further details of the executive directors’ shareholdings and interests in awards under the Company’s employee share plans are given in the Remuneration Report. The Board has considered whether to adopt a shareholding requirement for non-executive directors, but does not consider this to be appropriate. All directors of the Company, together with other persons discharging managerial responsibilities in relation to the Company, are restricted persons for the purposes of the Model Code annexed to section LR9 of the Listing Rules of the Financial Services Authority. The Company continues to operate provisions equivalent to those set out in the Model Code for a wider category of employee insiders who hold certain senior positions around the Group, even though the Model Code itself no longer requires this. The Model Code imposes restrictions on the periods when restricted persons may deal in affected securities (which comprise shares and other listed securities of the Company and other quoted entities within the Group). Dealings by restricted persons during open periods must be pre-cleared through the appropriate designated ofﬁ cer of the Company, and any dealings in affected securities by the directors or other persons discharging managerial responsibilities must be publicly announced once they have been notiﬁ ed to the Company. Page 112 Old Mutual plc Annual Report and Accounts 2008 Environmental matters A description of the Group’s environmental impact and management during 2008 is given in the Responsible Business section of this document. Political donations The Group made no EU or other political donations during the year. Dividend policy The Board has determined that, in order to preserve cash and capital during the current period of economic stress, no dividends will be paid by the Company during 2009. It will consider the position for 2010 in the light of prevailing conditions nearer the time. Longer term, the Board will look to pay a dividend based on the Group’s capital, cashﬂ ow and earnings with a view to maintaining cover of at least two times. Share capital The Company has a single class of share capital, which is divided into Ordinary Shares of 10 pence each. The Company’s issued share capital at 31 December 2008 was £551,614,136 divided into 5,516,141,360 Ordinary Shares of 10 pence each (2007: £551,027,253.70 divided into 5,510,272,537 Ordinary Shares of 10 pence each). During the year ended 31 December 2008, 5,841,448 shares were issued under the Company’s employee share option schemes at an average price of 87.82 pence each. At 31 December 2008, authorities were in force from the shareholders for the Company to make market purchases of, and/or to purchase pursuant to contingent purchase contracts relating to each of the overseas exchanges on which the Company’s shares are listed, its own shares up to an aggregate of 532,620,000. Out of the 5,516,141,360 shares in issue at 31 December 2008: > 239,434,888 were held by the Company in treasury > A total of 240,239,413 shares were held by African life subsidiaries of the Company, with 225,928,657 of these shares being held on books for the beneﬁ t of the Group’s South African life operations and related businesses. Under UK company law these shares cannot be voted while they are held by subsidiaries of Old Mutual plc. Out of the 239,434,888 shares held in treasury at 31 December 2008, 134,333,829 shares were bought into treasury during 2008. 87,405,685 of these were repurchased on the London Stock Exchange at an average price of £1.35 each and 46,928,144 were repurchased on the JSE at an average price of R18.32 each. The total number of voting rights in the Company’s issued ordinary share capital at 31 December 2008 (which excludes the 239,434,888 shares held in treasury, but includes the shares held by the African life subsidiaries) was 5,276,706,472. In the period 1 January to 3 March 2009, no further shares were issued by the Company and none were bought back. The Company’s issued share capital and the total number of voting rights at 3 March 2009 were accordingly unchanged from the position at 31 December 2008. Rights and obligations attaching to shares The following description summarises certain provisions of the Company’s current Articles of Association, as adopted by special resolution passed on 8 May 2008 (the Articles), and applicable English law concerning companies (the Companies Act 1985 and the Companies Act 2006, together referred to as the Companies Acts). This is a summary only: for further information please see the relevant provisions of the Companies Acts or the Articles. Issue of shares Subject to applicable statutes and other shareholders’ rights, shares may be issued with such rights and restrictions as the Company may by ordinary resolution approve or as the directors may decide. Subject to the Articles, the Companies Acts and other shareholders’ rights, unissued shares are at the disposal of the Board. At each Annual General Meeting the Company seeks shareholder authority for the directors to allot up to a certain amount of unissued shares, and up to a lower limit for cash. These limits are established in light of the guidelines of the UK Investor Protection Committees. Voting Subject to any rights or restrictions attached to any class of shares, every member attending a general meeting or class meeting in person has one vote in a show of hands. In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of votes of the other joint shareholders: seniority will be determined by the order in which the joint holders’ names are listed in the register. Under the Companies Acts, members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at a general meeting or class meeting. Page 113 l i e c n s a a n c r n e a v o n G F i DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued A member may appoint more than one proxy in relation to a general meeting or class meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. Proxies may vote in a poll or a show of hands. A member that is a corporation may appoint one or more individuals to act on its behalf at a general meeting or class meeting as a corporate representative. Where more than one corporate representative has been appointed, any one of them is entitled to vote and exercise other powers on behalf of the member at a general meeting or class meeting, but if the representatives’ votes or other powers conﬂ ict, the power is treated by the Company as not having been exercised and the member will be deemed to have abstained. To avoid inappropriate consequences of this rule, the Company adopts the Designated Corporate Representative procedure recommended by the Institute of Corporate Secretaries and Administrators, as explained in more detail in the notes accompanying the Notice of Annual General Meeting. Restrictions on voting No member is entitled to vote at any general meeting or class meeting in respect of any shares they hold if any call or other sum they owe on that share remains unpaid. In addition, no member may vote if they have been served with a restriction notice (as deﬁ ned in the Articles) after failing to give the Company information due under the Companies Acts concerning interests in those shares. Deadlines for voting rights Votes are exercisable at the general meeting of the Company in respect of which the business being voted upon is being heard. Votes may be exercised in person, by proxy or, in relation to corporate members, by corporate representative. Under the Companies Acts, the deadline for delivering proxy forms cannot be earlier than 48 hours (excluding non-working days) before the meeting for which the proxy is being appointed. However, the current Articles provide a deadline for submission of not less than 48 hours before the meeting (not excluding non-working days). Dividends and distributions Subject to the provisions of the Companies Acts, the Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Board. The Board may pay dividends, and also any ﬁ xed-rate dividend, whenever the ﬁ nancial position of the Company justiﬁ es its payment, in the Board’s opinion. If the Board acts in good faith, it is not liable to holders of shares with preferred or pari passu rights for losses arising from the payment of interim or ﬁ xed dividends on other shares. The Board may withhold payment of all or any part of any dividends or other monies payable in respect of the Company’s shares from a person with an interest in 0.25 percent or more (in nominal value or in number, calculated exclusive of any shares held as treasury shares) in the Company’s share capital if such person has been served with a restriction notice (as deﬁ ned in the Articles) after failure to provide the Company with information concerning interests in those shares required under the Companies Acts. Liquidation Under the Companies Acts, on a liquidation the liquidator may, with the sanction of a special resolution of the Company and any other approvals required by legislation, divide among the members in kind all or part of the assets of the Company. Variation of rights Subject to the Companies Acts, the Articles specify that rights attached to any class of shares may be varied with the written consent of the holders of not less than three-quarters in nominal value of the issued shares of that class (calculated excluding any shares held as treasury shares), or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. At every such separate general meeting (except an adjourned meeting) the quorum shall be two people holding or representing by proxy at least one-third in nominal value of the issued shares of the class (excluding treasury shares). The rights conferred on the holders of any shares shall not, unless otherwise expressly provided in the rights attached to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them unless those rights state otherwise. Transfer of shares Any shares in the Company may be held in uncertiﬁ cated form and, subject to the Articles, title to uncertiﬁ cated shares may be transferred by means of a relevant system. Provisions of the Articles do not apply to any uncertiﬁ cated shares to the extent that such provisions are inconsistent with the holding of shares in uncertiﬁ cated form or with the transfer of shares by means of a relevant system. Registration of a transfer of an uncertiﬁ cated share may be refused in the circumstances set out in the Uncertiﬁ cated Securities Regulations (as deﬁ ned in the Articles) and where, in case of a transfer to joint holders, the number of joint holders to whom the uncertiﬁ cated share is to be transferred exceeds four. Page 114 Old Mutual plc Annual Report and Accounts 2008 Appointment and replacement of directors Under the Articles, directors must be at least four and not more than 16 in number. Directors may be appointed by the Company by ordinary resolution or by the Board. A director appointed by the Board holds ofﬁ ce only until the next following Annual General Meeting and is then eligible for election by the shareholders. The Board may from time to time appoint one or more directors to hold employment or executive ofﬁ ce for such period (subject to the Companies Acts) and on such terms as it may determine and may revoke or terminate any such appointment. At every Annual General Meeting, at least one-third of the directors must retire by rotation. The directors to retire by rotation must be those who have been longest in ofﬁ ce since their last election or re-election. If there are directors who were last elected or re-elected on the same date, they can agree among themselves who is to retire, but if they do not agree, this will be determined by lot. The Company may by special resolution remove any director before the expiration of his or her term of ofﬁ ce. Directors shall vacate their ofﬁ ce if: > Their resignation is requested by all the other directors, numbering at least three > They deliver a written letter of resignation at a meeting of the directors or to the Company’s registered ofﬁ ce > They are or have been suffering from mental ill health and the directors pass a resolution stating that they have ceased to be a director > They are absent from Board meetings without the Board’s permission for six consecutive months and the Board resolves that their ofﬁ ce is vacated > They become bankrupt or make any arrangement or composition with their creditors > They are prohibited from being or cease to be a director by law or by any powers conferred on the Board or the Company’s shareholders by the Articles > Their appointment as an executive director is terminated or expires and the Board resolves that their ofﬁ ce is vacated. Subject to the Articles, any member may transfer all or any of their certiﬁ cated shares by an instrument of transfer in any usual form or in any other form which the Board may approve. The instrument of transfer must be executed by or on behalf of the transferor and (in the case of a partly-paid share) the transferee. The transferor of a share is deemed to remain the holder until the transferee’s name is entered into the register. The Board may also decline to register a transfer of a certiﬁ cated share unless the instrument of transfer: > Is duly stamped or certiﬁ ed or otherwise shown to the satisfaction of the Board to be exempt from stamp duty and accompanied by the relevant share certiﬁ cate and such other evidence of the right to transfer it as the Board may reasonably require > Is in respect of only one class of share > If to joint transferees, is in favour of not more than four such transferees. The Board may decline to register a transfer of any of the Company’s certiﬁ cated shares by a person with an interest in 0.25 percent or more (in nominal value or in number, calculated exclusive of any shares held as treasury shares) in the Company’s share capital if such a person has been served with a restriction notice (as deﬁ ned in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Acts, unless the transfer is in connection with an outright sale to an independent third party. Repurchase of shares Subject to authorisation by shareholder resolution, the Company may purchase its own shares in accordance with the Companies Acts. Any shares which have been bought may be held as treasury shares or else must be cancelled immediately the purchase is completed, so reducing the amount of the Company’s issued share capital. Further details of the existing authorities that the Company was granted by shareholders at the Annual General Meeting on 8 May 2008 and how these authorities have been used are set out under the heading ‘Share capital’ earlier in this report. Details of the proposed renewal of those authorities at the Annual General Meeting on 7 May 2009 are set out in the shareholder circular relating to that meeting. Amendment to the Articles of Association Any amendments to the Articles of the Company may be made in accordance with the provisions of the Companies Acts by special resolution. The Companies Act 2006 is being implemented in stages and changes effective up to 1 October 2008 are reﬂ ected in the new Articles of Association adopted at the Annual General Meeting on 8 May 2008. The remaining changes will be reﬂ ected in new Articles of Association that will be proposed for adoption at the Annual General Meeting in 2010. e c n a n r e v o G Page 115 DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS continued > Old Mutual Capital Funding L.P. (the Issuer) $750 million 8 percent. Guaranteed Cumulative Perpetual Preferred Securities (the Preferred Securities) guaranteed on a subordinated basis by the Company. Under the terms of the Preferred Securities, the Issuer is required to give notice to the holders of such securities (the Holders) in the event of a change of control of the Company. In such case the Issuer and the Company agree, to the extent that such action is within their reasonable control, to vary the terms of the Preferred Securities and the Company’s guarantee (and to use all reasonable endeavours to ensure that the entity that has acquired control of the Company (the Acquiror) gives such undertakings as are necessary) in order to preserve the rights of the Holders. The Issuer and the Company shall also take such steps as are in their reasonable control to ensure that the economic interests of the Holders are not adversely affected by the actions of the Acquiror following the change of control. Substantial interests in voting rights At 3 March 2009, the following substantial interests in voting rights had been declared to the Company in accordance with the Disclosure and Transparency Rules: Number of % of voting rights voting rights Public Investment Corporation of the Republic of South Africa 307,212,664 Legal & General Group Plc 250,395,703 Old Mutual Life Assurance Company (South Africa) Limited Franklin Resources Inc. 225,928,657 164,533,278 5.82 4.75 4.28 3.12 Powers of the directors Subject to the Company’s Memorandum of Association, the Articles, any legislation and any directions given by special resolution, the business of the Company will be managed by the directors, who may exercise all the powers of the Company, whether relating to the management of the business of the Company or not. In particular, the Board may exercise all the powers of the Company to borrow money and to mortgage or charge any of its undertaking, property, assets and uncalled capital and to issue debentures and other securities and give security for any debt, liability or obligation of the Company to any third party. Shares held in employee beneﬁ t trusts The shareholdings in the Company of the Group’s employee beneﬁ t trusts and the policies of those trusts on voting those shares are described in the section of the Remuneration Report entitled ‘Employee share ownership trusts’. Signiﬁ cant agreements The following signiﬁ cant agreements to which the Company is a party contain provisions entitling counterparties to exercise termination or other rights in the event of a change of control of the Company: > £1,250 million Revolving Credit Facility (the Facility) dated 2 September 2005 between the Company, various syndicate banks (the Banks) and Lloyds TSB Bank plc as agent (the Agent). If a person or group of persons acting in concert gains control of the Company, the Company must notify the Agent. The Agent and the Company will negotiate with a view to agreeing terms and conditions acceptable to the Company and all of the Banks for continuing the Facility. If such negotiations fail within 30 days of the original notiﬁ cation to the Agent by the Company, the Banks become entitled to declare any outstanding indebtedness repayable by giving notice to the Agent within 15 days of the 30-day period mentioned above. On receiving notice for payment from the Agent, the Company shall pay the outstanding sums within three business days to the relevant Bank(s) Page 116 Old Mutual plc Annual Report and Accounts 2008 Disclosure of information to the auditors The directors who held ofﬁ ce at the date of approval of this Directors’ Report on Corporate Governance and Other Matters conﬁ rm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware, and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s auditors were aware of that information. Governing law The Group Chief Executive’s Statement, the Risk Management section, the Business Review, the Group Finance Director’s Statement and this Directors’ Report on Corporate Governance and Other Matters collectively comprise the directors’ report for the purposes of section 463(i)(a) of the Companies Act 2006. The Remuneration Report set out in this document is the directors’ remuneration report for the purposes of section 463(1)(b) of that Act. English law governs the disclosures contained in and liability for the directors’ report and the directors’ remuneration report. By order of the Board Martin C Murray Group Company Secretary 4 March 2009 Going concern The Group’s business activities, together with factors likely to affect its future development, performance and position are set out in the Business Review. The ﬁ nancial position of the Group, its cash ﬂ ows, liquidity position and borrowing facilities are described in the Group Finance Director’s Statement. In addition, notes 47 and 48 to the ﬁ nancial statements include the Group’s objectives, policies and processes for managing its capital and set out details of the risks related to ﬁ nancial instruments and insurance risks taken on by the Group. The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group’s available credit facilities. The Company’s existing revolving current facility of £1.25 billion does not mature until September 2012. The current economic conditions create uncertainty particularly over the future levels of world equity markets, defaults in corporate bond portfolios, particularly in the United States, currency ﬂ uctuations, demand for the Group’s products and other economic factors. These uncertainties have been considered individually and in combination in the Group’s forecasts and projections, taking account of reasonably possible changes in trading performance and economic conditions in the markets in which the Group operates. The results show that the Group should be able to operate within the level of its available credit facilities and with an adequate level of capital, both at a Group level and within each of its major regulated Group entities. To the extent that changes in trading performance and economic conditions prove to be more severe than thought reasonably possible, the Group has evaluated and concluded on feasible management actions that would be possible in such circumstances so as to ensure adequate levels of liquid and capital resources are maintained. After making enquiries, the Board of Directors has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and accounts. e c n a n r e v o G Page 117 REMUNERATION REPORT This report has been prepared by the Remuneration Committee (referred to in this report as the Committee) and approved by the Board of the Company. The ﬁ gures included in the sections of this report headed ‘Directors’ Emoluments for 2007 and 2008’ on page 125 and ‘Directors’ interests under employee share plans’ on pages 131 and 132 have been audited by KPMG Audit Plc as required by the Directors’ Remuneration Report Regulations 2002. Their audit report is set out on page 110. The information in the remainder of this report has not been audited. Remuneration Committee The Committee is a committee of the Board. Its full terms of reference are published on the Company’s website. The Committee is responsible for: > Determining the remuneration, incentive arrangements, beneﬁ ts and any compensation payments of the executive directors > Determining the remuneration of the Chairman of the Board and monitoring and approving the level and structure of remuneration of senior management who report directly to the Group Chief Executive, together with the Company Secretary > Reviewing, monitoring and approving, or recommending for approval, the Company’s share incentive arrangements and awards. Remuneration policy for executive directors The Company embraces the principles of the Combined Code relating to directors’ remuneration and complies with its provisions. These are the guiding principles that the Committee has applied during 2008 and intends to continue to apply: > To take account of appropriate benchmarks, while using such comparisons with caution and recognising the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. Members of the UK FTSE 100 Index provide the benchmark for UK-based executive directors, with particular reference to subsets of that data within the ﬁ nancial sector and by market capitalisation > To be sensitive in determining, reviewing, monitoring and approving matters under its remit in relation to pay and employment conditions around the Group where relevant > To make a signiﬁ cant percentage of potential maximum rewards conditional on both short-term and long-term performance; these rewards include share-based incentives, to align the executive directors’ interests closely with those of shareholders > To provide an opportunity for overall remuneration packages to be in the upper quartile of the comparator group through payments under short-term and long-term incentive schemes if superior performance is delivered, while the ﬁ xed elements of remuneration remain benchmarked at or below appropriate median levels > To focus attention on the main drivers of shareholder value by linking performance-related remuneration to clearly deﬁ ned objectives and measurable targets > To design remuneration arrangements that will attract, retain and motivate individuals of the exceptional calibre needed to lead the Group’s development. The Committee’s policy is inﬂ uenced by the need to be competitive with other international ﬁ nancial services groups, while avoiding any excess. This includes its approach to setting the ﬁ xed elements of remuneration at or below appropriate median levels. It has reviewed this policy and considers it to be appropriate. The Committee has discretion to consider corporate performance on environmental, social and governance (ESG) issues when setting the remuneration of executive directors and senior management. It aims to ensure that the incentive structures for executive directors and senior management do not raise ESG risks by inadvertently motivating irresponsible behaviour. It also takes account of the FSA’s letter of 13 October 2008 relating to remuneration policies at ﬁ nancial services companies, where appropriate. Wherever it considers appropriate, the Committee seeks the views of institutional investors on any signiﬁ cant changes to remuneration structures applicable to the executive directors or affecting the structure of the Company’s share incentive arrangements. The Committee Chairman and representatives of Group Human Resources (Group HR) met representatives of UK institutional investors during January 2008 to discuss the 2008 remuneration structure and in February 2009 to discuss the corporate performance targets to be attached to certain share option and restricted share awards to be granted under the Company’s share incentive plans in 2009. Membership of the Committee The following independent non-executive directors served on the Committee during the year: Name of non-executive director Position Period on the Committee Mr R Bogni Mr N Andrews Mr R Edey Mr R Pym Mr N Broadhurst Chairman Member Member Member Member May 2005 to date November 2002 to date June 2007 to date May 2008 to date March 1999 to May 2008 The Committee continued to retain Mr Alan Judes as its independent adviser through his consultancy Strategic Remuneration during 2008. A copy of his letter of engagement is on the Company’s website. Any work that the Company wishes Mr Judes to do on its behalf, rather than for the Committee, is pre-cleared with the Committee Chairman with a view to avoiding conﬂ icts of interest. Mr Judes did not provide any other services to the Company during 2008. The Company retained Hewitt New Bridge Street to advise on the implementation of its new share incentive plans, which were approved by shareholders at the 2008 AGM. Mr Kevin Stacey of Group HR assisted the Committee during the year. Group HR provides supporting materials for matters that come before the Committee, including comparative data and justiﬁ cations for proposed salary, beneﬁ t, bonus and share awards and criteria for performance targets and appraisals against those targets. It uses the services of external advisers as necessary. The Committee Chairman has access to and regular contact with Group HR independently of the executive directors. During 2008, the Committee met six times. Mr Andrews was absent from one meeting. Mr Pym attended all four meetings following his appointment to the Committee, while Mr Broadhurst attended one of the two meetings before his retirement. The Board accepted the recommendations made by the Committee during the year without amendment. The Committee meetings were also attended by the Group Chief Executive (other than when his own remuneration was being discussed), Mr K Stacey, and Mr C Collins, the Chairman of the Board. The Company Secretary, Mr M Murray, acts as Secretary to the Committee. Page 118 Old Mutual plc Annual Report and Accounts 2008 The Executive Remuneration Committee During 2008, the Company reinforced its governance structure relating to remuneration by establishing a new Executive Remuneration Committee (ERC), which oversees executive remuneration governance at the tiers immediately below director and Group Executive Committee level. The ERC approves remuneration arrangements and pay-review proposals for this level across the Group, taking responsibility for remuneration decisions previously governed by subsidiary remuneration committees. It is chaired by the Group Chief Executive and comprises three members of the Group Executive Committee, including the Group Finance Director. It is supported by Group HR, which supplies supporting materials and analysis in a similar format to those supplied to the Committee. All minutes of ERC meetings are noted at the Committee and the ERC can escalate matters for decision by the Committee as appropriate. The ERC has adopted the following detailed remuneration principles to ensure that the principles agreed by the Committee are properly implemented at the Group’s main subsidiaries: > Remuneration must be: – Viewed in conjunction with wider people-management practices to support a consistent approach to achieving desired culture and behaviour – Performance-related, linked to delivery against value- creating objectives – Benchmarked to reliable and relevant market data speciﬁ c to each region and sector > Remuneration design should be considered a key business competence and resourced accordingly > Incentive payments must be based on performance measures that account adequately for the risks taken in producing the proﬁ ts > Incentives must be both short-term and long-term as well as complementary; the objectives they reward should create a sustainable business and long-term value creation should not be prejudiced by short-term objectives > Deferrals should be linked to the realised proﬁ tability of the business on which the incentive is based > Uncapped incentive arrangements will only be agreed if: – Funding of awards for bonus and long-term incentive (LTI) awards is an acceptable percentage of the economic proﬁ t – Bonus pools have not been struck above the level at which cost and risk can be allocated > Risk managers should not be rewarded from the same bonus pool as the managers whose risks they are assessing > Individual performance objectives aligned to business plans, and individual performance ratings, must be agreed annually > Underperformance should be dealt with formally according to local policies. Alignment with strategy and shareholders The Group’s strategy continues to evolve. The new reward structure adopted for executive directors in 2008, as approved by shareholders and disclosed in the 2007 Annual Report, is intended to provide alignment between the senior executives and shareholders notwithstanding incremental or signiﬁ cant shifts in strategy. The incentive structure, in its ﬁ rst cycle from the start of 2008, aligns short-term and long-term goals over a four-year cycle. The full incentive value is therefore only attained if both the short-term hurdles (which determine the amount of short-term incentive (STI) payable) and long-term hurdles (the corporate targets attached to the bonus-matching awards) are achieved. The STI targets, agreed annually by the Committee, comprise a balance of the key ﬁ nancial metrics, focusing on Group proﬁ tability, and personal objectives based on business plan priorities. To receive an LTI, a director is required to invest his own funds (from his cash STI) in purchasing Company shares under the bonus-matching arrangement. The bonus-matching arrangement provides a two-for-one share match of performance shares or performance share options on any portion of the post-tax cash STI (grossed up for income tax and employee national insurance contributions) used to buy Company shares, which vest subject to agreed hurdles being attained after three years. The Group differs from many other organisations in that the full incentive depends on achieving both STI and LTI targets rather than rewarding either one separately. This ensures the alignment of STI and LTI arrangements and focuses executive directors on a full spectrum of ﬁ nancial and personal objectives over both the annual and longer business planning cycle. It also provides a robust incentive structure with the ﬂ exibility to deal with changes in strategy as they occur. Apart from recruitment option grants and performance share awards, there are no free-standing awards of LTIs. This structure also aligns executive directors with shareholder interests through the full four-year cycle. It ensures they focus on agreed performance criteria in both the ﬁ rst year, when the initial STI award is determined, and over the following three years, when performance must be sustained to attain both the hurdles and the share price growth which determine the ﬁ nal value of the award at vesting. This structure does not encourage a short-term view. Any signiﬁ cant non-participation in the LTI would result in a total incentive well below market-median levels, because the STI level is capped, and total remuneration is benchmarked to market assuming full bonus-matching. A poor STI outcome may result from extraneous factors, in which case the Committee has the ﬂ exibility to rectify the consequently low bonus-match opportunity by offering a match to the target-level STI. In these circumstances the executive would be required to buy (using personal funds) or pledge existing personal shares for the match, further increasing his commitment and alignment with shareholders. The following graph shows the total shareholder return to 1 January 2009 on £100 invested in shares in Old Mutual plc on 1 January 2004 compared with £100 invested in the FTSE 100 Index. The other points are the comparative returns at the intervening ﬁ nancial year ends. In the opinion of the directors, the FTSE 100 Index is the most appropriate index against which to measure the Company’s total shareholder return, as it is an index of which Old Mutual plc is a member and is located where the Company has its primary listing. In reviewing performance, the Board and the Committee also consider a variety of other sector-speciﬁ c comparators. Total shareholder return for the five years to 1 January 2009 250 200 150 100 50 Old Mutual plc FTSE100 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Source: Datastream Page 119 l i e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Terms of engagement of the executive directors Directors holding executive ofﬁ ce have service contracts with the Company. The terms of these are considered by the Committee to provide a proper balance of responsibilities and security between the parties. The Company’s policy is to ﬁ x notice periods for executive directors at a maximum of 12 months. Compensation for loss of ofﬁ ce is tailored to reﬂ ect the Company’s contractual obligations and the obligation on the part of the employee to mitigate loss. The Company can terminate the service contracts of the two executive directors, Mr J Roberts and Mr P Broadley, on 12 months’ notice. Their current contracts are dated 23 January 2009 and 10 November 2008 respectively. If not terminated earlier, these contracts may continue until the director attains the age of 65 (7 June 2022 for Mr Roberts and 31 January 2026 for Mr Broadley). Neither Mr Roberts’ nor Mr Broadley’s contract contains any provisions quantifying compensation payable on early termination. Executive directors’ remuneration during 2008 The Committee reviews the structure of the executive directors’ remuneration packages annually to satisfy itself that the balance between ﬁ xed and variable remuneration and short-term and long-term incentives and rewards remains appropriate. The overall make-up of the remuneration packages for the executive directors in 2008 was as follows: Mr J Roberts, Group Chief Executive Element Basic salary Quantum £616,666 Additional information Paid monthly in cash. Reviewed with effect from 1 January each year, taking into account market benchmarks and any changes in role or responsibilities. Mr Roberts’ basic salary of £525,000 at 1 January 2008 was increased on 1 September 2008 to £800,000 due to his promotion to Group Chief Executive. Beneﬁ t allowance £196,114 Paid monthly in cash – 35% of basic salary (less pension contributions). Pension contribution £19,719 Paid in lieu of a monthly cash payment under the beneﬁ t allowance. STI £489,486 Up to a maximum of 150% of basic salary to be paid two-thirds in cash in March 2009 and one-third in restricted shares under the Share Reward Plan. The STI for 2008 was based on achievement of Group ﬁ nancial targets and, for part of the year, Skandia ﬁ nancial targets, as well as delivery of individually agreed objectives. LTI (To receive an LTI award, a director has to invest his own funds in Company shares) Mr Roberts elected to use 80% of his cash short-term incentive to buy Old Mutual £576,000 (based on the expected value shares and to pledge existing shares for the balance required to secure the maximum of awards after discounting bonus-matching awards available, and will receive awards of restricted shares by 40% for the impact of performance targets) and share options under the Performance Share Plan on a two-for-one basis (grossed up for tax and employee national insurance contributions). For 2008 only, the bonus match was offered against the cash STI that would have been payable assuming on-target performance for both the personal and corporate elements of the STI targets and on Mr Roberts’ revised salary as Group Chief Executive. The number of shares to be granted under option will be based on an independent option valuation obtained in February 2009, which determined that, for this purpose, the value of an option was equal to 20% of the face value of the shares under award. Bonus-matching shares and options vest subject to: (a) continued employment with the Group for the three-year vesting period, (b) the achievement of performance targets as described in the section of this report headed ‘New targets applicable to share incentives to be granted in 2009’, and (c) the retention for the entire three-year period of the personal shares backing the match. Other beneﬁ ts £1,933 Life cover of £1,000,000 and disability cover capped at £140,000 a year. Restricted share release £341,226 based on the market value of the shares at date of release On 9 May 2008, Mr Roberts received a release of 283,058 shares held under the deferred STI and bonus-matching restricted share awards granted in 2005 under the Restricted Share Plan (RSP). He retained all of these shares, paying the associated income tax and employee national insurance costs. Share option grant £525,000 (exercise price) On 3 April 2008, Mr Roberts received an option grant under the Share Option and Deferred Delivery Plan (SOP) over 426,137 shares with an exercise price of £1.232 per share. Vesting of the option is subject to the achievement of an IFRS-EPS based performance target, as set out in the section of this report headed ‘Historic performance targets applicable to share incentives’. Page 120 Old Mutual plc Annual Report and Accounts 2008 Mr P Broadley, Group Finance Director Element Basic salary Quantum £77,564 Additional information £550,000 a year paid monthly in cash. Reviewed with effect from 1 January each year, taking into account market benchmarks as well as any changes in role or responsibilities. Beneﬁ t allowance £27,147 Paid monthly in cash – 35% of basic salary. STI £71,794 The annual short-term incentive for 2008 was agreed, on appointment, to be equal to the on-target incentive that would have been awarded for the 2008 performance year, pro-rated to reﬂ ect the length of service during 2008. This is payable two-thirds in cash and one-third in restricted shares under the Share Reward Plan. The STI is normally up to a maximum of 150% of basic salary, paid two-thirds in cash and one-third in restricted shares under the Share Reward Plan, based on the achievement of Group ﬁ nancial targets as well as delivery of individually agreed objectives. LTI (To receive an LTI award, a director has to invest his own funds in of awards after discounting under the Performance Share Plan on a two-for-one basis (grossed up for tax and buying Company shares) by 40% for the impact of £57,435 (based on the expected value bonus-matching plan, and will receive awards of restricted shares and share options Mr Broadley elected to use all of his cash STI to buy Old Mutual shares under the employee national insurance contributions). performance targets) The number of shares to be granted under option will be based on an independent option valuation obtained in February 2009, which determined that, for this purpose, the value of an option was equal to 20% of the face value of the shares under award. Bonus-matching shares and options vest subject to: (a) continued employment with the Group for the three-year vesting period, (b) the achievement of performance targets as described in the section of this report headed ‘New targets applicable to share incentives to be granted in 2009’, and (c) the retention for the entire three-year period of the personal shares backing the match. Other beneﬁ ts £323 Life cover of £1,000,000 and disability cover capped at £140,000 a year. Joining option grant £750,000 (exercise price) On 10 November 2008, Mr Broadley received an option grant under the Share Reward Plan over 1,315,789 shares with an exercise price of £0.57 per share. Vesting of the option is not subject to the achievement of performance targets as this award was negotiated as an incentive to join the Group. The following diagrams show the breakdown of the executive directors’ total remuneration arrangements during 2008: Mr J Roberts Mr P Broadley Basic salary £616,666 Benefit allowance £217,766 Cash short-term incentive £326,324 Deferred short-term incentive £163,162 Long-term incentive £576,000 Share options £105,000 Basic salary £77,564 Benefit allowance £27,147 Cash short-term incentive £47,863 Deferred short-term incentive £23,931 Long-term incentive £57,435 Share options £150,000 The long-term incentive for Mr Roberts includes full take-up of the two-for-one bonus match for the 2008 performance year, based on on-target STI performance results for ﬁ nancial and personal targets and using an expected value (after discounting for the impact of targets) of 60 percent of the face value of the award. The long-term incentive for Mr Broadley includes full take-up of the two-for-one bonus match for the 2008 performance year, based on on-target STI performance results for ﬁ nancial and personal targets, pro-rated for length of service in 2008 and using an expected value (after discounting for the impact of targets) of 60 percent of the face value of the award. Short-term incentive targets for performance year 2008 The payment of STIs is subject to the achievement of pre-determined ﬁ nancial targets and personal objectives, based on the key deliverables for each executive director as reviewed and approved each year by the Committee. Details of the structure and outcomes of the metrics for Mr Roberts for 2008 are set out in the following table. Page 121 l i e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Targets applicable to Mr Roberts’ STI for performance year 2008 Group Targets as % of salary Personal targets as % of salary Corporate Milestones as % of salary Total (as % of salary) £000 salary for period £000 incentive for period Achieved incentive as % of maximum Skandia CEO Group CEO Total Potential Achieved Potential Achieved Potential Achieved 90 60 – 150 350 525 – 54 – 54 189 36 – – 150 150 267 400 – – 113 113 300 75 51 34 65 150 617 925 – 31 49 79 489 53 On his promotion to Group Chief Executive, existing corporate targets were not attainable and a number of key challenges and goals were agreed for Mr Roberts by the Board to ensure the Group’s stability and liquidity in the short term and to address the ability of the Group strategy and operating model to deal with severe market conditions being faced internationally. The speciﬁ c short-term goals delivered for the balance of 2008 were: > Devise and implement a strategy for resolving issues at the Group’s US Life operation (including Old Mutual Bermuda) > Devise and implement a new strategy by the end of the ﬁ rst quarter of 2009 > Agree a new operating model > Replace incumbents of key positions affected by the restructuring > Devise and implement a capital plan with the agreement of the Board > Win stakeholders’ support for the agreed strategy. The Chairman and the Committee assessed Mr Roberts’ performance against these agreed milestones as a whole, since they had not been allocated individual weightings for this purpose. It was agreed that Mr Roberts had taken on the role in very difﬁ cult circumstances and had addressed the challenges purposefully and proactively and had made substantial progress in delivering all the crucial elements of these milestones during his ﬁ rst four months in the role. These included a signiﬁ cant restructuring of Group management structures, which involved a number of senior appointments (both internal and external), signiﬁ cant progress in addressing the problems at US Life (including Old Mutual Bermuda) and agreeing with the Board a new operating model and capital plan. All of these actions put the Group on a stronger footing for 2009. The strategy and operating model implementation will be rolled out during 2009 and so the ultimate impact of these actions will be assessed over that period. The Committee agreed a ﬁ nal score of 75 percent based on its detailed analysis of the maximum attributable to Mr Roberts’ performance for this period. Historic performance targets applicable to share incentives Historically, the vesting of executive share options and, in certain cases, restricted share awards, was subject to the successful achievement of EPS-based targets. Before 2006, EPS was measured on a UK GAAP basis and, after the introduction of IFRS, on an IFRS basis. As a result of the acquisition of Skandia, existing unvested awards were converted to a European Embedded Value (EEV) EPS basis and the 2006 awards were also based on EEV EPS. Both conversions (from UK GAAP to IFRS and subsequently to EEV EPS) were validated with KPMG Audit Plc and the rationale for the use of EEV EPS targets following the Skandia acquisition was set out in the Notice of an Extraordinary General Meeting containing the related resolution approved by shareholders in November 2005. During 2008, the Company decided to convert its embedded value accounting standard from EEV to Market Consistent Embedded Value (MCEV). It was therefore necessary to agree an acceptable conversion basis for EEV EPS-based targets (attached to the 2006 share options and bonus-matching restricted share awards), to MCEV EPS. It was clear on the basis of the conversion agreed that targets for the vesting of share options and bonus-matching restricted share awards made during 2006 would not be met under either method and, as a result, the 2006 options and bonus-matching awards lapsed on 4 March 2009. The Committee obtains external audit sign-off on attainment of any performance targets as part of its oversight procedures, in which KPMG Audit Plc validates the performance measurement and submits a report to the Committee advising the relative vesting of each speciﬁ c award. A summary of the targets attached to the unvested share options and restricted share awards under the SOP, RSP and OMSA Management Incentive Share Plan (MISP) is set out in the table below. Year of grant Plans covered by targets Target 1 Target 2 Target 3 For bonus-matching restricted share For tier 2 of share option awards awards and tier 1 of share option awards (up to 100% of base salary) base salary) (between 100% and 200% of For tier 3 of share option awards (above 200% of base salary) 2007 2008 SOP MISP RSP Growth in IFRS EPS must exceed Growth in IFRS EPS must exceed growth in UK RPI by at least 12% growth in UK RPI by at least 9% over the three-year vesting period over the three-year vesting period Growth in IFRS EPS must exceed growth in UK RPI by at least15% over the three-year vesting period New targets applicable to share incentives to be granted in 2009 For awards under the bonus-matching plan in 2009, a new target of Return on Average Equity (RoAE) will be added to the IFRS EPS measure, which has been amended as shown below, so that targets for long-term incentive awards now reﬂ ect the two major measures of proﬁ tability and capital management applied across the Group. Equal weight is attached to the two metrics for the vesting of any award and vesting of each is attained against the three tiers speciﬁ ed below. One-third of each award vests on attainment of both the RoAE and EPS targets at each tier, with pro-rata vesting between tiers, after tier one has been attained. Targets are tested on a once-only basis after three years from the year prior to the grant and any award or part thereof that does not vest then lapses. Page 122 Old Mutual plc Annual Report and Accounts 2008 The targets for vesting of bonus-matching share incentives to be granted in 2009 are set out in the table below: Return on Average Equity RoAE required Real growth in adjusted operating proﬁ t IFRS earnings per share Stock Market growth* 50% + 0% Tier 1 % 10 Tier 2 % 11 Tier 3 % 12 Growth factor above UK RPI Tier 2 % Tier 1 % Tier 3 % 9.0 0.0 12.0 3.0 15.0 6.0 *Measured by the growth of the JSE ALSI and FTSE 100 indices. To reﬂ ect the current uncertain outlook for stock market levels (to which the Group’s earnings are substantially correlated) the required level of growth in IFRS EPS above UK RPI is dependent on the growth of a composite calculation of the JSE ALSI and FTSE 100 indices between Q4 2008 and Q4 2011. As reﬂ ected in the table above, the EPS targets will increase proportionately to the combined market indices where the targets will be UK RPI plus 0 percent, 3 percent and 6 percent over three years for tiers 1, 2 and 3 respectively where there is no growth in stock markets, to a maximum of UK RPI plus 9 percent, 12 percent and 15 percent where the combined market growth is 50 percent or more over the three years. Intermediate levels for these targets relative to stock market growth will be interpolated between the points. Growth will be calculated by the value of £100 invested as follows: > £33.33 in the FTSE 100 index – average price over Q4 2008 > £66.67 in the JSE ALSI index – average price over Q4 2008 against the value of that investment in £ calculated by reference to the average price (converted into £, in the case of the JSE ALSI component, by reference to the average daily exchange rates for the period) on the respective indices over Q4 2011. Former executive directors under notice at 31 December 2008 The service contracts of the two former executive directors, Mr J Nicholls and Mr J Sutcliffe (dated 1 November 2006 and 6 February 2002 respectively), were terminable by the Company on 12 months’ notice. The following tables set out the remuneration arrangements during 2008 for Mr Sutcliffe, the former Group Chief Executive, who ceased to be a director on 9 September 2008, and Mr Nicholls, the former Group Finance Director, who ceased to be a director on 10 November 2008. Mr J Sutcliffe, former Group Chief Executive Element Quantum Additional information Basic salary £800,000 Beneﬁ t allowance £277,792 STI LTI n/a n/a Other beneﬁ ts £4,141 Restricted share release £572,214 Share option grant £1,600,000 (exercise price) Share option exercise £122,136 Paid monthly in cash. £552,672 was paid to Mr Sutcliffe while a director. The monthly salary will continue to be paid until the end of Mr Sutcliffe’s notice period (8 September 2009 or such earlier date as the parties may agree) less a deduction of £6,247 as a result of Mr Sutcliffe being appointed as a non-executive director of SunLife Financial Inc. Paid monthly in cash. £191,910 was paid to Mr Sutcliffe while a director. 35% of basic salary, less £2,208 used to purchase additional life cover. The beneﬁ t allowance will continue to be paid until the end of Mr Sutcliffe’s notice period or such earlier date as the parties may agree. No STI payment was made to Mr Sutcliffe in respect of 2008 performance. No LTI payment was made to Mr Sutcliffe in respect of 2008 performance. Core life cover of £1,000,000, additional life cover of £500,000 and disability cover capped at £140,000 a year. These beneﬁ ts will remain in force until the end of Mr Sutcliffe’s notice period or such earlier date as the parties may agree. On 9 May 2008, Mr Sutcliffe received a release of 475,441 shares held under the deferred STI and bonus-matching restricted share awards granted in 2005. Mr Sutcliffe sold 195,696 of these shares and retained 279,745 shares. On 3 April 2008, Mr Sutcliffe received an option grant under the SOP over 1,298,702 shares with an exercise price of £1.232 per share. Vesting of the option is subject to the achievement of an IFRS EPS-based performance target, as set out in the section of this report headed ‘Historic performance targets applicable to share incentives’. On 10 September 2008, Mr Sutcliffe exercised his 2003 option under the SOP over 1,124,639 shares with an exercise price of 86.25p per share. Mr Sutcliffe sold all of the shares at a price of 97.11p per share. The market price of Old Mutual plc shares on 10 September 2008 was 97.4p per share. Mr Sutcliffe made a gain of £122,136 on the exercise of share options during 2008. Page 123 l i e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Mr J Nicholls, former Group Finance Director Element Quantum Additional information Basic salary £525,000 Beneﬁ t allowance £180,835 Paid monthly in cash. £450,859 was paid to Mr Nicholls while a director. The monthly salary will continue to be paid until the end of Mr Nicholls’ notice period (5 November 2009 or such earlier date as the parties may agree). Paid monthly in cash. £155,298 was paid to Mr Nicholls while a director. 35% of basic salary (less £2,915 childcare vouchers). The beneﬁ t allowance will continue to be paid until the end of Mr Nicholls’ notice period or such earlier date as the parties may agree. Childcare vouchers £2,915 Provided in lieu of a cash payment under the beneﬁ t allowance under a salary sacriﬁ ce arrangement. STI LTI n/a n/a Other beneﬁ ts £13,534 No STI payment was made to Mr Nicholls in respect of 2008 performance. No LTI payment was made to Mr Nicholls in respect of 2008 performance. Life cover of £1,000,000 and disability cover capped at £140,000 a year. These beneﬁ ts will continue until the end of Mr Nicholls’ notice period or such earlier date as the parties may agree. This ﬁ gure also includes a cash payment for the reimbursement of costs associated with a cancelled holiday and a cash payment in lieu of unused holiday entitlement. Share option grant £525,000 (exercise price) On 3 April 2008, Mr Nicholls received an option grant under the SOP over 426,137 shares with an exercise price of £1.232 per share. This was forfeited on 5 November 2008. Restricted share release £212,725 On 1 December 2008, Mr Nicholls received a time pro-rated release of shares from the 2007 and 2008 restricted share awards. In respect of the 2007 award, 383,008 shares were released and 493,376 shares were forfeited and in respect of the 2008 award, 20,262 shares were released and 71,716 shares were forfeited. Mr Nicholls sold 166,513 of the shares at a price of 52.8031p per share and retained 236,757 shares. The market price of Old Mutual plc shares on 1 December 2008 was 54.5p. The following diagrams show the breakdown of the former executive directors’ total remuneration arrangements in 2008, including payments made before and after cessation as directors, with option grants based on a fair value equal to 20% of the face value of the shares under option and option exercises and restricted share releases being excluded: Mr J Sutcliffe Mr J Nicholls Basic salary £800,000 Benefit allowance £277,792 Share options £320,000 Basic salary £525,000 Benefit allowance £180,835 Share options £105,000 No other payments were paid or are due to be paid to Mr Nicholls or Mr Sutcliffe in respect of the termination of their employment with the Group. The treatment of share incentive awards held by Mr Nicholls and Mr Sutcliffe on leaving, is set out in the section of this report entitled ‘Directors’ interests under employee share plans’. The Old Mutual Staff Pension Fund The Old Mutual Staff Pension Fund (OMSPF), established in 1979, is a hybrid scheme which has a deﬁ ned beneﬁ t section that was closed to new members in 1998 and a deﬁ ned contribution section established in 1997 that remains open to new members. The total membership of the OMSPF, including active, deferred and pensioner members (both sections) across the Group, reported in the most recent scheme Annual Report and accounts (at 31 December 2007) was 1,393. Page 124 Old Mutual plc Annual Report and Accounts 2008 Mr Roberts is a member of the deﬁ ned contribution section of the OMSPF and during 2008 the Company contributed a total of £19,719 in lieu of an equivalent cash payment under the agreed 35 percent beneﬁ t allowance. The accumulated value of Mr Roberts’ funds in the OMSPF was £182,390 at 31 December 2008 (£214,300 at 31 December 2007). Mr Broadley does not participate in any employer-provided pension scheme of the Group. Mr Sutcliffe, the former Group Chief Executive, is a deferred member of the deﬁ ned contribution section of the OMSPF. The accumulated value of his funds in the OMSPF was £91,100 at 31 December 2008 (£125,100 at 31 December 2007). Mr Nicholls, the former Group Finance Director, did not participate in any employer-provided pension scheme of the Group, but has a self-invested personal pension with Skandia UK. Directors’ emoluments for 2007 and 2008 Remuneration for the years ended 31 December 2007 and 31 December 2008 – including, in each case, remuneration from ofﬁ ces held with the Company’s subsidiaries, Skandia Insurance Company Limited, Livforsäkringsaktiebolaget Skandia (Publ) (Skandia), Old Mutual (US) Holdings, Inc. (OMUSH) and Nedbank Group Limited (Nedbank), where relevant – was as follows: Salary and Fees Bonus Beneﬁ ts and beneﬁ t allowance Pension Total £000 2008 £000 2007 £000 2008 £000 2007 £000 2008 £000 2007 £000 2008 £000 2007 £000 2008 £000 2007 Chairman Mr C Collins Executive directors Mr P Broadley Mr J Roberts Non-executive directors Mr N Andrews Mr R Bogni Mr R Edey Mr R Khoza Mr B Nqwababa Mr L Otterbeck Mr R Pym Former executive directors Mr J Nicholls Mr J Sutcliffe Former non-executive director Mr N Broadhurst 300 280 – – 241 201 78 617 1045 79 69 2516 65 1747 83 5258 8008 – 500 935 68 60 2276 41 1387 19 4959 735 38 8611 722 4892 – 3442 271 1961 – 2051,3 – – – – – – – – – – – – – – – – – 71 121 – – – 111 161 131 111 – – – 81 121 3402 4982 1811,8 3081,8 2491,10 3551 – – 111 – – 204 – – – – – – – – – – – 324 300 – 204 177 1,322 – 1,069 – – – – – – – – – – 111 91 69 251 65 185 99 106 79 60 227 41 146 31 706 1,108 1,084 1,588 38 97 Total emoluments 3,183 2,742 561 1,182 782 884 20 20 4,54612 4,828 1 Beneﬁ ts include cash allowances payable to the executive directors, as well as travel costs for directors’ spouses to accompany them to certain Board meetings or other corporate events of the Company and its major subsidiaries. The amount of this expenditure is reported to and considered by the Committee, and procedures are in place for such costs to be authorised. The Committee is satisﬁ ed that such expenditure is reasonable and in the interests of the Company. 2 The total short-term incentive is payable two-thirds in cash and one-third in the form of a restricted share award. The cash element for 2008 (£47,863 for Mr Broadley and £326,324 for Mr Roberts) may be used for the purposes of the bonus-matching arrangement described under the “Executive Directors’ remuneration during 2008” section above. Mr Roberts pledged existing shares to the value of £229,000 in order to secure a bonus-matching award for the 2007 performance year. The cash incentives were applied net of tax, as to £332,000 gross (in the case of Mr Sutcliffe) and £227,000 gross (in the case of Mr Nicholls) to purchase shares in the Company under the bonus-matching arrangement. 3Includes £33,000 in respect of the cost of providing furnished accommodation for Mr Roberts in Stockholm, an arrangement that has now ended. 4 The Company made pension contributions in lieu of an equivalent cash payment under Mr Roberts’ beneﬁ t allowance. 5Includes fees of £35,000 (2008) and £32,000 (2007) from OMUSH. 6Includes fees of £196,000 (2008) and £177,000 (2007) from Nedbank. 7 Includes fees of £119,000 (2008) and £88,000 (2007) from Skandia. 8 Includes payments made during 2008 while a director of the Company plus payments made after cessation as a director. A sum of £734,443 will be paid to Mr Sutcliffe during 2009 on the basis that his notice period ends on 8 September 2009 and a sum of £600,129 will be paid to Mr Nicholls during 2009 on the basis that his notice period ends on 5 November 2009. 9Mr Nicholls took unpaid paternity leave during 2007, forgoing base salary of £5,000. 10 Includes a payment of £62,500 in compensation for loss of fees resulting from Mr Nicholls’ resignation as a non-executive director of another FTSE 100 listed ﬁ nancial services group, which was agreed as a condition of employment. 11 Includes fees of £11,000 (2007) from Skandia. 12 The prior-year comparative number as published in the Remuneration Report for 2007 was £4,851,000, which included £22,000 paid to non-executive directors who retired during that year. The executive directors who held ofﬁ ce during 2008 were required to waive fees for non-executive directorships held in subsidiary companies totalling £15,000 during the year ended 31 December 2008 in favour of the Company or its subsidiaries. These waivers are expected to remain in force in the future. Page 125 l i e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Executive directors’ remuneration in 2009 There have been no signiﬁ cant changes to the overall remuneration structure for the executive directors from that which applied in 2008. The following are the details of arrangements for 2009. Mr J Roberts, Group Chief Executive Element Maximum amount Additional information Basic salary £830,000 p.a. Paid monthly in cash. Increased from £800,000 from 1 January 2009 (3.75% increase). Beneﬁ t allowance £290,500 p.a. Paid either as contributions to agreed beneﬁ ts or monthly in cash – 35% of basic salary. Maximum STI £1,245,000 (maximum) LTI (To receive an LTI £996,000 award, a director has (based on the expected to invest his own funds in purchasing Company shares) value of the maximum awards after discounting by 40% for the impact of performance targets) Maximum of 150% of basic salary payable two-thirds in cash and one-third deferred for three years in restricted shares under the Old Mutual Share Reward Plan. The STI for 2009 will be based on achievement of Group ﬁ nancial targets as well as delivery of individually-agreed objectives. If Mr Roberts elects to use some or all of his cash STI to buy Old Mutual shares or pledges existing Old Mutual shares, bonus-matching awards of restricted shares and/or share options will be granted under the Performance Share Plan on a two-for-one basis (grossed up for tax and employee national insurance contributions). The number of shares to be granted under option will be based on an independent option valuation to be obtained in February 2010. Both shares and options will be subject to corporate performance targets that will be determined by the Committee in March 2010. Maximum for 2009 £3,361,500 Mr P Broadley, Group Finance Director Element Maximum amount Additional information Basic salary £550,000 p.a. Paid monthly in cash – Not increased from that paid in 2008. Beneﬁ t allowance £192,500 p.a. Paid either as contributions to agreed beneﬁ ts or monthly in cash – 35% of basic salary. Maximum STI £825,000 (maximum) LTI (To receive an LTI £660,000 award, a director has to invest his own funds in buying Company shares) (based on the expected value of the maximum awards after discounting by 40% for the impact of performance targets) Joining performance £400,000 (face value) share award Maximum for 2009 £2,627,500 Maximum of 150% of basic salary payable two-thirds paid in cash and one-third deferred for three years in restricted shares under the Old Mutual Share Reward Plan. The STI for 2009 will be based on achievement of Group ﬁ nancial targets as well as delivery of individually agreed objectives. If Mr Broadley elects to use some or all of his cash STI to buy Old Mutual shares or pledges existing Old Mutual shares, bonus-matching awards of restricted shares and/or share options will be granted under the Performance Share Plan on a two-for-one basis (grossed up for tax and employee national insurance contributions). The number of shares to be granted under option will be based on an independent option valuation to be obtained in February 2010. Both shares and options will be subject to corporate performance targets that will be determined by the Committee in March 2010. As part of Mr Broadley’s joining arrangements, an award of restricted shares under the Old Mutual Performance Share Plan with a face value of £400,000 will be granted in the ﬁ rst open period after the preliminary results. Vesting of the award will be subject to the successful achievement of corporate performance targets over a three-year vesting period. Page 126 Old Mutual plc Annual Report and Accounts 2008 STI targets for performance year 2009 The respective weightings attached to the Group metrics (shown as a percentage of base salary) for the executive directors’ STI for 2009 are as follows: Metric IFRS earnings (Adjusted Operating Proﬁ t) per share Return on equity MCEV earnings Subtotal Personal objectives Mr P Broadley Mr J Roberts Group % Group % 30 30 15 75 75 45 45 22.5 112.5 37.5 In his role as Group Finance Director, Mr P Broadley is responsible to the Board for all ﬁ nancial matters including management control over the internal audit and risk functions. The Committee therefore agreed that the ﬁ nancial elements of his bonus would have a lower weighting than line management executives and more emphasis would be placed on personal objectives. The following chart depicts the overall make-up of the executive directors’ respective remuneration packages for 2009, assuming on-target (rather than maximum) delivery on STI and an expected value for LTI. Percentage of total remuneration 2009 Mr J Roberts Mr P Broadley 0 10 20 30 40 50 % of total Base Benefit Bonus Deferred bonus LTI 60 70 80 90 100 Total direct remuneration 2009 – Potential vs market expected values Mr J Roberts Maximum Market Upper Quartile On Target Market Median Mr P Broadley Maximum Market Upper Quartile On target Market Median 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Total remuneration (£000) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Total remuneration (£000) Total direct remuneration is made up of basic salary, STI and LTI (excluding value of beneﬁ ts) Market data used is the Hewitt New Bridge Street FTSE ﬁ nancial sector for 2008 Page 127 i l e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Employee share plans The following is a summary of the employee share plans currently operated by the Company and its wholly-owned subsidiaries. Name of Plan Description Performance Share Plan – share options The purpose of the PSP is to grant share options and/or restricted shares as and restricted shares (PSP) LTI awards under a bonus-matching arrangement to qualifying senior employees. Grants will be phased annually so that no undue incentive arises in relation to any year of maturity. If an employee disposes of the personal shares to which the matching option or restricted share award relates, the matching option and/or restricted share award will lapse pro-rata to the number of personal shares disposed of. Shares held under option or award cannot be transferred, assigned, charged or otherwise disposed of prior to exercise, except on death, and the awards would lapse on any attempt to do so. Shares under award or option at 31 December 2008 Nil Share Reward Plan – share options and restricted shares (SRP) 2008 Sharesave Plan (SAYE) Share Option and Deferred Delivery Plan (SOP) Restricted Share Plan (RSP) UK Sharesave Plan (Sharesave) The OMSA Broad-Based Employee Share Plan The purpose of the SRP is to grant share options and/or restricted shares as deferred short-term incentives (DSTI) or joining awards to qualifying senior employees. DSTI grants will be phased annually so that no undue incentive arises in relation to any year of maturity. Shares held under option or award cannot be transferred, assigned, charged or otherwise disposed of prior to exercise, except on death, and the awards would lapse on any attempt to do so. The purpose of the SAYE is to provide a savings and investment opportunity for employees of the Group’s participating UK businesses, which encourages share ownership at all levels. Options will be granted for three- or ﬁ ve-year periods at a discount of up to 20% from the market price during a reference period shortly before the date of grant. Shares held under option cannot be transferred, assigned, charged or otherwise disposed of prior to exercise, except on death, and the option would lapse on any attempt to do so. The purpose of the SOP (which is now closed to new awards) was to grant share options as short-term or long-term incentives to qualifying senior employees. Grants were phased annually so that no undue incentive arose in relation to any year of maturity. Shares held under option cannot be transferred, assigned or charged prior to exercise, except on death, and the option would lapse on any attempt to do so. The purpose of the RSP (which is now closed to new awards) was: (i) to assist in the recruitment of key individuals by making awards of shares, restricted for three or more years, which lapse on prior termination of employment unless special circumstances apply; and (ii) to support retention of key talent by (a) contingent share awards that form the deferred element of an annual incentive award, based on performance evaluation for the prior year; and (b) bonus matching awards. Shares held under award cannot be sold, transferred, pledged, assigned, or otherwise disposed of prior to vesting, except on death, and the awards would lapse on any attempt to do so. The purpose of Sharesave (which is now closed to new awards) was to provide a savings and investment opportunity for employees of the Group’s participating UK businesses, which encouraged share ownership at all levels. Options were granted for three- or ﬁ ve-year periods at a discount of up to 20% from the market price during a reference period shortly before the date of grant. Sharesave has been replaced for future awards by the new 2008 Sharesave Plan described above. Shares held under option cannot be transferred, assigned or charged prior to exercise, except on death, and the option would lapse on any attempt to do so. 1,315,789 Nil 38,973,188 16,788,536 7,434,016 This plan was designed in the context of the Group’s plans to promote black economic empowerment (BEE) in its wholly-owned South African and Namibian businesses to offer an opportunity of ownership of Old Mutual shares to all permanent staff of those businesses who were not in any of the Company’s other share schemes, through a one-off award of shares. Grants of share awards in connection with the South African BEE transactions were made in October 2005 and in connection with Namibian BEE transactions in April 2007. There is currently no intention for further awards to be made to South African or Namibian employees under this plan. During the restricted period, a participant may not dispose of or transfer any of his or her restricted shares or any interest in them. 5,433,574 Page 128 Old Mutual plc Annual Report and Accounts 2008 Employee share plans continued Name of Plan Description Shares under award or option at 31 December 2008 The OMSA Senior Black Management Share Plan (SBP) The OMSA Management Incentive Share Plan (MISP) The purpose of the SBP is to help Old Mutual South Africa and Old Mutual Namibia to attract and retain senior black managers in light of the increased competition for talented and experienced black management. It provides for the award of restricted shares and the grant of share options. Grants are made in addition to the normal annual share incentive allocations under the OMSA Management Incentive Share Plan described below. A participant may not dispose of or transfer his rights to the option or the shares related to it without the directors’ written consent and any attempt to do so would result in the option lapsing. During the restricted period, a participant may not dispose of or transfer any of his restricted shares or any interest in them. The purpose of the MISP is to attract, retain and reward senior and middle management at Old Mutual South Africa and Old Mutual Namibia. It provides for awards of both restricted shares and share options on similar terms and conditions to the SRP, SOP and RSP. A participant may not dispose of or transfer his rights to the option or the shares related to it without the directors’ written consent and any attempt to do so would result in the option lapsing. During the restricted period, a participant may not dispose of or transfer any of his restricted shares or any interest in them. 17,785,998 47,665,950 Total shares held under award or option at 31 December 2008 135,397,051 Change of control Under the rules of the respective schemes, in the event of a change of control of Old Mutual plc: > Restricted shares and options granted under the SRP would vest in full > Performance shares and options granted under the PSP would vest: (i) to the extent that the performance criteria to which such options are subject have been met; and (ii) on a pro-rata basis to reﬂ ect the reduction in the length of the original performance period, although the Committee does have discretion to disapply the length of service pro-rating for compassionate reasons > Options granted under the SOP and awards granted under the RSP would vest in full > Options granted under the MISP would vest: (i) to the extent that the performance criteria to which such options are subject have been met and (ii) on a pro-rata basis to reﬂ ect the reduction in the length of the original performance period > Restricted share awards granted under the MISP and the OMSA Broad-Based Employee Share Plan would vest in full > Options and restricted share awards granted under the OMSA Senior Black Management Share Plan would vest in full > Options granted under the SAYE and Sharesave would become exercisable to the extent of the savings accumulated. The Committee has reviewed the operation of the current share incentive schemes, including how discretion is exercised and the grant levels currently applicable, and considers these to be appropriate to the Company’s current circumstances and prospects. Page 129 l i e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Employee Share Ownership Trusts The Group operates a number of Employee Share Ownership Trusts (ESOTs), through which it collateralises some of its obligations under employee share schemes. At 31 December 2008, the following shares in the Company were held in ESOTs: Trust Capital Growth Investment Trust1 Old Mutual plc Employee Share Trust2 OMN Broad-Based Employee Share Trust3 OMN Management Incentive Trust3 OMSA Broad-Based Employee Share Trust4 OMSA Management Incentive Trust4 OMSA Share Trust4 Total Country Old Mutual plc Shares held in trust Zimbabwe Guernsey Namibia Namibia South Africa South Africa South Africa 1,063,577 13,429,570 904,224 2,234,800 32,131,364 83,604,527 28,056,209 161,424,271 1 The Capital Growth Investment Trust is used to satisfy restricted share awards or Deferred Delivery Shares in Zimbabwe under a locally run scheme. Any surplus shares held in trust because of non-vesting are taken into account when purchasing shares in respect of future grants. 2 The Old Mutual plc Employee Share Trust is used to satisfy awards under the RSP, SRP and PSP (excluding South Africa, Namibia and Zimbabwe). Its strategy is to hold shares approximately equal to the number of shares awarded, but not yet vested, at any time. Any surplus shares held in trust because of non-vesting are taken into account when purchasing shares in respect of future awards. 3 The OMN Broad-Based Employee Share Trust and the OMN Management Incentive Trust were established during 2006 to subscribe for and hold shares in the Company in connection with its Namibian BEE ownership transactions. The OMN Broad-Based Employee Share Trust holds shares for the purposes of the Namibian awards under both the OMSA Broad-Based Employee Share Plan and the OMSA Senior Black Management Share Plan, while the OMN Management Incentive Trust holds shares for Namibian awards under the OMSA MISP. Awards to white employees in Namibia under the OMSA MISP are settled by the OMSA Share Trust. 4 The OMSA Broad-Based Employee Share Trust and the OMSA Management Incentive Trust were established during 2005 to subscribe for and hold shares in the Company in connection with its South African BEE ownership transactions. The OMSA Broad-Based Employee Share Trust holds shares for the purposes of both the OMSA Broad-Based Employee Share Plan and the OMSA Senior Black Management Share Plan, while the OMSA Management Incentive Trust holds shares for the OMSA MISP. Awards to white employees under the OMSA MISP and all awards that have been granted to South African and Namibian employees under the restricted share plan and share option and deferred delivery plan are settled by the OMSA Share Trust. The strategy has historically been to ensure that sufﬁ cient shares were acquired to match at least 90 percent of the obligations of each share incentive grant. However, as a result of the requirements of the Company’s BEE transactions in South Africa and Namibia, it was necessary to place shares allotted as part of the transactions in the relevant BEE employee share trusts immediately, in order to cover the total annual share grant allocations likely to be made to black participants in terms of the BEE transactions up to 2014 and 2016 respectively. The general practice of the ESOTs shown in the table above (save for the BEE-related trusts) is not to vote the shares held at shareholder meetings, although beneﬁ ciaries of restricted shares may in principle give directions for those shares to be voted. However, with respect to the OMSA Broad-Based Employee Share Trust, the OMSA Management Incentive Trust, the OMN Broad-Based Employee Share Trust and the OMN Management Incentive Trust, the Trustees may, because of BEE considerations, vote any unallocated shares held in these trusts as well as those shares held in respect of any unexercised share options. The beneﬁ ciaries of any restricted shares allocated by these BEE employee share trusts are entitled to vote their relevant shares. Options granted under the SOP (for employees outside South Africa and Namibia), Sharesave and those to be granted under the SRP, PSP and SAYE are currently intended to be settled by the issue of new shares rather than using shares held in an employee beneﬁ t trust. Dilution limits For the purposes of calculating dilution limits, any awards that are satisﬁ ed by transfer of pre-existing issued shares (such as shares acquired by market purchase through ESOTs) and any shares comprised in any option that has lapsed are disregarded. The Company has complied with these limits at all times. At 31 December 2008, the Company had 2.41 percent of share capital available under the 5 percent in ﬁ ve years limit applicable to discretionary share incentive schemes and 6.29 percent of share capital available under the 10 percent in 10 years limit applicable to all share incentive schemes. The issued share capital ﬁ gure used for this calculation has not been reduced to reﬂ ect shares bought back into treasury by the Company. Subsidiaries’ share incentive schemes The Company’s separately-listed subsidiaries, Nedbank Group Limited and Mutual & Federal Insurance Company Limited, have their own share incentive schemes, which are under the control of the Remuneration Committees of their respective boards and are not further addressed in this Report. None of the past or present executive directors of the Company has any interest under any such subsidiary share incentive schemes. Page 130 Old Mutual plc Annual Report and Accounts 2008 Directors’ interests under employee share plans The following options and rights over shares in the Company were outstanding at 1 January and 31 December 2008 in favour of the executive directors under the employee share schemes described in the ‘Employee share plans’ section above. Those granted during 2008 are highlighted in bold and those vested, released or exercised during 2008 are shown in italics: Award type and plan Performance targets to be met Grant date At 1 Jan 08 Granted Exercised/ released/ lapsed At 31 Dec 08 Exercise price per share p No 10 Nov 08 – 1,315,789 – 1,315,7891 57.00 Vested 26 Feb 03 Vested 3 Mar 04 Yes 26 Apr 05 Yes3 29 Mar 06 Yes4 30 Mar 07 Yes4 3 Apr 08 645,4062 661,418 304,348 239,295 307,504 – – – – – – 426,1375 – – – – – – 645,406 661,418 304,348 239,295 307,504 426,137 86.25 95.25 126.5 198.5 162.6 123.2 Share Exercised or released or price at Gain made from which on date date of exercisable of exercise exercise/ release p or release £ or releasable Expiry or vesting date – – – – – – – – 10 Nov 11 10 Nov 14 – 26 Feb 06 26 Feb 09 – 3 Mar 07 3 Mar 10 – 26 Apr 08 26 Apr 11 – 29 Mar 09 29 Mar 12 – 30 Mar 10 30 Mar 13 3 Apr 14 – 3 Apr 11 2,157,971 426,137 – 2,584,108 Yes 27 Apr 05 Yes3 29 Mar 06 Yes4 30 Mar 07 Yes4 3 Apr 08 173,538 118,976 143,766 – – – – 186,6617 173,5386 – – – – 118,976 143,766 186,661 436,280 186,661 173,538 449,403 Yes 27 Apr 05 No 29 Mar 06 No 30 Mar 07 No 3 Apr 08 109,520 75,578 90,812 – – – – 93,1045 109,5206 – – – – 75,578 90,812 93,104 – – – – – – – – 120.55 – – – 209,200 9 May 08 – – 29 Mar 09 29 Mar 09 – 30 Mar 10 30 Mar 10 3 Apr 11 – 3 Apr 11 209,200 120.55 – – – 132,026 9 May 08 – – 29 Mar 09 29 Mar 09 – 30 Mar 10 30 Mar 10 3 Apr 11 – 3 Apr 11 275,910 93,104 109,520 259,494 132,026 No 27 May 05 9,199 9,199 – – 9,1998 9,199 – – 1039 – – – – i l e c n s a a n c r n e a v o n G F i Mr P Broadley Option (SRP) Mr J Roberts Option (SOP) Total Match (RSP) Total DSTI (RSP) Total Option (Sharesave) Total 1 Options under the SRP granted on 10 November 2008 were based on the closing middle market price of the Company’s shares on the London Stock Exchange on 9 November 2008, namely 57p. 2 Unexercised options granted on 26 February 2003 expired on 26 February 2009, six years after the date of grant. 3 As a result of the EEV EPS-based (converted to MCEV EPS) performance targets not being met, the options and bonus-matching restricted share awards granted on 29 March 2006 lapsed on 4 March 2009. 4 Subject to the fulﬁ lment of performance targets prescribed by the Committee, under which options and bonus-matching restricted shares granted in 2007 and 2008 are subject to a sterling-denominated EPS performance target requiring growth in IFRS EPS to exceed growth in UK RPI by at least 9 percent over the three-year vesting period. 5 Options under the SOP and the deferred STI RSP awards granted on 3 April 2008 were based on the closing middle-market price of the Company’s shares on the London Stock Exchange on 2 April 2008, namely 123.2p. The award under the SOP granted to Mr Roberts was over shares with a market value equal to 100 percent of his base salary at the time of grant. 6 On 9 May 2008, 283,058 shares were released to Mr Roberts under the 2005 deferred STI and bonus-matching restricted shares awards originally granted in 2005. Mr Roberts retained all 283,058 shares. 7 The number of shares awarded under the RSP bonus match on 3 April 2008 was calculated by reference to a price of 122.89p per share, being the price at which the matching shares were acquired by the Old Mutual plc Employee Share Trust. 8 Mr Roberts’ Sharesave option lapsed on 31 December 2008 as a result of not being exercised within six months of the maturity date. 9 The Sharesave option price was determined as 20 percent below the average of the Company’s share price between 5 and 9 May 2005. The Company’s share price at the date of grant (27 May 2005) was 120p. The directors in ofﬁ ce at 31 December 2008 did not make any gains on the exercise of share options during 2008 (2007: £789,534, including the exercise of options under the SOP and Sharesave by Mr J Sutcliffe). Page 131 REMUNERATION REPORT continued Under the employee share schemes described in the ‘Employee share plans’ section above, the former executive directors under notice at 31 December 2008 had the following options and rights over shares in the Company outstanding at 1 January 2008 and at 31 December 2008. Options and rights granted during 2008 are highlighted in bold and those vested, released, forfeited or exercised during 2008 are shown in italics: Award type and plan Performance targets to be met Grant date At 1 Jan 08 Granted Exercised/ released/ lapsed At 31 Dec 08 Exercise price per share p Yes 30 Mar 07 1,183,888 – Yes 3 Apr 08 – 1,183,8881 426,1372 426,1371 1,183,888 426,137 1,610,025 162.6 123.2 – – – Yes3 30 Mar 07 Yes3 3 Apr 08 182,542 – – 184,4044 182,542 184,404 – – – 182,542 184,404 366,946 No 30 Mar 07 No 3 Apr 08 876,384 – – 876,3845 91,9785 91,9782 876,384 91,978 968,362 – – – – – – – – Share Exercised or released or price at Gain made from which on date date of exercise/ exercisable of exercise release p or release £ or releasable Expiry or vesting date – – – – – – – – – – – 30 Mar 10 – 3 Apr 11 5 Nov 09 5 Nov 09 52.75 52.75 202,037 1 Dec 08 10,688 1 Dec 08 – – 212,725 Vested 26 Feb 03 1,124,639 944,882 Vested 3 Mar 04 434,783 Vested 26 Apr 05 Yes6 29 Mar 06 352,645 Yes3 30 Mar 07 904,060 Yes3 3 Apr 08 – 1,124,639 – – – 944,882 – – 434,783 – – 352,645 904,060 – – – 1,298,702 – 1,298,7022 86.25 95.25 126.5 198.5 162.6 123.2 97.11 – – – – – 122,136 26 Feb 03 – 3 Mar 07 – 26 Apr 08 – 29 Mar 09 – 30 Mar 10 – 3 Apr 11 – 3 Mar 10 8 Sep 10 – 8 Sep 09 8 Sep 09 3,761,009 1,298,702 1,124,639 3,935,072 122,136 Yes 27 Apr 05 Yes6 29 Mar 06 Yes3 30 Mar 07 Yes3 3 Apr 08 315,933 211,003 221,372 – – 315,9337 – – – – – 270,1334 – 211,003 221,372 270,133 748,308 270,133 315,933 702,508 Yes 27 Apr 05 No 29 Mar 06 No 30 Mar 07 No 3 Apr 08 159,508 107,230 111,877 – – 159,5087 – – – – – 134,7382 – 107,230 111,877 134,738 – – – – – – – – 120.35 – – – 380,239 9 May 08 – – 29 Mar 09 29 Mar 09 8 Sep 09 – 30 Mar 10 8 Sep 09 – 3 Apr 11 380,239 120.35 – – – 191,975 9 May 08 – – 29 Mar 09 29 Mar 09 8 Sep 09 – 30 Mar 10 8 Sep 09 – 3 Apr 11 378,615 134,738 159,508 353,845 191,975 No 4 Apr 07 12,500 12,500 – – – – 12,500 1318 – – 1 June 12 8 Sep 09 12,500 1Forfeited by Mr Nicholls as a result of his giving notice to the Company. 2 Options under the SOP and the deferred STI RSP awards granted on 3 April 2008 were based on the closing middle-market price of the Company’s shares on the London Stock Exchange on 2 April 2008, namely 123.2p. The award under the SOP granted to Mr Nicholls was over shares with a market value equal to 100 percent of his base salary at the time of grant and the award under the SOP granted to Mr Sutcliffe was over shares with a market value equal to 200 percent of his base salary at the time of grant. 3 Subject to the fulﬁ lment of performance targets prescribed by the Committee, under which options and restricted shares granted in 2007 and 2008 are subject to a sterling- denominated EPS performance target requiring growth in IFRS EPS to exceed growth in UK RPI by at least 9 percent over the three-year vesting period. 4 The number of shares awarded under the RSP bonus match on 3 April 2008 was calculated by reference to a price of 122.89p per share, being the price at which the matching shares were acquired by the Old Mutual plc Employee Share Trust. 5 In respect of the award granted in 2007, 383,008 shares were released and 493,376 shares were forfeited and in respect of the award granted in 2008, 20,262 shares were released and 71,716 shares were forfeited. 6 As a result of the EEV EPS-based (converted to MCEV EPS) performance targets not being met, the options and bonus-matching restricted share awards granted on 29 March 2006 lapsed on 4 March 2009. 7 On 9 May 2008, Mr Sutcliffe received a release of 475,441 shares held under the deferred short-term incentive and bonus-matching restricted share awards originally granted in 2005. Mr Sutcliffe sold 195,696 of these shares and retained 279,745 shares. 8 The Sharesave option price was determined as 20 percent below the average of the Company’s share price between 13 and 15 March 2007. The Company’s share price at the date of grant (4 April 2007) was 166.5p. Page 132 Old Mutual plc Annual Report and Accounts 2008 Mr J Nicholls Option (SOP) Total Match (RSP) Total Joining DSTI (RSP) Total Mr J Sutcliffe Option (SOP) Total Match (RSP) Total DSTI (RSP) Total Option (Sharesave) Total Treatment of share incentive awards – Mr J Nicholls (former Group Finance Director) > Mr Nicholls’ notice period will expire on 5 November 2009, or such earlier date as the parties may agree > All share options held by Mr Nicholls were forfeited during 2008 > Bonus-matching restricted share awards that vest during the period of notice will vest as normal. If unvested at the end of the notice period, the awards will be forfeited. Treatment of share incentive awards – Mr J Sutcliffe (former Group Chief Executive) > Mr Sutcliffe’s notice period will expire on 8 September 2009, or such earlier date as the parties may agree > Options that have already vested are exercisable at any time until 12 months after the end of the notice period, or until the expiry date of the option, whichever is sooner. Options that have not yet vested, but vest before the end of the notice period, will be exercisable for a period of 12 months from the end of the notice period or until the expiry date of the option, whichever is sooner. Options unvested at the end of the notice period will be forfeited. The 2006 share option award lapsed on 4 March 2009 due to the EPS-based performance target not being met > Bonus-matching restricted share awards that vest during the period of notice will vest as normal. If unvested at the end of the notice period, the awards will be forfeited. The 2006 bonus-matching award lapsed on 4 March 2009 due to the EPS-based performance target not being met > Deferred short-term incentive restricted share awards granted in 2006 will vest to Mr Sutcliffe on 30 March 2009. Deferred short-term incentive restricted share awards granted in 2007 and 2008 (for performance years 2006 and 2007) will vest to Mr Sutcliffe at the end of the notice period on a time pro-rated basis between the date of grant and the end of the notice period. Company share price performance The market price of the Company’s shares was 55p at 31 December 2008 and ranged from a low of 39p to a high of 169.3p during 2008. Executive directors’ shareholding requirements The Committee has established guidelines on shareholdings by executive directors of the Company. Under these, the Group Chief Executive is expected to build up a holding of shares in the Company equal in value to at least 150 percent of annual base salary within ﬁ ve years of appointment; the equivalent ﬁ gure for other executive directors is 100 percent of annual base salary. For the purposes of the calculations, unvested restricted share awards are excluded. The following table shows Old Mutual plc shares held by executive directors at 31 December 2008 (including holdings by connected persons) compared to the shareholding requirements prescribed by these guidelines. Mr J Roberts2 Mr P Broadley Minimum number of shares required to be held1 Personal shares held at 31 December 2008 Date by which holding must be achieved 2,263,636 1,000,000 1,089,604 – September 2013 November 2013 1The minimum number of shares required to be held has been calculated using the market price of Old Mutual plc shares on 31 December 2008, namely 55p. 2 The date by which Mr Roberts is required to meet the holding requirement has been extended to take account of his promotion to Group Chief Executive. Mr Roberts had met his obligations in this respect prior to his promotion and increase in salary. Current exposure The current exposure of the executive directors to the Company’s share price is shown in the table below. This includes shares owned outright (including holdings by connected persons) as well as restricted share awards that are not subject to performance targets, but excludes vested and unvested share options (as these were all underwater at 31 December 2008) and restricted share awards that are subject to performance targets, although Mr Roberts and Mr Broadley have further exposure to the Company’s share price in this respect. Mr J Roberts Mr P Broadley Total restricted shares held Total value (not subject to performance of personal targets) shares £ Personal shares held Total value of restricted shares £ Total exposure as a percentage exposure £ of base salary Total 1,089,604 – 599,282 – 259,494 – 142,722 – 742,004 – 93% 0% The Board has considered whether to adopt a shareholding requirement for non-executive directors, but does not consider this to be appropriate. Page 133 i l e c n s a a n c r n e a v o n G F i REMUNERATION REPORT continued Terms of engagement – Chairman and non-executive directors Mr C Collins entered into an engagement letter with the Company in January 2005 setting out the terms applicable to his role as Chairman from May 2005. Under these terms, subject to: (a) 12 months’ notice at any time given by either the Company or Mr Collins, (b) his being duly re-elected at any intervening Annual General Meetings, and (c) the provisions of the Company’s Articles of Association relating to the removal of directors, Mr Collins’ appointment may continue until his 70th birthday (19 January 2010), although he has indicated that he currently intends to retire at the end of 2009. The other seven non-executive directors are engaged on terms that may be terminated by either side without notice. However, it is envisaged that they will remain in place on a three-year cycle, in order to provide assurance to both the Company and the non-executive director concerned that the appointment is likely to continue. The renewal of non-executive directors’ terms for successive three-year cycles is not automatic, with the continued suitability of each non-executive director being assessed by the Nomination Committee. In the absence of exceptional circumstances, the Board has determined that non-executive directors’ engagements will be terminated at the end of their third three-year cycle. The original dates of appointment and the dates when the current appointments of the non-executive directors are due to terminate are as follows: Mr N Andrews Mr R Bogni Mr R Edey Mr R Khoza Mr B Nqwababa Mr L Otterbeck Mr R Pym Date of original appointment 1 June 2002 1 Feb 2002 24 June 2004 27 Jan 2006 1 April 2007 14 Nov 2006 1 Sep 2007 Date of current appointment 1 June 2008 1 Feb 2008 24 June 2007 27 Jan 2009 1 April 2007 14 Nov 2006 1 Sep 2007 Current term as director 3rd 3rd 2nd 2nd 1st 1st 1st Date current appointment terminates 1 June 2011 1 Feb 2011 24 June 2010 27 Jan 2012 1 April 2010 14 Nov 2009 1 Sep 2010 Mr N Broadhurst retired from the Board (and also ceased to be Chairman of the Group Audit and Risk Committee and a member of the Remuneration and Nomination Committees) at the end of the AGM on 8 May 2008. No compensation was paid to him in connection with his retirement. Remuneration – Chairman and non-executive directors The Company’s policy on remuneration for non-executive directors is that this should be: > Fee-based > Market-related (having regard to fees paid and time commitments of non-executive directors of other members of the FTSE 100 Index) > Not linked to share price or Company performance. The annual fees for the Chairman and for other non-executive roles for both 2008 and 2009 are set out in the table below. The Chairman and non-executive directors elected not to receive any increase in their annual fees for 2009. Chairman Non-executive directors > Base fee Senior Independent Director > Additional fee Additional fees payable for Committees Group Audit and Risk Committee > Chairman > Member Remuneration Committee > Chairman > Member £ 300,000 55,000 3,000 30,000 10,000 12,000 4,000 None of the non-executive directors of the Company (including the Chairman) contributed to any Group pension fund during 2008 or had any accrued pension fund beneﬁ ts in any Group pension fund at 31 December 2008. Shareholder approval of the Remuneration Report An advisory vote on the Remuneration Report will be put to shareholders at the AGM on 7 May 2009 in accordance with the Directors’ Remuneration Report Regulations 2002. Rudi Bogni Chairman of the Remuneration Committee, On behalf of the Board 4 March 2009 Page 134 Old Mutual plc Annual Report and Accounts 2008 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The directors are responsible for preparing the Annual Report and the group and Parent Company ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and Parent Company ﬁ nancial statements for each ﬁ nancial year. Under that law they are required to prepare the group ﬁ nancial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company ﬁ nancial statements on the same basis. The group and Parent Company ﬁ nancial statements are required by law and IFRSs as adopted by the EU to present fairly the ﬁ nancial position of the group and the Parent Company and the performance for that period; the Companies Act 1985 provides in relation to such ﬁ nancial statements that references in the relevant part of that Act to ﬁ nancial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the group and Parent Company ﬁ nancial statements, the directors are required to: > select suitable accounting policies and then apply them consistently > make judgments and estimates that are reasonable and prudent > state whether they have been prepared in accordance with IFRSs as adopted by the EU and > prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the ﬁ nancial position of the Parent Company and enable them to ensure that its ﬁ nancial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and ﬁ nancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions The directors conﬁ rm that to the best of their knowledge: > The ﬁ nancial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, ﬁ nancial position and proﬁ t or loss of the company and the undertakings included in the consolidation taken as a whole; and > The directors’ report includes a fair review of the development and performance of the business and the position of Old Mutual plc and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Julian Roberts Group Chief Executive Philip Broadley Group Finance Director 4 March 2009 Page 135 i l s a c n a n F i INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF OLD MUTUAL PLC For the year ended 31 December 2008 We have audited the group and Parent Company ﬁ nancial statements (the “ﬁ nancial statements”) of Old Mutual plc for the year ended 31 December 2008 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity, and the related notes. These ﬁ nancial statements have been prepared under the accounting policies set out therein. We have audited the reconciliation of adjusted operating proﬁ t to proﬁ t after tax which has been prepared on the basis as set out on page 138. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the ﬁ nancial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 135. Our responsibility is to audit the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the ﬁ nancial statements give a true and fair view and whether the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group ﬁ nancial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the ﬁ nancial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information speciﬁ ed by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reﬂ ects the Company’s compliance with the nine provisions of the 2006 Combined Code speciﬁ ed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited ﬁ nancial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁ nancial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the signiﬁ cant estimates and judgments made by the directors in the preparation of the ﬁ nancial statements, and of whether the accounting policies are appropriate to the Group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁ cient evidence to give reasonable assurance that the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: > the Group ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2008 and of its proﬁ t for the year then ended; > the Parent Company ﬁ nancial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2008; > the ﬁ nancial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group ﬁ nancial statements, Article 4 of the IAS Regulation; and > the information given in the Directors’ Report is consistent with the ﬁ nancial statements. KPMG Audit Plc Chartered Accountants Registered Auditor 8 Salisbury Square London EC4Y 8BB 4 March 2009 Page 136 Old Mutual plc Annual Report and Accounts 2008 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2008 Revenue Gross earned premiums Outward reinsurance Net earned premiums Investment return (non-banking) Banking interest and similar income Banking trading, investment and similar income Fee and commission income, and income from service activities Other income Total revenues Expenses Claims and beneﬁ ts (including change in insurance contract provisions) Reinsurance recoveries Net claims and beneﬁ ts incurred Change in investment contract liabilities Losses on loans and advances Finance costs Banking interest payable and similar expenses Fee and commission expenses, and other acquisition costs Other operating and administrative expenses Goodwill impairment Change in third party interest in consolidated funds Amortisation of PVIF and other acquired intangibles Total expenses Share of associated undertakings’ loss after tax Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Proﬁ t before tax Income tax credit/(expense) Proﬁ t after tax for the ﬁ nancial year Proﬁ t for the ﬁ nancial year attributable to: Equity holders of the parent Minority interests Ordinary shares Preferred securities Proﬁ t after tax for the ﬁ nancial year Earnings per share Basic earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) Weighted average number of shares – millions *2007 results have been restated to include Mutual & Federal as a continuing operation. Year ended Year ended 31 December Restated* £m 31 December £m Notes 2008 2007 3(iii) 8 9 10 11 47 12 13 14 15 4(ii) 4(ii) 21(ii) 4(iii) 5(i) 6(i) 6(ii) 7(i) 7(i) 5,156 (335) 4,821 (11,578) 4,059 162 2,313 270 (3,610) 262 (3,348) 10,051 (319) 392 (2,853) (937) (2,834) (74) 779 (361) 5,566 (293) 5,273 6,318 3,190 170 2,475 245 17,671 (7,193) 236 (6,957) (2,618) (157) (50) (2,053) (778) (2,813) (3) (156) (360) 496 (15,945) (1) 53 (1) 25 595 88 683 441 188 54 683 8.6 8.1 1,750 (504) 1,246 972 224 50 1,246 19.2 18.1 4,755 4,894 Page 137 i l s a c n a n F i RECONCILIATION OF ADJUSTED OPERATING PROFIT TO PROFIT AFTER TAX For the year ended 31 December 2008 Reconciliation of adjusted operating proﬁ t to proﬁ t after tax Europe South Africa United States Other Finance costs Other shareholders’ expenses Adjusted operating proﬁ t2 before tax Adjusting items Proﬁ t for the ﬁ nancial year before tax (excluding policyholder tax) Income tax attributable to policyholder returns Proﬁ t for the ﬁ nancial year before tax Total income tax expense Proﬁ t after tax for the ﬁ nancial year Adjusted operating proﬁ t after tax attributable to ordinary equity holders Adjusted operating proﬁ t2 before tax Tax on adjusted operating proﬁ t Adjusted operating proﬁ t2 after tax Minority interest – ordinary shares Minority interest – preferred securities Adjusted operating proﬁ t2 after tax attributable to ordinary equity holders Adjusted weighted average number of shares – (millions) Adjusted operating earnings per share3 – (pence) Year ended Year ended 31 December Restated* £m 31 December £m Notes 2008 2007 3(ii) 3(ii) 3(ii) 3(ii) 4(i) 3(ii) 5(i) 266 1,191 (270) (17) 1,170 (140) (31) 999 (168) 831 (236) 595 88 683 268 1,254 260 2 1,784 (119) (41) 1,624 66 1,690 60 1,750 (504) 1,246 Year ended Year ended 31 December Restated* £m 31 December £m Notes 2008 2007 5(iii) 6(iii) 6(ii) 7(i) 7(ii) 999 (86) 913 (218) (54) 641 1,624 (418) 1,206 (242) (50) 914 5,230 5,411 12.2 16.9 Basis of preparation 1 The reconciliation of adjusted operating proﬁ t has been prepared so as to reﬂ ect the Directors’ view of the underlying long-term performance of the Group. The statement reconciles adjusted operating proﬁ t to proﬁ t after tax as reported under IFRS as adopted by the EU. 2 For long-term business and general insurance businesses, adjusted operating proﬁ t 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 deﬁ ned as minority interests in accordance with IFRS. For all businesses, adjusted operating proﬁ t 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, proﬁ t/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value proﬁ ts/(losses) on certain Group debt movements. 3 Adjusted operating earnings per ordinary share is calculated on the same basis as adjusted operating proﬁ t. It is stated after tax attributable to adjusted operating proﬁ t and minority 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. *2007 results have been restated to include Mutual & Federal as a continuing operation. Page 138 Old Mutual plc Annual Report and Accounts 2008 CONSOLIDATED BALANCE SHEET At 31 December 2008 Assets Goodwill and other intangible assets Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investments in associated undertakings and joint ventures Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities Reinsurers’ share of general insurance liabilities Deposits held with reinsurers Loans and advances Investments and securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale Total assets Liabilities Long-term business policyholder liabilities General insurance liabilities Third party interests in consolidated funds Borrowed funds Provisions Deferred revenue Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositors Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale Total liabilities Net assets Shareholders’ equity Equity attributable to equity holders of the parent Minority interests Ordinary shares Preferred securities Total minority interests Total equity At At 31 December 31 December £m £m Notes 2008 2007 16 17 18 20 21 22 23 23 23 24 25 26 27 32 23 23 33 34 35 20 36 37 27 32 5,882 734 682 1,478 1,590 111 3,199 1,148 115 164 35,745 83,522 118 220 3,137 4,633 2,862 7 5,459 615 608 1,479 683 81 2,253 1,394 – 213 30,687 89,627 83 165 2,774 1,527 3,469 1,623 145,347 142,740 81,269 344 2,591 2,295 477 598 1,452 219 3,733 220 38,171 4,395 6 84,251 – 3,547 2,353 499 462 1,413 320 6,180 165 31,817 1,716 420 135,770 133,143 9,577 9,597 7,737 7,961 39(i) 39(ii) 1,147 693 933 703 1,840 1,636 9,577 9,597 The consolidated ﬁ nancial statements on pages 111 to 240 were approved by the Board of Directors on 4 March 2009. Julian Roberts Group Chief Executive Philip Broadley Group Finance Director Page 139 l i s a c n a n F i CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2008 Year ended Year ended 31 December 31 December £m £m Cash ﬂ ows from operating activities Proﬁ t before tax Capital losses/(gains) included in investment income Loss on disposal of property, plant and equipment Depreciation of property, plant and equipment Amortisation and impairment of goodwill and other intangible assets Impairment of loans and receivables Share-based payment expense Share of associated undertakings’ loss after tax Proﬁ t arising on disposal of subsidiaries, associated undertakings and strategic investments Other non-cash amounts in proﬁ t Non-cash movements in proﬁ t before tax Reinsurers’ share of long-term business policyholder liabilities Reinsurers’ share of general insurance liabilities Deferred acquisition costs Loans and advances Insurance liabilities Investment contracts Amounts owed to bank depositors Other operating assets and liabilities Changes in working capital Taxation paid 2008 2007 595 14,183 3 74 504 320 21 1 (53) (397) 14,656 486 (49) (370) (5,206) 282 (10,260) 6,110 (4,242) (13,249) (458) 1,750 (1,836) 4 73 403 183 15 (1) (25) 29 (1,155) (53) – (482) (5,339) 1,962 4,124 4,647 (491) 4,368 (563) Net cash inﬂ ow from operating activities 1,544 4,400 Cash ﬂ ows from investing activities Net acquisitions of ﬁ nancial investments Net acquisition of investment properties Net acquisition of property, plant and equipment Net acquisition of intangible assets Acquisition of interests in subsidiaries Disposal of interests in subsidiaries, associated undertakings and strategic investments Net cash outﬂ ow from investing activities Cash ﬂ ows from ﬁ nancing activities Dividends paid to: Equity holders of the Company Equity minority interests and preferred security interests Interest paid (excluding banking interest paid) Proceeds from issue of ordinary shares (including by subsidiaries to minority interests) Net sale of treasury shares Shares repurchased in buyback programme Net receipts from unclaimed shares trust Issue of subordinated and other debt Other debt repaid Net cash outﬂ ow from ﬁ nancing activities Page 140 Old Mutual plc Annual Report and Accounts 2008 (1,170) (7) (110) (18) (93) 1,138 (3,896) (26) (186) (67) (278) 106 (260) (4,347) (352) (208) (87) 31 5 (175) – 374 (225) (637) (333) (205) (83) 70 149 (177) 95 699 (356) (141) Year ended Year ended 31 December 31 December £m £m Net increase/(decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Consisting of: Coins and bank notes Money at call and short notice Balances with Central Banks (other than mandatory reserve deposits) Cash and cash equivalents from non-current assets held-for-sale Cash and cash equivalents Mandatory reserve deposits with Central Banks Short-term cash balances held in policyholder funds Cash and cash equivalents subject to consolidation of funds Total Other supplementary cash ﬂ ow disclosures Interest income received (including banking interest) Dividend income received Interest paid (including banking interest) 2008 2007 647 399 3,596 (88) 50 3,634 4,642 3,596 221 2,453 188 – 2,862 734 2,043 (997) 211 3,169 121 (32) 3,469 615 808 (1,296) 4,642 3,596 5,370 493 3,064 4,858 388 2,130 Cash ﬂ ows presented in this statement include all cash ﬂ ows relating to policyholders’ funds for the long-term business. Cash and cash equivalents subject to consolidation of funds are not included in the cash ﬂ ow as they relate to the minority holding in the funds. Management do not consider that there are material amounts of cash and cash equivalents which are not available for use by the Group. Mandatory reserve deposits with Central Banks are included in cash and cash equivalents for the purposes of the cash ﬂ ow statement in line with market practice in South Africa. Page 141 i l s a c n a n F i CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2008 Year ended 31 December 2008 Equity holders’ funds at beginning of the year Changes in equity arising in the year Fair value gains/(losses): Property revaluation Net investment hedge Available for sale investments: Fair value losses Recycled to the income statement Shadow accounting Currency translation differences/exchange differences on translating foreign operations Other movements Aggregate tax effect of items taken directly to or transferred from equity Net income recognised directly in equity Proﬁ t after tax for the ﬁ nancial year Total recognised income and expense for the year Dividends for the year Net sale of treasury shares Shares repurchased in the buyback programme Issue of ordinary share capital by the Company Change in participation in subsidiaries Exercise of share options Fair value of equity settled share options Number Attributable to equity holders of the parent £m of shares issued and fully paid Millions Notes Total minority interest Total equity £m £m 5,510 7,961 1,636 9,597 – – – – – – – – – – – – – – – – 6 – 16 281 (1,635) 414 26 419 (23) 366 (136) 441 305 (395) 5 (175) 5 – 5 26 – – – – – 10 91 – 101 242 343 (165) – – – 26 – – 16 281 (1,635) 414 26 429 68 366 (35) 683 648 (560) 5 (175) 5 26 5 26 42 Equity holders’ funds at end of the year 5,516 7,737 1,840 9,577 Page 142 Old Mutual plc Annual Report and Accounts 2008 Year ended 31 December 2008 Notes Share capital £m Share premium £m Other reserves £m Translation reserve £m Retained earnings £m Perpetual preferred callable securities £m Total £m Attributable to equity holders of the parent at beginning of the year Changes in equity arising in the year: Fair value gains/(losses): Property revaluation Net investment hedge Available for sale investments: Fair value losses Recycled to income statement Shadow accounting Currency translation differences/exchange differences on translating foreign operations Other movements Aggregate tax effect of items taken directly to or transferred from equity Net income recognised directly in equity Proﬁ t for the ﬁ nancial year attributable to equity holders of the parent Total recognised income and expense for the year Dividends for the year Net sale of treasury shares Shares repurchased in the buyback programme Issue of ordinary share capital by the Company Exercise of share options Fair value of equity settled share options 42 Attributable to equity holders of the parent at end of the year 551 757 2,908 (304) 3,361 688 7,961 – – – – – – – – – – – – – – – 1 – – – – – – – – – – – – – – – 5 4 – 16 – (1,635) 414 26 – 8 367 (804) – 281 – – – 419 3 (13) 690 – – – – – – (34) – (34) – – 410 (804) – – – – – 26 690 – – – – – – 376 (352) 5 (175) – – – – – – – – – – 12 12 31 43 (43) – – – – – 16 281 (1,635) 414 26 419 (23) 366 (136) 441 305 (395) 5 (175) 5 5 26 552 766 2,130 386 3,215 688 7,737 Other reserves Merger reserve Available for sale reserve Property revaluation reserve Share-based payments reserve Other reserves Attributable to equity holders of the parent at end of the year At 31 December £m 2008 2,716 (844) 85 171 2 2,130 Retained earnings were reduced by £280 million at 31 December 2008 in respect of own shares held in policyholders’ funds, ESOP trusts, Black Economic Empowerment trusts and other related undertakings. Included within other reserves is the merger reserve for the additional share consideration made in respect of the Skandia acquisition, being the difference between the market value of the shares on the date of issue and the nominal value included as share capital. Page 143 i l s a c n a n F i CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2008 continued Year ended 31 December 2007 Equity holders’ funds at beginning of the year Changes in equity arising in the year: Fair value gains/(losses): Property revaluation Net investment hedge Available for sale investments: Fair value losses Recycled to the income statement Shadow accounting Currency translation differences/exchange differences on translating foreign operations Other movements Aggregate tax effect of items taken directly to or transferred from equity Net income recognised directly in equity Proﬁ t after tax for the ﬁ nancial year Total recognised income and expense for the year Dividends for the year Net sale of treasury shares Shares repurchased in the buyback programme Issue of ordinary share capital by the Company Change in participation in subsidiaries Exercise of share options Fair value of equity settled share options Number of shares issued and fully paid Millions Attributable to equity holders of Total minority interest the parent £m £m Notes Total equity £m 5,501 7,237 1,526 8,763 – – – – – – – – – – – – – – – – 9 – 95 (13) (197) 36 25 129 (4) 34 105 972 1,077 (373) 149 (177) 3 – 9 36 1 – – – – 4 – – 5 274 279 (165) – – – (4) – – 96 (13) (197) 36 25 133 (4) 34 110 1,246 1,356 (538) 149 (177) 3 (4) 9 36 42 Equity holders’ funds at end of the year 5,510 7,961 1,636 9,597 Page 144 Old Mutual plc Annual Report and Accounts 2008 Year ended 31 December 2007 Notes Attributable to equity holders of the parent at beginning of the year Changes in equity arising in the year: Fair value gains/(losses): Property revaluation Net investment hedge Available for sale investments: Fair value losses Recycled to income statement Shadow accounting Currency translation differences/exchange differences on translating foreign operations Other movements Aggregate tax effect of items taken directly to or transferred from equity Net income recognised directly in equity Proﬁ t for the ﬁ nancial year attributable to equity holders of the parent Total recognised income and expense for the year Dividends for the year Net sale of treasury shares Shares repurchased in the buyback programme Issue of ordinary share capital by the Company Exercise of share options Fair value of equity settled share options 42 Attributable to equity holders of the parent at end of the year Share capital £m Share premium £m Other reserves £m Translation reserve £m Retained earnings £m Perpetual preferred callable securities £m Total £m 550 746 2,901 (421) 2,773 688 7,237 – – – – – – – – – – – – – – – 1 – – – – – – – – – – – – – – – 3 8 – 95 – (197) 36 25 – (10) 22 (29) – (29) – – – – – 36 – (13) – – – 129 (2) 3 117 – – – – – – 8 – 8 – – – – – – – 9 9 – 941 31 117 – – – – – – 949 (333) 149 (177) – – – 40 (40) – – – – – 95 (13) (197) 36 25 129 (4) 34 105 972 1,077 (373) 149 (177) 3 9 36 551 757 2,908 (304) 3,361 688 7,961 Other reserves Merger reserve Available for sale reserve Property revaluation reserve Share-based payments reserve Attributable to equity holders of the parent at end of the year At 31 December £m 2007 2,716 (30) 75 147 2,908 Retained earnings were reduced by £588 million at 31 December 2007 in respect of own shares held in policyholders’ funds, ESOP trusts, Black Economic Empowerment trusts and other related undertakings. Included within other reserves is the merger reserve for the additional share consideration made in respect of the Skandia acquisition, being the difference between the market value of the shares on the date of issue and the nominal value included as share capital. Page 145 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 1 Accounting policies (a) Basis of preparation Statement of compliance Old Mutual plc (the Company) is a company incorporated in England and Wales. The Group ﬁ nancial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”) and equity account the Group’s interest in associates and jointly controlled entities (other than those held by long-term insurance funds). The Parent Company ﬁ nancial statements present information about the Company as a separate entity and not about the Group. Both the Parent Company ﬁ nancial statements and the Group ﬁ nancial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs and IFRICs”). On publishing the Parent Company ﬁ nancial statements here together with the Group ﬁ nancial statements, the Company is taking advantage of the exemption in section 230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved ﬁ nancial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated ﬁ nancial statements. The ﬁ nancial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative ﬁ nancial instruments, ﬁ nancial instruments classiﬁ ed as fair value through the income statement or as available for sale, owner- occupied property and investment property. Non-current assets and disposal groups held-for-sale are stated at the lower of the previous carrying amount and the fair value less costs to sell. The Parent Company ﬁ nancial statements are prepared in accordance with these accounting policies, other than for investments in subsidiary undertakings and associates, which are stated at cost less impairments see note 1e(xi), in accordance with IAS 27. The Company and Group ﬁ nancial statements have been prepared on the going concern basis which the directors believe to be appropriate having taken into consideration the points as set out in the Directors’ Report in the section headed Going concern. Judgments made by the directors in the applications of these accounting policies that have a signiﬁ cant effect on the ﬁ nancial statements and estimates with a signiﬁ cant risk of material adjustment in the next year are discussed in note 1(q). (b) Foreign currency translation (i) Foreign currency transactions The Group’s presentation currency is Pounds Sterling (£). The functional currency of the Group’s foreign operations is the currency of the primary economic environment in which these entities operate. The Parent Company functional currency is Pounds Sterling (£). Transactions in foreign currencies are converted into the relevant functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at rates of exchange ruling at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into the functional currency at foreign exchange rates ruling at the dates the fair values were determined. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are converted into the functional currency at the rate of exchange ruling at the date of the initial recognition of the asset and liability and are not subsequently retranslated. Exchange gains and losses on the translation and settlement during the period of foreign currency assets and liabilities are recognised in the income statement. Exchange differences for non-monetary items are recognised in equity when the changes in the fair value of the non-monetary item are recognised in equity, and in the income statement if the changes in fair value of the non-monetary item are recognised in the income statement. (ii) Foreign investments The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group’s presentation currency using the year-end exchange rates, and their income and expenses using the average exchange rates. Other than in respect of cumulative translation gains and losses up to 1 January 2004, unrealised gains or losses resulting from translation of functional currencies to the presentation currency are included as a separate component of shareholders’ equity. To the extent that these gains and losses are effectively hedged, the gains and losses arising on the hedging instruments are also included in that component of shareholders’ equity. Upon the disposal of subsidiaries the cumulative amount of exchange differences deferred in shareholders’ equity, net of attributable amounts in relation to net investments, is recognised in the income statement. Cumulative translation gains and losses up to 1 January 2004 were reset to zero. Page 146 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (c) Group accounting (i) Subsidiary undertakings and special purpose entities Subsidiary undertakings are those entities controlled by the Group. Subsidiary undertakings include special purpose entities created to accomplish a narrow, well-deﬁ ned objective, which may take the form of a corporation, trust, partnership or unincorporated entities, and where the substance of the relationship between the Group and the entity indicates that the entity is controlled by the Group. Control exists when the Company has the power, directly or indirectly, to govern the ﬁ nancial and operating policies of an entity so as to obtain beneﬁ ts from its activities. The Company considers the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it has control. Entities which the Company controls by virtue of the Company retaining the majority of risks or beneﬁ ts, are also included in the consolidated ﬁ nancial statements. The Group ﬁ nancial statements include the assets, liabilities and results of the Company and subsidiary undertakings. This includes consolidated special purpose entities and holdings in mutual funds. The results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal or control ceasing. The consolidated ﬁ nancial statements do not include the wholly owned company Livförsäkringsaktiebolaget Skandia (Skandia Liv) and its subsidiaries. Skandia Liv’s business is a mutual life assurance company that is highly regulated within a strict legal framework for mutual life assurance companies in Sweden, particularly in relation to its relationship with its holding company. The Group does not have the power to control Skandia Liv in such a way as to access the beneﬁ ts usually associated with share ownership due to the legal and regulatory restrictions. Those beneﬁ ts accrue to the policyholders of Skandia Liv. Consequently, Skandia Liv is not consolidated. The shares in Skandia Liv are accounted for in accordance with the accounting policies for equity ﬁ nancial instruments. Intra-group balances and transactions, and all proﬁ ts and losses arising from intra-group transactions, are eliminated in preparing the Group ﬁ nancial statements. Unrealised losses are not eliminated to the extent that they provide evidence of impairment. (ii) Associates and jointly controlled operations An associate is an entity, including an unincorporated entity such as a partnership, over which the Group has signiﬁ cant inﬂ uence but not control, through participation in the ﬁ nancial and operating policy decisions of the investee (and that is neither a subsidiary nor an investment in a joint venture). A jointly controlled operation is a joint venture operated through a corporation, partnership or other entity in which each venturer has an interest. A joint venture is a contractual arrangement, whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over the activity. Joint control exists when the strategic ﬁ nancial and operating decisions relating to the activity require unanimous consent of the parties sharing control. The results, assets and liabilities of associates and jointly controlled operations are incorporated in these ﬁ nancial statements using the equity method of accounting. The carrying amount of such investments is reduced to recognise any impairment in the value of individual investments. Where a Group enterprise transacts with an associate or jointly controlled operation of the Group, unrealised proﬁ ts and losses are eliminated to the extent of the Group’s interest in the relevant associate or jointly controlled operation. Unrealised losses are eliminated in the same way but only to the extent that there is no evidence of impairment. Investments in associates and jointly controlled operations, which are held with a view to subsequent resale are accounted for as non-current assets held-for-sale, and those held by policyholder long-term insurance funds are accounted for as ﬁ nancial assets fair valued through the income statement. Page 147 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (d) Insurance and investment contracts Long-term business (i) Classiﬁ cation of contracts Contracts sold as long-term business (with the exception of unit-linked assurance contracts) are categorised into insurance contracts, contracts with a discretionary participation feature or investment contracts in accordance with the classiﬁ cation criteria set out in the following paragraphs. For the Group’s unit-linked assurance business, contracts are separated into an insurance component and an investment component (known as ‘unbundling’), and each unbundled component is accounted for separately in accordance with the accounting policy for that component. Contracts under which the transfer of insurance risk to the Group from the policyholder is not signiﬁ cant are classiﬁ ed as investment contracts. Contracts under which the Group accepts signiﬁ cant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneﬁ ciary if a speciﬁ ed uncertain future event (the insured event) adversely affects the policyholder are classiﬁ ed as insurance contracts. Insurance risk is risk other than ﬁ nancial risk. Financial risk is the risk of a possible future change in one or more of a speciﬁ ed interest rate, security price, security index, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or other variable, provided in the case of a non-ﬁ nancial variable that the variable is not speciﬁ c to a party to the contract. Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. These additional payments, the amount or timing of which is at the Group’s discretion, represent a signiﬁ cant portion of the total contractual payments and are contractually based on (1) the performance of a speciﬁ ed pool of contracts or a speciﬁ ed type of contract, (2) realised and/or unrealised investment returns on a speciﬁ ed pool of assets held by the Group or (3) the proﬁ t or loss of the Group. Investment contracts with discretionary participating features are accounted for in the same manner as insurance contracts. (ii) Premiums on long-term insurance Premiums and annuity considerations receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums in respect of linked insurance contracts are recognised when the liability is established. Premiums in respect of other insurance contracts and investment contracts with a discretionary participation feature are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Amounts received under investment contracts other than those with a discretionary participating feature are recorded as deposits and credited directly to investment contract liabilities. (iii) Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as revenue as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management service contracts in our asset management businesses are also recognised on this basis. (iv) Claims paid on long-term insurance Claims paid under insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notiﬁ ed. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. Page 148 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (d) Insurance and investment contracts continued Long-term business continued (v) Insurance contract provisions Insurance contract provisions for African businesses have been computed using a gross premium valuation method. Provisions in respect of African business have been made in accordance with the Financial Soundness Valuation basis as set out in the guidelines issued by the Actuarial Society of South Africa in Professional Guidance Note (PGN) 104 (2001). Under this guideline, provisions are valued using realistic expectations of future experience, with margins for prudence and deferral of proﬁ t emergence. Provisions for investment contracts with a discretionary participating feature are also computed using the gross premium valuation method in accordance with the Financial Soundness Valuation basis. Surplus allocated to policyholders but not yet distributed (i.e. bonus smoothing reserve) related to these contracts is included as a provision. For the US business, the insurance contract provisions are calculated using the net premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. For the term life products, the assumptions are set at the time the contracts are issued, whereas the assumptions are updated annually, based on experience for the annuity products. Universal life and deferred annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Reserves on immediate annuities and guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future beneﬁ t payments. For other territories, the valuation bases adopted are in accordance with local actuarial practices and methodologies. Derivatives embedded in an insurance contract are not separated and measured at fair value if the embedded derivative itself qualiﬁ es for recognition as an insurance contract. In this case the entire contract is measured as described above. The Group performs liability adequacy testing on its insurance liabilities to ensure that the carrying amount of its liabilities (less related deferred acquisition costs and intangible assets) is sufﬁ cient in view of estimated future cash ﬂ ows. When performing the liability adequacy test, the Group discounts all contractual cash ﬂ ows and compares this amount to the carrying value of the liability at discount rates appropriate to the business in question. Where a shortfall is identiﬁ ed, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reﬂ ected in the income statement as they occur. Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in signiﬁ cant adjustments to the amount provided. The Group applies shadow accounting in relation to certain insurance contract provisions in the South Africa long-term business, and DAC and PVIF assets in the United States long-term business, in respect of owner occupied properties or available for sale ﬁ nancial assets, in order for recognised unrealised gains or losses on those assets to affect the measurement of the insurance contract provisions, DAC or PVIF assets in the same way that recognised realised gains or losses do. In respect of the South Africa long-term business, shadow accounting is applied to insurance contract provisions where the underlying measurement of the policyholder liability depends directly on the value of owner-occupied property and the unrealised gains and losses on such property, which are recognised in equity. The shadow accounting adjustment to insurance contract provisions is recognised in equity to the extent that the unrealised gains or losses on owner-occupied property backing insurance contract provisions are also recognised directly in equity. In respect of the United States long-term business, shadow accounting adjustments are made to the amortisation of DAC and PVIF assets in respect of unrealised gains and losses on available for sale ﬁ nancial assets to the extent that those unrealised gains and losses would impact the calculation of DAC or PVIF amortisation were they recognised in income. The shadow DAC and PVIF amortisation charge is recognised in equity in line with the unrealised gains and losses on the relevant ﬁ nancial assets until such time as those assets are sold or otherwise disposed of, at which point the accumulated amortisation recognised in equity is recycled to the income statement in the same way as the unrealised gains or losses on those ﬁ nancial assets. Financial guarantee contracts are recognised as insurance contracts. Liability adequacy testing is performed to ensure that the carrying amount of the liability for ﬁ nancial guarantee contracts is sufﬁ cient. Page 149 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (d) Insurance and investment contracts continued Long-term business continued (vi) Investment contract liabilities Investment contract liabilities in respect of the Group’s US long-term non-linked business are measured at fair value. Investment contract liabilities for non-linked business in the Group’s other territories are measured at fair value, determined by reference to the fair value of the underlying assets. For linked liabilities, including the deposit component of unbundled unit-linked assurance contracts, fair value is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the bid price of the assets in the underlying fund (adjusted for tax). Investment contract liabilities measured at fair value are subject to a “deposit ﬂ oor” such that the liability established cannot be less than the amount repayable on demand. Derivatives embedded in investment contracts are separated and measured at fair value, when their risks and characteristics are not closely related to those of the host contract and the host contract liability is calculated on an amortised cost basis. (vii) Acquisition costs Acquisition costs for insurance contracts comprise all direct and indirect costs arising from the sale of insurance contracts. As the gross premium valuation method used in African territories to determine insurance contract provisions makes implicit allowance for the deferral of acquisition costs, no explicit deferred acquisition cost asset is recognised in the balance sheet for the contracts issued in these areas. For the US life insurance business, an explicit deferred acquisition cost asset is established in the balance sheet. Deferred acquisition costs are amortised over the period that proﬁ ts on the related insurance policies are expected to emerge. Acquisition costs are deferred to the extent that they are deemed recoverable from available future proﬁ t margins. Deferral of costs on insurance business in other territories is limited to the extent that they are deemed recoverable from available future margins. (viii) Costs incurred in acquiring investment management service contracts Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset if they can be identiﬁ ed separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs represent the contractual right to beneﬁ t from providing investment management services and are amortised as the related revenue is recognised. Costs attributable to investment management service contracts in the asset management businesses are also recognised on this basis. General insurance business All classes of general insurance business are accounted for on an annual basis. (ix) Premiums on general insurance Premiums stated gross of commissions exclude taxes and levies and are accounted for in the period in which the risk commences. The proportion of the premiums written relating to periods of risk after the balance sheet date is carried forward to subsequent accounting periods as unearned premiums, so that earned premiums relate to risks carried during the accounting period. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance. (x) Claims on general insurance Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising during the year and adjustments to prior year claim provisions. Outstanding claims comprise claims incurred up to, but not paid, at the end of the accounting period, whether reported or not. Outstanding claims do not include any provision for possible future claims where the claims arise under contracts not in existence at the balance sheet date. The Group performs liability adequacy testing on its claim liabilities to ensure that the carrying amount of its liabilities (less related deferred acquisition costs and the unearned premium reserve) is sufﬁ cient in view of estimated future cash ﬂ ows. Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events, and may result in signiﬁ cant adjustments to the amount provided. Adjustments to the amounts of claims provisions established in prior years are reﬂ ected in the ﬁ nancial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used and estimates made are reviewed regularly Page 150 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (d) Insurance and investment contracts continued General insurance business continued (xi) Acquisition costs on general insurance Acquisition costs, which represent commission and other related expenses, are deferred and amortised over the period in which the related premiums are earned. (xii) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the diversiﬁ cation of its risks. Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expense from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Only rights under contracts that give rise to a signiﬁ cant transfer of insurance risk are accounted for as reinsurance assets. Rights under contracts that do not transfer signiﬁ cant insurance risk are accounted for as ﬁ nancial instruments. Reinsurance premiums for ceded reinsurance are recognised as an expense on a basis that is consistent with the recognition basis for the premiums on the related insurance contracts. For general insurance business, reinsurance premiums are expensed over the period that the reinsurance cover is provided based on the expected pattern of the reinsured risks. The unexpensed portion of ceded reinsurance premiums is included in reinsurance assets. The net amounts paid to a reinsurer at the inception of a contract may be less than the reinsurance assets recognised by the Group in respect of its rights under such contracts. Any difference between the premium due to the reinsurer and the reinsurance asset recognised is included in the income statement in the period in which the reinsurance premium is due. The amounts recognised as reinsurance assets are measured on a basis that is consistent with the measurement of the provisions held in respect of the related insurance contracts. Reinsurance assets include recoveries due from reinsurance companies in respect of claims paid. Reinsurance assets are assessed for impairment at each balance sheet date. An asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. (e) Financial instruments (i) Recognition and de-recognition A ﬁ nancial asset or liability is recognised when, and only when, the Group becomes a party to the contractual provisions of the ﬁ nancial instrument. The Group de-recognises a ﬁ nancial asset when, and only when: > The contractual rights to the cash ﬂ ows arising from the ﬁ nancial assets have expired or been forfeited by the Group; or > It transfers the ﬁ nancial asset including substantially all the risks and rewards of ownership of the asset; or > It transfers and no longer controls the ﬁ nancial asset, regardless of whether it has retained or transferred substantially all the risks and rewards of ownership. A ﬁ nancial liability is de-recognised when and only when the liability is extinguished, that is, when the obligation speciﬁ ed in the contract is discharged, assigned, cancelled or has expired. The difference between the carrying amount of a ﬁ nancial liability (or part thereof) extinguished or transferred to another party and consideration received, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement. All purchases and sales of ﬁ nancial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Otherwise such transactions are treated as derivatives until settlement occurs. Loans and receivables are recognised (at fair value plus attributable transaction costs) when cash is advanced to borrowers. Page 151 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (e) Financial instruments continued (ii) Initial measurement Financial instruments are initially recognised at fair value plus, in the case of a ﬁ nancial asset or ﬁ nancial liability not at fair value through the income statement, transaction costs that are directly attributable to the acquisition or issue of the ﬁ nancial asset or ﬁ nancial liability. Where the transaction price of a ﬁ nancial instrument in a non-active market is different to the fair value from other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Group defers such differences (day-one gains or losses). Day-one gains or losses are amortised on a straight-line basis over the life of the instrument. To the extent that the inputs determining the fair value of the instrument become observable, or when the instrument is de-recognised, day-one gains or losses are recognised immediately in the income statement. (iii) Derivative ﬁ nancial instruments Derivative ﬁ nancial instruments are recognised in the balance sheet at fair value. Fair values are obtained from quoted market prices, discounted cash ﬂ ow models and option pricing models as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives not designated as hedges for hedge accounting purposes are included in investment income or ﬁ nance costs as appropriate. (iv) Hedge accounting Qualifying hedging instruments must either be derivative ﬁ nancial instruments or non derivative ﬁ nancial instruments used to hedge the risk of changes in foreign currency exchange rates, changes in fair value or changes in cash ﬂ ows. Changes in the value of the ﬁ nancial instrument should be expected to offset changes in the fair value or cash ﬂ ows of the underlying hedged item. The Group designates certain qualifying hedging instruments as either (1) a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised ﬁ rm commitment (fair value hedge); (2) a hedge of a future cash ﬂ ow attributable to a recognised asset or liability, or a forecasted transaction, and could affect proﬁ t or loss (cash ﬂ ow hedge); or, (3) a hedge of a net investment in a foreign operation. Hedge accounting is used for qualifying hedging instruments designated in this way provided certain criteria are met. The Group’s criteria for a qualifying hedging instrument to be accounted for as a hedge include: > Upfront formal documentation of the hedging instrument, hedged item or transaction, risk management objective and strategy, the nature of the risk being hedged and the effectiveness measurement methodology that will be applied is prepared before hedge accounting is adopted; > The hedge is documented showing that it is expected to be highly effective in offsetting the changes in the fair value or cash ﬂ ows attributable to the hedged risk, consistent with the risk management and strategy detailed in the upfront hedge documentation; > The effectiveness of the hedge can be reliably measured; > The hedge is assessed and determined to have been highly effective on an ongoing basis; and > For cash ﬂ ow hedges of a forecast transaction, an assessment that it is highly probable that the hedged transaction will occur and will carry proﬁ t and loss risk. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that prove to be highly effective in relation to hedged risk, are recorded in the income statement, along with the corresponding change in fair value of the hedged asset or liability that is attributable to that speciﬁ c hedged risk. Changes in the fair value of derivatives that are designated and qualify as cash ﬂ ow hedges or hedges of a net investment in a foreign operation and that prove to be highly effective in relation to the hedged risk are recognised in equity. If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued prospectively. Any previous adjustment to the carrying amount of a hedged interest-bearing ﬁ nancial instrument carried at amortised cost, (as a result of previous hedge accounting), is amortised in the income statement from the date hedge accounting ceases, to the maturity date of the ﬁ nancial instrument, based on the effective interest method. For hedges of a net investment in a foreign operation, any cumulative gains or losses recognised in equity are recognised in the income statement on disposal of the foreign operation. (v) Embedded derivatives Certain derivatives embedded in other ﬁ nancial and non-ﬁ nancial instruments (other than investment contracts), such as the conversion option in a convertible bond, are treated as separate derivatives and recognised as such on a stand alone basis, when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealised gains and losses reported in the income statement. If it is not possible to determine the fair value of the embedded derivative, the entire hybrid instrument is categorised as fair value through the income statement and measured at fair value. Page 152 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (e) Financial instruments continued (vi) Offsetting ﬁ nancial instruments and related income Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expense items are offset only to the extent that their related instruments have been offset in the balance sheet, with the exception of those relating to hedges, which are disclosed in accordance with the income statement effect of the hedged item. (vii) Interest income and expense Interest income and expense in relation to ﬁ nancial instruments carried at amortised cost or held as available for sale is recognised in the income statement using the effective interest method taking into account the expected timing and amount of cash ﬂ ows. Interest income and expense include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest basis. Interest earned on ﬁ nancial assets carried at fair value through the income statement is presented as part of interest income. (viii) Non-interest revenue Non-interest revenue in respect of ﬁ nancial instruments principally comprises fees and commission and other operating income. These are accounted for as set out below: Fees and commission income Loan origination fees for loans that are probable of being drawn down, are deferred (together with related direct costs) and recognised as an adjustment to the effective yield on the loan. Fees and commission arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Other Revenue other than interest, fees and commission (including fees and insurance premiums), which includes exchange and securities trading income, dividends from investments and net gains on the sale of banking assets, is recognised in the income statement when the amount of revenue from the transaction or service can be measured reliably, it is probable that the economic beneﬁ ts of the transaction or service will ﬂ ow to the Group and the costs associated with the transaction or service can be measured reliably. (ix) Financial assets Financial assets (other than derivatives) are recorded as held-for-trading, designated as fair value through the income statement, loans and receivables, held-to-maturity or available for sale. An analysis of the Group’s balance sheet, showing the categorisation of ﬁ nancial assets, together with ﬁ nancial liabilities is set out in note 31. Held-for-trading ﬁ nancial assets Held-for-trading ﬁ nancial assets are those that were either acquired for generating a proﬁ t from short-term ﬂ uctuations in price or dealer’s margin, or are securities included in a portfolio in which a pattern of short-term proﬁ t taking exists, or are derivatives that are not designated as effective hedging instruments. Financial assets designated as fair value through the income statement Financial assets that the Group has elected to designate as fair value through the income statement are those where the treatment either eliminates or signiﬁ cantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis (for instance with respect to ﬁ nancial assets supporting insurance contract provisions) or are managed, evaluated and reported using a fair value basis (for instance ﬁ nancial assets supporting shareholder funds). All ﬁ nancial assets carried at fair value through the income statement, whether held-for-trading or designated, are initially recognised at fair value and subsequently re-measured at fair value based on quoted bid prices. If quoted bid prices are unavailable the fair value of the ﬁ nancial asset is estimated using pricing models or discounted cash ﬂ ow techniques. Where discounted cash ﬂ ow techniques are used, estimated future cash ﬂ ows are based on management’s best estimates and the discount rate used is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market-related measures at the balance sheet date. Realised and unrealised fair value gains and losses on all ﬁ nancial assets carried at fair value through the income statement are included in Investment return (non-banking) or in Banking trading, investment and similar income as appropriate. Interest earned whilst holding ﬁ nancial assets at fair value through the income statement is reported within Investment return (non-banking) or Banking interest and similar income, as appropriate. Dividends receivable are included separately in dividend income, within Investment return (non-banking) or Banking trading, investment and similar income, when a dividend is declared. Page 153 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (e) Financial instruments continued (ix) Financial assets continued Loans and receivables Loans and receivables are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market, other than those classiﬁ ed by the Group as fair value through income statement or available for sale. Loans and receivables are carried at amortised cost, less any impairment write-downs. Third party expenses such as legal fees incurred in securing a loan are treated as part of the cost of the transaction. Held-to-maturity ﬁ nancial assets Financial assets with ﬁ xed maturity dates which are quoted in an active market and where management has both the intent and the ability to hold the asset to maturity are classiﬁ ed as held-to-maturity. These assets are carried at amortised cost using the effective interest method, less any impairment write-downs. Interest earned on held-to-maturity ﬁ nancial assets is reported within Investment return (non-banking) or Banking interest and similar income, as appropriate. Available for sale ﬁ nancial assets Financial assets intended to be held for an indeﬁ nite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices other than those designated fair value through income statement or as loans and receivables are classiﬁ ed as available for sale. Management determines the appropriate classiﬁ cation of its investments at the time of the purchase. Available for sale ﬁ nancial assets are measured at fair value based on quoted bid prices. If quoted bid prices are unavailable or determined to be unreliable, the fair value of the ﬁ nancial asset is estimated using pricing models or discounted cash ﬂ ow techniques. Where discounted cash ﬂ ow techniques are used, estimated future cash ﬂ ows are based on management’s best estimates and the discount rate used is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market-related measures at the balance sheet date. Unrealised gains and losses arising from changes in the fair value of available for sale ﬁ nancial assets are recognised in equity. When available for sale ﬁ nancial assets are disposed the related accumulated fair value adjustments are included in the income statement as gains and losses from available for sale ﬁ nancial assets. When available for sale assets are impaired the resulting loss is shown separately in the income statement as an impairment charge. Interest earned on available for sale ﬁ nancial assets is reported within Investment return (non-banking) or Banking interest and similar income, as appropriate. Dividends receivable are included separately in dividend income, within Investment return (non-banking) or Banking trading, investment and similar income, as appropriate when a dividend is declared. (x) Sale and repurchase agreements and lending of securities Securities sold subject to linked repurchase agreements are retained in the ﬁ nancial statements as appropriate when considering the de-recognition criteria contained within IAS 39. The securities that are retained in the ﬁ nancial statements are reﬂ ected as trading or investment securities and the counterparty liability is included in amounts owed to other depositors, deposits from other banks, or other money market deposits, as appropriate. Securities purchased under agreements to resell at a pre-determined price are recorded as loans and advances to other banks or customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the lives of agreements using the effective interest method. Securities lent to counter parties are also retained in the ﬁ nancial statements and any interest earned recognised in the income statement using the effective interest method. Securities borrowed are not recognised in the ﬁ nancial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability. (xi) Impairments of ﬁ nancial assets Loans and advances categorised as loans and receivables A provision for impairment of loans and advances categorised as loans and receivables is established if there is objective evidence that the Group will not be able to collect all amounts due from the asset. The amount of the impairment is the difference between the carrying amount and the recoverable amount, being the present value of expected cash ﬂ ows, including amounts recoverable from guarantees and collateral, discounted based on the effective interest rate at inception. The impairment provision also covers losses where there is objective evidence that losses are present in components of the loan portfolio at the balance sheet date, but these components have not yet been speciﬁ cally identiﬁ ed. When a loan is uncollectable, it is written off against the related impairment provision. Subsequent recoveries are credited to the income statement. If the amount of impairment subsequently decreases due to an event occurring after the write-down, the release of the impairment provision is credited to the income statement. Impairment reversals are limited to what the carrying amount would have been, had no impairment losses been recognised. Interest income on impaired loans and receivables is recognised on the impaired amount using the original effective interest rate before the impairment. Page 154 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (e) Financial instruments continued (xi) Impairments of ﬁ nancial assets continued Other ﬁ nancial assets carried at amortised cost, and available for sale ﬁ nancial assets Other ﬁ nancial assets are deemed to be impaired when there is objective evidence to suggest that one or more events has occurred subsequent to the initial recognition of the asset and that event(s) has an impact on the estimated future cash ﬂ ows of the asset that can be reliably measured. The amount of the impairment loss for other ﬁ nancial assets carried at amortised cost is calculated as being the difference between the asset’s carrying amount and the present value of expected future cash ﬂ ows discounted at the ﬁ nancial asset’s original effective interest rate. The carrying amount, for assets classiﬁ ed as available for sale and measured at fair value, is the present value of expected future cash ﬂ ows discounted at the current market rate of interest for a similar ﬁ nancial asset. All such impairments are recognised in the income statement. Where there is evidence of the reversal of the impairment of a ﬁ nancial asset held at amortised cost, the release of the impairment allowance is credited to the income statement. This is consistent with the initial recognition of impairment charges. Where there is evidence of a reversal of the impairment of an available for sale ﬁ nancial asset the accounting presentation of the release of the corresponding impairment allowance depends on the type of instrument concerned. The release of an impairment allowance in respect of a debt instrument categorised as available for sale is credited to the income statement, the release in respect of an equity instrument categorised as available for sale is credited to the available for sale reserve within equity. (xii) Financial liabilities (other than investment contracts) Financial liabilities, including borrowed funds, amounts owed to depositors and liabilities under acceptances, are recorded as held-for-trading, designated as fair value through the income statement or as ﬁ nancial liabilities at amortised cost. Liabilities that the Group has elected to designate as fair value through the income statement are those where the treatment either eliminates or signiﬁ cantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis and are managed, evaluated and reported using a fair value basis. For ﬁ nancial liabilities recorded at fair value and which contain a demand feature, the fair value of the liability is not less than the amount payable on demand, discounted from the ﬁ rst date that the amount could be required to be paid. Financial liabilities categorised at amortised cost are recognised initially at fair value, which is normally represented by the transaction price, less directly attributable transaction costs. Subsequent to initial recognition these ﬁ nancial liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Conversion options included within ﬁ nancial liabilities are recorded separately in shareholders’ equity. The Group does not recognise any change in the value of this option in subsequent periods. The remaining obligation to make future payments of principal and interest to bondholders is calculated using a market interest rate for an equivalent non-convertible bond and is presented on the amortised cost basis in other borrowed funds until extinguished on conversion or maturity of the bonds. If the Group purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of a liability and the consideration paid is included in other income. Page 155 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (e) Financial instruments continued (xiii) Reclassiﬁ cations of ﬁ nancial assets A non-derivative ﬁ nancial asset that would have met the deﬁ nition of loans and receivables at initial recognition that was required to be categorised as held-for-trading (on the basis that it was held for the purpose of selling or repurchasing in the near term) may be reclassiﬁ ed out of the fair value through income statement category if the Group intends and is able to hold the ﬁ nancial asset for the foreseeable future or until maturity. If a ﬁ nancial asset is so reclassiﬁ ed, it is reclassiﬁ ed at its fair value on the date of reclassiﬁ cation. Any gain or loss already recognised in proﬁ t or loss is not reversed. The fair value at the date of reclassiﬁ cation becomes its new cost or amortised cost, as applicable. Other non-derivative ﬁ nancial assets that were required to be categorised as held-for-trading at initial recognition may be reclassiﬁ ed out of the fair value through income statement category in rare circumstances. If a ﬁ nancial asset is so reclassiﬁ ed, it is reclassiﬁ ed at its fair value on the date of reclassiﬁ cation. Any gain or loss already recognised in proﬁ t or loss is not reversed. Measurement of the asset after reclassiﬁ cation depends on the subsequent categorisation. A non-derivative ﬁ nancial asset that would have met the deﬁ nition of loans and receivables at initial recognition that was designated as available for sale may be reclassiﬁ ed out of the available for sale category to the loans and receivables category if it meets the loans and receivables deﬁ nition at the date of reclassiﬁ cation and if the Group intends and is able to hold the ﬁ nancial asset for the foreseeable future or until maturity. If a ﬁ nancial asset is so reclassiﬁ ed, it is reclassiﬁ ed at its fair value on the date of reclassiﬁ cation. The fair value at the date of reclassiﬁ cation becomes its new cost or amortised cost, as applicable. In the case of a ﬁ nancial asset with a ﬁ xed maturity, the gain or loss already recognised in the available for sale reserve in equity is amortised to proﬁ t or loss over the remaining life using the effective interest method together with any difference between the new amortised cost and the maturity amount. In the case of a ﬁ nancial asset that does not have a ﬁ xed maturity, the gain or loss already recognised in the available for sale reserve in equity is recognised in proﬁ t or loss when the ﬁ nancial asset is sold or otherwise disposed of. In accordance with the transitional provisions of the amendments, issued in October 2008 to IAS39 ‘Financial Instruments: Recognition and Measurement’ relating to the reclassiﬁ cation of ﬁ nancial assets, certain qualifying ﬁ nancial assets held by the Group during the period up to and including 1 July 2008 have been reclassiﬁ ed as of that date and based on the fair value at that date. This represents a change of accounting policy in the current ﬁ nancial year. As the amendment applied from 1 July 2008, there were no retrospective changes to the ﬁ nancial statements. Details of all reclassiﬁ cations of ﬁ nancial assets in accordance with the above accounting policies are shown in note 31. (xiv) Parent Company investments in subsidiary undertakings and associates Parent Company investments in subsidiary undertakings and associates are recorded at cost. Impairments of Parent Company investments in subsidiary undertakings and associates are accounted for in the same way as impairments of other non-ﬁ nancial assets (see section 1(h)). (f) Tax Income tax on the proﬁ t or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred taxation is provided using the balance sheet liability method, based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and their tax base. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date. Deferred taxation is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in equity, or a business combination that is an acquisition. The effect on deferred taxation of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred tax asset is recognised only to the extent that it is probable that future taxable income will be available, against which the unutilised tax losses and deductible temporary differences can be used. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax beneﬁ ts will be realised. In certain circumstances, as permitted by accounting guidance, deferred tax balances are not recognised. In particular where the liability relates to the initial recognition of goodwill, or transactions that are not a business combination and at the time of their occurrence affect neither accounting or taxable proﬁ t. Note 20 includes further detail of circumstances in which the Group does not recognise temporary differences. Page 156 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (g) Intangible assets (i) Goodwill and goodwill impairment All business combinations are accounted for by applying the purchase method. At acquisition date, the Group recognises the fair value of the acquiree’s identiﬁ able assets, liabilities and contingent liabilities that satisfy the recognition criteria. The cost of a business combination is the fair value of purchase consideration due at date of acquisition plus any directly attributable transaction costs. Contingent purchase consideration is recognised to the extent that it is probable and can be measured reliably. Any minority interest in the acquiree is stated at the minority’s proportion of the net fair values of those items. Any excess between the cost of the business combination and the Group’s interest in the net fair value of the identiﬁ able assets, liabilities and contingent liabilities is recognised as goodwill. Goodwill is adjusted for any subsequent re-measurement of contingent purchase consideration. In accordance with the exemptions permitted under IFRS 1 ‘First-Time Adoption of International Financial Reporting Standards’, business combinations that took place prior to 1 January 2004 have not been restated. Purchased goodwill is allocated to one or more cash-generating units (CGUs), being the smallest identiﬁ able group of assets that generates cash inﬂ ows that are largely independent of the cash inﬂ ows from other assets or group of assets. The directors annually test for impairment of each CGU containing goodwill and intangible assets with indeﬁ nite useful lives. Where businesses are acquired as part of the same investment acquisition, these are combined for determining recoverability of the related goodwill. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. However, impairment losses relating to goodwill are not reversed. (ii) Present value of acquired in-force for insurance and investment contract business The present value of acquired in-force for insurance and investment contract business is capitalised in the consolidated balance sheet as an intangible asset. The capitalised value is the present value of cash ﬂ ows anticipated in the future from the relevant book of insurance and investment contract policies acquired. This is calculated by performing a cash ﬂ ow projection of the associated long-term fund and book of in-force policies in order to estimate future after tax proﬁ ts attributable to shareholders. The valuation is based on actuarial principles taking into account future premium income, mortality, disease and surrender probabilities, together with future costs and investment returns on the assets supporting the fund. These proﬁ ts are discounted at a rate of return allowing for the risk of uncertainty of the future cash ﬂ ows. The key assumptions impacting the valuation are discount rate, future investment returns and the rate at which policies discontinue. The asset is amortised over the expected proﬁ t recognition period on a systematic basis over the anticipated lives of the related contracts. The amortisation charge is stated net of any unwind in the discount rate used to calculate the asset. The recoverable amount of the asset is re-calculated at each balance sheet date and any impairment losses recognised accordingly. (iii) Other intangible assets acquired as part of a business combination Contractual banking and asset management customer relationships, relationships with distribution channels and similar intangible assets, acquired as a part of a business combination, are capitalised at their fair value, represented by the estimated net present value of the future cash ﬂ ows from the relevant relationships acquired at the date of acquisition. Brands and similar items acquired as part of a business combination are capitalised at their fair value based on a ‘relief from royalty’ valuation methodology. Subsequent to initial recognition such acquired intangible assets are amortised on a straight-line basis over their estimated useful lives as set out below: > Distribution channels 10 years > Customer relationships 10 years > Brand 15 – 20 years The estimated life is re-evaluated on a regular basis. Page 157 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (g) Intangible assets continued (iv) Internally developed software Internally developed software is amortised over its estimated useful life. Such assets are stated at cost less accumulated amortisation and impairment losses. Software is recognised in the balance sheet if, and only if, it is probable that the relevant future economic beneﬁ ts attributable to the software will ﬂ ow to the Group and its cost can be measured reliably. Costs incurred in the research phase are expensed whereas costs incurred in the development phase are capitalised subject to meeting speciﬁ c criteria, set out in the relevant accounting guidance. The main criteria being that future economic beneﬁ ts can be identiﬁ ed as a result of the development expenditure. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of the relevant software, which range between two and ﬁ ve years. (v) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic beneﬁ ts embodied in the speciﬁ c asset to which it relates. All other expenditure is expensed as incurred. (h) Impairment (all assets other than goodwill, deferred tax assets and ﬁ nancial assets) The Group assesses all assets (other than goodwill, deferred tax assets and ﬁ nancial assets) on an ongoing basis for indications of impairment or whether a previously recognised impairment loss should be reversed. If such indicators are found to exist, then detailed impairment testing is carried out. Impairments (where the carrying value of the asset exceeds its recoverable amount) and the reversal of previously recognised impairments are recognised in the income statement. (i) Property, plant and equipment (i) Owned assets Owner-occupied property is stated at revalued amounts, being fair value at the date of revaluation less subsequent accumulated depreciation and accumulated impairment losses. Plant and equipment, principally computer equipment, motor vehicles, ﬁ xtures and furniture, is stated at cost less accumulated depreciation and impairment losses. In accordance with the exemptions permitted under IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’, individual terms of property, plant and equipment held at 1 January 2004 were measured at fair value, which was deemed to be their cost at that date. (ii) Subsequent expenditure Subsequent expenditure is capitalised when it is measurable and will result in probable future economic beneﬁ ts. Expenditure incurred to replace a separate component of an item of owner-occupied property, plant and equipment is capitalised to the cost of the item of owner-occupied property, plant and equipment and the component replaced is de-recognised. All other expenditure is recognised in the income statement as an expense when incurred. (iii) Revaluation of owner-occupied property Owner-occupied property is valued on the same basis as investment property. When an individual property is revalued, any increase in its carrying amount (as a result of the revaluation) is transferred to a revaluation reserve, except to the extent that it reverses a revaluation decrease of the same property previously recognised as an expense in the income statement. When the value of an individual property is decreased as a result of a revaluation, the decrease is charged against any related credit balance in the revaluation reserve in respect of that property. However, to the extent that it exceeds any surplus, it is recognised as an expense in the income statement. (iv) De-recognition On de-recognition of an owner-occupied property or item of plant and equipment, any gain or loss on disposal, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement in the period of the de- recognition. In the case of owner-occupied property, any surplus in the revaluation reserve in respect of the individual property is transferred directly to retained earnings. Page 158 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (i) Property, plant and equipment continued (v) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of owner-occupied property, plant and equipment that are accounted for separately. In the case of owner-occupied property, any accumulated depreciation at revaluation is eliminated against the gross carrying amount of the property concerned and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount for each property. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred, net of any related deferred tax, between the revaluation reserve and retained earnings as the property is utilised. Land is not depreciated. The maximum estimated useful lives are as follows: > Computer equipment > Computer software > Motor vehicles > Fixtures and furniture > Leasehold property > Freehold property 5 years 3 years 6 years 10 years 20 years 50 years (vi) Leases Operating leases Leases where the lessor retains the risks and rewards of ownership of the underlying asset are classiﬁ ed as operating leases. Payments made under operating leases are charged against income on a straight-line basis over the period of the lease. Finance leases Lease agreements where the Group substantially accepts the risks and rewards of the ownership of the leased asset are classiﬁ ed as ﬁ nance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Lease payments are allocated between the liability and ﬁ nance charges so as to achieve a constant interest rate on the outstanding balance of the liability. Finance lease obligations, net of ﬁ nance charges, are included in liabilities. The interest element of the ﬁ nance cost is charged to the income statement over the lease period according to the effective interest method. Where applicable, assets acquired under ﬁ nance leases are depreciated over the shorter of the useful life of the asset and the lease term. Where assets are leased out under a ﬁ nance lease arrangement, the present value of the lease payments is recognised as a receivable. Initial direct costs are included in the initial measurement of the receivable. The difference between the gross receivable and unearned ﬁ nance income is presented in the balance sheet. Finance lease income is allocated to accounting periods to reﬂ ect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases. Assets leased out under operating leases are included under property, plant and equipment in the balance sheet. Initial direct costs incurred in negotiating and arranging are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the rental income. Leased assets are depreciated over their expected useful lives on a basis consistent with similar assets. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the term of the lease. When another systematic basis is more representative of the time pattern of the user’s beneﬁ t, then that method is used. (j) Investment properties Investment property is real estate held to earn rentals or for capital appreciation. It does not include real estate held for use in the production or supply of goods or services or for administrative purposes. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and balance sheet date an internal valuation is performed and adjustments made to reﬂ ect any material changes in value. The valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash ﬂ ows. Vacant land, land holdings and residential ﬂ ats are valued according to sales of comparable properties. Near vacant properties are valued at land value less the estimated cost of demolition. Surpluses and deﬁ cits arising from changes in fair value are reﬂ ected in the income statement. For properties reclassiﬁ ed during the year from property, plant and equipment to investment properties, any revaluation gain arising is initially recognised in the income statement to the extent that impairment losses were previously recognised. Any residual excess is taken to the revaluation reserve. Revaluation deﬁ cits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deﬁ cit is accounted for in the income statement. Page 159 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (j) Investment properties continued Investment properties that are reclassiﬁ ed to owner-occupied property are revalued at the date of transfer, with any difference being taken to the income statement. (k) Finance costs Finance costs relate to the Group’s borrowed funds that are directly controlled by, or managed on behalf of, Old Mutual plc. These include interest payable, and gains and losses on revaluation of these funds and on those derivative instruments which are used to hedge these funds. (l) Non-current assets held-for-sale and discontinued operations Non-current assets (and disposal groups) classiﬁ ed as held-for-sale are measured at the lower of their carrying amount and their fair value less costs to sell. Where the proceeds of disposal are expected to exceed the book value of the related net assets no impairment loss is recognised on the reclassiﬁ cations of assets as held-for-sale. Non-current assets and disposal groups are classiﬁ ed as held-for-sale if their carrying amount will be recovered through a sales transaction rather than through continuing use. This condition is regarded as having been met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year of the date of classiﬁ cation. A discontinued operation is deﬁ ned as a component of an entity that either has been disposed of, or is classiﬁ ed as held-for-sale and: > represents a separate major line of business or geographical area of operations; > is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or > is a subsidiary acquired exclusively with a view to resale. When a non-current asset (or disposal group) ceases to be classiﬁ ed as held-for-sale, the individual assets and liabilities cease to be shown separately in the balance sheet at the end of the year in which the classiﬁ cation changes. Comparatives are not restated. If the line of business was previously presented as a discontinued operation and subsequently ceases to be classiﬁ ed as held-for-sale the income statement and cash ﬂ ows of the comparative period are restated to show that line of business as a continuing operation. (m) Pension plans and retirement beneﬁ ts Deﬁ ned beneﬁ t and deﬁ ned contribution schemes have been established for eligible employees of the Group with the assets held in separate trustee administered funds. The projected unit credit method is used to determine the deﬁ ned beneﬁ t obligations based on actuarial assessments, which incorporate not only the pension obligations known on the balance sheet date but also information relevant to their expected future development. The discount rates used are determined based on the yields for investment grade corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. Actuarial gains or losses arising subsequent to 1 January 2004 are accounted for using the “corridor method”. Actuarial gains and losses are recognised in the income statement over a period of time to the extent that the net cumulative unrecognised gains and losses at the end of the previous ﬁ nancial year exceed 10 percent of the greater of the fair value of the plan assets or 10 percent of the present value of the gross deﬁ ned beneﬁ t obligations before deducting plan assets in the scheme at that date. Such actuarial gains and losses are recognised over the expected average remaining working lives of the employees participating in the scheme. Cumulative actuarial gains and losses at 1 January 2004 were recognised in equity at that date. Where the corridor calculation results in a beneﬁ t to the Group, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. When the beneﬁ ts of a plan are improved, the portion of the increased beneﬁ t relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the beneﬁ ts become vested. To the extent that the beneﬁ ts vest immediately, the expense is recognised immediately in the income statement. Contributions in respect of deﬁ ned contribution schemes are recognised as an expense in the income statement as incurred. Where applicable, Group companies make provision for post retirement medical and housing beneﬁ ts for eligible employees. Non-pension post retirement beneﬁ ts are accounted for according to their nature, either as deﬁ ned contribution or deﬁ ned beneﬁ t plans. The expected costs of post retirement beneﬁ ts that are deﬁ ned beneﬁ t plans in nature are accounted for in the same manner as for deﬁ ned beneﬁ t pension plans. Page 160 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (n) Share-based payments (i) Equity-settled share-based payment transactions with employees The services received in an equity-settled transaction with employees are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date. If the equity instruments granted vest immediately and the employee is not required to complete a speciﬁ ed period of service before becoming unconditionally entitled to those instruments, the services received are recognised in full on grant date in the income statement for the period, with a corresponding increase in equity. Where the equity instruments do not vest until the employee has completed a speciﬁ ed period of service, it is assumed that the services rendered by the employee, as consideration for those equity instruments, will be received in the future, during the vesting period. These services are accounted for in the income statement as they are rendered during the vesting period, with a corresponding increase in equity. In the Parent Company, the fair value of equity instruments granted by the company to the employees of subsidiary undertakings is recorded as an additional investment in the relevant subsidiary with ‘credit’ recorded in equity. (ii) Cash-settled share-based payment transactions with employees The services received in cash-settled transactions with employees and the liability to pay for those services, are recognised at fair value as the employee renders services. Until the liability is settled, the fair value of the liability is re-measured at each reporting date and at the date of settlement, with any changes in fair value recognised in the income statement for the period. (iii) Measurement of fair value of equity instruments granted The equity instruments granted by the Group are measured at fair value at the measurement date using standard option pricing valuation models. The valuation technique is consistent with generally acceptable valuation methodologies for pricing ﬁ nancial instruments, and incorporates all factors and assumptions that knowledgeable, willing market participants would consider in setting the price of the equity instruments. As permitted under IFRS 1, the provisions of this accounting policy have not been applied to equity-settled grants made on or before 7 November 2002, or awards granted after that date but which had vested prior to 1 January 2005. (o) Cash and cash equivalents For the purposes of the cash ﬂ ow statement, cash and cash equivalents comprise cash balances and highly liquid short-term funds, mandatory reserve deposits held with central banks, cash held in investment portfolios awaiting reinvestment and cash and cash equivalents subject to the consolidation of funds. (p) Other provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outﬂ ow of economic beneﬁ ts will occur, and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are discounted and the discount rate used is a pre-tax rate that reﬂ ects current market assessments of the time value of money and, where appropriate, the risks speciﬁ c to the liability. Speciﬁ c policies: > A provision for onerous contracts is recognised when the expected beneﬁ ts to be derived by the Group from a contract are lower than the unavoidable cost of meeting the obligations under the contract; > A provision for restructuring is recognised only if the Group has approved a detailed formal plan and raised a valid expectation among those parties directly affected, that the plan will be carried out either by having begun implementation or by publicly announcing the plan’s main features; and > No provision is made for future operating costs or losses. (q) Critical accounting estimates and judgments Critical accounting estimates are those which involve the most complex or subjective judgments or assessments. The areas of the Group’s business that typically require such estimates are life insurance contract provisions, determination of the fair value for ﬁ nancial assets and liabilities, impairment charges, present values of acquired in-force for insurance and investment contract business, other intangible assets acquired as part of a business combination, deferred acquisition costs, deferred taxes and the non consolidation of the Group’s wholly owned mutual life insurance undertaking. Insurance contract accounting is discussed in more detail in note 1(d), and further detail of the key assumptions made in determining insurance contract provisions is included in note 23. Accounting for deferred acquisition cost assets is also discussed in note 1(d). Page 161 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (q) Critical accounting estimates and judgments continued The fair values of ﬁ nancial assets and liabilities are classiﬁ ed and accounted for in accordance with the policies set out in note 1(e). They are valued on the basis of listed market prices in so far as this is possible. In the current market environment, such price information is typically not available for all instruments and the Group therefore uses internal models and valuation techniques to measure such instruments. These techniques use market observable inputs where available, derived from similar assets and liabilities in similar and active markets, from recent transaction prices for comparable items or from other observable market data. For positions where observable reference data are not available for some or all parameters the Group estimates the non-market observable inputs used in its valuation models. Fair values of certain ﬁ nancial instruments including over-the-counter (OTC) derivative instruments, are determined using pricing models that consider, among other factors, contractual and market prices, correlations, yield curves, credit spreads, and volatility factors. Accounting for present values of acquired in-force insurance and investment contract business, together with other intangibles acquired as part of a business combination are discussed in note 1(g). Assets are subject to regular impairment reviews as required. Impairments are measured at the difference between the cost (or amortised cost) of a particular asset and the current fair value or recoverable amount. Impairments are recorded in the income statement in the period in which they occur. The Group’s policy in relation to impairment testing in respect of Goodwill is detailed in note 1(g). The policy in respect of investment securities and purchased loans and receivables is described in note 1(e). The accounting policy for deferred tax is detailed in note 1(f). The Group does not consolidate its wholly owned mutual life insurance undertaking, Skandia Liv. For more information refer to the Subsidiary Undertakings and Special Purpose Entities Accounting Policy, note 1(c) (i). (r) Segment reporting The Group’s results are analysed across nine reportable segments. For purposes of presentation these are grouped in geographical areas. This is consistent with the 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. The reported segments are Skandia UK, Nordic and ELAM, Old Mutual South Africa, Nedbank, Mutual & Federal, Rest of Africa, US Life and US Asset Management. Information about other business activities and operating segments is disclosed in the ‘other operating segments’ category. Other operating segments comprise the Asia Paciﬁ c asset management business and Group head ofﬁ ce. There are four principal business activities from which the Group generates revenues. These are long-term business (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 proﬁ ts and losses in note 3. The information reﬂ ected in note 3 reﬂ ects the measures of proﬁ t and loss, assets and liabilities for each segment as regularly provided to management and the Board of Directors. There are no differences between the measurement of the assets and liabilities reﬂ ected in the primary statements and that reported for the segments. A reconciliation between the reported segment revenues and expenses and the Group’s revenues and expenses is shown in note 3. Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments 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. Reallocations of certain comparative segment information have been made following changes in the Group’s management reporting structure, effective 1 January 2008. There was no impact on net proﬁ t or net assets. (s) Treasury shares Upon consolidation, the balance sheet and income statement are adjusted for own shares held by Employee Share Ownership Trusts (ESOPs), policyholder funds of African life companies and those held in Black Economic Empowerment Trusts consolidated within the Group’s ﬁ nancial statements. Own shares are deducted from equity to eliminate the inter-company portion. On purchase, the cost of the shares acquired is deducted from equity. Subsequently, any gain or loss on the sale or cancellation of an entity’s own equity instruments is recognised in equity. Any net income in relation to own shares, both dividends received and unrealised losses on own shares are eliminated before stating the proﬁ t for the year. Page 162 Old Mutual plc Annual Report and Accounts 2008 1 Accounting policies continued (s) Treasury shares continued Dividends paid in respect of these shares are also excluded when determining the retained proﬁ t for the year. In calculating the basic earnings per share, the exclusion of income in respect of own shares from the income statement requires the exclusion of treasury shares from the weighted average number of shares. When calculating the diluted earnings per share, the number of shares included in the weighted average reﬂ ects the potential issue in respect of the treasury shares. (t) Share capital Ordinary and preference share capital (including perpetual preferred callable securities) are classiﬁ ed as equity if they are non-redeemable by the shareholder and any dividends are discretionary and coupon payments are recognised as distributions within equity. Preference share capital is classiﬁ ed as a liability if it is redeemable on a speciﬁ c date or at the option of the shareholders or if dividend payments are not discretionary. Coupon payments thereon are recognised in the income statement as interest expense. (u) Dividends Dividends payable to holders of equity instruments are recognised in the period in which they are authorised or approved. Interim dividends payable to holders of the Group’s ordinary share capital are authorised by the directors of the Parent Company, the ﬁ nal dividend typically requires shareholder approval. (v) Balance sheet liquidity analysis The Group’s balance sheet is presented in order of liquidity as is permitted by IAS 1 ‘Presentation of Financial Statements’. In order to satisfy the requirements of IAS 1, the following additional balance sheet analyses are given to describe how balance sheet lines are categorised between current and non-current balances, applying the principles laid out in IAS 1. The following balance sheet captions are generally classiﬁ ed as current – cash and cash equivalents, non-current assets held-for-sale, client indebtedness for acceptances, current tax receivable, current tax payable, liabilities under acceptances and non-current liabilities held-for-sale. The following balances are generally classiﬁ ed as non-current – goodwill and other intangible assets, mandatory reserve deposits with Central Banks, property, plant and equipment, investment property, deferred tax assets, investments in associated undertakings and jointly controlled operations, deferred acquisition costs, deposits held with reinsurers, third party interests in the consolidation of funds, provisions, deferred revenue and deferred tax liabilities. The following balances include both current and non-current portions – reinsurers’ shares of long-term and general insurance business policyholder liabilities, loans and advances, investments and securities, other assets, derivative ﬁ nancial assets and liabilities, long-term business and general insurance policyholder liabilities, borrowed funds, amounts owed to bank depositors and other liabilities. The split between the current and non-current portions for these assets and liabilities is given either by way of a footnote to the relevant note to the accounts or by way of a maturity analysis (in respect of major ﬁ nancial liability captions). (w) Standards, amendments to standards, and interpretations adopted in the 2008 annual ﬁ nancial statements The following standards, amendments to standards and interpretations which are relevant to the Group, have been adopted in these ﬁ nancial statements: > The amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’, issued in October 2008, in respect of the reclassiﬁ cation of ﬁ nancial instruments have been adopted in these ﬁ nancial statements. The amendments extend the ability of preparers to make reclassiﬁ cations of ﬁ nancial instruments between IAS 39 categories in restricted circumstances. Under the revised reclassiﬁ cation rules an entity has the ability to reclassify ﬁ nancial instruments from the held-for-trading and available for sale ﬁ nancial instrument categories in certain speciﬁ ed rare circumstances. The Group’s accounting policies have been amended as shown in note 1(e) (xiii). > The amendments to IFRS 7 ‘Financial Instruments: Disclosures’, issued in October 2008, in conjunction with the changes to IAS 39, in respect of the reclassiﬁ cation of ﬁ nancial instruments, have also been adopted in these ﬁ nancial statements. The amendments require additional disclosures where reclassiﬁ cations have been made in respect of the extended reclassiﬁ cations provisions in IAS 39. See note 31 for the additional disclosures. > IFRS 2 ‘Share-based payments’ (effective 1 January 2009). Amendment relating to vesting conditions and cancellations. The amendments which have been early adopted in these ﬁ nancial statements, clarify that vesting conditions are performance conditions and service conditions only. Other features of a share-based transaction are not vesting conditions. There were no material impacts arising from the implementation of this amendment. > IFRIC 14 ‘The Limit on a Deﬁ ned Beneﬁ t Asset, Minimum Funding Requirements and their Interaction’ (effective 1 January 2008) clariﬁ es when refunds or reductions in future contributions in relation to deﬁ ned beneﬁ t assets should be regarded as available and provides guidance on the impact of minimum funding requirements (MFR) on such assets. This amendment was endorsed by EV on 16 December 2008. There was no material impact on the Group’s ﬁ nancial statements from the implementation of this amendment. Page 163 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 1 Accounting policies continued (x) Standards and interpretations that have previously been early adopted in the Group’s annual ﬁ nancial statements The following standards and interpretations have been previously early adopted in the Group’s ﬁ nancial statements. > IFRS 8 ‘Operating Segments’ (effective 1 January 2009) was adopted in the 2007 ﬁ nancial statements. IFRS 8 replaces IAS 14 ‘Segment Reporting’. The key change from IAS 14 is to require segment information to be presented based on internal reports that are regularly reviewed by the entity’s chief operating decision maker. The amount of each operating segment item reported is the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance. > IFRIC 11, ‘IFRS 2: Group and Treasury Share Transactions’ (effective 1 March 2007) was adopted in the 2007 ﬁ nancial statements. IFRIC 11 clariﬁ es the treatment required in group and subsidiary ﬁ nancial statements of certain share-based transactions entered into by holding companies or subsidiaries, principally in respect of accounting for entitlements to equity instruments of the holding company. The principles set out in the interpretation had no impact on the Group’s accounting policies on share-based payments and limited impact in the Parent Company’s ﬁ nancial statements. (y) Future standards, amendments to standards, and interpretations not early adopted in the 2008 annual ﬁ nancial statements At the date of authorisation of these ﬁ nancial statements the following standards, amendments to standards, and interpretations, which are relevant to the Group, have been issued by the International Accounting Standards Board, although the EU has not yet endorsed all of them. > IAS 1 ‘Presentation of Financial Statements – a Revised Presentation’ (effective 1 January 2009). The changes include a comprehensive revision of primary statements, and include a requirement to introduce a statement of comprehensive income. There will be some presentational changes as a result of the introduction of this standard but no changes in measurement or recognition. There have also been additional amendments to this standard during 2008 as a consequence of the amendments made to IAS 32 relating to the disclosure of puttable instruments and obligations arising on liquidation (please see below for the amendments made to IAS 32 ‘Financial Instruments: Presentation’). > IAS 32 ‘Financial Instruments: Presentation – Puttable Financial Instruments and Obligations arising on liquidation’ (effective 1 January 2009). Amendments have been made relating to the balance sheet classiﬁ cation of puttable instruments and obligations arising only on liquidation. As a result of the amendments some ﬁ nancial instruments that currently meet the deﬁ nition of a ﬁ nancial liability will be classiﬁ ed as equity because they represent the residual interest in the net assets of an entity. The amendments are not expected to have an impact on the Group’s ﬁ nancial statements. > IAS 39 ‘Financial Instruments: Recognition and Measurement’ (effective 1 July 2009). Amendments have been made to clarify two hedge accounting issues: i) inﬂ ation in a ﬁ nancial hedged item and ii) a one sided risk in a hedged item. The amendments will not have a material impact on the Group’s ﬁ nancial statements. > IFRS 3 ‘Business Combinations’ (effective 1 July 2009, not yet endorsed by EU). The amendments to IFRS 3 introduce a comprehensive revision to the standard, in particular on the application of the acquisition method. The provisions of the standard largely apply to future acquisitions, and in the case of Old Mutual, the standard will be applicable for acquisitions occurring on or after 1 January 2010, the required date of implementation of the standard by the Group. No retrospective application is necessary. > IAS 27 ‘Consolidated and Separate Financial Statements’ (effective 1 July 2009, not yet endorsed by EU). The amendments to IAS 27 coincide with those made to IFRS 3, and the majority of the signiﬁ cant provisions of the revised standard are only applicable to the Group in 2010. > IAS 28 ‘Investments in Associates’ and IAS 31 ‘Interests in Joint Ventures’ (effective 1 July 2009, not yet endorsed by EU). The amendments coincide with the changes to IFRS 3 and IAS 27. > IFRIC 13 ‘Customer Loyalty Programmes’ (effective 1 July 2008). These amendments address accounting by entities that grant loyalty award credits to customers who buy other goods or services. Speciﬁ cally, they explain how entities should account for their obligations to provide free or discounted goods or services (“awards”) to customers who redeem award credits. The amendments are anticipated to have a limited impact in the Group’s South African banking business. > IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ (effective 1 October 2008, not yet endorsed by EU). These amendments clarify three particular issues relating to the accounting for hedges of net investments in foreign operations. The interpretation is not anticipated to have any material impact on the Group’s ﬁ nancial statements. Page 164 Old Mutual plc Annual Report and Accounts 2008 2 Foreign currencies The principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are: 31 December 2008 Rand US Dollars Swedish Kronor Euro 31 December 2007 Rand US Dollars Swedish Kronor Euro 3 Segment information Income statement (average rate) Balance sheet (closing rate) 15.2948 1.8524 12.2209 1.2594 13.7194 1.4575 11.4494 1.0446 14.1109 2.0014 13.5253 1.4602 13.6043 1.9827 12.8320 1.3596 (i) Basis of segmentation The Group’s results are analysed across nine reportable segments. For purposes of presentation these are grouped in geographical areas. This is consistent with the 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. The Group generates revenue from four principal business activities: long-term business, asset management, banking and general insurance. The types of products and services from which each reportable segment derives its revenues are as follows: Europe – Skandia UK – long-term business and asset management Europe – Nordic – long-term business, asset management and banking Europe – ELAM – long-term business and asset management South Africa – OMSA – long-term business and asset management South Africa – Nedbank – banking and asset management South Africa – Mutual & Federal – general insurance South Africa – Rest of Africa – long-term business and asset management (includes Namibia) United States – US Life – long-term business United States – USAM – asset management Information about other business activities and operating segments is disclosed in the ‘other operating segments’ category. Other operating segments comprise the Asia Paciﬁ c asset management business and Group head ofﬁ ce. Adjusted operating proﬁ t 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 279 to 327. Comparative segment information has been revised in accordance with the improvements in presentation made in the current ﬁ nancial year. 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. Page 165 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (ii) Adjusted operating proﬁ t statement – segment information year ended 31 December 2008 Europe South Africa UK £m Nordic £m ELAM £m OMSA £m Nedbank £m Revenue Gross earned premiums Outward reinsurance Net earned premiums Investment return (non-banking) Banking interest and similar income Banking trading, investment and similar income Fee and commission income, and income from service activities Other income Inter-segment revenues 131 (78) 53 (6,165) – – 667 14 104 92 (4) 88 (2,317) 266 24 184 20 104 92 (8) 84 (1,436) – – 316 2 29 1,587 (45) 1,542 (305) – – 185 97 227 Total revenues (5,327) (1,631) (1,005) 1,746 Expenses Claims and beneﬁ ts (including change in insurance contract provisions) Reinsurance recoveries Net claims and beneﬁ ts incurred Change in investment contract liabilities Losses on loans and advances Finance costs Banking interest payable and similar expenses Fee and commission expenses, and other acquisition costs Other operating and administrative expenses Goodwill impairment Change in third party interest in consolidated funds Amortisation of PVIF and other acquired intangibles Income tax attributable to policyholder returns Inter-segment expenses (38) 34 (4) 5,991 – – – (330) (333) – – – 283 (113) (68) 4 (64) 2,390 (4) – (183) (49) (193) – – – (52) (126) (103) 2 (101) 1,466 – – – (151) (166) – – – (1) (31) (648) 41 (607) 184 – – – (150) (487) – – – 7 (177) – – – – 3,793 138 533 85 19 4,568 – – – – (315) – (2,684) – (928) – – – – (71) Total expenses 5,494 1,719 1,016 (1,230) (3,998) Share of associated undertakings’ proﬁ t/(loss) after tax Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Adjusted operating proﬁ t/(loss) before tax and minority interests Tax expense Minority interests Adjusted operating proﬁ t/(loss) after tax and minority interests Adjusting items net of tax and minority interests Proﬁ t/(loss) after tax attributable to equity holders of the parent – – 167 (56) – 111 55 166 – – 88 (11) – 77 (122) (45) – – 11 (14) – (3) (16) (19) 6 – 522 (155) (5) 362 104 466 5 – 575 (123) (227) 225 29 254 Page 166 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (ii) Adjusted operating proﬁ t statement – segment information year ended 31 December 2008 continued United States M & F £m Rest of Africa £m US Life £m USAM £m Other operating Consolidation adjustments segments £m £m Total reportable segments £m Adjusting items (note 4) £m Income statement £m 570 (91) 479 56 – – 16 – 26 577 (401) 72 (329) – – – – (101) (59) – – – – (12) (501) – – 76 (17) (19) 40 (49) (9) 85 (2) 83 (14) – – 4 – 3 76 (52) 1 (51) 16 – – – (6) (10) – – – (1) (6) (58) – – 18 (2) – 16 (13) 3 2,599 (107) 2,492 (332) – – – 22 – 2,182 (2,300) 108 (2,192) 4 – – – (264) (84) – – – – (13) (2,549) – – (367) 76 – (291) (569) (860) – – – (3) – – 473 17 8 495 – – – – – – – (10) (388) – – – – – (398) – – 97 2 – 99 1 100 – – – (13) – – 33 – 66 86 – – – – – (140) – (10) (75) – – – – (37) (262) (12) – (188) 214 (21) 5 380 385 – – – (713) – – (1) 13 (586) 5,156 (335) 4,821 (11,242) 4,059 162 2,410 270 – (1,287) 480 – – – – – – – (44) (34) – 779 – – 586 1,287 – – – – – – – – (3,610) 262 (3,348) 10,051 (319) (140) (2,867) (1,115) (2,757) – 779 236 – 520 (1) – 999 (86) (272) 641 (200) 441 – – – (336) – – (97) – – (433) – – – – – 532 14 178 (77) (74) – (361) (236) – (24) – 53 (404) 174 30 (200) 5,156 (335) 4,821 (11,578) 4,059 162 2,313 270 – 47 (3,610) 262 (3,348) 10,051 (319) 392 (2,853) (937) (2,834) (74) 779 (361) – – 496 (1) 53 595 88 (242) 441 Page 167 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (ii) Adjusted operating proﬁ t statement – segment information year ended 31 December 2007 Europe South Africa UK £m Nordic £m ELAM £m OMSA £m Nedbank £m 129 (66) 63 1,565 – – 706 15 82 2,431 (79) 47 (32) (1,525) – – – (327) (325) – – – 42 (91) (2,258) – – 173 (43) – 130 (13) 117 73 (3) 70 349 211 3 184 17 92 926 (46) 1 (45) (293) (3) – (125) (35) (223) – – – (39) (98) (861) – – 65 (10) – 55 (69) (14) 28 (3) 25 50 – – 295 1 44 415 (26) 2 (24) (33) – – – (131) (149) – – – – (48) 1,474 (39) 1,435 3,006 – – 209 100 190 – – – – 2,979 167 529 65 39 4,940 3,779 (2,842) 38 (2,804) (768) – – – (148) (533) – – – (62) (139) – – – – (154) – (1,928) – (977) – – – – (75) (385) (4,454) (3,134) – – 30 (15) (1) 14 (14) – 11 – 497 (128) (6) 363 121 484 8 – 653 (173) (252) 228 23 251 Revenue Gross earned premiums Outward reinsurance Net earned premiums Investment return (non-banking) Banking interest and similar income Banking trading, investment and similar income Fee and commission income, and income from service activities Other income Inter-segment revenues Total revenues Expenses Claims and beneﬁ ts (including change in insurance contract provisions) Reinsurance recoveries Net claims and beneﬁ ts incurred Change in investment contract liabilities Losses on loans and advances Finance costs Banking interest payable and similar expenses Fee and commission expenses, and other acquisition costs Other operating and administrative expenses Goodwill impairment Change in third party interest in consolidated funds Amortisation of PVIF and other acquired intangibles Income tax attributable to policyholder returns Inter-segment expenses Total expenses Share of associated undertakings’ proﬁ t/(loss) after tax Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Adjusted operating proﬁ t/(loss) before tax and minority interests Tax expense Minority interests Adjusted operating proﬁ t/(loss) after tax and minority interests Adjusting items net of tax and minority interests Proﬁ t/(loss) after tax attributable to equity holders of the parent Page 168 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (ii) Adjusted operating proﬁ t statement – segment information year ended 31 December 2007 continued United States M & F £m Rest of Africa £m US Life £m USAM £m Other operating segments £m Consolidation adjustments £m Total reportable segments £m Adjusting items (note 4) £m Income statement Restated £m 625 (92) 533 60 – – 18 – 33 644 (390) 52 (338) – – – – (128) (53) – – – – (36) (555) – – 89 (28) (20) 41 2 43 89 (2) 87 77 – – 5 – 3 3,148 (88) 3,060 774 – – – 9 – 172 3,843 (139) 1 (138) 1 – – – (5) (6) – – – (1) (8) (157) – – 15 (1) – 14 1 15 (3,671) 95 (3,576) – – – – (102) (54) – – – – (13) (3,745) – – 98 (33) – 65 (49) 16 – – – 13 – – 570 12 12 607 – – – – – – – (10) (435) – – – – – (445) – – 162 (27) – 135 8 143 – – – 8 – – 42 3 17 70 – – – – – (119) – (11) (74) – – – – (4) (208) (20) – (158) 40 (13) (131) 48 (83) – – – 211 – – – 23 (512) 5,566 (293) 5,273 6,113 3,190 170 2,558 245 – (278) 17,549 – – – – – – – (70) (8) – (156) – – 512 (7,193) 236 (6,957) (2,618) (157) (119) (2,053) (967) (2,837) – (156) – (60) – – – – 205 – – (83) – – 122 – – – – – 69 – 189 24 (3) – (360) 60 – 5,566 (293) 5,273 6,318 3,190 170 2,475 245 – 17,671 (7,193) 236 (6,957) (2,618) (157) (50) (2,053) (778) (2,813) (3) (156) (360) – – 278 (15,924) (21) (15,945) – 25 126 (86) 18 58 (1) 25 1,750 (504) (274) 972 – – (1) – 1,624 (418) (292) 914 58 972 Page 169 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (iii) Gross earned premiums Year ended 31 December 2008 Long-term business – insurance contracts Long-term business – investment contracts with discretionary participation features General insurance Gross earned premiums UK £m 131 – – 131 Europe South Africa Nordic £m ELAM £m OMSA £m Nedbank £m 92 – – 92 92 – – 92 1,111 476 – 1,587 Long-term business – other investment contracts recognised as deposits 4,892 976 1,052 1,358 Year ended 31 December 2007 Long-term business – insurance contracts Long-term business – investment contracts with discretionary participation features General insurance Gross earned premiums UK £m 129 – – 129 Nordic £m 73 – – 73 Europe ELAM £m 28 – – 28 OMSA £m 1,011 463 – 1,474 Long-term business – other investment contracts recognised as deposits 6,335 694 1,421 1,293 – – – – – South Africa Nedbank £m – – – – – (iv) Impairments on ﬁ nancial assets Year ended 31 December 2008 Impairment losses Year ended 31 December 2007 Impairment losses (v) Funds under management As at 31 December 2008 Long-term business policyholder funds Unit trusts and mutual funds Third party client funds Total client funds under management Shareholder funds Total funds under management As at 31 December 2007 Long-term business policyholder funds Unit trusts and mutual funds Third party client funds Total client funds under management Shareholder funds Total funds under management Page 170 Old Mutual plc Annual Report and Accounts 2008 Europe South Africa UK £m – UK £m – Nordic £m 5 Nordic £m ELAM £m – Europe ELAM £m OMSA £m Nedbank £m – 315 South Africa OMSA £m Nedbank £m 2 – 5 154 Europe South Africa UK £m 26,889 7,108 – 33,997 885 34,882 UK £m 31,735 9,211 – 40,946 915 Nordic £m 6,605 1,000 – 7,605 418 8,023 Nordic £m 7,595 1,182 – 8,777 315 ELAM £m 5,297 4,291 – 9,588 311 OMSA £m Nedbank £m 20,048 3,613 8,613 32,274 1,596 425 2,617 3,375 6,417 – 9,899 33,870 6,417 Europe ELAM £m 5,344 4,023 – 9,367 224 South Africa OMSA £m Nedbank £m 21,784 3,918 6,945 32,647 1,846 430 2,775 3,335 6,540 – 41,861 9,092 9,591 34,493 6,540 3 Segment information continued M & F £m – – 570 570 – Rest of Africa £m 37 48 – 85 33 M & F £m Rest of Africa £m 37 52 – 89 22 Rest of Africa £m – Rest of Africa £m – Rest of Africa £m 253 – 228 481 36 517 Rest of Africa £m 255 – 237 492 60 552 625 625 – M & F £m – M & F £m – M & F £m – – – – 145 145 M & F £m – – – – 136 136 US Life £m 2,599 – – 2,599 230 US Life £m 3,148 – – 3,148 177 US Life £m 414 US Life £m 32 US Life £m 2,642 – – 2,642 – 2,642 US Life £m 2,368 – – 2,368 – 2,368 United States Other USAM £m – – – – – United States USAM £m – – – – – £m – – – – – Other £m – – – – – United States Other USAM £m – £m United States Other USAM £m – £m – United States Other USAM £m 13,623 3,127 147,956 164,706 177 164,883 £m 193 1,859 1,484 3,536 – 3,536 United States Other USAM £m 12,454 5,260 149,850 167,564 191 167,755 £m 122 2,535 3,833 6,490 – 6,490 Total £m 4,062 524 570 5,156 8,541 Total £m 4,426 515 625 5,566 9,942 Total £m 734 Total £m 193 Total £m 75,975 23,615 161,656 261,246 3,568 264,814 Total £m 82,087 28,904 164,200 275,191 3,687 278,878 Page 171 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2008 Europe South Africa UK £m Nordic £m ELAM £m OMSA £m Nedbank £m 1,609 1,183 1,138 644 713 22 230 – 23 2 166 – 639 24 552 63 607 42 551 14 – – 116 116 – 27,167 163 2 – 1 23 638 26,340 – – 80 – 178 – 202 – 163 222 742 1 218 – 4 – 78 – 34 2 32 – 13 10 – 3 – 121 3,846 – 3,846 7,595 214 813 – – 12 155 6,401 – – – – 138 – 372 – 264 28 24 – 4 – – 254 1,273 65 26 102 – 92 10 6 6 – – – – 49 49 – 574 375 6 183 – 17 1 51 – 315 25 282 8 5 3 – 2 – – 25 24 1 5,389 21,700 610 41 67 1 9 11 4,650 – – 8 – 125 – 183 – 89 3,631 1,781 2,106 6,678 873 283 4,233 2,114 1 3 – 433 1,614 97 7 1,308 425 308 – 117 – 734 316 15 25 75 2 – – 2 9 9 – – – – 31,634 – 31,634 5,043 2,255 2,172 – 38 152 426 – – – 25 220 486 1,627 631 – 19 30,952 13,648 7,346 26,965 41,286 At 31 December 2008 Assets Goodwill and other intangible assets Goodwill Present value of acquired in-force business Software development Other intangibles Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investments in associated undertakings and joint ventures Deferred acquisition costs Insurance contracts Investment contracts Asset management Reinsurers’ share of long-term business policyholder liabilities Insurance contracts Unit-Linked investment contracts and similar contracts Outstanding claims Reinsurers share of general insurance liabilities Deposits held with reinsurers Loans and advances Policyholder loans Other loans and advances Investments and securities Government and government-guaranteed securities Listed other debt securities, preference shares and debentures Unlisted other debt securities, preference shares and debentures Listed equity securities Unlisted equity securities Listed pooled investments Unlisted pooled investments Short-term funds and securities treated as investments Other securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale Inter-segment assets Total assets Page 172 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2008 continued United States M & F £m Rest of Africa £m US Life £m 29 10 – 19 – – 24 – 8 – 15 15 – – – – – – 115 3 2 – 2 322 – 1 2 67 5 36 – 211 – – – 68 – 56 – 46 4 4 – – – – 13 8 – – 3 – 3 – – – – – – – 10 10 – 626 64 9 7 253 11 128 – 150 4 – – 10 – 4 – 14 137 – 120 17 – – 1 – 1,036 – 2,041 2,041 – – 508 480 – 28 – 40 62 61 1 13,960 97 7,555 2,690 – 118 2,093 18 1,389 – – – 1,041 57 11 – 423 USAM £m 1,305 1,271 – 1 33 – 26 – 158 – 40 – – 40 – – – – – – – – – 177 – – – – – 135 42 – – – – 139 – 220 – 99 688 692 19,317 2,164 Other operating segments £m Consolidation adjustments £m Total reportable segments £m 24 24 – – – – 4 – 3 10 8 – – 8 – – – – – – 1 – 1 88 – – – – – – – – 88 2 – 100 226 89 – 1,632 2,187 – – – – – – – 179 – – – – – – – – – – – – – – – 1,455 1,942 1,695 175 7,938 – 1,310 (11,853) 125 123 – – 419 1,109 997 – (4,057) 5,882 3,081 1,950 187 664 734 682 1,478 1,590 111 3,199 2,107 961 131 1,148 550 551 47 115 164 35,745 260 35,485 83,522 8,976 14,069 5,047 14,976 1,203 5,215 29,831 3,989 216 118 220 3,137 4,633 2,862 7 – 102 145,347 Page 173 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2008 continued At 31 December 2008 Liabilities Long-term business policyholder liabilities Insurance contracts Unit-linked investment contracts and similar contracts Other investment contracts Discretionary participating investment contracts Outstanding claims General insurance liabilities Third party interests in consolidated funds Borrowed funds Senior debt securities Mortgage backed securities Subordinated debt securities Provisions Deferred revenue Long-term business Asset management General insurance Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositees Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale Inter-segment liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Minority interests Minority interests – ordinary shares Minority interests – preference shares Total equity Europe South Africa UK £m Nordic £m ELAM £m OMSA Nedbank £m £m 27,327 6,884 5,348 22,569 157 27,154 – – 16 71 6,704 – – 109 700 4,641 – – 7 10,310 6,525 105 5,428 201 – – 1 1 – – 22 401 320 81 – 221 26 508 – – 1 – 185 – – – – – – 203 3 3 – – 93 22 198 – 4,622 – – 174 – – – – – – 15 155 149 6 – 212 3 173 – – – – 406 – – 237 – – 237 126 22 16 6 – 172 96 826 – – 1,436 6 26 426 – – 426 – – – – 960 – 104 856 1 – – – – 162 18 747 220 33,549 1,731 – 427 28,692 12,199 6,312 25,516 38,241 2,260 1,449 1,034 1,449 3,045 2,260 – 1,449 – 1,034 – 1,441 8 – – – – – – 8 – 2,260 1,449 1,034 1,449 1,717 1,328 1,081 247 3,045 The net assets of South African businesses are stated after eliminating investments in Group equity and debt instruments of £236 million (2007: £493 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 South Africa debt relates to long-term business. All other debt relates to other shareholders’ net assets. Page 174 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2008 continued M & F £m – – – – – – 344 – – – – – 21 8 – – 8 2 2 71 – – – – (1) 447 241 193 48 48 – 241 Rest of Africa £m 593 238 137 – 218 – – – – – – – 2 1 1 – – – 1 5 – – – – 5 607 85 85 – – – 85 United States USAM £m Other operating segments £m Consolidation adjustments £m Total reportable segments £m – – – – – – – – – – – – 3 – – – – – 8 299 – – – – 1,452 1,762 402 365 37 37 – 402 – – – – – – – – 1,097 556 – 541 84 8 – 8 – 12 39 165 – – 124 – 1,379 2,908 (721) (1,140) 419 (27) 446 (721) – – – – – – – 2,591 – – – – – – – – – – – 465 – – 1,103 – (4,057) 81,269 28,106 45,161 1,965 5,646 391 344 2,591 2,295 557 104 1,634 477 598 489 101 8 1,452 219 3,733 220 38,171 4,395 6 – 102 135,770 – – – – – – 9,577 7,737 1,840 1,147 693 9,577 US Life £m 18,122 16,630 – 1,434 – 58 – – – – – – – – – – – 578 4 276 – – – – 4 18,984 333 333 – – – 333 Page 175 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2007 Europe South Africa UK £m Nordic £m ELAM £m OMSA Nedbank 1,716 1,180 639 794 24 259 – 19 2 40 – 524 20 439 65 702 56 636 10 – 64 63 1 31,964 163 – – 1 1 2,520 29,279 – – 45 – 161 – 599 – 198 196 760 1 223 – 5 – 74 – 15 1 14 – 8 5 – 3 183 3,117 – 3,117 7,867 165 105 16 1 16 197 7,367 – – 5 – 63 15 202 1,024 549 £m 26 14 – 12 – – 241 1,096 106 25 93 – 86 7 4 4 – – – 83 83 – 939 436 338 4 161 – 14 1 13 – 182 3 175 4 4 2 – 2 – 19 15 4 5,426 24,394 44 80 3 7 3 11 5,278 – – 2 – 166 – 125 – 137 3,074 1,969 2,083 9,402 680 214 4,703 2,269 – 4 – 513 43 195 2 844 £m 420 320 – 100 – 615 291 13 12 62 1 – – 1 13 13 – – – 27,360 – 27,360 4,686 1,414 2,660 – 44 138 430 – – – 4 165 611 666 763 2 102 36,034 14,307 7,028 27,669 35,786 At 31 December 2007 Assets Goodwill and other intangible assets Goodwill Present value of acquired in-force business Software development Other intangibles Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investments in associated undertakings and joint ventures Deferred acquisition costs Insurance contracts Investment contracts Asset management Reinsurers’ share of long-term business policyholder liabilities Insurance contracts Unit-Linked investment contracts and similar contracts Outstanding claims Deposits held with reinsurers Loans and advances Policyholder loans Other loans and advances Investments and securities Government and government-guaranteed securities Listed other debt securities, preference shares and debentures Unlisted other debt securities, preference shares and debentures Listed equity securities Unlisted equity securities Listed pooled investments Unlisted pooled investments Short-term funds and securities treated as investments Other securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale Inter-segment assets Total assets Page 176 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2007 continued M & F £m Rest of Africa £m United States USAM £m 959 932 – 10 17 – 17 – 106 – 24 – – 24 – – – – – – – – 192 – – – – – 169 23 – – – – 182 – 205 – – US Life £m 184 57 116 11 – – 1 – 327 – 1,398 1,398 – – 662 646 – 16 30 44 43 1 11,560 240 6,881 2,179 – 115 1,656 11 478 – – – 876 20 3 – 46 4 4 – – – – 13 8 – – 3 – 3 – 1 1 – – – – – – 675 80 15 – 320 10 104 – 106 40 – – 13 – 5 – 11 733 15,151 1,685 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 595 52 647 Other operating segments £m 31 31 – – – – 7 – 5 (6) 13 – – 13 – – – – – – – – 155 – – – – – – – – 155 23 – 85 72 76 – 2,112 2,573 Consolidation adjustments £m Total reportable segments £m – – – – – – – 359 – – – – – – – – – – – – – – 2,708 2,054 911 – 11,586 – 897 (13,261) 489 32 – – 104 711 1,296 – (4,051) 1,127 5,459 2,629 2,008 162 660 615 608 1,479 683 81 2,253 1,422 717 114 1,394 727 636 31 213 30,687 204 30,483 89,627 7,234 12,621 4,281 21,361 963 6,198 33,400 3,342 227 83 165 2,774 1,527 3,469 1,623 – 142,740 Page 177 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2007 continued Europe South Africa UK £m Nordic £m ELAM £m OMSA £m Nedbank £m 32,311 7,909 5,371 24,632 188 32,111 – – 12 – – 22 22 – – 21 345 261 84 332 34 618 – – – – 198 72 7,738 – – 99 – – 20 20 – – 180 1 1 – 111 15 219 – 3,936 21 22 579 103 5,263 – – 5 11,105 6,936 85 6,194 312 – – 17 17 – – 5 76 72 4 155 8 152 – – 3 – 212 – – 238 – – 238 134 23 16 7 281 149 772 – – 115 2 75 430 – – 430 – – – – 845 – 103 742 18 3 – 3 128 29 2,406 165 27,881 840 – 379 33,881 13,013 5,999 26,421 33,124 2,153 1,294 1,029 1,248 2,662 2,153 – 1,294 – 1,024 5 – – – – 5 – 1,238 10 10 – 1,520 1,142 885 257 2,153 1,294 1,029 1,248 2,662 At 31 December 2007 Liabilities Long-term business policyholder liabilities Insurance contracts Unit-linked investment contracts and similar contracts Other investment contracts Discretionary participating investment contracts Outstanding claims General insurance liabilities Third party interests in consolidated funds Borrowed funds Senior debt securities Mortgage backed securities Subordinated debt securities Provisions Deferred revenue Long-term business Asset management Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositors Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale Inter-segment liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Minority interests Minority interests – ordinary shares Minority interests – preference shares Total equity Page 178 Old Mutual plc Annual Report and Accounts 2008 3 Segment information continued (vi) Balance sheet – segment information year ended 31 December 2007 continued M & F £m Rest of Africa £m – – – – – – – – – – – – – – – – – – – – – – 396 4 400 247 200 47 47 – 247 602 269 123 – 210 – – – – – – – 3 – – – – 1 33 – – – – 2 641 92 92 – – – 92 US Life £m 12,996 11,900 – 1,059 – 37 – – – – – – – – – – 401 13 555 – – – – – 13,965 1,186 1,186 – – – 1,186 United States USAM £m Other operating segments £m Consolidation adjustments £m Total reportable segments £m – – – – – – – – – – – – 2 – – – – (5) 364 – – – – 1,638 1,999 (314) (346) 32 32 – (314) – – – – – – – – 1,211 402 – 809 136 14 – 14 5 76 137 – – 30 – 964 2,573 – (400) 400 (46) 446 – – – – – – – – 3,547 – – – – – – – – – – 924 – – 707 – (4,051) 1,127 – – – – – – 84,251 23,637 52,171 1,574 6,404 465 – 3,547 2,353 461 103 1,789 499 462 350 112 1,413 320 6,180 165 31,817 1,716 420 – 133,143 9,597 7,961 1,636 933 703 9,597 Page 179 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 4 Operating proﬁ t adjusting items (i) Summary of adjusting items In determining the adjusted operating proﬁ t of the Group certain adjustments are made to proﬁ t before tax to reﬂ ect the directors’ view of the underlying long-term performance of the Group. The following table shows an analysis of those adjustments from adjusted operating proﬁ t to proﬁ t before and after tax. Notes Europe £m South Africa £m United States £m Other £m Total £m (341) – (96) (1) (438) 4(ii) 4(iii) 4(iv) 4(v) 4(vi) 4(viii) 4(ix) 5(iii) 6(iii) 72 145 – – – – (124) 41 – (83) (20) (239) 234 – – 14 (11) 45 37 71 1 (476) – – 7 – (564) 3 (7) (568) Notes Europe £m South Africa £m United States £m 4(ii) 4(iii) 4(iv) 4(v) 4(vi) 4(vii) 4(viii) 4(ix) 5(iii) 6(iii) (218) (3) (24) 16 55 – – – – – (147) 51 – (96) 1 191 14 – 13 – – 216 (98) 29 147 8 (55) – – – 11 – (60) 30 (11) (41) – – – 43 – 489 531 (151) – 380 Other £m – – – – 40 (12) – 29 57 (9) – 48 53 (570) 234 43 7 503 (168) (62) 30 (200) Total £m (245) 25 191 14 40 1 11 29 66 (26) 18 58 Year ended 31 December 2008 Income/(expense) Goodwill impairment and impact of acquisition accounting Proﬁ t/(loss) on disposal of subsidiaries, associated undertakings and strategic investments Short-term ﬂ uctuations in investment return 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 minority holders Credit-related fair value gains on Group debt instruments Total adjusting items Tax on adjusting items Minority interest in adjusting items Total adjusting items after tax and minority interests Year ended 31 December 2007 Income/(expense) Goodwill impairment and impact of acquisition accounting Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Short-term ﬂ uctuations in investment return Investment return adjustment for Group equity and debt instruments held in life funds Dividends declared to holders of perpetual preferred callable securities Closure of unclaimed shares trusts US Asset Management equity plans and minority holders Credit-related fair value gains on Group debt instruments Total adjusting items Tax on adjusting items Minority interest in adjusting items Total adjusting items after tax and minority interests Page 180 Old Mutual plc Annual Report and Accounts 2008 4 Operating proﬁ t adjusting items continued (ii) Goodwill impairment and impact of acquisition accounting In applying acquisition accounting in accordance with IFRS deferred acquisition costs and deferred revenue are not recognised. These are reversed in the acquisition balance sheet 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 proﬁ t 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. Goodwill impairment and acquisition accounting adjustments to adjusted operating proﬁ t are summarised below: Year ended 31 December 2008 Amortisation of acquired PVIF UK Nordic ELAM US Life Amortisation of acquired deferred costs and revenue UK Nordic ELAM Amortisation of other acquired intangible assets UK Nordic ELAM Change in acquisition balance sheet provisions UK Nordic Goodwill impairment Nordic US Life Other Year ended 31 December 2007 Amortisation of acquired PVIF UK Nordic ELAM US Life Amortisation of acquired deferred costs and revenue UK Nordic ELAM Amortisation of other acquired intangible assets UK Nordic ELAM Change in acquisition balance sheet provisions Nordic Goodwill impairment M & F Europe £m South Africa £m United States £m Other £m (86) (105) (60) – 33 22 26 (30) (24) (21) (8) (76) (12) – – (341) – – – – – – – – – – – – – – – – – – – (35) – – – – – – – – – (61) – (96) – – – – – – – – – – – – – – (1) (1) Total £m (86) (105) (60) (35) 33 22 26 (30) (24) (21) (8) (76) (12) (61) (1) (438) South Africa Restated £m Europe £m United States £m Other £m Total £m (95) (92) (79) – 35 20 51 (30) (22) (18) 12 – (218) – – – – – – – – – – – (3) (3) – – – (24) – – – – – – – – (24) – – – – – – – – – – – – – (95) (92) (79) (24) 35 20 51 (30) (22) (18) 12 (3) (245) Page 181 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 4 Operating proﬁ t adjusting items continued (iii) Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments On 11 June 2008, ELAM completed the disposal of its controlling shareholding in Palladyne, an asset management business, resulting in a proﬁ t on disposal of £17 million. Part of the Nordic segment’s banking business, Skandia’s Nordic vehicle ﬁ nance operation, SkandiaBanken Bilﬁ nans, was sold during the six months ended 30 June 2008, resulting in a proﬁ t on disposal of £55 million. During 2007, the Nordic segment’s banking subsidiary sold its Danish operation. An accounting proﬁ t on sale of £16 million was recognised. The US Asset Management business disposed of its interests in certain afﬁ liate asset managers, resulting in a proﬁ t on disposal of £8 million in 2007. The Group has closed its project to develop a direct ﬁ nancial services capability in South Africa due to adverse market conditions. Costs relating to the closure amounting to £25 million have been excluded from the adjusted operating proﬁ t. OMSA realised a proﬁ t of £4 million on the sale of its administration business and Nedbank recognised a £1 million proﬁ t in the disposal of Bond Choice. Proﬁ ts on the disposal of subsidiaries, associated undertakings and strategic investments are analysed below: Year ended 31 December 2008 Nordic ELAM OMSA Nedbank M & F USAM Year ended 31 December 2007 Nordic Nedbank USAM Europe £m South Africa £m United States £m Other £m 55 17 – – – – 72 – – (11) 1 (10) – (20) – – – – – 1 1 – – – – – – – Europe £m South Africa £m United States £m Other £m 16 – – 16 – 1 – 1 – – 8 8 – – – – Total £m 55 17 (11) 1 (10) 1 53 Total £m 16 1 8 25 (iv) Long-term investment return Proﬁ t before tax includes actual investment returns earned on the shareholder assets of the Group’s long-term and general insurance businesses. Adjusted operating proﬁ t 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 ﬂ uctuations 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 inﬂ ation expectations 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 proﬁ t are consistent with the actual returns expected to be earned over the long-term. For South Africa long-term business, the return is applied to an average value of investible shareholders’ assets, adjusted for net fund ﬂ ows. For US and Europe long-term businesses, the return is applied to average investible assets. For all businesses mis-matches attributed to the timing of the recognition of policyholder tax and related receipts from policyholders are eliminated with reference to the historic net gains/(losses) in respect of this item. Long-term investment rates Europe long-term business South Africa long-term business United States long-term business Page 182 Old Mutual plc Annual Report and Accounts 2008 Year ended Year ended 31 December 31 December % % 2008 4.8 16.6 5.9 2007 4.9 15.6 5.7 4 Operating proﬁ t adjusting items continued (iv) Long-term investment return continued Analysis of short-term ﬂ uctuations in investment return At 31 December 2008 Long-term investment return Less: Actual shareholder investment return Short-term ﬂ uctuations in investment return Hedge losses on Bermuda guarantees treated as short-term ﬂ uctuations Total short–term ﬂ uctuations in investment return At 31 December 2007 Long-term investment return Less: Actual shareholder investment return Short-term ﬂ uctuations in investment return Hedge losses on Bermuda guarantees treated as short-term ﬂ uctuations Total short–term ﬂ uctuations in investment return UK £m 65 205 (140) – (140) UK £m 6 60 (54) – (54) Nordic £m ELAM £m OMSA £m M & F £m Rest of Africa £m US Life £m 1 5 (4) – (4) – 1 (1) – (1) Nordic £m ELAM £m – – – – – 1 2 (1) – (1) 230 76 154 – 154 OMSA £m 212 406 (194) – (194) 60 (12) 72 – 72 M & F £m 65 61 4 – 4 11 (2) 13 – 754 484 270 206 Total £m 1,121 757 364 206 13 476 570 Rest of Africa £m 9 10 (1) – US Life £m 582 527 55 – Total £m 875 1,066 (191) – (1) 55 (191) i l s a c n a n F i The actual investment return attributable to shareholders for the US long-term business reﬂ ects total investment income, as a distinction is not drawn between shareholder and policyholder funds. (v) Investment return adjustment for Group equity and debt instrument held in life funds Adjusted operating proﬁ t includes investment returns on policyholder investments in Group equity and debt instruments by the Group’s life funds. These include investments in the Company’s ordinary shares, and the subordinated liabilities and ordinary securities of the Group’s South Africa banking subsidiary. These investment returns are eliminated within the consolidated income statement in arriving at proﬁ t before tax, but are included in adjusted operating proﬁ t. In 2008 the investment return adjustment decreased adjusted operating proﬁ t by £234 million (2007: decrease of £14 million). (vi) Dividends declared to holders of perpetual preferred callable securities Dividends declared to the holders of the Group’s perpetual preferred callable securities were £43 million in the year ended 31 December 2008 (2007: £40 million). These are recognised in ﬁ nance costs on an accruals basis for the purpose of determining adjusted operating proﬁ t. In the IFRS ﬁ nancial statements this cost is recognised in equity. (vii) Closure of unclaimed shares trusts During 2006 Old Mutual plc announced that the Old Mutual South Africa Unclaimed Shares Trust (UST), together with similar trusts set up in Namibia, Zimbabwe, Malawi and Bermuda, would be closed. Proceeds of sale of the Old Mutual plc shares held by those trusts were remitted to Old Mutual plc in 2006 and 2007. Old Mutual intends to use substantially all of the proceeds realised to discharge late claims in cash for a further period of three years (to 31 August 2009), to fund good causes in the jurisdictions of the trust concerned or to enhance beneﬁ ts for certain speciﬁ c groups of policyholders of the Group’s South African and Namibian life businesses. Provisions are held in this regard. During 2007 adjustments were made in respect of the realisation of certain foreign exchange losses (£14 million) and the remeasurement of certain provisions (£13 million). Consistent with the original accounting treatment in 2006, these amounts have been excluded from adjusted operating proﬁ t. Page 183 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 4 Operating proﬁ t adjusting items continued (viii) US Asset Management equity plans and minority interests During 2007, US Asset Management entered into a number of new long-term incentive arrangements with its asset management afﬁ liates. In accordance with IFRS requirements the cost of these schemes is disclosed as being attributable to minority interests. However, this is treated as a compensation expense in determining adjusted operating proﬁ t. The amount recognised in relation to this in 2008 was £7 million (2007: £11 million). The Group has issued put options to employees as part of some of its US afﬁ liate incentive schemes. The impact of revaluing these instruments is recognised in accordance with IFRS, but excluded from adjusted operating proﬁ t. As at 31 December 2008 these instruments were revalued, the impact of which was nil (2007: less than £1 million). (ix) Credit-related fair value gains on Group debt instruments The widening of credit spread of the Group’s debt instruments in the market price has resulted in gains of £489 million (2007: £29 million gain) at Group head ofﬁ ce and £14 million (2007: nil) in Nedbank being recorded in the Group’s income statement for those instruments that are recorded at fair value. In the directors’ view, this gain is not reﬂ ective of the underlying performance of the Group and will reverse over time. The gain has therefore been excluded from adjusted operating proﬁ t. Year ended Year ended 31 December Restated £m 31 December £m 2008 2007 93 (145) 436 (399) 264 4 68 22 1 307 (548) (1) 154 (395) (88) 403 26 73 74 (25) 588 (66) (13) (5) (84) 504 5 Income tax (credit)/expense (i) Analysis of total income tax (credit)/expense Current tax United Kingdom tax Corporation tax Double tax relief Overseas tax South Africa United States Europe Secondary Tax on Companies (STC) Prior year adjustments Total current tax Deferred tax Origination of temporary differences Changes in tax rates/bases Write down/recognition of deferred tax assets Total deferred tax Total income tax (credit)/expense Page 184 Old Mutual plc Annual Report and Accounts 2008 5 Income tax expense continued (ii) Reconciliation of total income tax (credit)/expense Proﬁ t before tax Tax at standard rate of 28.5% (2007: 30%) Different tax rate or basis on overseas operations Untaxed and low taxed income Disallowable expenses Net movement on deferred tax assets not recognised Effect on deferred tax of changes in tax rates STC Income tax attributable to policyholder returns Other Total income tax (credit)/expense (iii) Income tax on adjusted operating proﬁ t Income tax (credit)/expense Tax on adjusting items Impact of acquisition accounting Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Short-term ﬂ uctuations in investment return Income tax attributable to policyholders returns Secondary Tax on Companies (STC) on dividends paid Tax on dividends declared to holders of perpetual preferred callable securities recognised in equity Fair value gains on group debt instruments Year ended Year ended 31 December Restated £m 31 December £m 2008 2007 595 1,750 169 (23) (218) 8 123 (5) 53 (169) (26) (88) 525 (20) (166) 90 (38) (18) 57 51 23 504 Year ended Year ended 31 December Restated £m 31 December £m 2008 (88) 46 12 35 236 – (12) (143) 2007 504 65 (10) (37) (60) (35) (9) – Income tax on adjusted operating proﬁ t 86 418 Page 185 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 6 Minority interests – Income statement (i) Minority interests – ordinary shares The minority interest charge to proﬁ t for the ﬁ nancial year has been calculated on the basis of the Group’s effective ownership of the subsidiaries in which it does not own 100 percent of the ordinary equity. The principal subsidiaries where a minority exists are the Group’s banking and general insurance businesses in South Africa. For the year ended 31 December 2008 the minority interest attributable to ordinary shares was £188 million (2007: £224 million). (ii) Minority interests – preferred securities R2,000 million non-cumulative preference shares R792 million non-cumulative preference shares R300 million non-cumulative preference shares US$750 million cumulative preferred securities R364 million non-cumulative preference shares Minority interest – preferred securities At At 31 December 31 December £m £m 2008 2007 14 5 1 32 2 54 13 5 1 30 1 50 (iii) Minority interests – adjusted operating proﬁ t The following table reconciles minority interests’ share of proﬁ t for the ﬁ nancial year to minority interests’ share of adjusted operating proﬁ t: Year ended Year ended 31 December 31 December £m £m Reconciliation of minority interests share of proﬁ t for the ﬁ nancial year 2008 2007 The minority interest charge is analysed as follows: Minority interest – ordinary shares Goodwill impairment and impact of acquisition accounting Proﬁ t on disposal of subsidiaries, associated undertakings and strategic investments Short-term ﬂ uctuations in investment return Income attributable to Black Economic Empowerment trusts of listed subsidiaries Fair value gains on group debt instruments Income attributable to US Asset Management minority holdings Minority interest share of adjusted operating proﬁ t 188 – 2 11 30 (6) (7) 218 224 – – – 29 (11) 242 The Group uses revised weighted average effective ownership interests when calculating the minority interest applicable to the adjusted operating proﬁ t of its South Africa banking and general insurance businesses. This reﬂ ects 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 reﬂ ected in arriving at proﬁ t after tax in the consolidated income statement is lower than that applied in arriving at adjusted operating proﬁ t after tax. In 2008 the increase in adjusted operating proﬁ t attributable to minority interests as a result of this was £30 million (2007: £29 million). Page 186 Old Mutual plc Annual Report and Accounts 2008 7 Earnings and earnings per share (i) Basic and diluted earnings per share Basic earnings per share is calculated by dividing the proﬁ t for the ﬁ nancial 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. Year ended Year ended 31 December 31 December £m £m Proﬁ t for the ﬁ nancial year attributable to equity holders of the parent Dividends declared to holders of perpetual preferred callable securities Proﬁ t attributable to ordinary equity holders 2008 2007 441 (31) 410 972 (31) 941 Total dividends declared to holders of perpetual preferred callable securities of £43 million in 2008 (2007: £40 million) are stated net of tax credits of £12 million (2007: £9 million). Year ended Year ended 31 December 31 December Millions Millions Weighted average number of ordinary shares in issue Shares held in charitable foundations Shares held in ESOP trusts Adjusted weighted average number of ordinary shares Shares held in life funds Shares held in Black Economic Empowerment trusts Weighted average number of ordinary shares Basic earnings per ordinary share (pence) 2008 2007 5,294 (19) (45) 5,230 (240) (235) 5,492 (20) (61) 5,411 (282) (235) 4,755 4,894 8.6 19.2 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. Year ended Year ended 31 December 31 December Millions Millions Weighted average number of ordinary shares Adjustments for share options held by ESOP trusts Adjustments for shares held in Black Economic Empowerment trusts Diluted earnings per ordinary share (pence) 2008 2007 4,755 61 235 4,894 63 235 5,051 5,192 8.1 18.1 Page 187 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 7 Earnings and earnings per share continued (ii) Adjusted operating earnings per ordinary share Adjusted operating earnings per ordinary share is determined based on adjusted operating proﬁ t. Adjusted operating proﬁ t represents the directors’ view of the underlying performance of the Group. For long-term and general insurance business adjusted operating proﬁ t 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 deﬁ ned as minority interests in accordance with IFRS. For all businesses, adjusted operating proﬁ t 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, proﬁ t/(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 proﬁ t for the ﬁ nancial year to adjusted operating proﬁ t after tax attributable to ordinary equity holders is as follows: Proﬁ t for the ﬁ nancial year attributable to equity holders of the parent Adjusting items Tax on adjusting items Minority interest on adjusting items Adjusted operating proﬁ t after tax attributable to ordinary equity holders Adjusted weighted average number of ordinary shares – (millions) Adjusted operating earnings per ordinary share – (pence) 8 Investment return (non-banking) Interest and similar income Loans and advances Investments and securities Government and government-guaranteed securities Other debt securities, preference shares and debentures Pooled investments Short-term funds and securities treated as investments Other Cash and cash equivalents Total interest and similar income Dividend income – investments and securities Equity securities Pooled investments Fair value gains and losses recognised in income (14,207) 4,187 Investments and securities Derivatives Investment property Other Rental income from investment property Foreign currency (losses)/gains (12,921) (25) (143) (1,118) 71 (15) Total investment return recognised in income (11,578) 6,318 Page 188 Old Mutual plc Annual Report and Accounts 2008 Year ended Year ended 31 December 31 December £m £m 2008 2007 441 168 62 (30) 641 972 (66) 26 (18) 914 5,230 5,411 12.2 16.9 Year ended Year ended 31 December Restated £m 31 December £m 2008 2007 34 10 1,918 1,571 253 916 54 290 405 108 323 731 57 283 177 103 2,060 1,684 513 480 33 384 341 43 3,764 (44) 277 190 57 6 8 Investment return (non-banking) continued Total interest income for assets not at fair value through income statement The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows: Held for trading (including derivatives) Designated at fair value through income statement Available-for-sale ﬁ nancial assets Loans and receivables Investment property Realised fair value gains and losses included in the above Year ended Year ended 31 December Restated £m 31 December £m 2008 2007 851 620 (14,226) (26) (13,787) (414) 1 3,923 48 3,910 (36) 1 (143) 277 (2) 5,928 The fair value gains/(losses) on available for sale ﬁ nancial assets shown above reﬂ ect the amount previously recognised as unrealised within the available for sale reserve in equity that have been recycled to the income statement on disposal or impairment of the particular assets. Included within fair value gains and losses on available-for-sale investments and securities are impairment losses of £414 million (2007: £32 million) relating to securities held by the Group’s US Life business. 9 Banking interest and similar income Interest and similar income Loans and advances Mortgage loans Finance lease and instalment debtors Credit cards Bills and acceptances Overdrafts Term loans and other Investments and securities Government and government-guaranteed securities Other debt securities, preference shares and debentures Cash and cash equivalents Total interest and similar income Total interest income for assets not at fair value through income statement Total interest income on impaired ﬁ nancial assets Year ended Year ended 31 December 31 December £m £m 2008 2007 3,701 2,942 1,958 545 89 4 149 956 345 244 210 135 13 4,059 1,531 457 71 7 122 754 137 107 4 3,190 3,779 2,880 77 – Page 189 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 10 Banking trading, investment and similar income Dividend income – investments and securities Equity securities Pooled investments Rental income from investment property Exchange and other non-interest income Derivative income Exchange Securities dealing Fair value gains Net trading income Foreign exchange Debt securities Equities Other Year ended Year ended 31 December 31 December £m £m 16 3 43 100 2008 2007 11 14 2 62 49 6 (22) 10 93 76 36 (12) – 10 1 4 45 – 16 1 51 24 16 2 Total banking trading, investment and similar income 162 170 The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows: Held-for-trading (including derivatives) Designated at fair value through income statement Loans and receivables Realised fair value gains included in the above 11 Fee and commission income, and income from service activities (61) 85 – 1 19 24 Banking £m General insurance £m Long-term Asset business management £m £m 950 – (109) 841 910 34 4 948 977 – (139) 1,007 132 (21) 838 1,118 507 – 1 508 501 – – 501 18 – (2) 16 18 – – 18 (20) 20 1 47 Total £m 2,385 34 (106) 2,313 2,503 132 (160) 2,475 Year ended 31 December 2008 Fee and commission income Transaction and performance fees Change in deferred revenue Year ended 31 December 2007 Fee and commission income Transaction and performance fees Change in deferred revenue The amounts shown above for asset management relate to fees earned on trust and ﬁ duciary activities where the group holds or invests assets on behalf of its customers. Page 190 Old Mutual plc Annual Report and Accounts 2008 12 Finance costs Interest payable on borrowed funds Senior debt and term loans Subordinated debt Other Fair value gains and losses on borrowed funds Borrowed funds Derivative instruments Foreign currency gains and losses on borrowed funds Reserve movements relating to debt and derivative instruments Total ﬁ nance costs excluding banking activities Finance costs from banking activities Total interest expense included above for liabilities not at fair value through income statement The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows: Held for trading (including derivatives) Designated at fair value through income statement Realised fair value gains and losses included in the above 13 Banking interest payable and similar expense Amounts owed to bank depositors Deposits and loan accounts Current and savings accounts Negotiable certiﬁ cates of deposit Long-term debt instruments Other liabilities Year ended Year ended 31 December 31 December £m £m Note 2008 2007 89 (474) (392) 13 (474) 86 26 65 (2) (37) (434) (40) (6) (1) 79 27 (40) (434) (37) – 25 60 1 (29) (8) – 1 50 68 29 (8) (29) – Year ended Year ended 31 December 31 December £m £m l i s a c n a n F i 2008 2007 2,594 1,854 1,698 267 550 79 259 1,216 203 367 68 199 2,053 Total interest payable and similar expenses 2,853 Total interest expense included above for liabilities not at fair value through income statement 2,038 1,723 Page 191 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 14 Fee and commission expenses, and other acquisition costs Long-term Asset business management £m £m 804 (184) 46 666 846 (457) 68 170 (7) 7 170 210 (32) 15 457 193 128 General insurance £m 103 (2) – 101 128 – – 778 Total £m 1,077 (193) 53 937 1,184 (489) 83 Year ended Year ended 31 December 31 December £m £m Note 2008 2007 15(ii) 17 1,463 74 24 44 58 329 100 1,573 73 29 41 49 338 5 Year ended Year ended 31 December 31 December £m £m Note 2008 2007 1,011 60 37 (24) 3 200 3 21 2 4 146 971 52 45 (3) 4 358 (2) 38 3 4 103 1,463 1,573 41(viii) 41(viii) Year ended 31 December 2008 Fees and commission expenses Changes in deferred acquisition costs Other acquisition costs Year ended 31 December 2007 Fees and commission expenses Changes in deferred acquisition costs Other acquisition costs 15 Other operating and administrative expenses (i) Other operating and administrative expenses includes: Staff costs Depreciation Software costs Operating lease rentals – banking Operating lease rentals – non-banking Amortisation of intangibles Impairment of goodwill and other intangible assets (ii) Staff costs Staff costs Wages and salaries Social security costs Retirement obligations Deﬁ ned contribution plans Deﬁ ned beneﬁ t plans Other retirement beneﬁ ts Bonus and incentive remuneration Share-based payments Cash settled Equity settled Termination beneﬁ ts Long-term employee beneﬁ ts Other Page 192 Old Mutual plc Annual Report and Accounts 2008 15 Other operating and administrative expenses continued The average number of persons employed by the Group during the year was: Long-term business Banking Asset management General insurance Other Number 2008 Number 2007 20,814 27,257 5,506 2,703 266 20,188 26,314 5,257 3,448 148 55,355 56,546 (iii) Fees to Group’s auditors Included in other operating expenses are fees paid to the Group’s auditors. These can be categorised as follows: Year ended Year ended 31 December 31 December £m £m Fees for audit services Group Subsidiaries Pension schemes Total audit fees Fees for non-audit services Taxation Information technology Other services pursuant to legislation Valuation and actuarial Corporate ﬁ nance transactions Any other services Total non-audit services Total Group auditors’ remuneration 2008 2007 1.5 9.7 0.3 1.3 8.4 0.3 11.5 10.0 0.9 0.1 0.4 0.2 – 2.7 4.3 0.3 – – 0.7 0.1 2.8 3.9 15.8 13.9 In addition to the above, fees of £2.6 million (2007: £2.5 million) were payable to other auditors in respect of joint audit arrangements of Nedbank, the Group’s banking subsidiary in South Africa. Page 193 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 16 Goodwill and other intangible assets Goodwill £m Present value of acquired in-force business £m Software development costs £m Other intangible assets £m At 31 December 2008 2007 2008 2007 2008 2007 2008 2007 Total £m 2008 2007 Cost Balance at beginning of the year 2,762 Acquisitions through 2,559 2,736 2,543 423 358 804 758 6,725 6,218 business combinations Additions Foreign exchange and other movements Disposals or retirements Transfer from/(to) non-current 40 – 496 – 122 – 127 (26) – – 393 – assets held-for-sale 18 (20) – 101 – 92 – – Balance at end of the year 3,316 2,762 3,129 2,736 Amortisation and impairment losses Balance at beginning of the year Amortisation charge for the year Impairment losses Foreign exchange and other movements Disposals or retirements Transfer from/(to) non-current assets held-for-sale (133) – (74) (19) – (9) (130) – – (10) – 7 (728) (286) – (165) – – (431) (290) – (7) – – – 82 12 (3) 34 548 (261) (43) (25) (17) 1 (16) 1 90 3 (2) (27) 423 (222) (48) (1) (5) 1 14 – – 114 (2) – 15 4 27 – – 40 82 1,015 (5) 239 94 249 (28) 52 (47) 916 804 7,909 6,725 (144) (75) (1) (32) – – (68) (70) (1) (1,266) (404) (100) (5) – – (233) 1 (25) (851) (408) (2) (27) 1 21 Balance at end of the year (235) (133) (1,179) (728) (361) (261) (252) (144) (2,027) (1,266) Carrying amount Balance at beginning of the year 2,629 2,429 2,008 2,112 Balance at end of the year 3,081 2,629 1,950 2,008 162 187 136 162 660 664 690 5,459 5,367 660 5,882 5,459 The majority of other intangible assets comprise distribution channels, customer relationships and brands associated with the Skandia business acquired during 2006. The increase in the goodwill balance arising on acquisitions through business combinations comprises £3 million (2007: £51 million) in respect of various acquisitions by the Group’s US Asset Management business, £21 million (2007: £70 million) relating to the purchase of additional interests in Nedbank and £16 million (2007: £1 million) relating to various other small acquisitions. Impairment tests for goodwill Goodwill is reviewed for each cash generating unit (CGU) annually and the recoverable amounts are determined as the higher of the value in use or net selling price calculations. A goodwill impairment charge is recognised when the recoverable amount is less than the carrying value. The CGU groupings utilised in the goodwill impairment testing correspond to the reportable segments reﬂ ected in note 3 of the ﬁ nancial statements. The goodwill balance recognised primarily relates to the European CGUs of Nordic, UK and ELAM, the US Life and US Asset Management units as well as Nedbank. The principles underlying the key assumptions used in the determination of the recoverable amounts are applied consistently and are outlined below for each of the principal lines of business which generate revenue for the Group and which has goodwill allocated to it. Goodwill impairment and other charges The goodwill impairment charge recognised in the income statement for the year ended 31 December 2008 was £74 million (2007: £3 million – included within transfer from non-current assets held-for-sale). The component of the charge that relates to impairments based on comparisons to value-in-use calculations amounts to £62 million and relates to the US Life CGU following an assessment of the embedded value of that CGU in the current economic environment. There have been no reversals of impairment charges in the current year (2007: nil). Details of how the impairment loss has been determined are given below. Page 194 Old Mutual plc Annual Report and Accounts 2008 16 Goodwill and other intangible assets continued Goodwill impairment and other charges continued The remaining £12 million expense (2007: nil) relates to an adjustment to the goodwill allocated to the Nordic CGU on the acquisition of Skandia as a result of the recognition, in 2008, of previously unrecognised pre-acquisition tax losses in that business unit, in accordance with the initial accounting requirements contained within IFRS 3. Key assumptions applied to the value in use calculations Long-term business The shareholders’ recoverable amount within the long-term business is determined using embedded value methodology plus a value in use calculation for the value of new business (VNB). VNB represents the present value of future proﬁ ts from expected new business. Embedded value represents the shareholders’ interest in the long-term business and is calculated in accordance with established industry practice. The methodology and signiﬁ cant assumptions underlying the determination of embedded value is disclosed in the supplementary information shown on pages 260 to 270 of the Group embedded value report. The Group adopted Market Consistent Embedded Value (MCEV) methodology in the current year. The differences between the key assumptions applied in the current year and in the prior year are disclosed on pages 295 and 296. The cash ﬂ ows included in the value in use calculations are actuarially determined with reference to the embedded value methodology and utilises the inputs from the latest business plans approved by management. Projections beyond the three-year business plan period have been extrapolated using a conservative inﬂ ation based growth assumption. The cash ﬂ ows are discounted at the 10 year government bond/gilt rates relevant to the geographic region in question, which is adjusted to reﬂ ect the particular risks and uncertainties which could cause variations in the timing, amount or liquidity of the cash ﬂ ows derived from the assets. The key assumptions that affect the value in use calculations are detailed for each of the CGUs below. In the prior year the value of new business component of the long-term business value in use calculation was calculated as a multiple of one year’s new business value generation. The multiple was determined by reference to market multiples for similar transactions of similar businesses. Asset management and banking business The recoverable amount associated with the asset management and banking business has been determined under the value in use methodology. As for the long-term business, the cash ﬂ ows are based on the latest three-year business plans approved by management, extrapolations beyond that period used conservative inﬂ ation based growth rates. The assumptions underlying the business plans include market share, sales growth and investment performance. The cash ﬂ ows are discounted at the relevant 10 year government bond / gilt rates, adjusted to reﬂ ect the particular risks and uncertainties which could cause variations in the timing, amount or liquidity of the cash ﬂ ows derived from the assets. The key assumptions that affect the value in use calculations are detailed for each of the CGUs below. Results of the impairments tests performed Europe The goodwill recognised in the CGUs within the European region relate primarily to the acquisition of Skandia. UK and ELAM generate revenues through their long-term and asset management businesses. Nordic also has a banking business as an additional principal source of revenue. There has been no goodwill impairment recognised in the current ﬁ nancial year (2007: nil) based on the value in use calculations performed for each of these CGUs. The key assumptions used in the long-term, asset management and banking value in use calculations for the European CGUs are as follows: > The assumed growth rates used in the extrapolation of the forecasted cash ﬂ ows beyond the three-year period included in the latest approved business plans – The rate used is a conservative inﬂ ation based growth assumption, which varies by CGU. ELAM, which incorporates a number of European countries, uses a weighted average calculation to determine the growth rate of 3.2 percent applied to its long-term business and of 3.6 percent for the mutual fund business. Nordic has applied the Riksbanken inﬂ ation target of 2 percent to all principal business lines. UK applied 1.3 percent to the long-term business and 1.6 percent as the growth rate for mutual funds. > The discount rate – The applied rate uses the relevant 10-year government bond rate as a starting point, which is adjusted for an equity market risk premium and other relevant risk adjustments which are determined using market valuation models and other observable references. The rate is considered to be representative of the cost of equity relevant to the CGU. For the long-term businesses a rate of 11.6 percent has been applied in the UK, 10 percent for Nordic and 10.9 percent for ELAM. A rate of 8.6 percent has been applied to the Nordic banking and mutual funds businesses. A rate of 11.6 percent in the UK and 16.8 percent in ELAM was applied to the asset management businesses. For Nordic, the banking and asset management cash ﬂ ows are extrapolated for one year beyond the business plan period, whereas for the other businesses two additional years are added. The embedded value components are projected for the period detailed in the Group’s embedded value disclosures. Management believe that any reasonable change in the assumptions would not cause the recoverable amounts of the Nordic and UK CGUs to fall below the carrying amounts. A reasonable adverse change in the assumptions used in the value in use calculation for ELAM (for example, reducing expected sales growth by 10 percent or increasing the risk discount rate by 3 percent) would be absorbed before the recoverable amounts fall below the carrying amount for this CGU. Page 195 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 16 Goodwill and other intangible assets continued North America Goodwill attributable to North America originally related to the acquisition of the US Life business and US Asset Management. The goodwill associated with these businesses was evaluated for impairment using the methodology described above. The key assumptions used in the value in use calculations for the US Asset Management CGU are the following: > An assumed growth rate of 7 percent (2007: 6 percent) was applied to the extrapolation of cash ﬂ ows beyond the three-year business plan period. Extrapolation was performed for two years beyond the business plan period. > The risk adjusted discount rate applied was 17 percent (2007: 14 percent). No impairment has been recognised for the US Asset Management business. Management believe that a reasonable adverse change in the assumptions used in the value in use calculation (for example, reducing the terminal growth rate to 5 percent) for that CGU would be absorbed before the recoverable amounts fall below the carrying amounts. Given the current economic market environment, an external appraisal value was obtained for the US Life CGU. The appraisal, published by Milliman (a ﬁ rm of consulting actuaries), discounted the embedded value of the in force business at a risk adjusted rate of 15 percent. Based on the results of the impairment tests, it has been necessary to recognise an impairment of £62 million (2007: nil) for the US Life business, which amounts to the full amount of goodwill that relates to this CGU. Africa The goodwill for South Africa primarily relates to Nedbank. The impairment test has been performed using the value in use methodology detailed above. There was no impairment recognised for this CGU in the current ﬁ nancial year (2007: nil). The discount rate applied is approximately 11 percent (2007: 12 percent). A 5 percent growth rate was applied to extrapolate cash ﬂ ows for an additional two years beyond the three-year business plan period. Goodwill by cash generating unit The following table is an analysis of the goodwill, net of amortisation and impairment losses by principal cash generating units: US Asset Management US Life Nedbank UK Nordic ELAM Other Goodwill, net of impairment losses Goodwill and other intangible assets by segment At 31 December 2008 Goodwill and intangible assets, net of amortisation and impairment losses Amortisation Impairment losses At 31 December 2007 Goodwill and intangible assets, net of amortisation and impairment losses Amortisation Impairment losses South Europe £m 3,930 332 30 South Europe £m 3,839 340 1 United Africa £m 486 28 8 United Africa £m 448 37 1 At At 31 December 31 December £m £m 2008 2007 1,271 – 308 639 222 574 62 932 57 318 196 436 51 3,081 2,629 Other £m 24 – – Other £m 31 – – Total £m 5,882 404 100 Total £m 5,459 408 2 644 States £m 1,442 44 62 States £m 1,141 31 – Page 196 Old Mutual plc Annual Report and Accounts 2008 17 Property, plant and equipment Land £m 2008 Buildings £m Plant and equipment £m 2007 2008 2007 2008 2007 Gross carrying amount 73 Balance at beginning of the year – Additions – Additions from business combinations 2 Increase arising from revaluation – Disposals – Foreign exchange and other movements Transfer from/(to) non-current asset held-for-sale 1 Balance at end of the year 76 Accumulated depreciation and impairment losses – Balance at beginning of the year – Depreciation charge for the year – Disposals – Foreign exchange and other movements Transfer from/(to) non-current asset held-for-sale – Balance at end of the year Carrying amount Balance at beginning of the year Balance at end of the year – 73 76 53 3 – 17 – 1 (1) 73 – – – – – – 360 16 – 20 – (1) 10 405 (10) (8) – 6 (1) (13) 290 4 1 87 (20) 5 (7) 360 (13) (8) 4 6 1 (10) 547 83 – – (36) 32 34 660 (362) (66) 28 (24) (22) (446) 53 73 350 392 277 350 185 214 514 108 – – (43) 2 (34) 547 (345) (65) 30 (4) 22 (362) 169 185 Total £m 2008 980 99 – 22 (36) 31 45 1,141 (372) (74) 28 (18) (23) (459) 608 682 2007 857 115 1 104 (63) 8 (42) 980 (358) (73) 34 2 23 (372) 499 608 The carrying value of property, plant and equipment leased to third parties under operating leases, included in the above is £33 million (2007: £28 million) and comprises land of £5 million (2007: £4 million) and buildings of £28 million (2007: £24 million). There are no restrictions on property, plant and equipment title as a result of security pledges and no contractual commitments for the acquisition of plant, property and equipment. The revaluation of land and buildings relates to OMSA, £1 million and £15 million respectively (2007: £2 million and £67 million), Nedbank, £1 million and £5 million respectively (2007: £15 million and £20 million). For OMSA, land and buildings are valued as at 31 December each year by internal professional valuers and external valuations are obtained once every three years. External professional valuers are used for Nedbank. For both businesses the valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash ﬂ ows and vacant land and property are valued according to sales of comparable properties. The carrying value that would have been recognised had the land and buildings been carried under the cost model would be £19 million (2007: £19 million) and £91 million (2007: £92 million) respectively for OMSA and £12 million (2007: £13 million) and £92 million (2007: £86 million) for Nedbank respectively. Capital expenditure and depreciation by segment Year ended 31 December 2008 Capital expenditure, net of depreciation Depreciation Year ended 31 December 2007 Capital expenditure, net of depreciation Depreciation South Africa £m 607 53 South Africa £m 544 54 United States £m 27 7 United States £m 17 6 Europe £m Other £m 44 11 Europe £m 39 13 4 3 Other £m 8 – Total £m 682 74 Total £m 608 73 Page 197 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 18 Investment property Balance at beginning of the year Additions Additions from business combinations Disposals Net (loss)/gain from fair value adjustments Foreign exchange and other movements Balance at end of the year Year ended Year ended 31 December 31 December £m £m 2008 2007 1,479 145 – (13) (143) 10 1,149 50 – (12) 277 15 1,478 1,479 In 2008 additions of £144 million (2007: £49 million) related to OMSA and £1 million (2007: £1 million) related to Nedbank. Of the net (loss)/gain arising from fair value adjustments on investment properties, £31 million gain (2007: £263 million gain) related to OMSA, £1 million gain (2007: £1 million gain) related to Nedbank, £5 million gain (2007: nil) related to other African businesses and £180 million loss (2007: £13 million gain) related to UK. The fair value of investment property leased to third parties under operating leases is as follows: Year ended Year ended 31 December 31 December £m £m Freehold Long leaseholds Short leaseholds Rental income from investment property Direct operating expense arising from investment property that generated rental income 2008 2007 1,478 – – 1,471 – 8 1,478 1,479 84 (16) 68 80 (25) 55 The carrying amount of investment property is the fair value of the property as determined by a registered independent valuer at least every three years, and annually by locally qualiﬁ ed staff, having an appropriate recognised professional qualiﬁ cation and recent experience in the location and category of the property being valued. Fair values are determined having regard to recent market transactions for similar properties in the same location as the Group’s investment property. The Group’s current lease arrangements, which are entered into on an arm’s length basis and which are comparable to those for similar properties in the same location, are taken into account. Of the total investment property of £1,478 million (2007: £1,479 million), £1,296 million (2007: £1,117 million) is attributable to South Africa and £182 million (2007: £362 million) to Europe. Page 198 Old Mutual plc Annual Report and Accounts 2008 19 Operating lease arrangements (i) The Group as lessee Year ended Year ended 31 December 31 December £m £m Minimum lease payments under operating leases recognised as an expense in the year 2008 2007 Banking Non-banking Minimum lease payments Outstanding commitments under non-cancellable operating leases, fall due as follows: Year ended 31 December Within one year In the second to ﬁ fth years inclusive After ﬁ ve years 43 33 76 Banking Non-banking £m £m 2008 2008 38 117 170 325 36 148 114 298 Total £m 2008 74 265 284 623 Banking Non-banking £m £m 2007 2007 56 281 262 599 32 105 35 172 46 30 76 Total £m 2007 88 386 297 771 Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment. (ii) The Group as lessor Assets subject to operating leases Land Buildings Investment property Future minimum lease payments of contracts with tenants Within one year In the second to ﬁ fth years inclusive After ﬁ ve years At At 31 December 31 December £m £m 2008 2007 5 28 1,478 4 24 1,479 1,507 1,511 At At 31 December 31 December £m £m 2008 2007 57 132 27 216 51 129 41 221 Page 199 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 20 Deferred tax assets and liabilities Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise. (i) Deferred tax assets The movement on the deferred tax assets account is as follows: Insurance funds Tax losses carried forward Accelerated capital allowances Available for sale securities Other temporary differences Netted against liabilities Deferred fee income Insurance funds Tax losses carried forward Accelerated capital allowances Available for sale securities Other temporary differences Netted against liabilities Deferred fee income 1 January 2008 £m Income statement (charge)/ credit £m 71 139 40 47 356 (123) 153 683 158 140 (29) 34 (165) 78 21 237 (Charged)/ Acquisition/ credited to disposals of equity subsidiaries movements £m £m £m Foreign exchange and other 31 December 2008 £m – – – 391 – – – 391 2 (2) – – (5) – – (5) 67 69 6 112 98 (18) (50) 284 298 346 17 584 284 (63) 124 1,590 1 January 2007 £m Income statement (charge)/ credit £m (Charged)/ credited to equity £m 125 337 42 – 7 – – 511 (57) (231) – – 322 (102) 86 18 – – – 50 7 – – 57 Acquisition/ disposals of subsidiaries movements £m Foreign exchange and other 31 December 2007 £m £m – – – – 7 – – 7 3 33 (2) (3) 13 (21) 67 90 71 139 40 47 356 (123) 153 683 Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax beneﬁ t is probable. The amounts for which no deferred tax asset has been recognised comprise: At 31 December Unrelieved tax losses Expiring within one year Expiring in the second to ﬁ fth years inclusive Expiring after ﬁ ve years Accelerated capital allowances Other timing differences Gross amount £m Tax Gross amount £m £m Tax £m 2008 2008 2007 2007 54 1,222 1,826 19 28 3,149 2 109 541 5 8 665 – 262 825 19 207 1,313 – 17 177 6 68 268 Page 200 Old Mutual plc Annual Report and Accounts 2008 20 Deferred tax assets and liabilities continued (ii) Deferred tax liabilities The movement on the deferred tax liabilities account is as follows: Accelerated tax depreciation Deferred acquisition costs Leasing PVIF Other acquired intangibles Available for sale securities Other temporary differences Policyholder tax Netted against assets Accelerated tax depreciation Deferred acquisition costs Leasing PVIF Other acquired intangibles Available for sale securities Other temporary differences Policyholder tax Netted against assets 1 January 2008 £m Income statement charge/ (credit) £m 25 534 80 256 103 – 429 109 (123) 1,413 (1) 47 (9) (32) (12) – (169) (60) 78 (158) Charged/ Acquisition/ (credited) to disposals of equity subsidiaries movements £m £m £m Foreign exchange and other 31 December 2008 £m – 16 – – – – 9 – – 25 – – – – – – – – – – – 118 (17) 34 16 2 (13) 50 (18) 172 24 715 54 258 107 2 256 99 (63) 1,452 1 January 2007 £m Income statement (charge)/ credit £m (Charged)/ credited to equity £m 5 338 173 311 109 4 453 – – 1,393 15 142 (91) (63) (11) – 91 (45) (102) (64) – 27 – – – (4) – – – 23 Acquisition/ disposals of subsidiaries movements £m Foreign exchange and other 31 December 2007 £m £m – – – – – – (1) – – (1) 5 27 (2) 8 5 – (114) 154 (21) 25 534 80 256 103 – 429 109 (123) 62 1,413 As the Group is able to control the reversal of temporary differences in respect of investments in subsidiaries, branches, associates and JVs and it is probable that these temporary differences will not reverse in the foreseeable future, there is no need to provide for the associated deferred tax liabilities. The aggregate amount of temporary differences on which further tax might be due if these temporary differences reversed would be estimated at £3.2 billion (2007: £2.2 billion). Page 201 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 21 Investments in associated undertakings and joint ventures (i) Investments in associated undertakings and joint ventures The Group’s investments in associated undertakings and joint ventures accounted for under the equity method are as follows: As 31 December 2008 Clidet No. 638 (Pty) Ltd Kotak Mahindra Old Mutual Life Insurance Ltd Skandia BSAM Visigro Investments (Pty) Ltd Odyssey Developments (Pty) Ltd All other associated undertakings Country of operation % Interest held £m Republic of South Africa India China Republic of South Africa Republic of South Africa 49 26 50 30 49 Carrying Group share value of proﬁ t/(loss) £m 19 26 11 8 8 39 – (3) (3) – – 5 111 (1) All of the above investments in associated undertakings and joint ventures are unlisted. All investments in associated undertakings and joint ventures are equity accounted using ﬁ nancial information as at 31 December 2008. As 31 December 2007 Clidet No. 638 (Pty) Ltd Kotak Mahindra Old Mutual Life Insurance Ltd Skandia BSAM Visigro Investments (Pty) Ltd Odyssey Developments (Pty) Ltd All other associated undertakings Country of operation Interest held % Carrying Group share of proﬁ t/(loss) £m value £m Republic of South Africa India China Republic of South Africa Republic of South Africa 49 26 50 30 49 16 25 11 4 8 17 81 – (3) (3) – – 5 (1) (ii) Aggregate ﬁ nancial information of investments in associated undertakings The aggregate ﬁ nancial information for all investments in associated undertakings is as follows: Year ended Year ended 31 December 31 December £m £m Total assets Total liabilities Total revenues Net loss after tax 2008 2007 476 417 148 (1) 428 353 125 (1) Page 202 Old Mutual plc Annual Report and Accounts 2008 21 Investments in associated undertakings continued (iii) Aggregate Group investment in associated undertakings The aggregate amounts for the Group’s investment in associated undertakings are as follows: Balance at beginning of the year Net additions of investment in associated undertakings Share of loss after tax Dividends paid Foreign exchange and other movements Balance at end of the year Year ended Year ended 31 December 31 December £m £m 2008 2007 81 18 (1) (8) 21 111 83 8 (1) (8) (1) 81 The Group has no signiﬁ cant investments in which it owns less than 20 percent of the ordinary share capital that it accounts for using the equity method. (iv) Other Group holdings The above does not include companies whereby the Group has a holding of more than 20 percent, but does not have signiﬁ cant inﬂ uence over these companies by virtue of the Group not having any direct involvement in decision making or the other owners possessing veto rights. (v) Contingent liabilities The Group is severally liable for the contingent liabilities relating to investments in associated undertakings of £1 million (2007: £2 million). 22 Deferred acquisition costs Year end 31 December 2008 Balance at beginning of the year New business Amortisation Unlocking of deferred acquisition costs Foreign exchange and other movements Transfer from assets held-for-sale Balance at end of the year Year end 31 December 2007 Balance at beginning of the year New business Amortisation Unlocking of deferred acquisition costs Foreign exchange and other movements Transfer to assets held-for-sale Balance at end of the year Insurance contracts £m 1,422 234 (80) (159) 677 13 2,107 961 Insurance contracts £m 1,103 364 (78) (30) 70 (7) 1,422 Investment Asset contracts management £m £m 717 286 (97) – 55 – 131 114 47 (40) – 10 – 3,199 Investment Asset contracts management £m £m 74 67 (35) – 8 – 401 357 (58) – 17 – 717 l i s a c n a n F i Total £m 2,253 567 (217) (159) 742 13 Total £m 1,578 788 (171) (30) 95 (7) 114 2,253 Page 203 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 23 Long-term insurance business policyholder and general insurance liabilities At 31 December Long-term business policyholder liabilities Insurance contracts Investment contracts Unit-linked investment contracts and similar contracts Other investment contracts Discretionary participating investment contracts Outstanding claims General insurance liabilities Claims incurred but not reported Unearned premiums Outstanding claims Gross £m 2008 Reinsurance £m 2008 Net £m 2008 Gross £m 2007 Reinsurance £m 2007 Net £m 2007 28,106 (550) 27,556 23,637 (727) 22,910 45,161 1,965 5,647 390 (551) – – (47) 44,610 1,965 5,647 343 52,171 1,574 6,404 465 (636) – – (31) 51,535 1,574 6,404 434 81,269 (1,148) 80,121 84,251 (1,394) 82,857 45 79 220 344 (8) (26) (81) (115) 37 53 139 229 – – – – – – – – – – – – Long-term insurance business policyholder and general insurance liabilities 81,613 (1,263) 80,350 84,251 (1,394) 82,857 Of the £1,263 million (2007: £1,394 million) included in reinsurer’s share of long-term business policyholder and general insurance liabilities is an amount of £705 million (2007: £682 million) which is classiﬁ ed as current, the remainder being non-current. Of the £164 million (2007: £213 million) included in deposits held with reinsurers £124 million (2007: £183 million) is classiﬁ ed as current, the remainder being non-current. Movements in the amounts outstanding in respect of long-term business policyholder liabilities, other than outstanding claims, are set out below. (i) Insurance contracts Year ended 31 December Balance at beginning of the year Income Premium income Investment income Other income Expenses Claims and policy beneﬁ ts Operating expenses Currency translation loss/(gain) Other charges and transfers Taxation Transfer from/(to) operating proﬁ t Gross £m 2008 Reinsurance £m 2008 Net £m 2008 Gross £m 2007 Reinsurance £m 2007 Net £m 2007 23,637 (727) 22,910 21,877 (717) 21,160 4,062 (993) 2 (3,681) (290) 4,320 1,229 12 (192) (152) – – 147 – (151) 326 – 7 3,910 (993) 2 (3,534) (290) 4,169 1,555 12 (185) 4,107 1,805 13 (3,479) (274) (33) (160) (29) (190) (128) – – 111 – 10 (10) – 7 3,979 1,805 13 (3,368) (274) (23) (170) (29) (183) Balance at end of the year 28,106 (550) 27,556 23,637 (727) 22,910 Page 204 Old Mutual plc Annual Report and Accounts 2008 23 Long-term insurance business policyholder and general insurance liabilities continued (ii) Unit-linked investment contracts and similar contracts, and other investment contracts Balance at beginning of the year New contributions received Maturities Withdrawals and surrenders Fair value movements Foreign exchange and other movements Balance at end of the year (iii) Discretionary participating investment contracts Balance at beginning of the year Income Premium income Investment income Currency translation (gains)/losses Other income Expenses Claims and policy beneﬁ ts Operating expenses Other charges and transfers Taxation Transfer to operating proﬁ t Balance at end of the year Year ended Year ended 31 December 31 December £m £m 53,745 2008 2007 47,338 8,616 (762) (5,470) (10,085) 1,082 9,942 (729) (5,305) 455 2,044 47,126 53,745 Year ended Year ended 31 December 31 December £m £m 2008 2007 6,404 5,690 524 (362) (128) – 515 818 54 15 34 1,402 (641) (59) (31) 3 (628) (60) (535) (56) (31) (6) 6,404 (728) (63) 5,647 (iv) Maturity analysis A maturity analysis of long-term and general insurance policyholder liabilities is shown in the following table: At 31 December 2008 Long-term business Insurance contracts Investment contracts Unit-linked investment contracts and similar contracts Other investment contracts Discretionary participating investment contracts Outstanding claims General insurance liabilities Claims incurred but not reported Unearned premium Outstanding claims Undiscounted cash ﬂ ows Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m Total £m 28,106 1,046 2,426 12,912 31,690 48,074 45,161 1,965 5,647 390 41,555 39 5,944 346 369 112 14 12 666 590 69 30 2,970 1,282 149 68 45,560 2,023 6,176 456 81,269 48,930 2,933 14,267 36,159 102,289 45 79 220 344 27 4 145 176 16 49 57 122 2 26 18 46 – – – – 45 79 220 344 81,613 49,106 3,055 14,313 36,159 102,633 Page 205 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 23 Long-term insurance business policyholder and general insurance liabilities continued (iv) Maturity analysis continued At 31 December 2007 Long-term business Insurance contracts Investment contracts Undiscounted cash ﬂ ows Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m Total £m 23,637 495 2,489 12,475 29,425 44,884 Unit-linked investment contracts and similar contracts Other investment contracts Discretionary participating investment contracts Outstanding claims 52,171 1,574 6,404 465 47,236 433 5,638 332 364 129 3 47 947 578 15 27 4,069 1,001 42 67 52,616 2,141 5,698 473 84,251 54,134 3,032 14,042 34,604 105,812 (v) Assumptions Insurance contract provisions are calculated based upon assumptions determined in accordance with local accounting requirements. As described in the accounting policies, these vary signiﬁ cantly between geographies and are therefore discussed separately below. South Africa In the calculation of liabilities, provision has been made for: > the current best estimate of future experience, as described below; plus > the compulsory margins as set out in the Actuarial Society of South Africa professional guidance notes; plus > discretionary margins reﬂ ecting mainly the excess of capital charges over the compulsory investment margin of 0.25 percent for policies that are valued prospectively. These discretionary margins cause capital charges to be included in operating proﬁ ts as they are charged and ensure that proﬁ ts are released appropriately over the term of each policy. Other discretionary margins, mainly held to cover: > mortality and investment return margins for Group Schemes funeral policies, due to the additional risk associated with this business, and to ensure that proﬁ t is released appropriately over the term of the policies; > expense margins in the pricing basis for Employee Beneﬁ ts annuities; > proﬁ t margins on Employee Beneﬁ ts non-proﬁ t annuities to ensure that proﬁ t is released appropriately over the life of the policies; > mortality margins on Individual Business life policies, accidental death supplementary beneﬁ ts and disability supplementary beneﬁ ts, due to uncertainty about future experience; > margins on certain Individual Business non-proﬁ t annuities, due to the inability to fully match assets to liabilities as a result of the limited availability of long-dated bonds; > interest margins on Employee Beneﬁ ts PHI claims in payment due to the inability to fully match assets to liabilities as a result of the high rate of change in the portfolio (high volume of new claimants and terminations); and > margins on the investment guarantee reserves to mitigate the sensitivity of the reserves calculated on a market-consistent basis to market interest rates in particular. Liabilities include provisions to meet ﬁ nancial options and guarantees on a market-consistent basis, and make due allowance for potential lapses and surrenders, based on levels recently experienced. Mortality and disability rates assumed are consistent with Old Mutual’s recent experience, or expected future experience if this would result in a higher liability. In particular, allowance has been made for the expected deterioration in assured lives experience due to HIV/AIDS, and for the expected improvement in annuitant mortality. Page 206 Old Mutual plc Annual Report and Accounts 2008 23 Long-term and general business policyholder liabilities continued (v) Assumptions continued The provision for expenses (before allowing for margins) starts at a level consistent with recent experience and allows for an escalation thereafter. The future gross investment returns by major asset categories and expense inﬂ ation (excluding margins) assumed for South Africa insurance business are as follows: Fixed interest securities Cash Equities Properties Future expense inﬂ ation At At 31 December 31 December % % 2008 2007 7.5 5.5 11.0 9.0 8.5 6.5 12.0 10.0 4.51 5.51 1 6.5 percent (2007: 7.5 percent) for Individual Business administered on old platforms and 5.5 percent (2007: 6.5 percent) for Group Schemes business. For non-proﬁ t annuities, liabilities are determined by calculating the present value of projected future beneﬁ ts and expenses, valued using current ﬁ xed-interest yields or swap curve yields. Assumptions are based upon experience as analysed in the following investigations: Type of business Individual Business Group Schemes Employee Beneﬁ ts All Type of investigation Period of investigation Flexi business mortality Conventional business mortality Annuitant mortality Greenlight mortality Dread disease Disability Persistency – Flexi and Conventional Persistency – Greenlight Mortality Persistency Annuitant mortality Group Assurance Expenses 2003 to 2006 1999 to 2000 2005 to 2007 2001 to 2007 2000 to 2002 2000 to 2002 2006 2001 to 2007 2006 2006 to 2007 2000 to 2004 Ongoing for the purpose of setting scheme rates Reviewed on an annual basis Various assumption changes have been made which have resulted in a net increase in the value of liabilities of £11 million (2007: £22 million increase) on the Published basis. The reserve for investment guarantees which have been calculated on a market-consistent basis was increased by £27 million (including a discretionary margin), as a result of the reduction in swap yields and increases in volatilities. Lower economic assumptions also led to an increase in underlying policy liabilities of £8 million. The basis for terminations and alterations was strengthened leading to an increase in liabilities of £35 million. Lower expense and mortality assumptions reduced liabilities by £39 million and £13 million respectively. Methodology changes and error corrections reduced liabilities by £6 million. United States Insurance contract provisions and Deferred Acquisition Costs (DAC) balances for traditional insurance products with ﬁ xed premiums and beneﬁ ts (measured according to FAS 60 under US GAAP) are calculated using mortality, lapse, expense and discount assumptions as at inception of the contract. These assumptions are determined based on management’s best estimate, reﬂ ecting actual and expected experience, and also include provision for adverse deviation. The assumptions are locked in as of the date of issue, and are revised only where liability adequacy testing based on current best estimate assumptions results in loss recognition. For insurance products with ﬂ exible premiums or beneﬁ ts (measured according to FAS 97 under US GAAP), the account value is held as the base insurance contract provision, and the assumptions below are therefore not applicable. DAC balances, and additional reserves held for items including lapse guarantees, persistency bonuses and gains followed by losses, utilise best estimate assumptions as of the valuation date. Mortality rates vary by gender and issue age; lapse rates vary by issue age and duration. Page 207 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 23 Long-term insurance business policyholder and general insurance liabilities continued (v) Assumptions continued Reserves for life contingent payout annuities are accumulated using the effective interest rate, which is the rate that discounts future liability cash ﬂ ows back to the gross premium less transaction costs. All other FAS 60 products use a discount rate based on best estimate of future yields at policy inception. Best estimate assumptions as of December 2008 reﬂ ect experience as analysed in the following investigations: Assumption Mortality rates – assurance Mortality rates – annuities Lapse rates Expenses Period of investigation 2005 to 2008 2005 to 2008 2005 to 2008 2005 During the year, the operations of the US long-term business have been operationally segregated into on-shore and off-shore which has had certain consequences for liability adequacy testing of certain liabilities together with the calculation of DAC amortisation for certain product lines. The liability for guarantees on the ﬁ xed indexed annuity product was adjusted to include a non-performance risk factor, which reduced the liability by £184 million. Changes to lapse assumptions in the on-shore deferred annuity and ﬁ xed index annuity business resulted in a £68 million reduction in DAC. Segregation of the business led to an increase in liabilities in respect of the on-shore life contingent single premium immediate annuity (SPIA) product of £235 million as a result of changes to mortality assumptions. In 2007, on-shore actuarial modelling changes related to spread-based crediting on the ﬁ xed index annuity business and other assumption changes resulted in a £32 million reduction in DAC. The on-shore shadow DAC asset relating to unrealised losses in the investment portfolio was written down by £540 million due to insufﬁ cient estimated gross proﬁ ts to which shadow DAC relates. Changes in shadow DAC are recorded in equity. Assumption changes were made in respect of the off-shore guarantee liabilities, in respect of non-performance risk, volatility, correlation and fees, which resulted in a net decrease in the value of those liabilities of £61 million. There were consequential impacts of assumption changes for hedge costs and earned rates that resulted in accelerated DAC amortisation of £92 million. Europe Insurance contract provisions for the Group’s Europe long-term business are limited, and principally comprise technical provisions for pure disability and death beneﬁ t cover sold in the United Kingdom and Sweden, together with death beneﬁ t risk cover in respect of unit-linked assurance products. Page 208 Old Mutual plc Annual Report and Accounts 2008 24 Loans and advances (i) Summary Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Policyholder loans Other loans to clients Preference shares and debentures Net ﬁ nance leases and instalment debtors Gross investment Unearned ﬁ nance charges Factoring accounts Trade, other bills and bankers’ acceptances Term loans Remittances in transit Deposits placed under reverse purchase agreements Gross loans and advances Provisions for impairment Speciﬁ c provisions Portfolio provision Total net loans and advances At At 31 December 31 December £m £m Notes 2008 2007 14,111 5,325 58 556 895 260 4,443 1,142 4,474 4,948 (474) 29 78 4,746 15 192 12,082 4,415 23 541 990 204 4,727 689 3,866 4,267 (401) 36 135 2,988 14 429 36,324 31,139 30 30 (407) (172) (322) (130) 35,745 30,687 Non-performing loans included above had a book value less impairment provisions of £868 million (2007: £487 million). Impairment provisions in respect of loans and advances is established when there is objective evidence that a loan or group of loans is impaired, including observable data that come to the attention of the Group about the following loss events: > signiﬁ cant ﬁ nancial difﬁ culty of the borrower; > a breach of contract, such as a default or delinquency in interest or principal payments; > the Group, for economic or legal reasons relating to the borrower’s ﬁ nancial difﬁ culty, grants to the borrower a concession that the Group would not otherwise consider; > it becomes probable that the borrower will enter bankruptcy or other ﬁ nancial reorganisation; > the disappearance of an active market for that asset because of ﬁ nancial difﬁ culties; or > observable data indicating that there is a measurable decrease in the estimated future cash ﬂ ows from a group of loan assets since the initial recognition of those assets, although the decrease cannot yet be identiﬁ ed with the individual loans, including: – adverse changes in the payment status of borrowers in the group of loans; or – national or local economic conditions that correlate with defaults on the assets in the group of loans. Of the loans and advances shown above, £11,268 million (2007: £10,110 million) is receivable within one year of the balance sheet date and is regarded as current. £24,477 million (2007: £20,577 million) is regarded as non-current based on the maturity proﬁ le of the assets. l i s a c n a n F i (ii) Finance lease and instalment debtors Amounts receivable under ﬁ nance leases At 31 December Within one year In the second to ﬁ fth years inclusive After ﬁ ve years Less: unearned ﬁ nance income Present value of minimum lease payments receivable 4,474 3,866 4,474 The accumulated allowance for uncollectable minimum lease payments receivable is £117 million (2007: £131 million). Minimum lease payments receivable Present value of minimum lease payments receivable £m 2008 882 3,283 783 4,948 (474) £m 2007 828 3,165 274 4,267 (401) £m 2008 741 2,954 779 4,474 – £m 2007 748 2,869 249 3,866 – 3,866 Page 209 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 25 Investments and securities Government and government-guaranteed securities Other debt securities, preference shares and debentures Listed Unlisted Equity securities Listed Unlisted Pooled investments Listed Unlisted Short-term funds and securities treated as investments Other Total investments and securities At At 31 December 31 December £m £m 2008 2007 8,976 7,234 14,069 5,047 14,976 1,203 5,215 29,831 3,989 216 12,621 4,281 21,361 963 6,198 33,400 3,342 227 83,522 89,627 Investments and securities are regarded as current and non-current assets based on the intention with which the ﬁ nancial assets are held as well as their contractual maturity proﬁ le. Of the amounts shown above, £40,905 million (2007: £42,754 million) is regarded as current and £42,617 million (2007: £46,873 million) are regarded as non-current. 26 Other assets Debtors arising from direct insurance operations Amounts owed by policyholders Amounts owed by intermediaries Other Debtors arising from reinsurance operations Outstanding settlements Other receivables Accrued interest and rent Trading securities and spot positions Prepayments and accrued income Other assets Total other assets At At 31 December 31 December £m £m 2008 2007 63 93 49 205 90 459 1,531 508 62 151 131 3,137 26 88 43 157 91 147 1,365 444 273 134 163 2,774 Based on the maturity proﬁ le of the above assets, £2,693 million (2007: £2,153 million) is regarded as current and £444 million (2007: £621 million) as non-current. Page 210 Old Mutual plc Annual Report and Accounts 2008 27 Derivative ﬁ nancial instruments – assets and liabilities The Group utilises the following derivative instruments for both hedging and non-hedging purposes: Foreign currency, interest rate and equity, or equity index, futures are contractual obligations to receive or pay a net amount based on changes in currency rates or underlying equities, or indices or interest rates or buy or sell foreign currency or a ﬁ nancial instrument on a future date at a speciﬁ ed price established in an organised ﬁ nancial market (an Exchange). Since futures contracts are collateralised by cash or marketable securities and changes in the futures contract value are settled daily with the Exchange, the credit risk is negligible. Forward rate agreements are individually negotiated interest rate contracts that call for a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate, based on a notional principal amount. Forward foreign exchange contracts are individually negotiated contracts that require settlement of the pre-agreed currency amounts at a future date. Currency and interest rate swaps are commitments to exchange one set of cash ﬂ ows for another. Swaps result in an economic exchange of currencies or interest rates or a combination of both (i.e. cross-currency interest rate swaps). Except for certain currency swaps, no exchange of principal takes place. The Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation. This risk is monitored continuously with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Group assesses counterparties using the same techniques as for its lending activities. Foreign currency, interest rate and equity, or equity index, options are contractual agreements under which the writer grants the holder the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a speciﬁ c amount of a foreign currency or a ﬁ nancial instrument or amount of assets determined by reference to an index at a predetermined price. In consideration for the assumption of foreign exchange, interest rate or asset price risk, the seller receives a premium from the purchaser. Options may be either exchange-traded or negotiated between the Group and a customer (over-the-counter). The Group is exposed to credit risk on purchased options only, and only to the extent of their carrying amount, which is their fair value. The notional amounts of certain types of ﬁ nancial instruments provide a basis for comparison with instruments recognised on the balance sheet, but do not necessarily indicate the amounts of future cash ﬂ ows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The derivative instruments become in-the-money or out-of-the-money as a result of ﬂ uctuations in market interest rates, foreign exchange rates or asset prices relative to their terms. The aggregate contractual or notional amount of derivative ﬁ nancial instruments on hand, the extent to which instruments are in-the-money or out-of-the-money and, therefore, the aggregate fair values of derivative ﬁ nancial assets and liabilities can ﬂ uctuate signiﬁ cantly from time to time. The following tables provide a detailed breakdown of the contractual or notional amounts and the fair values of the Group’s derivative ﬁ nancial instruments outstanding at year end. These instruments allow the Group and its customers to transfer, modify or reduce their credit, equity market, foreign exchange and interest rate risks. The Group undertakes transactions involving derivative ﬁ nancial instruments with other ﬁ nancial institutions. Management has established limits commensurate with the credit quality of the institutions with whom it deals, and manages the resulting exposures such that a default by any individual counterparty is unlikely to have a materially adverse impact on the Group. Page 211 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 27 Derivative ﬁ nancial instruments – assets and liabilities continued At 31 December 2008 Equity derivatives Options written Options purchased Futures Exchange rate contracts Forwards Swaps Options purchased Futures Options written Interest rate contracts Swaps Forward rate agreements Options purchased Options written Futures Caps Credit derivatives Credit linked notes Credit default swaps Other derivatives Total Notional principals Fair values Positive values £m Negative values £m Assets £m Liabilities £m – 803 251 1,054 1,079 9,408 1,912 357 – – 863 1 215 41 9,872 1,483 – – 358 – 33 8 118 2,022 274 47 – – 11,677 11,713 2,343 14,397 4,417 2,997 – 2,027 253 10,621 4,543 1,256 1,821 1,686 253 1,890 116 73 – 101 3 24,091 20,180 2,183 2,042 128 57 185 – 140 60 200 229 66 – 66 – 114 – 4 2,021 154 – – 49 2,224 1,835 94 12 10 90 1 11 – 11 – 37,007 33,401 4,633 4,395 Page 212 Old Mutual plc Annual Report and Accounts 2008 27 Derivative ﬁ nancial instruments – assets and liabilities continued At 31 December 2007 Equity derivatives Options written Options purchased Futures Exchange rate contracts Forwards Swaps Options purchased Futures Options written Interest rate contracts Swaps Forward rate agreements Options purchased Options written Futures Caps Credit derivatives Credit linked notes Credit default swaps Other derivatives Total Notional principals Fair values Positive values £m Negative values £m Assets £m Liabilities £m – 3,443 823 3,515 – 1,831 – 68 35 4,266 5,346 103 5,765 2,576 445 193 – 6,307 1,186 – 58 319 917 96 1 – – 171 – 65 236 952 71 – – 2 8,979 7,870 1,014 1,025 10,153 2,744 305 – 1,401 487 11,849 3,454 – 339 1,466 182 15,090 17,290 104 – 104 142 – 53 53 287 294 8 2 – 51 2 357 32 – 32 21 380 7 – 42 25 1 455 – – – 28,581 30,846 1,527 1,716 The contractual maturities of the derivatives held are as follows: At 31 December 2008 Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m No contractual maturity date £m Total £m Derivative ﬁ nancial liabilities 4,395 1,262 1,194 1,609 1,920 – 5,985 At 31 December 2007 Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m No contractual maturity date £m Total £m Derivative ﬁ nancial liabilities 1,716 1,620 46 15 – 35 1,716 Page 213 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 28 Hedge accounting Cash ﬂ ow hedges Cash ﬂ ow hedge accounting is applied by the Parent Company in respect of the Group’s exposures to foreign currency risk. The Group hedges its foreign currency risk on one of its existing Euro loan borrowings by entering into foreign currency swaps for USD. These swaps are separated, for accounting purposes, into a EUR/GBP swap and a GBP/USD swap. Cash ﬂ ow hedge accounting is applied to the EUR/GBP swap. At 31 December 2008 the EUR/GBP swaps had a notional principal of £29 million (€30 million) (2007: £22 million (€30 million)) and a fair value of £7 million (2007: minimal). The GBP/USD swap qualiﬁ es as a net investment hedge, as discussed below. The maturity date of the ﬁ nal EUR/USD swap of €30 million is 11 July 2010 and matches the repayment of the corresponding bond. The cash ﬂ ow hedge reserve will be released to the income statement over the remaining life of the swap to offset the currency movements on the loan. An analysis of amounts in the ﬁ nancial statements relating to derivatives designated as cash ﬂ ow hedges is shown in the table below: Fair value of derivatives designated as cash ﬂ ow hedges at the balance sheet date Cross currency interest rate swap – €30 million Euro loan borrowing Analysis of movements in cash ﬂ ow hedge reserve Cash ﬂ ow hedge at beginning of the year Amount recognised in equity during the year Amount removed from equity and recognised in income statement during the year Finance costs (borrowed funds) Cash ﬂ ow hedge reserve at end of year At At 31 December 31 December £m £m 2008 2007 7 7 – 2 – 2 – – 1 – (1) – The cash ﬂ ow hedge reserve is included in ‘Other reserves’ in the statement of changes in equity. In respect of the cross currency swap discussed above, cash ﬂ ows will occur annually on 11 July until 11 July 2010. There was no ineffectiveness in respect of either of the above cash ﬂ ow hedges during the ﬁ nancial year (2007: nil). Net investment hedges The Group uses a combination of currency swaps, forward foreign exchange contracts and debt raised in the currency of the exposure to mitigate the translation effect of holding overseas companies. The following table summarises the Group’s open positions with respect to ﬁ nancial instruments utilised for net investment hedging purposes. At 31 December 2008 Forward contracts Currency swaps1 Debt2 At 31 December 2007 Forward contracts Currency swaps1 Debt2 Open positions at year-end USD £m 20 356 303 679 USD £m 38 262 106 406 ZAR £m 232 – – 232 SEK £m 86 356 – 442 Open positions at year-end ZAR £m 182 – – 182 SEK £m 52 318 161 531 EUR £m – – 96 96 EUR £m – – – – 1Excludes $35 million (2007: $35 million) of currency swaps that do not qualify for hedge accounting. 2Excludes $750 million and €500 million (2007: $750 million and €500 million) of ﬁ nancial instruments accounted as minority interests or as equity. Page 214 Old Mutual plc Annual Report and Accounts 2008 28 Hedge accounting continued Net investment hedges continued An analysis of amounts in the ﬁ nancial statements relating to derivatives designated as net investment hedges is shown in the table below: Fair value of ﬁ nancial instruments designated as net investment hedges at the balance sheet date €30 million cross currency swap – fair value of net investment hedge only SEK forward foreign exchange contracts ZAR forward foreign exchange contracts £300 million cross currency swap €750 million cross currency swap At At 31 December 31 December £m £m 2008 2007 (2) (2) (25) (57) (84) (170) 4 (1) (5) (16) (2) (20) The €30 million Euro loan borrowing – cross currency swap is designated to hedge the foreign exchange currency exposure to USD assets in respect of the Group’s investment in its US operations. The ZAR forwards are designated as hedges against the foreign currency risk in respect of the Group’s investment in its South African operations. SEK forwards are used to hedge foreign currency risk in respect of the Group’s investment in Skandia. The £300 million cross currency swap is used to hedge SEK currency risk on SEK based assets in the Group’s net investment in Skandia. The GBP to USD (£246 million to $486 million) leg of the €750 million cross currency is used to hedge USD currency risk on the USD based assets in the Group’s net investment in US operations. There was no ineffectiveness in respect of any of the above net investment hedges during the ﬁ nancial year (2007: nil). 29 Fair values of ﬁ nancial assets and liabilities Determination of fair value All ﬁ nancial instruments, regardless of their IAS 39 categorisation, are initially recorded at fair value. The fair value of a ﬁ nancial instrument on initial recognition is normally the transaction price, that is, the fair value of the consideration given or received. In certain circumstances, however, the initial fair value may be based on other observable current market transactions in the same instrument, without modiﬁ cation or repackaging, or on a valuation technique whose variables include only observable data. Subsequent to initial recognition, the fair values of ﬁ nancial instruments measured at fair value that are quoted in active markets are based on bid prices for assets, which in certain circumstances includes using quotations from independent third parties such as brokers and pricing services, and offer prices for liabilities. When quoted prices are not available, fair values are determined by using valuation techniques that refer as far as possible to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash ﬂ ow analysis, option pricing models and other valuation techniques commonly used by market participants. A number of factors such as bid-offer spread, credit proﬁ le, servicing costs and model uncertainty are taken into account, as appropriate, when values are calculated using a valuation technique. Changes in the assumptions used in such valuations could impact the reported value of such instruments. The fair value of derivative instruments reﬂ ects the estimated amount the Group would receive or pay in an arm’s length transaction. This amount is determined using quotations from independent third parties or by using standard valuation techniques. For certain derivative instruments, fair values may be determined in whole or in part using techniques based on assumptions that are not supported by prices from current market transactions or observable market data. In general, other than in respect of those securities that have been reclassiﬁ ed from available-for-sale to loans and receivables as described in note 31, none of the carrying amounts of ﬁ nancial assets and liabilities carried at amortised cost have a fair value signiﬁ cantly different to their carrying amounts. Such assets and liabilities are primarily comprised of variable-rate ﬁ nancial assets and liabilities that reprice as interest rates change, short-term deposits or current assets. Loans and advances Loans and advances principally comprise of variable rate ﬁ nancial assets and liabilities, which are re-priced when there are movements in the interest rates. The Group has developed and applied a fair value methodology in respect of gross exposures of loans and advances that are measured at amortised cost. The methodology incorporates the historical interest rates per product type and the projected monthly cash ﬂ ows per product type. Future forecasts for the overall probability of default (PD) and loss given defaults (‘LGDs’) for the years from 2009 to 2011, based on the latest internal data available, is applied to the ﬁ rst three years’ projected cash ﬂ ows. Average PDs and LGDs are applied to the projected cash ﬂ ows for later years. These results are compared to both regulatory and accounting credit model values. There are no signiﬁ cant variances in the fair value methodology results compared to the carrying values reported in these ﬁ nancial statements. Page 215 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 29 Fair values of ﬁ nancial assets and liabilities continued Determination of fair value continued Loans and advances continued For impaired advances, the carrying value as determined from the Group’s credit models is considered the best estimate of fair value. The Group is satisﬁ ed that, after considering the internal credit models together with other assumptions and the variable interest rate exposure, the carrying value of loans and advances measured at amortised cost approximates fair value. Investments and securities The fair values of listed investments and securities are based on bid prices. For unlisted investments and securities, fair values are determined using valuation techniques that refer as far as possible to observable market data (see above). Investment contracts The approach to determining the fair values of investment contracts is set out in the accounting policies section for insurance and investment contract business. Amounts owed to bank depositors The fair values of amounts owed to bank depositors corresponds with the carrying amount shown in the balance sheet, which generally reﬂ ects the amount payable on demand. Borrowed funds The fair values of amounts included in borrowed funds are based on quoted market prices at the balance sheet date where applicable, or by reference to quoted prices of similar instruments. Other ﬁ nancial assets and liabilities The fair values of other ﬁ nancial assets and liabilities are reasonably approximated by the carrying amounts reﬂ ected in the balance sheet. Financial instruments designated as fair value through income statement Certain items in the Group’s balance sheet that would otherwise be categorised as loans and receivables under IAS 39 have been designated as fair value through income statement. Information relating to the change in fair value of these items as it relates to credit risk is shown in the table below: Change in fair value due to change in credit risk Maximum exposure to credit risk £m Current ﬁ nancial year Cumulative £m £m 2,548 6,622 36 9,206 (9) 1 (13) – – (9) – (12) Change in fair value due to change in credit risk Maximum exposure to credit risk £m Current ﬁ nancial year £m Cumulative £m 1,768 6,346 18 8,132 (9) 1 (4) – (8) (1) – (3) At 31 December 2008 Loans and advances Investments and securities Other assets At 31 December 2007 Loans and advances Investments and securities Other assets Page 216 Old Mutual plc Annual Report and Accounts 2008 29 Fair values of ﬁ nancial assets and liabilities continued Financial instruments designated as fair value through income statement continued Certain items in the Group’s balance sheet that would otherwise be categorised as ﬁ nancial liabilities at amortised cost under IAS 39 have been designated as fair value through income statement. Information relating to the change in fair value of these items as it relates to credit risk is shown in the table below: Change in fair value due to change in credit risk At 31 December 2008 Borrowed funds Amounts owed to bank depositors At 31 December 2007 Borrowed funds Amounts owed to bank depositors Fair value £m 1,460 7,164 8,624 Current ﬁ nancial year Cumulative £m £m Contractual maturity amount £m (503) 10 (493) (565) 11 2,002 7,169 (554) 9,171 Change in fair value due to change in credit risk Fair value £m 1,676 4,002 5,678 Current ﬁ nancial year £m (61) 1 (60) Cumulative £m (62) 1 (61) Contractual maturity amount £m 1,718 4,022 5,740 l i s a c n a n F i The change in fair value due to change in credit risk shown above is determined as the amount of the change in fair value of the instrument that is not attributable to changes in market conditions that give rise to market risk. For loans and receivables that have been designated as at fair value through the income statement, individual credit spreads are determined at inception as the difference between the benchmark interest rate and the interest rate charged to the client. Subsequent changes in the benchmark interest rate and the credit spread give risk to changes in fair value in the ﬁ nancial instrument. Loans and advances are reviewed for observable changes in credit risk, and the credit spread is adjusted at subsequent dates if there has been an observable change in credit risk relating to a particular loan or advance. No credit derivatives are used to hedge the credit risk on any of the ﬁ nancial assets designated at fair value through the income statement. The change in fair value due to credit risk of ﬁ nancial liabilities designated at fair value through the income statement has been determined as the difference between fair values determined using a liability curve (adjusted for credit) and a risk-free liability curve. This difference is cross-checked to market related data on credit spreads, where available. 30 Analysis of movements in impairment account Movements in provisions for impairment of loans and advances are analysed as follows: Year ended 31 December Loans and advances Balance at beginning of the year Income statement charge Amounts written off against the provision Recoveries of amounts previously written off Foreign exchange and other movements Balance at end of the year Speciﬁ c impairment £m Portfolio impairment £m Total impairment £m Speciﬁ c impairment £m Portfolio impairment £m Total impairment £m 2008 2008 2008 2007 2007 2007 322 279 (215) 25 (4) 407 130 41 (2) – 3 172 452 320 (217) 25 (1) 579 277 133 (116) 30 (2) 322 105 23 – – 2 130 382 156 (116) 30 – 452 Page 217 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 31 Group balance sheet – categories of ﬁ nancial instruments The analysis of assets and liabilities into their categories as deﬁ ned in IAS 39 ‘Financial Instruments: Recognition and Measurement’ (IAS 39) is set out in the following table. For completeness, assets and liabilities of a non-ﬁ nancial nature, or ﬁ nancial assets and liabilities that are speciﬁ cally excluded from the scope of IAS 39, are reﬂ ected in the non-ﬁ nancial assets and liabilities category. Fair value through income statement Held-for- Total £m trading Designated £m £m Available for sale ﬁ nancial assets £m Held-to- maturity investments £m Loans and receivables £m Financial liabilities amortised cost £m Non- ﬁ nancial assets and liabilities £m At 31 December 2008 Assets Goodwill and other intangible assets Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investment in associated undertakings and joint ventures Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities Reinsurers’ share of general insurance liabilities Deposits held with reinsurers Loans and advances Investments and securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale 5,882 734 682 1,478 1,590 111 3,199 1,148 115 164 35,745 83,522 118 220 3,137 4,633 2,862 7 – – – – – – – – – – – – – – – – – – – – – – – – – – 760 627 – – 73 4,633 – – – 121 2,548 67,703 – – 596 – – – – – – 11,732 – – – – – – – – – – – – – – – – – 1,494 – – – – – – – 734 – – – – – 37 – 43 32,437 1,966 – – 2,145 – 2,862 – 145,347 6,093 70,968 11,732 1,494 40,224 Liabilities 81,269 Long-term business policyholder liabilities 344 General insurance liabilities Third party interest in consolidation of funds 2,591 2,295 Borrowed funds 477 Provisions 598 Deferred revenue 1,452 Deferred tax liabilities 219 Current tax payable 3,733 Other liabilities 220 Liabilities under acceptances 38,171 Amounts owed to bank depositors 4,395 Derivative ﬁ nancial instruments – liabilities 6 Non-current liabilities held-for-sale – – – – – – – – 271 – 1,431 4,395 – 53,211 – 2,591 1,460 – – – – 531 – 7,164 – – 135,770 6,097 64,957 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Page 218 Old Mutual plc Annual Report and Accounts 2008 – – – – – – – – – – – – – – – – – – – – – – 835 – – – – 1,788 – 29,576 – – 5,882 – 682 1,478 1,590 111 3,199 1,111 115 – – – 118 220 323 – – 7 14,836 28,058 344 – – 477 598 1,452 219 1,143 220 – – 6 32,199 32,517 31 Group balance sheet – categories of ﬁ nancial instruments continued In accordance with the provisions of the October 2008 amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ in respect of reclassiﬁ cations of ﬁ nancial assets, the Company’s US subsidiary, US Life, has elected to reclassify 152 securities from the available for sale category to the loans and receivables category on the basis that the securities were no longer regarded as being traded in an active market. The reclassiﬁ cations were made as at 1 July 2008 in accordance with the transitional provisions in the amendment. The book values and fair values of the reclassiﬁ ed securities as at 1 July 2008 were £1,119 million and £926 million respectively. These securities had an aggregate carrying value and aggregate fair value as at 31 December 2008 of £1,262 million and £972 million respectively. The amount of accumulated unrealised losses on the reclassiﬁ ed securities already recognised in equity as at the date of reclassiﬁ cation was £263 million (31 December 2007: £59 million). The amount of unrealised losses that would have been recognised in equity had the reclassiﬁ cation not taken place would have been £284 million at 31 December 2008. The changes in values between 1 July 2008 and 31 December 2008 are largely attributable to changes in the exchange rate between the USD and GBP. The overall income statement impact of the reclassiﬁ cations is nil, as the revised amortised effective interest on the reclassiﬁ ed securities is directly offset by the amortisation of the previously recognised unrealised losses to the income statement using the same amortisation pattern. At 1 July 2008, the effective rates of interest for the reclassiﬁ ed securities ranged from 4.39 percent to 15.23 percent and at that point the Group expected to recover £2.1 billion (based on exchange rate at 1 July 2008) in projected cash ﬂ ows over the remaining lives of the reclassiﬁ ed securities. Fair value through income statement Total £m Held-for- trading £m Designated £m Available for sale ﬁ nancial assets £m Held-to- maturity investments £m Loans and receivables £m Financial liabilities amortised cost £m Non- ﬁ nancial assets and liabilities £m At 31 December 2007 Assets Goodwill and other intangible assets Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investment in associated undertakings and joint ventures Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities Deposits held with reinsurers Loans and advances Investments and securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale 5,459 615 608 1,479 683 81 2,253 1,394 213 30,687 89,627 83 165 2,774 1,527 3,469 1,623 – – – – – – – – – 1,912 1,445 – – 273 1,527 – – – – – – – – – – – – – – – – 638 184 1,768 76,828 – – 659 – – – – – – 10,274 – – – – 1 – 142,740 5,157 80,077 10,275 Liabilities Long-term business policyholder liabilities Third party interests in consolidation of funds Borrowed funds Provisions Deferred revenue Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositors Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale 84,251 – 53,745 3,547 2,353 499 462 1,413 320 6,180 165 31,817 1,716 420 – – – – – – 1,955 – 1,187 1,716 – 3,547 1,676 – – – – 435 – 4,002 – – 133,143 4,858 63,405 – – – – – – – – – – – – – i l s a c n a n F i – – – – – – – – – – 650 – – – – – – 650 – – – – – – – – – – – – – – 615 – – – – – 16 29 27,007 430 – – 1,459 – 3,468 – 33,024 – – – – – – – – – – – – – – – – – – 5,459 – 608 1,479 683 81 2,253 740 – – – 83 165 383 – – 1,623 13,557 – – – – – – – – – – – – – – 30,506 – 677 – – – – 3,184 – 26,628 – – – – 499 462 1,413 320 606 165 – – 420 30,489 34,391 Page 219 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 32 Discontinued operations, assets and liabilities held-for-sale Non-current assets held-for-sale Loans and advances Investments and securities Other assets Cash and cash equivalents Non-current liabilities held-for-sale General insurance liabilities Other liabilities At At 31 December 31 December £m £m 2008 2007 – – 7 – 7 994 359 238 32 1,623 At At 31 December 31 December £m £m 2008 2007 – 6 6 305 115 420 Europe vehicle ﬁ nance business Skandia’s Nordic vehicle ﬁ nance operation, SkandiaBanken Bilﬁ nans, was sold to DnB NOR during the year. The assets and liabilities were classed as held-for-sale as at 31 December 2007. South Africa general insurance business At 31 December 2007 Mutual & Federal was presented as a non-current asset held-for-sale on the basis that the business was being actively marketed for sale. On 27 November 2008, the Group announced the termination of the sales process. As a result of the sales termination, Mutual & Federal is no longer held–for–sale and is therefore consolidated on a line–by–line basis in the balance sheet and presented within continuing operations in the income statement. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ the income statement for the year ended 2007 has been restated to present the results of Mutual & Federal within continuing operations. The balance sheet classiﬁ cation at 31 December 2007 as Non-current assets and Non-current liabilities held for sale has not been restated, also in accordance with IFRS 5. 33 Borrowed funds Senior debt securities and term loans Mortgage backed securities Subordinated debt securities Borrowed funds (i) Senior debt securities and term loans Floating rate notes1 Fixed rate notes2 Revolving credit facility3 Term loan and other loans Investment fund borrowings Total senior debt securities and term loan Page 220 Old Mutual plc Annual Report and Accounts 2008 At At 31 December 31 December £m £m Notes 2008 2007 33(i) 33(ii) 33(iii) 557 104 1,634 2,295 461 103 1,789 2,353 At At 31 December 31 December £m £m 152 2008 85 44 294 26 – 557 2007 151 161 26 79 461 33 Borrowed funds continued (i) Senior debt securities and term loans continued The maturities of the senior debt securities and term loans are as follows: At 31 December 2008 Floating rate notes Fixed rate notes Revolving credit facility Term loans and other loans Investment fund borrowings Total senior debt securities and term loan At 31 December 2007 Floating rate notes Fixed rate notes Revolving credit facility Term loans and other loans Investment fund borrowings Total senior debt securities and term loan Greater than 1 year and Less than 1 year £m less than Greater than 5 years £m 5 years £m 16 96 – 26 – 138 – – – 17 79 96 69 56 294 – – 419 75 29 161 9 – 274 – – – – – – 76 15 – – – 91 Total £m 85 152 294 26 – 557 151 44 161 26 79 461 Senior debt securities and term loan comprise: 1Floating rate notes – £7 million note repayable in December 2010, with holders having the option to elect for early redemption every 6 months with coupon referenced against 6 month LIBOR less 0.50 percent. – US$150 million repayable September 2014 at 3 month LIBOR plus 0.63 percent – repaid. – US$50 million repayable September 2011 at 3 month LIBOR plus 0.50 percent. – US$10 million repayable September 2009 at 3 month LIBOR plus 0.35 percent. – SEK100 million repayable March 2009 at 3 month STIBOR plus 0.20 percent. – €22 million repayable January 2010 at 3 month EURIBOR plus 0.35 percent. – SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38 percent. 2Fixed rate notes – €30 million Euro bond repayable July 2010, capital and interest swapped into ﬁ xed rate US Dollars at 5.28 percent. – €10 million Euro bond repayable December 2010, capital and interest swapped into ﬂ oating rate US Dollars at 3 month LIBOR plus 0.95 percent. – €20 million Euro bond repayable August 2013, capital and interest swapped into ﬂ oating rate US Dollars at 3 month LIBOR plus 1.30 percent. – €100 million Euro bond repayable December 2009 at 3.46 percent. The total fair value of the swap derivatives associated with the Senior notes is £11 million (2007: £8 million). These are recognised as assets and are included within note 27. 3Revolving credit facility The Group has a £1,250 million ﬁ ve-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 £1,232 million of the facility until September 2012. At 31 December 2008 £826 million (2007: £413 million) of this facility was utilised, £294 million (2007: £161 million) in the form of drawn debt and £532 million (2007: £252 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 2009. At 31 December 2008 this facility was undrawn. (ii) Mortgage backed securities R291 million notes (class A1) repayable 18 November 2039 (11.467 percent)1 R1.4 billion notes (class A2A) repayable 18 November 2039 (11.817 percent)1 R98 million notes (class B note) repayable 18 November 2039 (12.067 percent)1 R76 million notes (class C note) repayable 18 November 2039 (13.317 percent)1 1Issued on 10 December 2007 by the Group’s South African banking business and are callable on 18 November 2012. At At 31 December 31 December £m £m 2008 2007 22 73 5 4 21 73 5 4 104 103 Page 221 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 33 Borrowed funds continued (iii) Subordinated debt securities Banking US$18 million repayable 31 August 2009 (6 month LIBOR less 1.5%)1 R1.5 billion repayable 24 April 2016 (7.85%)2 R1.8 billion repayable 20 September 2018 (9.84%)3 R515 million repayable on 4 December 2008 (13.5%)4 – Repaid R500 million repayable on 30 December 2010 (8.38%)5 R650 million repayable 8 February 2017 (9.03%)6 R1.7 billion repayable 8 February 2019 (8.9%)7 R2.0 billion repayable 6 July 2022 (3 month JIBAR plus 0.47%)8 R500 million repayable 15 August 2012 (3 month JIBAR plus 0.45%)9 R1.0 billion repayable 17 September 2015 (10.54%)10 R500 million repayable 14 December 2017 (3 month JIBAR plus 0.70%)11 R120 million repayable 14 December 2017 (10.38%)12 R487 million repayable 20 November 2018 (15.05%)13 R1,265 million repayable 20 November 2018 (JIBAR plus 4.75%)14 R300 million repayable on 4 December 2013 (JIBAR + 2.5%)15 Other R3.0 billion repayable 27 October 2020 (8.9%)16 £300 million repayable 21 January 2016 (5.0%)17 R250 million preference shares repayable 9 June 201118 €750 million repayable 18 January 2017 (4.5%)19 At At 31 December 31 December £m £m 2008 2007 108 920 12 103 135 – 36 49 125 150 37 77 37 9 40 94 11 219 239 18 303 779 9 135 39 34 47 123 151 37 77 37 9 – – – 801 220 291 18 519 1,048 Less: banking subordinated debt securities held by other Group companies Total subordinated liabilities (65) (60) 1,634 1,789 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. 1This instrument is matched either by advances to clients or covered against exchange rate ﬂ uctuations. 2Unsecured secondary callable note was issued 24 April 2005 with a call date of 24 April 2011. 3Unsecured 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. 4Unsecured callable Bonds issued 10 June 2002. 5Unsecured callable Bonds issued 30 March 2006. 6Unsecured secondary callable note was issued 8 February 2007 with a call date of 8 February 2012. 7Unsecured secondary callable note was issued 8 February 2007 at R1.0 billion. On 19 March 2007 an additional R0.7 billion was issued. 8Unsecured secondary capital callable note issued 6 July 2007 and has a call date of 6 July 2017. 9This bond issued on 15 August 2007 is an unsecured secondary capital callable ﬂ oating rate note with a call date 15 August 2012. 10This bond issued on 17 September 2007 is an unsecured ﬁ xed rate note with a term of 13 years (non-call 8). 11 This bond issued on 14 December 2007 is a 10 year (non-call 5) ﬂ oating rate note. After its call date on 14 December 2012 its terms become JIBAR plus 1.70 percent until maturity. 12 This bond issued on 14 December 2007 is a 10 year (non-call 5) ﬁ xed rate note. After its call date its terms become ﬂ oating 3 month JIBAR plus initial margin over mid swaps plus 1.0 percent until maturity. 13This bond issued on 20 May 2008 is a perpetual (non-call 10 year) ﬁ xed rate note with a call date on 20 November 2018. 14This bond issued on 20 May 2008 is a perpetual (non-call 10 year) ﬂ oating rate note with a call date of 20 November 2018. 15 This bond issued on 4 December 2008 is a ﬂ oating rate note with a call date of 4 December 2013. 16 These bonds have a maturity date of 27 October 2020 and pay a coupon of 8.92 percent to 27 October 2015 and 3 month JIBAR plus 1.59 percent thereafter. The Group has the option to repay the bonds at par on 27 October 2015 and at 3 monthly intervals thereafter. 17 These bonds, issued on 20 January 2006, have a maturity date of 21 January 2016 and pay a coupon of 5.0 percent to 21 January 2011 and 6 month LIBOR plus 1.13 percent thereafter. The coupon on the bonds was swapped into ﬂ oating rate of 6 month STIBOR plus 0.50 percent. The Group has the option to repay the bonds at par on 21 January 2011 and at 6 monthly intervals thereafter. 18 These preference shares are redeemable on 9 June 2011 and pay a variable cumulative coupon of 61.0 percent 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 ﬁ nal redemption date but after giving an agreed period of notice. 19 This bond, issued on 16 January 2007, has a maturity date of 18 January 2017 and pays a coupon of 4.5 percent to 17 January 2012 and 6 month EURIBOR plus 0.96 percent 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 percent and 6 month US LIBOR plus 0.31 percent respectively. The Group has the option to repay the bonds at par on 17 January 2012 and at 6 monthly intervals thereafter. Page 222 Old Mutual plc Annual Report and Accounts 2008 34 Provisions Surplus property Client compensation Warranties on sale of business Liability for long service leave Provision for donations Litigation claims Other provisions Post employment beneﬁ ts Total At At 31 December 31 December £m £m 2008 2007 23 27 111 38 80 36 165 480 (3) 477 Other £m 183 (40) – 20 (24) 26 165 29 19 87 34 82 64 183 498 1 499 Total £m 498 (51) 1 91 (123) 64 480 Year ended 31 December 2008 Balance at beginning of the year Unused amounts reversed Unwind of discount Charge to income statement Utilised during the year Foreign exchange and other movements Balance at end of the year Surplus property £m Client Warranties on sale of business £m compen- sation £m Liability for long service Provision for donations £m leave £m Litigation claims £m 29 (1) 1 – (7) 1 23 19 (5) – 8 (14) 19 27 87 (5) – 22 (3) 10 111 34 – – 4 1 (1) 38 82 – – – (2) – 80 64 – – 37 (74) 9 36 l i s a c n a n F i 2008 provisions in relation to surplus property amounted to £23 million (2007: £29 million). These relate to the onerous costs of vacant properties leased by the Group. Provisions in relation to client compensation were £27 million (2007: £19 million), primarily relating to possible misselling of guarantee contracts in Nordic. Provisions in relation to warranties on the sale of businesses amounted to £111 million (2007: £87 million). These principally relate to the sale of American Skandia to Prudential Financial, recognised by the Group on acquisition of Skandia in 2006. The liability for long service leave of £38 million (2007: £34 million) relates to provision for staff payments for long serving employees. The provision for donations is held by OMSA. 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. At 31 December 2008 provisions in relation to litigation claims amounted to £36 million (2007: £64 million). During the year £74 million of the provision was utilised, principally in respect of payments made in connection with the outcome of the Skandia Liv arbitration (note 45). The balance of the provision primarily relates to future amounts payable to Skandia Liv in connection with the arbitration ruling. Where material, provisions are discounted at discount rates speciﬁ c to the risks inherent in the liability. The timing and ﬁ nal 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 result in adjustments to the amounts recorded. Of the provisions recorded above, £271 million (2007: £420 million) is estimated to be payable after more than one year. Year ended 31 December 2007 Balance at beginning of the year Unused amounts reversed Unwind of discount Charge to income statement Utilised during the year Foreign exchange and other movements Balance at end of the year Surplus property £m Client compen- sation £m Warranties on sale of business £m Liability for long service leave £m Provision for donations £m Litigation claims £m 41 (3) 2 – (8) (3) 29 8 (1) – 20 (8) – 19 113 (11) – – (15) – 87 30 – – 4 (2) 2 34 115 – – (33) – 82 71 (6) – – (1) 64 Other £m 151 – – 23 – 9 183 Total £m 529 (21) 2 47 (66) 7 498 Page 223 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 350 350 35 Deferred revenue Year ended 31 December 2008 Balance at beginning of the year Fees and commission income deferred Amortisation Foreign exchange and other movements Transfer from assets held for sale Balance at end of the year Year ended 31 December 2007 Balance at beginning of the year Fees and commission income deferred Amortisation Foreign exchange and other movements Transfer from assets held for sale Balance at end of the year 36 Other liabilities Amounts payable on direct insurance business Funds held under reinsurance business ceded Amounts owed to policyholders Amounts owed to intermediaries Other direct insurance operation creditors Accounts payable on reinsurance business Accruals and deferred income Share-based payments – cash-settled scheme liabilities Short trading securities and spot positions Trade creditors Outstanding settlements Total securities sold under agreements to repurchase Other liabilities Long-term Asset business management £m £m 112 120 (11) 30 – 489 – 32 (37) (6) – 101 Long-term Asset business management £m £m 201 149 (10) 10 – 112 82 52 (31) 9 – – General insurance £m 462 – – 2 6 8 General insurance £m 6 – – – (6) 462 Total £m 152 (48) 26 6 598 Total £m 289 201 (41) 19 (6) At At 31 December 31 December £m £m 2008 2007 15 535 66 46 64 749 15 267 312 592 299 773 3,733 325 708 54 3 29 713 26 1,952 278 1,078 304 710 6,180 Included in the amounts shown above are £3,094 million (2007: £4,865 million) that are regarded as current, the remainder as non-current. 37 Amounts owed to bank depositors Current accounts Savings deposits Other deposits and loan accounts Call and term deposits Fixed deposits Cash management deposits Other Negotiable certiﬁ cates of deposit Deposits received under repurchase agreements Page 224 Old Mutual plc Annual Report and Accounts 2008 At At 31 December 31 December £m £m 2008 2007 7,916 1,043 14,035 1,894 2,635 2,746 6,369 1,533 7,303 1,024 10,568 1,792 3,081 3,268 4,129 652 38,171 31,817 37 Amounts owed to bank depositors continued A contractual maturity analysis of the amounts owed to bank depositors is shown in the following table: Year ended 31 December 2008 Amounts owed to bank depositors Current accounts Savings deposits Other deposits and loan accounts Negotiable certiﬁ cates of deposit Deposits received under repurchase agreements Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m 7,916 1,043 21,310 6,369 1,533 7,756 1,043 17,452 2,287 318 35 – 3,105 4,392 – – – 1,104 373 – Amounts owed to bank depositors 38,171 28,856 7,532 1,477 Year ended 31 December 2007 Amounts owed to bank depositors Current accounts Savings deposits Other deposits and loan accounts Negotiable certiﬁ cates of deposit Deposits received under repurchase agreements Balance sheet amount £m 7,303 1,024 18,709 4,129 652 Less than 3 months £m 7,267 1,024 15,765 1,648 652 More than 3 months less than 1 year £m 19 – 2,389 2,555 – 17 – 861 325 – Between 1 and 5 years £m More than 5 years £m Amounts owed to bank depositors 31,817 26,356 4,963 1,203 Total £m 7,791 1,043 21,744 7,052 318 37,948 Total £m 7,303 1,024 19,068 4,528 652 32,575 – – 83 – – 83 – – 53 – – 53 l i s a c n a n F i 38 Equity (i) Share capital Authorised and issued share capital Authorised ordinary shares of 10p each Issued ordinary shares of 10p each At At 31 December 31 December £m £m 2008 750 552 2007 750 551 (ii) Perpetual preferred callable securities In addition to the Group’s senior and subordinated debt, the Group has issued two separate tranches of perpetual preferred callable securities with a total carrying value of £688 million (2007: £688 million) as at 31 December 2008. In accordance with IFRS accounting standards these instruments are classiﬁ ed as equity and disclosed within equity shareholders’ funds as shown on page 143. £350 million perpetual preferred callable securities – These are unsecured and subordinated to the claims of senior creditors and the holders of any priority preference shares. For an initial period to 24 March 2020 interest is payable at a ﬁ xed rate of 6.4 percent per annum annually in arrears. From 24 March 2020 interest is reset semi-annually at 2.2 percent per annum above the Sterling inter-bank offer rate for six month Sterling deposits, and is payable semi-annually in arrears. Coupon payments may be deferred at the Group’s discretion. The perpetual preferred callable securities are redeemable at the discretion of the Group at their principal amount from 24 March 2020. €500 million perpetual preferred callable securities – Step-up Option B Undated Subordinated Notes issued under a Global Note Programme. These are unsecured and subordinated to the claims of senior creditors and the holders of any priority preference shares. For an initial period to 4 November 2015 the notes pay interest at a ﬁ xed rate of 5.0 percent per annum annually in arrears. After this date the interest is reset semi-annually at 2.63 percent per annum above six month EURIBOR and is payable semi-annually in arrears. Coupon payments may be deferred at the Group’s discretion. The perpetual preferred callable securities are redeemable at the discretion of the Group at their principal amount from 4 November 2015. (iii) Share buy back programme As at 31 December 2008 there have been 161,559,272 shares (2007: 74,153,87 shares) repurchased on the LSE at an average price paid of 149.3p (2007: 165.7p) and 77,875,616 shares (2007: 30,947,472 shares) repurchased on the JSE at an average price paid of Rand 20.23 (2007: Rand 23.14) in accordance with the share buyback programme announced on 3 October 2007. The shares repurchased have not been cancelled and are held by the Company as treasury shares. Page 225 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 39 Minority interests – balance sheet (i) Ordinary shares Reconciliation of movements in minority interests Balance at beginning of the year Minority interests’ share of proﬁ t Minority interests’ share of dividends paid Net acquisition of interests Foreign exchange and other movements Balance at end of the year (ii) Preferred securities R2,000 million non-cumulative preference shares1 R792 million non-cumulative preference shares2 R300 million non-cumulative preference shares3 US$750 million cumulative preferred securities4 R364 million non-cumulative preference shares5 Unamortised issue costs Total in issue at 31 December At At 31 December 31 December £m £m 2007 848 224 (115) 1 (25) 2008 933 188 (111) 25 112 933 1,147 At At 31 December 31 December £m £m 2008 2007 140 140 71 12 458 25 706 (13) 693 71 22 458 25 716 (13) 703 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 percent 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 ﬁ xed rate of 8.0 percent 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 on 16 April 2007 at R10.27 per share by Nedbank on the same terms as the securities described in (1) above. Page 226 Old Mutual plc Annual Report and Accounts 2008 40 Post employment beneﬁ ts The Group operates a number of pension schemes around the world. These schemes have been designed and are administered in accordance with local conditions and practices in the countries concerned and include both deﬁ ned contribution and deﬁ ned beneﬁ t schemes. The assets of these schemes are held in separate trustee administered funds. Pension costs and contributions relating to deﬁ ned beneﬁ t schemes are assessed in accordance with the advice of qualiﬁ ed actuaries. Actuarial advice conﬁ rms that the current level of contributions payable to each pension scheme, together with existing assets, are adequate to secure members’ beneﬁ ts over the remaining service lives of participating employees. The schemes are reviewed at least on a triennial basis or in accordance with local practice and regulations. In the intervening years the actuary reviews the continuing appropriateness of the assumptions applied. The actuarial assumptions used to calculate the projected beneﬁ t obligations of the Group’s pension schemes vary according to the economic conditions of the countries in which they operate. (i) Liability for deﬁ ned beneﬁ t obligations Year to 31 December Changes in projected beneﬁ t obligation Projected beneﬁ t obligation at beginning of the year Beneﬁ ts earned during the year Interest cost on beneﬁ t obligation Actuarial (gain)/loss Beneﬁ ts paid Foreign exchange and other movements Projected beneﬁ t obligation at end of the year Change in plan assets Plan assets at fair value at beginning of the year Actual return on plan assets Company contributions Employee contributions Beneﬁ ts paid Foreign exchange and other movements Plan assets at fair value at end of the year Net (asset)/liability recognised in balance sheet Funded status of plan Unrecognised assets Other amounts recognised in balance sheet Unrecognised actuarial gains Net amount recognised in balance sheet (ii) (Credit)/expense recognised in the income statement Year to 31 December Current service costs Interest cost Expected return on plan assets Net actuarial (gains)/losses recognised in the year Losses/(gains) on curtailment Total (included in staff costs) Pension plans Other post-retirement beneﬁ t schemes £m 2008 £m 2007 £m 2008 £m 2007 675 6 41 3 (36) 89 778 855 (18) 13 1 (34) 11 828 (50) 18 – 10 (22) 758 8 38 (47) (34) (48) 675 836 82 14 1 (33) (45) 855 (180) 84 – 83 (13) 128 4 10 – (2) 18 158 134 8 – – (2) 20 160 (2) 2 2 16 18 133 4 10 (3) (5) (11) 128 139 16 – – (4) (17) 134 (6) – 3 21 18 Pension plans Other post-retirement beneﬁ t schemes £m 2008 9 31 (51) (15) 2 (24) £m 2007 7 28 (43) 5 – (3) £m 2008 3 10 (10) – – 3 £m 2007 4 10 (10) – – 4 Page 227 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 40 Post employment beneﬁ ts continued (iii) Principal actuarial assumptions UK and Guernsey pension schemes Discount rate Expected return on plan assets: Equities Debt Property Cash Annuities and other Future salary increases Pensions in payment and deferred pensions inﬂ ation Price inﬂ ation Europe pension schemes Discount rate Expected return on plan assets: Equities Debt Property Annuities and other Future salary increases Pensions in payment and deferred pensions inﬂ ation Price inﬂ ation African pension schemes Discount rate Expected return on plan assets: Equities Debt Property Cash Annuities and other Future salary increases Pensions in payment and deferred pensions inﬂ ation Price inﬂ ation African other post retirement schemes Discount rate Expected return on plan assets Future salary increases Price inﬂ ation Health cost inﬂ ation Page 228 Old Mutual plc Annual Report and Accounts 2008 Year to Year to 31 December 31 December % % 2008 2007 5.5-5.8 5.0 6.7-8.8 3.7-5.8 – 3.8-5.5 5.5-8.8 4.1-4.9 2.8-3.1 2.8-3.1 7.5-8.0 4.5-5.5 6.0 3.0-5.5 5.0-8.0 4.65 3.0-4.0 3.25-3.4 3.5 5.1 2.1 5.1 5.1 3.3 2.0 2.0 4.5 6.7 3.7 5.5 5.5 3.3 2.0 2.0 5.8-9.0 5.0-9.0 8.8-11.5 5.8-9.0 9.5 3.8-6.5 8.8-11.5 6.25 3.0-3.8 3.0-6.0 7.3-9.0 7.3-8.5 5.3-9.0 5.3-9.0 5.3-9.0 4.5-9.3 8.0-9.0 9.0 2.0-6.0 4.5-9.3 6.0 4.5 2.6-6.0 8.0-8.5 8.0-8.5 6.5-8.5 6.5-8.5 6.3-8.5 40 Post employment beneﬁ ts continued (iv) Plan asset allocation At 31 December Equity securities Debt securities Property Cash Annuities and other Pension plans Other post-retirement beneﬁ t schemes % 2008 38.4 37.4 7 1 16.2 % 2007 45.0 33.7 4.5 2.4 14.4 % 2008 13.4 6.2 – 21.6 58.8 % 2007 13.2 0.7 – 31.1 55.0 100.0 100.0 100.0 100.0 Pension and other retirement beneﬁ t plan assets include ordinary shares issued by the Company with a fair value of £0.1 million (2007: £0.4 million). (v) Summary of Group pension plans Year to 31 December Present value of deﬁ ned beneﬁ t obligations Fair value of plan assets Surplus Experience losses arising on deﬁ ned beneﬁ t plan liabilities: Amount As a percentage of plan liabilities Experience gains arising on deﬁ ned beneﬁ t plan assets: Amount As a percentage of plan assets 41 Share-based payments £m 2008 (778) 828 50 2 – (69) -8.3% £m 2007 (675) 855 180 (5) 0.7% 39 4.3% £m 2006 (758) 836 78 (12) 1.6% 50 6.0% £m 2005 (497) 508 11 (16) 3.2% 40 7.7% £m 2004 (430) 428 (2) – – (1) 0.2% (i) Share-based payment arrangements During the year ended 31 December 2008, the Group had the following share-based payment arrangements: l i s a c n a n F i Scheme UK Sharesave Scheme UK Share Option and Deferred Delivery Plan UK Restricted Share Plan Old Mutual plc Share Reward Plan – Share options Old Mutual plc Share Reward Plan – Restricted Shares Old Mutual plc Performance Share plan – Share Options Old Mutual plc Performance Share plan – Restricted Shares Description of award Contractual life V esting conditions Restricted shares Options Dividend entitlement Other Years Service Performance (measure) (years) Other – – ✔ – ✔ – ✔ ✔ ✔ – ✔ – ✔ – ✔ ✔ ✔ – ✔ – ✔ ✔2 31⁄2- 51⁄2 3 & 5 – – – – – – – 6 3 Target growth in EPS 3-5 3 & 5 Up to 10 years Not less than 3 years Up to 10 years Not less than 3 years 3 – 3 – – – – – Target growth in EPS and ROE – – – – – – – Page 229 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 41 Share-based payments continued (i) Share-based payment arrangements continued Scheme Restricted shares Options Dividend entitlement Other Years Service Performance (measure) (years) Other Description of award Contractual life V esting conditions ✔2 31⁄2-51⁄2 3 & 5 – – – – ✔3 – – ✔6 ✔7 ✔7 – – ✔6 ✔6 ✔6 ✔6 ✔6 ✔6 – 6 5 5 4-6 3-6 10 10 10 3-6 3 3 – 4, 5 & 64 3 – – – 3 4-6 4, 5 & 64 5 10 10 10 10 10 6 – – – – – – Target growth in EPS – – – Target growth in EPS5 – – – – – – – – – – – 3 & 48 Target growth in headline earnings 5 3 – – – – – – – – – – – – – – – – – – – – Old Mutual plc 2008 Sharesave Plan South Africa Share Option and Deferred Delivery Plan South Africa Restricted Share Plan OMSA Broad-based Employee Scheme OMSA Senior Black Management Scheme OMSA Management Scheme OMSA Black Business Partners Scheme OMSA Client & Distributor Scheme OMSA Community Scheme Old Mutual Namibia Management Scheme Old Mutual Namibia Senior Black Management Scheme Old Mutual Namibia Broad-based Employee Scheme Old Mutual Namibia Education Scheme Old Mutual Namibia Distributor Scheme Old Mutual Namibia Community Partners Scheme Old Mutual Namibia Black Business Partners Scheme Old Mutual Namibia Discretionary Scheme Nedcor Group (1994) Share Option Scheme – – ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ ✔ – – – ✔ – – – ✔ – – – – – – – ✔ – – ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ Nedbank Group (2005) Share Option Scheme – ✔ ✔ Page 230 Old Mutual plc Annual Report and Accounts 2008 41 Share-based payments continued (i) Share-based payment arrangements continued Description of award Contractual life V esting conditions Restricted shares1 Options Dividend entitlement Other Years Service Performance (measure) (years) Scheme Nedbank Group (2005) Matched Share Scheme Nedbank Eyethu Non-Executive Directors’ Scheme Nedbank Eyethu Black Executive Scheme ✔ – ✔ Nedbank Eyethu Black Management Scheme ✔ Nedbank Eyethu Broad-based Employee Scheme Nedbank Eyethu Black Business Partner Scheme Nedbank Eyethu Retail Scheme Nedbank Eyethu Corporate Scheme Nedbank Namibia Omuﬁ ma Black Management Scheme Nedbank Namibia Omuﬁ ma Broad-based Employee Scheme Nedbank Namibia Omuﬁ ma Black Business Partner Scheme Nedbank Namibia Omuﬁ ma Afﬁ nity Group Scheme Nedbank Namibia Omuﬁ ma Education Scheme Nedbank UK Long-term Incentive Plan Mutual & Federal Share Option Scheme Mutual & Federal Senior Black Management Scheme Mutual & Federal Management Incentive Scheme Mutual & Federal Distributor Scheme Mutual & Federal Community Scheme Mutual & Federal Black Business Partners Scheme ✔ – ✔ – ✔ ✔ – – – – – ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ – ✔ – ✔ ✔ – ✔ ✔ ✔ – ✔ – ✔ ✔ – – – ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ ✔ ✔ – ✔9 – – – – – ✔12 – – – – – – ✔15 – – – – – – 5 6 7 7 5 10 3 6 7 5 10 10 10 4 6 7 6 Indeﬁ nite Indeﬁ nite 10 3 6 4, 5 & 64 4, 5 & 64 – – – – 4, 5 & 64 – – – – 3 3 4, 5 & 64 3 – – – Various10 – – – – – – – – – – – – Target growth in average RoE – – – – – – Other – ✔11 – – ✔3 ✔6,11 ✔13 ✔14 – ✔6 ✔6,11 ✔6,11 ✔6,11 – – – – ✔7 ✔7 ✔6 Page 231 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 41 Share-based payments continued (i) Share-based payment arrangements continued Description of award Contractual life V esting conditions Restricted shares Options Dividend entitlement Other Years Service Performance (measure) (years) Scheme1 Mutual & Federal Broad-based Employee Scheme Mutual & Federal Namibia Share Option Scheme Mutual & Federal Namibia Senior Black Management Scheme ✔ – ✔ Mutual & Federal Namibia Community Scheme ✔ Mutual & Federal Namibia Black Business Partners Scheme Mutual & Federal Namibia Management Incentive Scheme Mutual & Federal Namibia Broad-based Employee Scheme Mutual & Federal Discretionary Scheme ✔ ✔ ✔ ✔ – ✔ – – – ✔ – – ✔ ✔ ✔ ✔ – ✔ ✔ – – – – – – – – – 5 6 – 3 7 4, 5 & 64 Indeﬁ nite 10 6 5 10 – – 3 – – – – – – – – – – Other ✔6 – – ✔7 ✔6 – ✔6 ✔6 1 All share-based payment arrangements are equity settled with the exception of the South Africa Share Option and Deferred Delivery Plan and the South Africa Restricted Share Plan which are cash-settled. ‘UK’ schemes relate to shares in Old Mutual plc listed on the London Stock Exchange. ‘South Africa’, ‘OMSA’ and ‘Old Mutual’ schemes relate to shares in Old Mutual plc listed on the Johannesburg Stock Exchange (“JSE”). ‘Nedcor’ and ‘Nedbank’ schemes relate to shares in Nedbank Group Ltd listed on the JSE. ‘Mutual & Federal’ schemes relate to shares in Mutual & Federal Insurance Company Ltd listed on the JSE. Details of schemes related to US Asset Management are provided in note 41(v). 2Scheme is linked to a savings plan. 3Earlier of ﬁ ve years or participant being entitled to any other award under any other share incentive scheme of the Company. 4One-third of the instruments granted become unrestricted after each of these time periods. 5Performance target applies to options only. 6Expiry of the contractual life. 7Minimum period of ten years. 8One half of the instruments granted become unrestricted after each of these time periods. 9Matching contributions made by the participant of an amount not more than 50 percent of their after-tax bonus. 10Where performance targets are not met, 50 percent of the instruments granted will become unrestricted. 11No dealing in these instruments during the notional funding period. 12For every three shares acquired, participants qualify for an additional bonus share. 13Participant holds a Nedbank Group Ltd account as their primary account for the contractual life of the instrument. 14Participant uses Nedbank Group Ltd as their primary banker for contractual life of the instrument. Nedbank has ﬁ rst right of refusal over all banking requirements. 15 Share appreciation rights “SAR” scheme, where Nedbank will settle the difference between the current market price and the exercise price in cash, when the employee decides to exercise the SAR. (ii) Reconciliation of movements in options The number and weighted average exercise prices of share options is as follows: Options over shares in Old Mutual plc (London Stock Exchange) Year ended 31 December Outstanding at beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at end of the year Exercisable at 31 December Number of options Weighted average exercise price Number of Weighted average options exercise price 2008 2008 2007 2007 30,268,067 £1.24 28,763,896 17,480,275 (7,440,893) (6,191,349) (894,078) £1.04 £1.07 11,642,305 £1.33 (873,287) £0.86 (9,047,035) £1.22 (217,812) £1.51 £1.39 £0.92 £1.57 33,222,022 £1.20 30,268,067 £1.24 9,765,796 £1.07 11,700,076 £0.93 The options outstanding at 31 December 2008 have an exercise price in the range of £0.60 to £1.99 (2007: £0.60 to £1.99) and a weighted average remaining contractual life of 3.2 years (2007: 3 years). The weighted average share price at date of exercise for options exercised during the year was £1.08 (2007: £1.68). Page 232 Old Mutual plc Annual Report and Accounts 2008 41 Share-based payments continued (ii) Reconciliation of movements in options continued Options over shares in Old Mutual plc (Johannesburg Stock Exchange) Year ended 31 December Outstanding at beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at end of the year Exercisable at 31 December Number of options Weighted average exercise price Number of Weighted average options exercise price 2008 2008 2007 2007 33,704,154 R18.15 37,090,128 15,011,301 (3,758,982) (2,282,921) (50,000) R15.47 R18.31 7,565,967 R20.07 (688,282) R14.07 (10,075,116) R15.15 (188,543) R23.28 R14.45 R12.41 R17.90 42,623,552 R18.30 33,704,154 R18.15 14,441,080 R14.28 16,199,844 R14.08 The options outstanding at 31 December 2008 have an exercise price in the range of R10.80 to R24.78 (2007: R10.80 to R24.78) and a weighted average remaining contractual life of 3.7 years (2007: 3.5 years). The weighted average share price at date of exercise for options exercised during the year was R18.14 (2007: R24.35). Options over shares in Nedbank Group Ltd Year ended 31 December Outstanding at beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at end of the year Exercisable at 31 December Number of options Weighted average exercise price Number of Weighted average options exercise price 2008 2008 2007 2007 44,497,984 R119.05 42,641,399 2,152,253 R108.04 R110.84 8,101,157 (2,591,584) (3,591,323) (61,665) (2,051,134) R114.27 (2,089,408) R68.49 (1,385,621) R113.69 R141.14 R88.30 R80.82 R74.81 41,124,074 R121.61 44,497,984 R86.94 5,240,727 R73.28 2,197,789 R93.52 i l s a c n a n F i The options outstanding at 31 December 2008 have an exercise price in the range of R78 to R282.58 (2007: R45 to R282.58) and a weighted average remaining contractual life of 3.6 years (2007: 2.9 years). The weighted average share price at date of exercise for options exercised during the year was R104.26 (2007: R143.43). Options over shares in Mutual & Federal Insurance Company Ltd Year ended 31 December Outstanding at beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at end of the year Exercisable at 31 December Number of options Weighted average exercise price Number of Weighted average options exercise price 2008 2008 2007 2007 6,420,700 1,595,020 (793,580) (1,712,050) (218,930) R14.49 7,234,000 R22.23 317,700 R17.93 (305,500) R9.03 (825,500) R19.89 – R18.82 R26.04 R19.34 R8.18 – 5,291,160 R17.33 6,420,700 R14.49 2,248,450 R12.03 1,206,900 R8.55 The options outstanding at 31 December 2008 have an exercise price in the range of R1.50 to R27.98 (2007: R3.50 to R27.99) and a weighted average remaining contractual life of 3.5 years (2007: 3.7 years). The weighted average share price at date of exercise for options exercised during the year was R17.99 (2007: R27.12). Page 233 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 41 Share-based payments continued (iii) Measurements and assumptions The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of share options granted is measured using a Black-Scholes option pricing model. Share options are granted under a service and non-market based performance condition. Such conditions are not taken into account in the grant date fair value measurement of the share options granted. There are no market conditions associated with the share option grants. The grant date for the UK and SA Share Option and Deferred Delivery Plan annual awards is deemed to be 1 January in the year prior to the date of issue. As such the Group is required to estimate, at the reporting date, the number and fair value of the options that will be granted in the following year. The fair value of awards expected to be granted in 2009 which will have an IFRS 2 grant date of 1 January 2008, is shown separately below. The grant date for all other awards is the award issue date. (iv) Option pricing inputs The following describes the option pricing inputs used for option granted by the Group during the year: Exercise price Expected volatility Expected life Expected dividends Risk-free interest rate Number of Fair value at options measurement date granted UK Sharesave Scheme UK Share Option and Deferred Delivery Plan 2008 2007 7,437,751 4,376,651 2008 10,042,524 7,265,654 2007 Old Mutual plc Share Reward 2008 2007 Plan – Share Options 1,315,789 – OMSA Management Scheme 2008 14,713,200 7,473,176 2007 Old Mutual Namibia Management Scheme Nedbank Group (2005) Share Option Scheme Nedbank Eyethu Black Executive Scheme Nedbank Eyethu Black Management Scheme Nedbank Eyethu Corporate Scheme Nedbank UK Long-term Incentive Plan 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 298,101 92,791 – 6,377,666 188,922 160,465 1,847,384 1,225,244 – 300,282 34,132 37,500 Mutual & Federal Management 2008 2007 Incentive Scheme 1,550,240 317,700 £0.26 £0.45 £0.21 £0.39 £0.08 – R0.77 R6.99 R0.98 R7.03 – R27.19 R20.45 R32.93 R20.52 R33.40 – R63.59 R19.01 R33.50 R6.62 R9.15 Share price £1.17 £1.66 £1.20 £1.64 £0.57 – R18.35 R23.28 R16.24 R23.22 £0.90 £1.31 £1.20 £1.63 £0.57 – R18.35 R23.28 R16.24 R23.22 – R134.78 – R143.16 R108.63 R134.86 R111.56 R139.81 R108.79 R134.88 R112.01 R139.13 – R134.76 – R108.06 R111.03 R135.00 R120.62 R134.27 R22.22 R26.04 R22.22 R26.04 27.1% 26.2% 29.5% 31.6% 43.9% – 37.0% 27.1% 37.0% 27.2% – 27.0% 28.0% 28.0% 28.0% 28.0% – 27.0% 27.0% 28.0% 34.2% 34.6% 3.5yrs 3.7 yrs 5.0yrs 5.0 yrs 5.0 yrs – 5.4 yrs 5.3 yrs 5.5 yrs 5.4 yrs – 4.0 yrs 6.0yrs 5.8 yrs 6.0yrs 6.0 yrs – 3.9 yrs 4.0yrs 5.0 yrs 3.0yrs 3.0 yrs 5.8% 4.2% 5.8% 4.2% 12.3% – 4.5% 3.0% 4.5% 3.0% – 4.9% 7.9% 5.1% 7.9% 5.1% – – 8.1% 5.3% 4.5% 4.5% 4.0% 5.2% 4.1% 5.1% 3.7% – 7.5% 8.9% 7.5% 8.9% – 8.6% 9.7% 9.0% 9.7% 8.8% – 9.8% 11.9% 9.3% 8.9% 8.1% All of the above model inputs are expressed as weighted averages. The expected volatility is based on the annualised historic volatility of the share price over a period commensurate with the expected option life, ending on the date of valuation of the option. The expected life assumption is based on the average length of time similar grants have remained outstanding in the past and the type of employees to which awards have been granted. Page 234 Old Mutual plc Annual Report and Accounts 2008 41 Share-based payments continued (v) Share-based payment arrangements relating to US Asset Management During the year ended 31 December 2008, US Asset Management had the following share-based payment arrangements: OMAM Afﬁ liate Equity Plan Equity granted during the year to employees of ﬁ rms participating in the OMAM Afﬁ liate Equity Plan vests 3 years from the date of grant, conditional upon continued employment over this period. Equity purchased vested immediately. Fair value was determined based on a multiple of prior year earnings. Under the terms of the arrangements, no sooner than 4 years from the date of purchase (for purchased equity) or 4 years from the date of grant (for granted equity) participating employees can sell their equity back to Old Mutual (which acts as a buyer of last resort) at a ﬁ xed multiple of prior year earnings, subject to certain restrictions. Accordingly, the schemes are accounted for as cash-settled share-based payments, despite the fact the initial purchase and/or grants of equity are settled in equity instruments. Acadian Asset Management (AAM) Class B equity interests in AAM acquired by employees during the year entitle the participating employees to 28.57 percent of the earnings of AAM in excess of $120 million, and to a liquidation preference proportionate to their shareholding. In consideration for the equity acquired, the participating employees agreed to forego a portion of existing long-term incentive payments owed. The difference between the carrying amount of this consideration and the fair value of the interest acquired was treated as share-based compensation expense. Fair value was determined based on the discounted projected future cash ﬂ ows of AAM. Fair value of instruments granted and purchased during the year AAM1 OMAM Afﬁ liate Equity Plan Total fair value of instruments ($USm)2 1Percentage of Class B equity. 2Represents fair value in excess of consideration granted for afﬁ liate share purchases. Afﬁ liate share purchases Afﬁ liate share grants – 28.6% 3.9% 2.4% – 17 – – 2.5% 7.3% 6 9 2008 2007 2008 2007 2008 2007 Total minority share in afﬁ liate – 28.6% 6.4% 9.7% 6 26 US Asset Management annual bonus awards The OMAM Afﬁ liate Equity Plan is incorporated into annual bonus awards of employees at participating ﬁ rms, which are to be settled partly in cash, and partly in equity. The level of bonus is contingent upon current year ﬁ nancial and individual performance, therefore the vesting period for bonus equity to be granted during 2009 in respect of the 2008 ﬁ nancial year has been determined to commence from 1 January 2008. It is anticipated that instruments with a fair value of US $3.5 million (2007: US$2.8 million) will be granted during 2009 to ﬁ rms participating in the OMAM Afﬁ liate Equity Plan based on 2008 ﬁ nancial performance. Page 235 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 41 Share-based payments continued (vi) Restricted share grants The following summarises the fair value of restricted shares granted by the Group during the year: UK Restricted Share Plan OMSA Senior Black Management Scheme OMSA Management Scheme Old Mutual Namibia Management Scheme Old Mutual Namibia Senior Black Management Scheme Old Mutual Namibia Broad-based Employee Scheme Nedbank Group (2005) Matched Share Scheme Nedbank Eyethu Black Executive Scheme Nedbank Eyethu Black Management Scheme Nedbank Eyethu Retail Scheme Nedbank Group (2005) Share Option Scheme Nedbank Namibia Omuﬁ ma Black Management Scheme Nedbank Namibia Omuﬁ ma Broad-based Employee Scheme Mutual & Federal Senior Black Management Scheme Mutual & Federal Management Incentive Scheme Mutual & Federal Black Business Partners Scheme Mutual & Federal Namibia Management Incentive Scheme Mutual & Federal Namibia Black Business Partners Scheme Mutual & Federal Namibia Community Scheme Mutual & Federal Discretionary Scheme Number granted 2008 7,013,741 2007 6,112,787 2008 3,546,385 2007 1,865,075 2008 10,924,260 2007 4,970,627 112,596 37,211 456,879 439,854 – 144,000 Weighted average fair value £1.22 £1.63 R16.62 R22.56 R18.68 R23.39 R19.07 R23.31 R14.69 R23.36 – R21.33 295,983 179,917 R95.26 R125.10 92,666 72,705 R108.76 R134.83 167,864 110,562 R108.76 R134.88 – 2,137 – R118.41 2008 2,516,999 – 2007 R111.53 – 2008 2007 2008 2007 2008 2007 – – – – 167,378 145,770 2008 1,777,790 95,310 2007 2008 145,090 2007 2,267,136 53,770 – – – – – R18.85 R25.95 R22.46 R26.04 R26.35 R27.70 R22.50 – 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 35,347 R26.33 13,092 R26.33 15,480 R26.33 The share price at measurement date was used to determine the fair value of the restricted shares. Expected dividends were not incorporated into the measurement of fair value where the holder of the restricted share is entitled to dividends throughout the vesting period. Page 236 Old Mutual plc Annual Report and Accounts 2008 41 Share-based payments continued (vii) Annual bonus awards The UK and South Africa Share Option and Deferred Delivery Plans give rise to annual bonus awards. The level of annual bonus awards is contingent upon the satisfactory completion of individual and Company performance targets, measured over the ﬁ nancial year prior to the date the employees receive the award. The accounting grant date for the SA and UK annual bonus plans (other than the new joiner and newly qualiﬁ ed grants) has therefore been determined as 1 January in the year prior to the date of issue of the grants. The Group anticipates awards under the South African scheme of 10,770,000 options (2007: 6,456,000 options) and 8,420,000 restricted shares (2007: 4,721,500 restricted shares.) The options have been valued using the Black-Scholes option pricing model, using an at the money option assumption. The restricted shares have been valued using a share price of R7.6 (2007: R22.91). The Group estimate of the total fair value of the annual bonus expected to be paid in the form of options and restricted shares under the UK Share Option and Deferred Delivery Plan is outlined below. The fair value is determined by making an estimate of the level of bonus to be paid out following the attainment of personal and Company performance conditions. Year ended 31 December Old Mutual plc performance share plans – restricted shares Old Mutual plc performance share plans – options (viii) Financial impact Expense arising from equity settled share and share option plans Expense arising from cash settled share and share option plans Closing balance of liability for cash settled share awards Total intrinsic value liability for vested beneﬁ ts 42 Dividends Dividends paid were as follows: 2006 Final dividend paid – 4.15p per 10p share 2007 Interim dividend paid – 2.3p per 10p share 2007 Final dividend paid – 4.55p per 10p share 2008 Interim dividend paid – 2.45p per 10p share Total fair value £m 2008 Vesting period 2008 Total fair value £m 2007 Vesting period 2007 3 1 4.2 years 4.2 years 5 1 4.2 years 4.2 years Year ended Year ended 31 December 31 December £m £m 2008 2007 21 3 24 15 – 38 (2) 36 26 10 Year ended Year ended 31 December 31 December £m £m Notes 2008 2007 l i s a c n a n F i – – 227 125 352 43 395 218 115 – – 333 40 373 Dividends to ordinary equity holders Dividends declared to holders of perpetual preferred callable securities 38(ii) Dividend payments for the year 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 2008, £23 million and £20 million respectively were declared and paid to holders of perpetual preferred callable securities (March 2007: £22 million and November 2007: £18 million). Page 237 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 43 Contingent liabilities Guarantees and assets pledged as collateral security Irrevocable letters of credit Secured lending Other contingent liabilities At At 31 December 31 December £m £m 2008 2007 1,839 760 383 393 1,489 426 1,052 136 Nedbank structured ﬁ nancing Historically a number of the Group’s South African banking businesses entered into structured ﬁ nance 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 ﬁ rst 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 speciﬁ cally 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. American Skandia The sale of American Skandia to Prudential Financial contained customary representations and warranties. The indemnity in respect of this is limited to US$1 billion. Investigations by various US regulators have given rise to potential settlements and claims in relation to market timing. American Skandia’s exposure to market timing is part of a wider investigation of the US industry. The exposure is covered by the aforementioned indemnity which also covers the matter of American Skandia’s failure to administer the annuitisation provisions contained in certain contracts. This was an administrative error made by the American Skandia business between 1996 and 2003. American Skandia has been provided for in the acquisition accounting. 44 Commitments Capital commitments The Group’s capital commitments are detailed in the table below. The Group’s management is conﬁ dent that future net revenues and funding will be sufﬁ cient to cover these commitments. Investment property Property, plant and equipment At At 31 December 31 December £m £m 2008 2007 – 37 3 66 Commitments to extend credit to customers The following table presents the contractual amounts of the Group’s off-balance sheet ﬁ nancial instruments that commit it to extend credit to customers. Original term to maturity of one term or less Original term to maturity of more than one year Other commitments, note issuance facilities and revolving underwriting facilities At At 31 December 31 December £m £m 2008 2007 2,467 115 441 1,588 96 237 Assets are pledged as collateral under repurchase agreements with other banks and for security deposits relating to local futures, options and stock exchange memberships. Mandatory reserve deposits are also held with local Central Banks in accordance with statutory requirements. These deposits are not available to ﬁ nance the Groups’ day-to-day operations. Commitments under the Group’s operating and ﬁ nance lease arrangements are described in note 19. Page 238 Old Mutual plc Annual Report and Accounts 2008 45 Related parties The Group provides certain pension fund, insurance, banking and ﬁ nancial services to related parties. These are conducted on an arm’s length basis and are not material to the Group’s results. (i) Transactions with key management personnel, remuneration and other compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. Details of the remuneration and other compensation paid to the Board of Directors are disclosed in the Remuneration Report and details of their shareholdings in the Company are contained in the Directors’ Report on Corporate Governance and Other Matters. (ii) Key management personnel remuneration and other compensation Year ended 31 December Directors’ fees Remuneration Cash remuneration Short-term employee beneﬁ ts Post employment beneﬁ ts Other long-term beneﬁ ts Share-based payments Share options Year ended 31 December Outstanding at beginning of the year Leavers New appointments Granted during the year Lapsed during the year Lapsed during the year Outstanding at end of the year Restricted shares Year ended 31 December Outstanding at beginning of the year Leavers New appointments Granted during the year Released during the year Outstanding at end of the year Number of personnel 2008 8 12 17 8 4 11 Number of personnel 2007 9 13 20 7 7 17 Value £000s 2008 1,124 9,924 5,971 1,285 665 7 1,996 11,048 Value £000s 2007 1,014 13,989 8,616 1,319 281 45 3,728 15,003 Number of Number of options/shares ’000s personnel Number of Number of options/shares ’000s personnel 2008 2008 2007 2007 11 4 1 9 3 3 10 12,592 (7,706) 1,316 1,525 (191) (143) 7,393 11 – 2 8 11 1 11 15,458 – 1,370 1,888 (6,110) (14) 12,592 Number of Number of options/shares ’000s personnel Number of Number of options/shares ’000s personnel 2008 2008 2007 2007 11 4 1 8 4 9 6,270 (4,325) 900 1,741 (566) 4,020 13 – 3 8 10 11 4,257 – 1,333 1,695 1,015 6,270 Page 239 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 45 Related parties continued (iii) Key management personnel transactions Key management personnel and members of their close family have undertaken transactions with Old Mutual plc and its subsidiaries, jointly controlled entities and associated undertakings in the normal course of business, details of which are given below. For current accounts positive values indicate assets of the individual whilst for credit cards and mortgages positive values indicate liabilities of the individual. Year ended 31 December Current accounts Balance at beginning of the year Net movement during the year Balance at end of the year Credit cards Balance at beginning of the year Net movement during the year Balance at end of the year Mortgages Balance at beginning of the year Net movement during the year Interest charged Less repayments Foreign exchange movements Balance at end of the year General insurance contracts Total premium paid during the year Claims paid during the year Life insurance products Total sum assured/value of investment at end of the year Pensions, termination beneﬁ ts paid Value of pension plan as at end of the year Number of personnel 2008 Value £000s 2008 Number of personnel 2007 40 (51) (11) 16 (4) 12 2,014 421 194 (716) (17) 1,896 25 18 8,397 7 6 4 5 5 5 7 2 7 6 6 5 4 5 4 5 1 12 10 Value £000s 2007 2,323 (2,283) 40 12 4 16 1,643 2,201 210 (2,048) 8 2,014 21 11 3,157 9,500 13 8,404 Various members of key management personnel hold, and/or have at various times during the year held, investments managed by asset management businesses of the Group. These include unit trusts, mutual funds and hedge funds. None of the amounts concerned are material in the context of the funds managed by the Group business concerned, and all of the investments have been made by the individuals concerned either on terms which are the same as those available to external clients generally or, where that is not the case, on the same preferential terms as were available to employees of the business generally. Page 240 Old Mutual plc Annual Report and Accounts 2008 45 Related parties continued (iv) Skandia Liv Livförsäkringsaktiebolaget Skandia (publ) (Skandia Liv), is a related party to the Old Mutual Group. Skandia Liv is a wholly-owned subsidiary of Skandia and its business is conducted on a mutual basis. For the reasons given in the accounting policies Skandia Liv’s result is not consolidated in these ﬁ nancial statements. Material transactions between the Group and the Skandia Liv group in twelve months ended 31 December 2008 were as follows: 1 Agreement in principle and framework agreement on co-operation covering market-related functions and certain staff functions – this involves distribution and distribution support, customer service, market communication, administration of group insurance products, and staff and service functions. Skandia Liv paid £52 million (2007: £86 million) for services rendered under this agreement. 2 Premises – the Group rents ofﬁ ce premises from Skandia Liv. The Group paid market rents of £15 million (2007: £14 million) for these premises. 3 Occupational pensions – Skandia Liv provides occupational pensions for the employees of the Group, for which the Group paid £15 million (2007: £14 million). 4 Agreement on IT services – the Group provides IT services to Skandia Liv. The amount charged to Skandia Liv was £9 million (2007: £7 million). 5 In 2002, prior to Skandia being acquired by Old Mutual, it sold its asset management business, Skandia Asset Management. Skandia Liv submitted a claim against Skandia, ﬁ rstly based upon the proceeds of sale and, secondly based upon the terms of the asset management agreement entered into prior to the sale. Skandia and Skandia Liv agreed to settle the dispute by means of a binding arbitration process. The arbitration board has not accepted Skandia Liv’s claim to any part of the purchase price paid, but has ruled that Skandia is obliged to pay Skandia Liv a total sum of £47 million (SEK580 million) (2007: £174 million (SEK2,360 million)) plus interest by way of compensation in relation to fees under the asset management agreement which Skandia Liv deemed to be higher than prevailing market rates. Skandia has paid £74 million (£47 million plus £27 million relating to fees and interest respectively) to Skandia Liv. This ruling means that the last of a number of questions about relations between Skandia Liv and the parent company Skandia is now settled. The balance outstanding at 31 December 2008 due from Skandia Liv is £13 million (2007: £13 million). Various other arrangements exist between the Group and Skandia Liv, principally in respect of provision of accounting, legal and treasury functions, all of which are transacted on an arm’s length basis. Arbitration settlement During the year settlement was reached in the arbitration proceedings between Skandia, and Skandia Liv in respect of the sale of the Skandia Asset Management business to Den Norske Bank in 2002. In 2002, prior to its acquisition by Old Mutual, Skandia sold its asset management business, Skandia Asset Management, which principally managed the assets of the Skandia Liv business, to Den Norske Bank for SEK3.2 billion. Following the sale, Skandia Liv submitted a claim against Skandia, ﬁ rstly based upon the proceeds of sale and, secondly based upon the terms of the asset management agreement entered into prior to the sale. In June 2004, Skandia and Skandia Liv agreed to settle the dispute by means of a binding arbitration process. The arbitration board made its ruling in October 2008. The board did not accept Skandia Liv’s claim to any part of the purchase price paid, but ruled that Skandia was obliged to pay Skandia Liv a sum of £47 million together with interest thereon by way of compensation in relation to fees under the asset management agreement which Skandia Liv deemed to be higher than prevailing market rates. (v) Aka Capital (Proprietory) Limited A Group subsidiary, Nedbank Ltd, sold its 20 percent interest in Aka Capital (Proprietary) Limited (“Aka Capital”) at arm’s length, in August 2006, to the other existing Aka Capital shareholders. These included Mr RJ Khoza, who is a non-executive director of Old Mutual plc, who acquired an additional 4.2 percent of Aka Capital through a special purpose vehicle (SPV) for R11.0 million. Nedbank Ltd’s Capital Investment Committee approved this transaction in line with its mandate in the normal course of business. The funding for the acquisition by Mr Khoza’s SPV was ﬁ nanced by Nedbank Ltd on arm’s length terms, with none (2007: R12.8 million) of such funding being outstanding at year-end. Page 241 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 46 Principal subsidiaries and Group enterprises The following table lists the principal Group undertakings whose results are included in the consolidated ﬁ nancial statements. All shares held are ordinary shares and, except for OM Group (UK) Ltd, are held indirectly by the Company. Name Old Mutual (South Africa) Ltd Old Mutual Life Assurance Company (South Africa) Ltd Old Mutual Life Assurance Company (Namibia) Ltd Old Mutual Investment Group (South Africa) (Pty) Ltd Nedbank Group Ltd Nedbank Ltd Mutual & Federal Insurance Company Ltd Old Mutual (US) Holdings, Inc Old Mutual U.S. Life Holdings, Inc OM Financial Life Insurance Company Old Mutual (Bermuda) Ltd Dwight Asset Management Company Acadian Asset Management1 Barrow, Hanley, Mewhinney & Strauss, Inc OM Group (UK) Ltd Skandia Europe and Latin America (Holdings) Ltd Skandia Life Assurance Company Ltd Försäkringsaktiebolaget Skandia SkandiaBanken AB Skandia UK Holdings Limited Old Mutual (Netherlands) B.V. Nature of business Holding company Life assurance Life assurance Asset management Banking Banking General insurance Holding company Holding company Life assurance Life assurance Asset management Asset management Asset management Holding company Holding company Life assurance Life assurance Banking Holding company Holding company Percentage holding 100 100 100 100 61 61 84 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Country of incorporation Republic of South Africa Republic of South Africa Namibia Republic of South Africa Republic of South Africa Republic of South Africa Republic of South Africa Delaware, USA Delaware, USA Maryland, USA Bermuda Delaware, USA Massachusetts, USA Nevada, USA England and Wales England and Wales England and Wales Sweden Sweden England and Wales Netherlands 1 The Group holds 100 percent Class A shares and 71.43 percent Class B shares in Acadian Asset Management. The remaining 28.57 percent Class B shares are held by the employees as described in note 41(v). A complete list of subsidiaries is ﬁ led with the UK Registrar of Companies with the annual return. All the above companies have a year-end of 31 December. As described in the accounting policies Skandia Liv is not consolidated in these ﬁ nancial statements. Skandia Liv’s capital and reserves are summarised as follows: Capital and Reserves (Loss)/Proﬁ t after tax At At 31 December 31 December £m £m 2008 2007 25 (7) 25 2 Page 242 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk The Group is exposed to ﬁ nancial risk through its ﬁ nancial assets (investments and loans), ﬁ nancial liabilities (investment contracts, customer deposits and borrowings), reinsurance assets and insurance liabilities. The key focus of ﬁ nancial risk management for the Group is ensuring that the proceeds from its ﬁ nancial assets are sufﬁ cient to fund the obligations arising from its insurance and banking operations. The most important components of ﬁ nancial risk are credit risk, market risk (arising from changes in equity, and bond prices, interest and foreign exchange rates), and liquidity risk. Market risk arises from open positions in interest rate, currency and equity products, all of which are exposed to general and speciﬁ c market movements and/or conditions. (a) Financial Risk Management strategy and policy (i) Overview The Old Mutual Group operates an Enterprise Risk Management (ERM) framework containing the following components: > a robust risk governance structure; > risk appetites established at Group and subsidiary level; > Group-wide risk policies; and > methodologies that focus on risk identiﬁ cation, risk measurement, risk assessment, action plans, monitoring and reporting. Group risk principles have been established for each major risk category to which the Group is exposed. These are designed to provide management teams across the Group with guiding principles within which to manage risks. Business unit risk policies expand on these principles and contain detailed requirements and/or limits for the speciﬁ c business unit concerned. Further details regarding the ERM framework and risk governance procedures are contained in the Risk Management section on pages 12 to 20 of this Annual Report. The Group’s exposure to ﬁ nancial risk varies according to the nature of its operations and the location of those operations. Consequently the Group’s policy is to manage ﬁ nancial risk separately through its principal operations subject to appropriate central corporate monitoring. The Group’s operations that incur signiﬁ cant ﬁ nancial risk are: > Old Mutual plc > OMSA, through its principal operating entity, Old Mutual Life Assurance Company South Africa (OMLAC(SA)) > US Life > Skandia, through its unit-linked assurance operations > in UK, Nordic and ELAM, and through its banking operation in Nordic (SkandiaBanken) > M&F > Nedbank The Group’s asset management businesses are exposed to ﬁ nancial risk to some extent due to the impact of market ﬂ uctuations on revenue levels, which are a function of the value of client portfolios. This exposure is reduced through asset class and product diversiﬁ cation. Investment risk is borne principally by the client. These asset management businesses, together with the long-term insurance operations in the rest of Africa, do not give rise to signiﬁ cant ﬁ nancial risks relative to the Group as a whole, and are therefore not considered further. (ii) Old Mutual plc The principal ﬁ nancial risks Old Mutual plc faces, other than those that it is exposed to through its operating entities, relate to credit risk, liquidity risk and currency risk. Credit risk arises primarily as a result of the exposure to ﬁ nancial institutions with which Old Mutual plc has deposited surplus cash or entered into other ﬁ nancial arrangements, such as forward foreign exchange transactions or interest rate derivatives. The Old Mutual plc Board controls this risk by setting limits on the level of exposure to individual counterparties. Liquidity risk is the risk that Old Mutual plc may not be able to pay obligations when due, or provide capital to its subsidiaries when required. Old Mutual plc mitigates this risk by ensuring it maintains liquid assets and/or committed ﬁ nance facilities sufﬁ cient to meet its expected needs. In terms of currency risk, Old Mutual plc’s exposure arises from the fact that the impact on the consolidated results of the Group, insofar as its presentational currency is GBP, whilst the functional currencies of its principal operations are South African Rand, US Dollar, Euro and Swedish Krona. Old Mutual plc seeks to reduce it’s consolidated exposure to currency ﬂ uctuations by hedging a proportion of the currency translation risk of its net investments in its foreign subsidiaries and anticipated cash ﬂ ows through currency swaps, currency borrowings and forward foreign exchange contracts. The hedging relationships that qualify for hedge accounting are classiﬁ ed as either cash ﬂ ow hedges or net investment hedges in the consolidated ﬁ nancial statements. Certain transactions undertaken as hedges do not qualify for hedge accounting. Fair value movements for these derivatives are accounted for in the income statement. (iii) Insurance operations The principal ﬁ nancial risks faced by the insurance operations are credit risk, market risk and liquidity risk and, to the extent that those operations have overseas operations with different functional currencies, currency risk. Each of the insurance operations manages their ﬁ nancial risks using asset and liability management (ALM) frameworks aimed at matching assets to the liabilities arising as a result of the various type of beneﬁ ts payable to policyholders, as well as seeking to maximise the return on shareholders’ funds, all within an acceptable risk framework. Page 243 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (a) Financial Risk Management strategy and policy continued (iii) Insurance operations continued The insurance operations retain substantial ﬁ nancial exposures to the extent that the beneﬁ ts payable to policyholders are not linked to the performance of the underlying assets and/or policyholders enjoy options embedded in their contracts that are not matched by identical options in their investment portfolios. These exposures include liquidity risk (for example where the durations of assets do not match those of the policyholder liabilities they seek to match), credit risk (where changes in credit quality of asset portfolios or credit losses cannot be passed on to policyholders) and market risk (for example in respect of equity holdings in shareholders’ funds). (iv) Banking operations The Group’s banking operations incur credit, interest rate and liquidity risk by accepting deposits from customers at both ﬁ xed and ﬂ oating rates and for various periods and seeks to earn above average interest margins by consolidating them and investing in a range of assets, often for longer periods, whilst maintaining sufﬁ cient liquidity to meet all claims that might fall due. Nedbank also incurs credit exposures as a result of entering into guarantees and other commitments such as letters of credit and performance, and other bonds. Nedbank also trades in ﬁ nancial instruments, taking positions in traded and over the counter instruments including derivatives, in order to take advantage of short-term market movements in equity, bond, currency, interest rate and commodity prices. Each of the banking operations manages their ﬁ nancial risks using an asset and liability management framework, conducted through formal structures appropriate to their individual businesses. (b) Capital management (i) Overview The Group actively manages its capital with a focus on capital efﬁ ciency and effective risk management. The capital objectives are to maintain the Group’s ability to continue as a going concern while enabling the ability to identify capital strains and ensuring that the return to shareholders is maximised through the optimisation of the debt and equity balance. The Group ensures that it can meet its expected capital and ﬁ nancing needs at all times having regard to the Group’s business plans, forecasts and strategic initiatives. It is critical that the Group’s capital management policies are aligned with the Group’s overall strategy, business plans and risk appetite. The Group’s Capital Management Committee (GCMC) reviews the capital structure regularly. As part of the review the committee considers the cost of capital and the risks associated with each class of capital. Based on the recommendations of the committee, the Group will balance its overall capital structure through the payment of dividends, new share issues, share buybacks as well as the issue of new debt or the redemption of existing debt. Measures that inform the GCMC’s views on the appropriate level of capital for the Group includes shareholder performance objectives, regulatory capital requirements, internal economic capital measures, rating agency expectations and general views on maintaining ﬁ nancial ﬂ exibility. The Group’s overall capital risk appetite is managed with reference to the requirements of the relevant stakeholders and seeks to maintain sufﬁ cient, but not excessive, ﬁ nancial strength to support stakeholder requirements, optimise its overall debt to equity structure to enhance returns to shareholders, subject to the requirements set by the Group’s capital risk appetite and retain ﬁ nancial ﬂ exibility by maintaining liquidity, including unutilised committed credit lines. The primary sources of capital used by the Group are equity shareholders’ funds, preference shares, subordinated debt and borrowings. Alternative resources are utilised where appropriate. Targets are established in relation to regulatory solvency, ratings, liquidity and dividend capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders. The individual companies in the Group are subject to regulatory capital requirements at an individual level. In addition, the Group as a whole is subject to the solvency requirements of the Financial Groups Directive (FGD) as implemented by the FSA. The Group utilises both this measure and economic capital measures to manage its capital position. Under FGD a continuous company solvency test is applied. Under this test the surplus capital held in each of the regulated entities is aggregated with the free assets of the non-regulated entities. Group borrowings are deducted from this total (other than subordinated debt issues which qualify as capital). No credit is given to the beneﬁ t of diversiﬁ cation. The test is passed where the aggregate number is positive. Due to the geographically diverse nature of the group’s operations there is an added complexity to the application of the FSA capital requirements. In particular certain regional capital requirements need to be recalculated under the FSA rules as if the companies were directly subject to the FSA capital regime. The Group met its FGD requirements at 31 December 2008 and throughout the year. As at the date of issue of these ﬁ nancial statements the unaudited pro-forma surplus was estimated to be £0.7 billion. The FGD position will be submitted to the FSA by 30 April 2009. Page 244 Old Mutual plc Annual Report and Accounts 2008 1,191 (154) (570) 467 (126) 341 Restated Europe £m 2007 3,699 (1,049) (1,505) 1,145 (211) 934 Europe £m 2007 944 238 (75) 3 – 35 47 Financial risk continued Capital position statements (i) Long-term insurance business operations Each of the Group’s long term businesses is capitalised at a sufﬁ ciently strong level for their individual circumstances. The regulatory capital position of the Group’s long-term insurance operations, based on latest estimates that are not audited, is summarised as follows: South Africa United States £m £m Europe £m South Africa United States £m £m Restated 2008 2007 2007 At 31 December (unaudited) Equity shareholders’ funds Adjustments to a regulatory basis: Inadmissible assets Other adjustments Total available capital resources Total capital requirements – local regulatory basis Overall excess of capital resources over requirements 2008 3,455 (15) (257) 3,183 (851) 2,332 2008 339 (276) 232 295 (232) 3,745 (1,066) (1,412) 1,267 (237) 3,984 (22) (565) 3,397 (886) 63 1,030 2,511 At 31 December Capital position at 1 January Earnings after tax Change in admissible assets and other adjustments and other movements in reserves New capital/(capital redemptions) Dividends Foreign exchange movements South Africa United States £m £m Europe £m South Africa United States £m £m 2008 3,397 (233) 276 (209) (48) 2008 467 (751) (239) 650 – 168 2008 2007 2007 1,145 366 2,993 535 (327) – (55) 138 452 – (613) 30 409 19 62 (19) – (4) l i s a c n a n F i Capital position at 31 December 3,183 295 1,267 3,397 467 1,145 South Africa The amounts disclosed above represent the capital position of OMLAC(SA) and the life business in Namibia. The calculations are determined in accordance with the requirements of the South African Financial Services Board, using estimates of the regulatory adjustments, as the relevant regulatory returns have yet to be completed or audited. At 31 December 2008, OMLAC(SA)’s excess assets was 3.8 times (2007: 3.8 times) the Statutory Capital Adequacy Requirement (SCAR), after allowing for estimates of statutory limitations on the value of certain assets. OMLAC(SA)’s shareholders’ funds include its investments in Nedbank £1,176 million (2007: £1,633 million) and M&F £219 million (2007: £404 million). In addition, £904 million (2007: £516 million) is invested in the Group’s loan notes and £335 million (2007: £194 million) is held in inter-company loans. All inter-company loans are immediately repayable and subject to commercial terms and conditions, with the exception that interest may be waived in certain circumstances. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the shareholders’ fund, maintaining the minimum statutory capital adequacy requirement and foreign exchange controls, as determined by the South African Reserve Bank. The statutory solvency requirement for Namibia is N$4 million (£0.3 million) (2007: N$4 million (£0.3 million)). This has been determined in accordance with local statutory rules. United States In the case of OMUSL, the amounts disclosed above represent the consolidated capital position of the OMUSL group of companies, including Old Mutual Financial Life Insurance Company, Old Mutual Financial Life Insurance Company of New York, Old Mutual (Bermuda) Limited and Old Mutual Reassurance (Ireland) Limited. The calculations have been determined on the basis of local regulatory requirements for the United States, Bermuda and Ireland accordingly. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the entities and the requirement to maintain the minimum statutory capital requirements. Page 245 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued Europe In the case of Skandia, the amounts disclosed above represent the consolidated capital position of Skandia’s unit-linked assurance operations in the United Kingdom, Scandinavia and Continental Europe. The calculations have been determined on the basis of local regulatory requirements for the territories in question. The amount of the surplus available to be distributed as dividends to the ultimate parent, Old Mutual plc, is subject to available distributable reserves within the shareholders’ fund, maintaining the minimum statutory capital adequacy requirements and obtaining any necessary regulatory permissions as required by local regulators in the territories in question. (iv) Banking operations The regulatory capital position of the Group’s banking operations, based on latest estimates, is summarised as follows: Banking business (unaudited) Equity shareholder funds Eligible subordinated debt Inadmissible assets Other adjustments Total capital resources Total capital requirement Excess of capital resources over capital requirement Capital position at 1 January Earnings after tax and other increases in reserves Change in admissible assets, other adjustments and other movements in reserves New capital Net (redemption)/issue of subordinated debt Dividends paid Foreign exchange movements Capital position at 31 December Africa £m 2008 1,434 482 – (18) 1,898 (1,528) 370 1,883 243 (49) – (60) (104) (15) 1,898 Europe £m 2008 218 105 (3) 1 321 (166) 155 324 119 (13) – – (149) 40 Africa £m 2007 1,357 546 – (20) 1,883 (1,375) 508 1,440 333 (35) 63 169 (94) 7 321 1,883 Europe £m 2007 221 94 (2) 11 324 (194) 130 259 74 (20) – – – 11 324 The above amounts represent the capital positions of Nedbank Limited (including the London branch), Imperial Bank Limited and SkandiaBanken AB. The calculations have been determined on the basis of local regulatory requirements for the territories in question, and reﬂ ect the Group’s percentage ownership. (c) Credit risk (i) Overall exposure to credit risk Credit risk refers to the risk that counterparty will default on its contractual obligation resulting in ﬁ nancial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufﬁ cient collateral where appropriate, as a means of mitigating the ﬁ nancial loss from defaults. The Group’s exposure and credit rating of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The Group does not have signiﬁ cant credit exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds and derivative ﬁ nancial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Nedbank’s lending portfolio forms the substantial part of the Group’s loans and advances, analysed below. Credit risk represents the most signiﬁ cant risk type facing Nedbank, accounting for over 70 percent of its economic capital requirements. Nedbank’s credit risk proﬁ le is managed in terms of its credit risk management framework, which encompasses comprehensive credit policy, mandate (limits) and governance structures, and is approved by the Nedbank Board. The other major source of credit risk arises predominantly in the Group’s insurance operations’ portfolios of debt and similar securities along with those portfolios of debt instruments held by the banking operations. Credit risk for these portfolios is managed with reference to established credit rating agencies with limits placed on exposures to below investment grade holdings. Other than the above, the Group has other limited credit risk exposures in respect of amounts due from policyholders, intermediaries and reinsurers. None of the long-term business operations cedes signiﬁ cant risk through reinsurance and any loans to policyholders are secured on the surrender value of the relevant policies. The credit risk exposure of the Group’s South Africa general insurance business, classiﬁ ed as non-current assets held-for-sale in 2007, is included in the analysis below. Page 246 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued The table below represents the Group’s maximum exposure to credit risk, without taking into account the value of any collateral obtained. The total credit exposure also includes potential exposure arising from ﬁ nancial guarantees given by the Group and undrawn loan commitments, which are not yet reﬂ ected in the Group’s balance sheet. (c) Credit risk continued Mandatory reserve deposits with Central Banks Reinsurers’ share of long-term business policyholder liabilities Reinsurers’ share of general insurance liabilities Deposits held with reinsurers Loans and advances Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Policyholder loans Other loans to clients Net ﬁ nance lease and instalment debtors Preference shares and debentures Factoring accounts Trade, other bills and bankers’ acceptances Term loans Remittances in transit Deposits placed under reverse repurchase agreements Less: impairment of loans and advances Investments and securities Government and government-guaranteed securities Other debt securities, preference shares and debentures Short-term funds and securities treated as investments Other Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Financial guarantees and other credit related contingent liabilities Loan commitments and other credit related commitments At At 31 December 31 December £m £m 2008 2007 734 1,148 115 164 35,745 14,111 5,325 58 556 895 260 4,443 4,474 1,142 29 78 4,746 15 192 (579) 615 1,394 66 215 30,690 12,083 4,415 23 541 990 204 4,729 3,866 689 36 135 2,988 14 429 (452) 32,297 27,705 8,976 19,116 3,989 216 2,681 4,633 2,862 1,989 4,165 7,234 16,902 3,342 227 2,330 1,527 3,501 1,691 4,683 86,533 74,417 Page 247 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (c) Credit risk continued (ii) Debt instruments and similar securities The following table shows an age analysis of the portfolio of debt instruments and similar securities: Neither past due nor impaired Impaired instruments Total debt instruments and similar securities At At 31 December 31 December £m £m 2008 2007 31,875 206 27,448 30 27,478 32,081 The following table shows an analysis of the carrying values of the Group’s portfolio of debt and similar securities according to their credit rating (Standard & Poor’s or equivalent), by investment grade. At 31 December 2008 Investment grade (AAA to BBB) Sub-investment grade (BB and lower) Not rated At 31 December 2007 Investment grade (AAA to BBB) Sub-investment grade (BB and lower) Not rated Government Other debt and government- related securities £m securities, preference shares and debentures £m Short-term funds and securities £m 7,029 – 1,947 14,969 312 3,835 3,601 – 388 Total £m 25,599 312 6,170 8,976 19,116 3,989 32,081 Government and government- related securities £m Other debt securities, preference shares and debentures £m 5,122 – 2,112 14,229 296 2,377 Short-term funds and securities £m 2,969 – 373 Total £m 22,320 296 4,862 7,234 16,902 3,342 27,478 In general, no collateral is taken in respect of the Group’s holdings of debt instruments and similar securities. United States US Life has incurred impairment losses of £414 million and net unrealised losses of £1,800 million and the following analysis on the US Life debt instruments and similar securities portfolio and of its fair value gains and losses gives further information as to the quality and spread of the investment portfolio. US Life are the only business unit where the investment portfolio is categorised as Available-for-sale. Page 248 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued US Life NAIC designation For US statutory reporting, debt securities are classiﬁ ed into six categories speciﬁ ed by the National Association of Insurance Commissioners (NAIC). The categories range from class 1 (the highest) to class 6 (the lowest). Classes 1 to 5 are regarded as performing. Class 6 securities are regarded as in or near default. Generally, classes 1 and 2 are regarded as investment grade (by nationally recognised ratings agencies), classes 3, 4, 5 and 6 securities are non-investment grade securities. At 31 December 1 2 3 4 5 6 Carrying value £m 2008 6,253 3,526 209 27 31 5 % of total Carrying value £m % of total 2008 62.2 35.1 2.0 0.3 0.3 0.1 2007 5,941 3,177 172 10 – – 2007 63.9 34.2 1.8 0.1 – – 10,051 100.0 9,300 100.0 US Life Securities rating by sector The following table analyses the securities portfolio by sector and investment rating. At 31 December 2008 Finance Banking Utility Communications Insurance Energy Manufacturing Other Total At 31 December 2007 Finance Banking Utility Communications Insurance Energy Manufacturing Other Total AAA % 0 1 0 0 0 0 0 27 28 AAA % 1 1 0 0 0 0 0 29 31 AA % 1 1 0 0 0 0 0 3 5 AA % 2 1 0 0 0 0 0 2 5 A % 7 7 2 3 3 2 1 4 A % 7 6 2 3 3 1 1 4 BBB % BB and below % 5 5 6 4 3 3 1 8 5 5 5 5 3 3 1 8 1 0 0 0 0 0 0 2 3 0 0 1 0 0 0 0 1 2 29 35 BBB % BB and below % 27 35 l i s a c n a n F i Total % 14 14 8 7 6 5 2 44 100 Total % 15 13 8 8 6 4 2 44 100 Page 249 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (c) Credit risk continued (ii) Debt instruments and similar securities continued US Life Securities by industry The following table analyses the securities portfolio by industry Afﬁ liated Air transport Asset backed Automotive Banking Basic industries CMBS Communications Consumer cyclical Consumer non-cyclical Energy Entertainment Finance Insurance International Manufacturing Municipal RMBS Technology Transportation Treasury Utility Total At At 31 December 31 December % % 2008 2007 4 1 6 1 14 2 10 6 2 2 5 1 14 6 1 2 1 10 1 1 1 9 1 1 7 1 13 2 11 8 2 2 4 1 16 6 3 2 – 9 1 1 1 8 100 100 Page 250 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued Further information on the book values, fair values and unrealised gains and losses within the debt securities portfolio held by the Group’s US subsidiary, US Life, is given in the following tables. US Life fair value gains and losses Assets fair valued at below book value Book value Unrealised loss Fair value (as included in balance sheet) Assets fair valued at or above book value Book value Unrealised gain Fair value (as included in balance sheet) Total Book value Unrealised loss Fair value (as included in balance sheet) At At 31 December 31 December £m £m 2008 2007 9,525 (1,935) 5,313 (311) 7,590 5,002 2,326 135 2,461 4,163 135 4,298 11,851 (1,800) 9,476 (176) 10,051 9,300 The above takes account of the unrealised losses in relation to those securities that were reclassiﬁ ed in accordance with the provisions of the October 2008 amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ which had an aggregate carrying value and aggregate fair value as at 31 December 2008 of £1,262 million and £972 million respectively. Included in the above are the amounts relating to sub-prime, Alt-A, CMBS and RMBS securities of: At 31 December Sub-prime Alt-A CMBS RMBS Total US Life debt securities in an unrealised loss position The following tables excludes unrealised gains. At 31 December 2008 Between 90% and 100% Between 80% and 90% Below 80% Total At 31 December 2007 Between 90% and 100% Between 80% and 90% Below 80% Total Unrealised Fair value £m 2008 312 33 973 1,036 2,354 (478) loss £m 2008 (141) (10) (288) (39) Fair value £m Unrealised loss £m 2007 2007 368 33 1,004 768 2,173 (16) (1) (4) (4) (25) Unrealised Fair value £m 2,686 1,814 3,090 loss £m (135) (308) (1,492) 7,590 (1,935) Fair value £m Unrealised loss £m (150) 583 167 (94) (67) 5,002 (311) 4,252 Page 251 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (c) Credit risk continued (ii) Debt instruments and similar securities continued Included in the above are the amounts relating to sub-prime, Alt-A, CMBS and RMBS securities of: At 31 December 2008 Between 90% and 100% Between 80% and 90% Below 80% Total At 31 December 2007 Between 90% and 100% Between 80% and 90% Below 80% Total Aged analysis of unrealised losses for the time periods indicated The following table excludes unrealised gains. At 31 December 2008 Less than 6 months 6 months to 1 year Over 1 year At 31 December 2007 Less than 6 months 6 month to 1 year Over 1 year Fair value £m Unrealised loss £m 738 232 554 (34) (38) (428) 1,524 (500) Fair value £m Unrealised loss £m 1,139 39 (25) (7) 24 1,202 (8) (40) Non- investment grade Investment Total grade (5) (47) (49) (161) (667) (1,006) (166) (714) (1,055) (101) (1,834) (1,935) Non- investment grade Investment grade (2) (10) (12) (24) (35) (106) (146) (287) Total (37) (116) (158) (311) Page 252 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued (c) Credit risk continued (iii) Reinsurance assets An age analysis of the Group’s balance sheet exposures to reinsurers is set out below. Neither past due nor impaired Sub-investment grade (BB and lower) Past due but not impaired, greater than 6 months but less than 1 year Total reinsurance assets At At 31 December 31 December £m £m 2008 2007 1,427 – – 1,656 1 18 1,427 1,675 The following table shows an analysis of the Group’s balance sheet exposure to reinsurers according to the individual reinsurers’ credit rating (Standard & Poor’s or equivalent). At 31 December 2008 Investment grade (AAA to BBB) Sub-investment grade (BB and lower) Not rated At 31 December 2007 Investment grade (AAA to BBB) Sub-investment grade (BB and lower) Not rated Reinsurers’ of long-term business policyholder liabilities £m share Reinsurers’ share of general insurance liabilities £m 1,131 – 17 1,148 115 – – 115 Reinsurers’ share of long-term business policyholder liabilities £m Reinsurers’ share of general insurance liabilities £m 1,375 1 18 1,394 66 – – 66 Collateral is not taken against reinsurance assets or deposits held with reinsurers other than in limited circumstances. Deposits held with reinsurers £m 164 – – 164 Deposits held with reinsurers £m 215 – – 215 Total £m 1,410 – 17 1,427 Total £m 1,656 1 18 1,675 Page 253 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (d) Market risk (i) Overview Market risk is the risk of a ﬁ nancial impact arising from the changes in values of ﬁ nancial assets or ﬁ nancial liabilities from changes in equity, bond and property prices, interest rates and foreign exchange rates. Market risk arises differently across the Group’s businesses depending on the types of ﬁ nancial assets and liabilities held. Each of the Group’s business units has an established set of policies, principles and governance processes to manage market risk within their individual businesses and in accordance with their local regulatory requirements. A monitoring process established at a Group level overlies these individual approaches to the management of market risk. The impacts of changes in market risk are monitored and managed by way of sensitivity analyses, through the business units’ own regulatory processes, with reference to the Group’s economic capital processes, and by other means. The sensitivity of the Group’s earnings, capital position and embedded value is monitored through the Group’s embedded value reporting processes. (ii) Insurance operations For the Group’s insurance operations, equity and property price risk and interest rate risk (on the value of the securities) are modelled in accordance with the Group’s risk-based capital practices, which require sufﬁ cient capital to be held in excess of the statutory minimum to allow the Group to manage signiﬁ cant equity exposures. In South Africa the stock selection and investment analysis process is supported by a well-developed research function. For ﬁ xed annuities, market risks are managed where possible by investing in ﬁ xed interest securities with a duration closely corresponding to those liabilities. Market risk on policies that include speciﬁ c guarantees and where shareholders carry the investment risk, principally reside in the South African guaranteed non-proﬁ t annuity book, which is closely matched with gilts and semi-gilts. Other non-proﬁ t policies are also suitably matched based upon comprehensive investment guidelines. Market risk on with-proﬁ t policies, where investment risk is shared, is minimised by appropriate bonus declaration practices. In the US, for ﬁ xed annuities, policyholder option risk is managed by investing in ﬁ xed securities with durations within a half-year of the duration of the liabilities. Cash ﬂ ows in any period are closely aligned to ensure any mismatch is not material. In addition, extensive interest rate scenario testing is carried out, as required by US regulatory authorities, in order to ensure that the amounts reserved are sufﬁ cient to meet the guaranteed obligations. The guaranteed returns provided under equity indexed annuities are hedged to ensure a close matching of option or futures payoffs to the liability growth. Hedging is largely static with minimal trading. For variable annuities, the guaranteed returns provided are dynamically hedged. Hedging positions are reviewed daily to re-adjust them as necessary. In Skandia’s unit-linked assurance operations, the Group has limited exposure to the volatility from equity markets, because in the main, equity price risk is borne by policyholders (subject to the impact on asset-based fees charged on policyholder funds). In respect of Skandia’s shareholders’ funds, equity price risks are addressed in Skandia’s investment policy, which provides for very limited opportunity for business units to invest their own capital in equities or in units in equity funds. In some areas of Skandia’s business, most notably its traditional life insurance business, Skandia is exposed to market risks arising from various forms of guarantees. Typically the policyholder is guaranteed a certain return regardless of the asset return achieved during the term of the policy. These risks are closely monitored and mitigated by applying asset and liability management techniques, ensuring that the proceeds from sale of assets are sufﬁ cient to meet the obligations to policyholders. Sensitivities to adverse impacts of changes in market prices arising in the Group’s insurance operations are set out in the Old Mutual Market Consistent Embedded Value supplementary basis information section of the Annual Report and Accounts on pages 287 to 294. (iii) Banking operations The principal market risks arising in the Group’s banking operations arise from: > trading risk in Nedbank Capital; and > banking book interest rate risk arises from repricing and/or maturity mismatches between on and off-balance sheet components in all banking businesses. A comprehensive market risk framework is used to ensure that market risks are understood and managed. Governance structures are in place to achieve effective independent monitoring and management of market risk. Page 254 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued (d) Market risk continued (iii) Banking operations continued Trading risk Market risk exposures from trading activities at Nedbank Capital are measured using Value-at-Risk (VaR), supplemented by sensitivity analysis, and stress-scenario analysis, and limit structures are set accordingly. The VaR risk measure estimates the potential loss in pre-tax proﬁ t over a given holding period for a speciﬁ ed conﬁ dence level. The VaR methodology is a statistically deﬁ ned, probability-based approach that takes into account market volatilities as well as risk diversiﬁ cation by recognising offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99 percent VaR number used by Nedbank represents the overnight loss that has less than 1 percent chance of occurring under normal market conditions. By its nature, VaR is only a single measure and cannot be relied upon on its own as a means of measuring and managing risk. Historical VaR (one-day, 99 percent) by risk type Average £m Minimum £m Maximum £m Year-end £m At 31 December 2008 Foreign exchange Interest rate Equity products Other Diversiﬁ cation Total VaR exposure 0.4 0.9 0.5 0.4 (0.9) 1.3 0.1 0.5 0.2 0.2 – 1.0 1.3 1.6 1.4 0.6 – 4.9 0.2 1.3 0.4 0.4 (0.8) 1.5 Historical VaR (one-day, 99 percent) by risk type Average £m Minimum £m Maximum £m Year-end £m At 31 December 2007 Foreign exchange Interest rate Equity products Diversiﬁ cation Total VaR exposure 0.2 1.0 0.9 (0.3) 1.8 – 0.7 0.4 – 1.1 0.5 1.6 2.0 – 4.1 0.3 1.0 0.5 (0.2) 1.6 Page 255 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (d) Market risk continued (iii) Banking operations continued Banking book interest rate risk Banking book interest rate risk at Nedbank arises because: > the bank writes a large quantum of prime-linked assets and raises fewer prime-linked deposits; > funding is prudently raised across the curve at ﬁ xed-term deposit rates that reprice only on maturity; > short-term demand-funding products reprice to different short-end base rates; > certain ambiguous maturity accounts are non-rate-sensitive; and > the bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds, that do not reprice for interest rate changes. Nedbank uses standard analytical techniques to measure interest rate sensitivity within its banking book. This includes static reprice gap analysis and a point-in-time interest income stress testing for parallel interest rate moves over a forward-looking 12-month period. At 31 December 2008 the sensitivity of the banking book to a 1 percent instantaneous reduction in interest rates would have led to a reduction in net interest income and equity of £31 million (2007: £41 million). The table below shows the repricing proﬁ le of Nedbank’s banking book balance sheet, which highlights the fact that assets reprice quicker than liabilities following derivative hedging activities. Interest rate repricing gap At 31 December 2008 Total assets Total liabilities and shareholders’ funds Interest rate hedging activities Repricing proﬁ le Cumulative repricing proﬁ le Expressed as a % of total assets Interest rate repricing gap At 31 December 2007 Total assets Total liabilities and shareholders’ funds Interest rate hedging activities Repricing proﬁ le Cumulative repricing proﬁ le Expressed as a % of total assets Up to 3 months £m 3<6 months £m 6 months < 1 year £m 1<5 years £m Over Trading and non-rate £m 5 years £m 30,900 25,369 (3,371) 2,160 2,160 5.2 635 2,714 1,768 (311) 1,849 4.5 137 3,355 3,093 (125) 1,724 4.2 2,759 1,021 (275) 1,464 3,188 7.7 1,598 440 (1,215) (57) 3,131 7.6 5,301 8,431 – (3,131) – – Up to 3 months £m 3<6 months £m 6 months < 1 year £m 1<5 years £m Over 5 years £m Trading and non-rate £m 27,972 21,083 (3,122) 4,166 4,166 11.6 343 1,348 1,777 (128) 4,038 11.2 288 3,186 2,557 (342) 3,696 10.3 1,699 1,166 (998) 35 3,731 10.4 911 407 (214) 291 4,022 11.2 4,720 8,743 – (4,022) – – Total £m 41,330 41,330 – – – – Total £m 35,933 35,933 – – – – SkandiaBanken has low sensitivity to interest rate risk. The majority of SkandiaBanken’s deposit taking and lending activity, after risk coverage, is short-term, which means that interest rates are changed to reﬂ ect the situation in the money market. The interest rate risk that arises from mismatching of ﬁ xed rates of interest is reduced through interest rate swap agreements. Page 256 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued (e) Currency risk The Group is exposed to effects of ﬂ uctuations in the prevailing foreign currency exchange rates on its ﬁ nancial position and cash ﬂ ows. The principal foreign currency risk arises from the fact that the Group’s functional currency is GBP, whereas the functional currencies of its principal operations are South African Rand, US Dollar, Swedish Krona and Euro. The Group reduces this risk through the use of currency swaps, currency borrowings and forward foreign exchange contracts. Such risk mitigation techniques are reﬂ ected in the currency analyses that follow. The table below shows the Group’s balance sheet by major currency at 31 December 2008. At 31 December 2008 ZAR £m GBP £m USD £m Euro £m SEK £m Other £m Total £m Assets 479 Goodwill and other intangible assets 686 Mandatory reserve deposits with central banks 594 Property, plant and equipment 1,296 Investment property 97 Deferred tax assets 78 Investments in associated undertakings and joint ventures 117 Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities 15 100 Reinsurers’ share of general insurance liabilities 3 Deposits held with reinsurers 29,263 Loans and advances 23,251 Investments and securities 29 Current tax receivable 208 Client indebtedness for acceptances 983 Other assets 3,184 Derivative ﬁ nancial instruments – assets 716 Cash and cash equivalents 7 Non-current assets held-for-sale 1,670 46 27 181 166 26 624 607 – – 468 27,969 80 – 311 32 645 – 1,392 – 28 – 1,194 – 2,082 508 – 161 1,398 17,845 1 9 1,396 1,210 657 – 1,065 – 5 – 44 – 234 1 – – 166 4,595 6 1 54 175 180 – 1,146 – 3 – 73 – 29 6 – – 1,728 7,799 – – 297 30 293 – 130 2 25 1 16 7 113 11 15 – 2,722 2,063 2 2 96 2 371 – 5,882 734 682 1,478 1,590 111 3,199 1,148 115 164 35,745 83,522 118 220 3,137 4,633 2,862 7 Liabilities Long–term business policyholder liabilities General insurance liabilities Third party interests in consolidation of funds Borrowed funds Provisions Deferred revenue Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositors Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale 61,106 32,852 27,881 6,526 11,404 5,578 145,347 23,604 316 374 1,184 142 26 329 115 1,655 208 30,298 3,135 6 20,607 – 1,068 279 102 394 235 64 842 – 645 33 – 23,070 – 129 316 124 – 578 13 754 9 1,724 1,128 – 5,949 – – 455 18 128 194 2 182 1 282 7 – 6,655 – 1,020 61 58 – 87 20 180 – 2,261 92 – 1,384 28 – – 33 50 29 5 120 2 2,961 – – 81,269 344 2,591 2,295 477 598 1,452 219 3,733 220 38,171 4,395 6 61,392 24,269 27,845 7,218 10,434 4,612 135,770 Page 257 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 47 Financial risk continued (e) Currency risk continued At 31 December 2007 Assets Goodwill and other intangible assets Mandatory reserve deposits with Central Banks Property, plant and equipment Investment property Deferred tax assets Investments in associated undertakings and joint ventures Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities Deposits held with reinsurers Loans and advances Investments and securities Current tax receivable Client indebtedness for acceptances Other assets Derivative ﬁ nancial instruments – assets Cash and cash equivalents Non-current assets held-for-sale Liabilities Long-term business policyholder liabilities Third party interests in consolidation of funds Borrowed funds Provisions Deferred revenue Deferred tax liabilities Current tax payable Other liabilities Liabilities under acceptances Amounts owed to bank depositors Derivative ﬁ nancial instruments – liabilities Non-current liabilities held-for-sale ZAR £m GBP £m USD £m 446 611 530 1,117 120 66 96 17 – 24,831 26,347 7 158 1,126 700 861 542 1,732 – 24 361 41 25 513 702 – 373 28,465 68 – 314 98 1,722 6 1,105 – 20 – 431 – 1,423 663 213 1,610 19,660 – 4 1,095 647 371 4 Euro £m 866 – 5 – 17 – 138 1 – 106 5,958 1 – 140 66 114 6 SEK £m Other £m Total £m 1,190 – 3 – 77 – 13 4 – 1,309 7,699 – – 40 15 (174) 526 120 4 26 1 (3) (10) 70 7 – 2,458 1,498 7 3 59 1 575 533 5,459 615 608 1,479 683 81 2,253 1,394 213 30,687 89,627 83 165 2,774 1,527 3,469 1,617 57,575 34,444 27,246 7,418 10,702 5,349 142,734 25,663 488 1,076 155 28 405 176 3,187 158 24,672 949 358 31,347 1,406 384 165 340 339 119 1,621 1 696 105 – 13,862 147 132 79 – 399 8 938 4 1,786 621 – 2,976 – 580 4 58 160 6 172 – 138 4 6 7,773 1,506 177 82 – 100 4 169 – 1,700 37 – 2,630 – 4 14 36 10 7 93 2 2,825 – 50 84,251 3,547 2,353 499 462 1,413 320 6,180 165 31,817 1,716 414 57,315 36,523 17,976 4,104 11,548 5,671 133,137 A 10 percent deterioration in the value of the major currencies shown above in relation to GBP would result in a reduction in the Group’s consolidated equity holders’ funds of £2 million (2007: £1,091 million), and a similar decline in the average exchange rates for the year (as set out in note 2) would have led to a reduction in Adjusted operating proﬁ t of £93 million (2007: £146 million). Page 258 Old Mutual plc Annual Report and Accounts 2008 47 Financial risk continued (f) Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity by maintaining adequate reserves, banking facilities and continuously monitoring forecast and actual cash ﬂ ows and matching the maturity proﬁ les of ﬁ nancial assets and liabilities. Individual businesses separately maintain and manage their local liquidity requirements according to their business needs, within the overall liquidity framework established by Old Mutual plc. The contractual maturities of the Group’s ﬁ nancial liabilities are set out in the appropriate notes to the ﬁ nancial statements. (g) Fiduciary activities The Group provides custody, trustee, corporate administration, and investment management and advisory services to third parties that involve the Group making allocation and purchase and sale decisions in relation to a wide range of ﬁ nancial instruments. Those assets that are held in a ﬁ duciary capacity are not included in these ﬁ nancial statements. Some of these arrangements involve the Group accepting targets for benchmark levels of returns for the assets under the Group’s care. These services give rise to the risk that the Group will be accused of misadministration or under-performance. Total funds under management are disclosed in note 3(v). 48 Insurance risk The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other beneﬁ ciary if a speciﬁ ed uncertain future event (the insured event) affecting the policyholder occurs. Insurance risk includes mortality and morbidity risk in the case of long-term business or risk of loss (from ﬁ re, accident, or other source) in the case of general insurance. For accounting purposes insurance risk is deﬁ ned as risk other than ﬁ nancial risk. Contracts issued by the Group may include both insurance and ﬁ nancial risk; contracts with signiﬁ cant insurance risk are classiﬁ ed as insurance contracts, while contracts with no or insigniﬁ cant insurance risk are classiﬁ ed as investment contracts. The Group’s approach to ﬁ nancial risk management has been described in note 47. (a) Risk management objectives and policies for mitigating insurance risk The Group’s exposure to insurance risk varies depending on the nature of its operations and their location. Consequently the Group’s policy is to manage insurance risk separately through its principal operations, subject to appropriate central Corporate supervision and monitoring. The Group’s principal operations that incur signiﬁ cant insurance risk are: > OMLAC (SA) – long-term insurance in South Africa > Old Mutual US Life – long-term insurance in the United States > Mutual & Federal – general insurance in South Africa The Group’s other insurance operations include long-term insurance in Skandia’s unit-linked assurance operations in Scandinavia, the United Kingdom, Continental Europe and Latin America, Namibia, and Rest of World but do not give rise to signiﬁ cant insurance risks relative to the Group as a whole. Exposure to insurance risk in Skandia’s unit-linked assurance operations is limited, as the unbundled insurance component of those products is insigniﬁ cant in comparison to the rest of the Old Mutual Group. The Group effectively manages its insurance risks through the following mechanisms: > the diversiﬁ cation of business over several classes of insurance and a number of geographical segments and large numbers of uncorrelated individual risks, by which the Group seeks to reduce variability in loss experience; > the maintenance and use of sophisticated management information systems, which provide current data on the risks to which the business is exposed; > actuarial models, which use the above information to calculate premiums and monitor claims patterns. Past experience and statistical methods are used; > guidelines for concluding insurance contracts and assuming insurance risks. These include underwriting principles and product pricing procedures; > reinsurance, which is used to limit the Group’s exposure to large single claims and catastrophes. When selecting a reinsurer, consideration is given to those companies that provide high security. In order to assess this, rating information from both public and private sources is used; and > the mix of assets, which is driven by the nature and term of the insurance liabilities. The management of assets and liabilities is closely monitored to ensure that there are sufﬁ cient interest bearing assets to match the guaranteed portion of liabilities. Hedging instruments are used at times to limit exposure to equity market and interest rate movements. Page 259 i l s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 48 Insurance risk continued (b) Terms and conditions of long-term insurance business – South Africa and United States The terms and conditions attaching to insurance contracts determine the level of insurance risk accepted by the Group. The following tables outline the general form of terms and conditions that apply to contracts sold in each category of business, and the nature of the risk incurred by the Group. South Africa Category Essential terms Main risks Policyholder guarantees Individual Life Flexi business with cover Mortality/morbidity rates may be repriced Mortality, morbidity (regular premium contracts) Some investment performance, cover and annuity guarantees Policyholder participation in investment return Varies1 Conventional with cover Charges ﬁ xed at inception and cannot be changed Mortality, morbidity Some investment performance and annuity guarantees Varies1 Greenlight Charges ﬁ xed at inception and cannot be changed for a speciﬁ ed term Mortality, morbidity, expense Rates ﬁ xed for a speciﬁ ed number of years Group Schemes – funeral cover Charges ﬁ xed at inception and cannot be changed for a speciﬁ ed number of years Mortality including HIV/AIDS, expense Rates ﬁ xed for a speciﬁ ed number of years Employee Beneﬁ ts – Group Assurance Non-proﬁ t annuity With-proﬁ t annuity Rates are annually renewable Mortality, morbidity No signiﬁ cant guarantees, except for PHI claims in payment for which beneﬁ t payment schedule is guaranteed Regular beneﬁ t payments guaranteed in return for consideration Mortality, investment Beneﬁ t payment schedule is guaranteed Regular beneﬁ t payments participating in proﬁ ts in return for consideration Investment Underlying pricing interest rate is guaranteed. Declared bonuses cannot be reduced None None None None Yes 1 The extent of the Group’s discretion as to the allocation of investment return to policyholders varies based on the type of contract. Where the contracts are pure risk type, there is no sharing of investment returns. For other contracts, investment return is attributed to the policyholder. Declared bonuses may be either vesting and/or non-vesting (in which case they can be removed in adverse circumstances). Smoothed bonus products constitute a signiﬁ cant proportion of the business. Particular attention is paid to ensuring that the declaration of bonuses is done in a responsible manner, such that sufﬁ cient reserves are retained for bonus smoothing purposes. Investment returns not distributed after deducting charges are credited to bonus smoothing reserves, which are used to support subsequent bonus declarations. Page 260 Old Mutual plc Annual Report and Accounts 2008 48 Insurance risk continued (b) Terms and conditions of long-term insurance business – South Africa and United States continued United States Category Essential terms Main risks Policyholder guarantees Policyholder participation in investment return Life term Universal life Renewable term products offering coverage for level periods ranging from 1 to 30 years Mortality, expense Premium guarantees from 1 to 30 years, return of premium guarantees None Flexible and ﬁ xed premium interest sensitive life insurance with cash value build up Mortality, expense, investment Secondary non-lapse guarantees (max of 15 years or to age 95); cost of insurance (mortality charge) guarantees Equity indexed annuities Single and ﬂ exible premium accumulation Mortality, investment, annuities with upside potential of equity indexed returns on their account value hedging Minimum caps, maximum spread guarantees, maximum spread, minimum interest guarantees Fixed deferred annuities Single and ﬂ exible premium accumulation annuities Mortality, investment Minimum guaranteed accumulation rates and annuitisation rates Equity indexed universal life Flexible premium interest sensitive whole Mortality, investment, life products with upside potential of equity indexed returns on their account value and a ﬁ xed account option hedging Secondary non-lapse guarantees; cost of insurance (mortality charge) guarantees; minimum caps; maximum spread guarantees Immediate (Payout) Annuities Variable Annuities Regular beneﬁ t payments guaranteed in return for consideration Mortality, investment Beneﬁ t payment schedule is guaranteed Accumulation annuities with policyholder Mortality, investment, Minimum guaranteed death beneﬁ t investments in separate accounts and a ﬁ xed account option hedging and minimum guaranteed accumulation beneﬁ t which may include a minimum rate of return or waiver of surrender charges Yes, through the crediting rate Yes, through the index Limited – crediting rates are reset at speciﬁ ed intervals Yes, through the index and crediting rates are reset at speciﬁ ed intervals None Yes, through separate Accounts and crediting rates are reset at speciﬁ ed intervals i l s a c n a n F i In addition to the speciﬁ c risks identiﬁ ed above, the Group is subject to the risk that policyholders discontinue the insurance policy, through lapse or surrender. Page 261 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 48 Insurance risk continued (c) Management of insurance risks – long-term business The table below summarises the variety of risks to which the Group’s long-term insurance business is exposed, and the methods by which the Group seeks to mitigate these risks. Risk Deﬁ nition Risk management Underwriting Misalignment of policyholders to the appropriate pricing basis or impact of anti-selection, resulting in a loss HIV/AIDS Impact of HIV/AIDS on mortality rates and critical illness cover Medical developments Possible increase in annuity costs due to policyholders living longer Changing ﬁ nancial market conditions Lower swap curves and higher volatilities cause investment guarantee reserves to increase Policyholder behaviour Catastrophe Selection of more expensive options, or lapse and re-entry when premium rates are falling, or termination of policy, which may cause the sale of assets at inopportune times Natural and non-natural disasters, including war/terrorism, could result in increased mortality risk and payouts on policies Experience is closely monitored. For universal life business, mortality rates can be reset. Underwriting limits, health requirements, spread of risks and training of underwriters all mitigate the risk. Impact of HIV/AIDS is mitigated wherever possible by writing products that allow for repricing on a regular basis or are priced to allow for the expected effects of HIV/AIDS. Tests for HIV/AIDS and other tests for lives insured above certain values are conducted. A negative test result is a prerequisite for acceptance at standard rates. For non-proﬁ t annuities, improvements to mortality are allowed for in pricing and valuation. Experience is closely monitored. For with-proﬁ t annuity business, the mortality risk is carried by policyholders and any mortality proﬁ t or loss is reﬂ ected in the bonuses declared. A discretionary margin is added to the value of guarantees, determined on a market-consistent stochastic basis and included in current reserves. A partial hedge is in place (South Africa). Fewer and lower guarantees are typically provided on new business (South Africa). Certain guarantees are reinsured (United States). Experience is closely monitored, and policyholder behaviour is allowed for in pricing and valuation. Catastrophe stop loss/excess of loss reinsurance treaty in place which covers claims from one incident occurring within a speciﬁ ed period between a range of speciﬁ ed limits. Policy lapse A policyholder option to terminate the policy, which may cause the Experience is closely monitored, and policyholder sale of assets at inopportune times. This creates the risk of capital behaviour is allowed for in pricing and valuation. losses and/or reinvestment risk if market yields have decreased Many of the above risks are concentrated, either geographically (in the case of catastrophe) or by line of business (for example, medical developments, HIV/AIDS). The Group, through diversiﬁ cation in the types of business it writes and its geographic spread, attempts to mitigate this concentration of risk. See “Segment Analysis”, in the preceding section, for illustration of this. Page 262 Old Mutual plc Annual Report and Accounts 2008 48 Insurance risk continued (d) Sensitivity analysis – long-term business Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract liabilities recorded, with a corresponding impact on proﬁ t/(loss) and/or shareholders’ equity. The effect of a change in assumption is mitigated by the following factors: > offset (partial or full) through Deferred Acquisition Costs (DAC) amortisation in the case of US business; > the effect of locked-in assumptions for payout annuities and term insurance under US GAAP accounting, where assumptions underlying the insurance contract liabilities are not changed until liabilities are not adequate after reﬂ ecting current best estimates; and > offset to the bonus stabilisation reserve in the case of mortality assumption changes for with-proﬁ t annuity business in South Africa. The impact on Group equity resulting from a change in insurance contract liabilities or DAC balances at 31 December 2008 for long-term business has been estimated as follows (negative impact shown as positive ﬁ gure): Assumption Mortality and morbidity rates – assurance Mortality rates – annuities Discontinuance rates Expenses (maintenance) Change South Africa £m % +10 -10 +10 +10 187 41 (9) 50 US £m 11 (3) 23 23 The insurance contract liabilities recorded for the South African business are also impacted by the valuation discount rate assumed. Lowering this rate by 1 percent would result in a net increase to the insurance contract liabilities, and decrease to proﬁ t, of £66 million (2007: £41 million). There is no impact for the US businesses as the valuation rate is locked-in. South Africa The changes in insurance contract liabilities shown are calculated using the speciﬁ ed increase or decrease to the rates, with no change in charges paid by policyholders. The valuation interest rate sensitivity reﬂ ects a change in the valuation interest rates without any corresponding change in investment returns or in the expense inﬂ ation rate. It should be noted that where the assets and liabilities of a product are closely matched (e.g. non-proﬁ t annuity business), the net effect has been shown since the assets and liabilities move in parallel. United States The assumption changes have relatively little impact on the US net IFRS insurance contract liabilities or DAC on life and immediate annuities, as assumptions are generally locked-in. For universal life and deferred annuities, assumptions supporting the Present Value Future Proﬁ ts (PVFP)/Deferred Acquisition Costs (DAC) amortisation are periodically updated for actual experience. Each of these assumption changes would trigger a DAC unlocking. The assumption changes speciﬁ ed do not approach the levels necessary to trigger a change in liabilities or DAC. (e) Guarantees and options – long-term business Many of the insurance contracts issued by the Group contain guarantees and options to policyholders, the ultimate liability for which will depend signiﬁ cantly on the number of policyholders exercising their options and on market and investment conditions applying at that time. South Africa Certain life assurance contracts include the payment of guaranteed values to policyholders on maturity, death, disability or survival. The published liabilities include the provision for both the intrinsic and time-value of the options and guarantees. The time-value of options and guarantees has been valued using a market-consistent stochastic asset model that is in keeping with the applicable professional guidance notes issued by the Actuarial Society of South Africa (ASSA), PGN 110 in particular. The options and guarantees that could have a material effect on the amount, timing and uncertainty of future cash ﬂ ows are described below. Page 263 l i s a c n a n F i NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 48 Insurance risk continued (e) Guarantees and options – long-term business continued – South Africa continued Product category Individual business Death, disability, point and/or maturity guarantees Guaranteed annuity options Group business Vested bonuses in respect of pre-retirement with-proﬁ ts business United States Description of options and guarantees A closed block of unit-linked type and smoothed bonus business with an underlying minimum growth rate guarantee (4.28 percent per annum for life and endowment business and 4.78 percent per annum for retirement annuity business), and smoothed bonus business with vested bonuses, applicable when calculating death,disability and maturity claims. A small block of smoothed bonus savings business in Group Schemes that has death guarantees of premiums (net of fees) plus 4.25 percent per annum investment return. Retirement annuities sold prior to June 1997 contain guaranteed annuity options, whereby the policyholder has an option to exchange the full retirement proceeds for a minimum level of annuity income at maturity. There is a signiﬁ cant pre-retirement savings smoothed bonus portfolio. Vested bonuses affect the calculation of beneﬁ t payments when a member exits from the scheme as the face value is paid out. If, however, a scheme terminates, the lower of face and market value is paid out and the vested bonuses are not guaranteed. Product category Description of options and guarantees Required shock to bring out-of-the-money policies in-the-money Death, disability, Crediting rates declared for the ﬁ xed deferred annuity block of surrender point and/or maturity guarantees business vest fully. They are subject to a minimum crediting rate which is speciﬁ ed in the contract. Minimum surrender values are determined by this rate. 24 percent of policies are currently in-the-money and being credited the minimum rate. A 300 basis points drop in interest rates would bring 79 percent of policies in-the-money. Equity indexed annuities offer minimum crediting rates on the ﬁ xed portion of the product, minimum surrender values based on this and credit equity participation annually as a percentage of equity growth subject to a maximum percent. This equity participation, which is subject to a minimum of 0 percent therefore vests annually. The variable annuities offered to off-shore customers through Old Mutual Bermuda can offer minimum death beneﬁ t guarantees. Death beneﬁ ts are subject to a minimum of the sum invested or value at any anniversary date if greater. A minimum guaranteed account value on maturity, and at certain points in time, is also available on most policies (the most common being 5 and 10 year guarantees). The minimum surrender values of 17 percent of policies are currently in-the-money. A year of ﬂ at equity markets with no equity credits would bring an additional 24 percent in-the-money. Two years of no equity credits would result in 26 percent of the portfolio being in-the-money. The equity exposure is hedged using a hedging strategy. The minimum death beneﬁ t on 96.6 percent of policies is currently in-the-money. These risks are hedged. The minimum accumulation beneﬁ t on 92.3 percent of policies is currently in-the-money. The universal life policies specify a minimum crediting rate to accumulate account balances. The minimum rate is currently being credited on 77 percent of the block. Guaranteed annuity options All deferred annuities offer a guaranteed annuitisation option on maturity. The rates are set conservatively and typically have very low utilisation as customers in the United States value the choice inherent in a lump-sum payment. No-lapse guarantees Certain universal life contracts contain a feature that guarantees that the contract will continue, even if values would otherwise be insufﬁ cient, provided the customer has paid at least a stated amount of premium. The extent to which the policies are currently in-the-money is negligible. 17 percent of policies are currently in-the-money. This risk is reinsured. Page 264 Old Mutual plc Annual Report and Accounts 2008 48 Insurance risk continued (f) General insurance risks and sensitivities Mutual & Federal writes the following types of business within its commercial, risk ﬁ nance and personal divisions: Fire Accident Personal accident Motor Engineering Crop Marine Credit Commercial Risk ﬁ nance Personal ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✘ ✘ ✘ ✘ ✓ ✓ ✓ ✓ ✘ ✘ ✓ ✓ Underwriting guidelines are designed to ensure that underwritten risks are well diversiﬁ ed, and that terms and conditions, including premium rates, appropriately reﬂ ect the risk. Reinsurance plays an extremely important role in the management of risk and exposure at Mutual & Federal. The Group makes use of a combination of proportional and non-proportional reinsurance to limit the impact of both individual and event losses and to provide insurance capacity. Involvement in any property catastrophe loss is limited to approximately £5 million for any one event and the level of catastrophe cover purchased is based on estimated maximum loss scenarios, in keeping with accepted market norms. (Provisional: This is based on a limit of R75 million for one event at an estimated exchange rate of R15 to the pound). General insurance risk includes the following risks: > occurrence risk – the possibility that the number of insured events will differ from those expected; > severity risk – the possibility that the costs of the events will differ from those expected; and > development risk – the possibility that changes may occur in the amount of an insurer’s obligation at the end of a contract period. An increase of 10 percent in the average cost of claims would require the recognition of an additional loss of £37 million (£32 million net of reinsurance). Similarly, an increase of 10 percent in the ultimate number of claims would result in an additional loss of £37 million (£32 million net of reinsurance). The majority of the Group’s general insurance contracts are classiﬁ ed as ‘short-tailed’, meaning that any claim is settled within a year after the loss date. This contrasts with the ‘long-tailed’ classes where the claims costs take longer to materialise and settle. The Group’s long-tailed business is generally limited to personal accident, third party motor liability and some engineering classes. In total the long-tail business comprises less than 5 percent of an average year’s claim costs. 49 Post balance sheet events On 2 March 2009 the Group announced the sale, by its group subsidiary, OM Group (UK) Limited, of the Group’s interests in the Old Mutual Australia group. The sale is expected to complete on 6 March 2009. Page 265 i l s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY COMPANY BALANCE SHEET At 31 December 2008 Assets Investments in Group subsidiaries Investments in associated undertakings Investments and securities Other assets (including inter-company) Derivative ﬁ nancial instruments – assets Cash and cash equivalents Total assets Liabilities Borrowed funds Provisions Other liabilities (including inter-company) Derivative ﬁ nancial instruments – liabilities Total liabilities Net assets Shareholders’ equity Equity attributable to equity holders At At 31 December 31 December £m £m Notes 2008 2007 8 9 1 2 3 4 5 6 3 7,595 26 39 2,943 197 3 10,803 1,037 20 4,679 91 4,792 25 45 2,943 72 41 7,918 1,134 23 1,745 31 5,827 2,933 4,976 4,985 4,976 4,985 The Company’s ﬁ nancial statements on pages 266 to 278 were approved by the Board of Directors on 4 March 2009. Julian Roberts Chief Executive Philip Broadley Group Finance Director Page 266 Old Mutual plc Annual Report and Accounts 2008 FINANCIAL STATEMENTS OF THE COMPANY COMPANY CASH FLOW STATEMENT At 31 December 2008 Year ended Year ended 31 December 31 December £m £m Cash ﬂ ows from operating activities Proﬁ t before tax Capital gains included in investment income Recognition of impairment losses Fair value movements on derivatives and borrowed funds Foreign exchange movements on assets and liabilities Other non-cash amounts in proﬁ t Non-cash movements in proﬁ t before tax Other operating assets and liabilities Changes in working capital Net cash inﬂ ow from operating activities Cash ﬂ ows from investing activities Proceeds from sale and maturity of investments Acquisition of interests in subsidiaries Purchase of interest in associates and joint ventures Other investing cash ﬂ ows Net cash (outﬂ ow)/inﬂ ow from investing activities Cash ﬂ ows from ﬁ nancing activities External interest received External interest paid Inter-company interest received Inter-company interest paid Dividends paid to: Ordinary shareholders of the Company Preferred shareholders Net proceeds from issue of ordinary shares Net purchase of treasury shares Redemption of own shares Other debt issued Loan ﬁ nancing received from/(paid to) Group companies Net cash (outﬂ ow) from ﬁ nancing activities Net (decrease)/increase in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the year 2008 2007 411 6 – (489) 308 1 (174) 6 6 243 – (3) (1) – (4) 91 (162) 1 (33) (214) (43) 10 (5) (175) 32 228 (270) (31) (7) 41 3 423 11 (6) (85) 82 1 3 5 5 431 95 (100) (6) 95 84 63 (112) 1 (44) (228) (40) 12 (6) (176) 181 (158) (507) 8 (6) 39 41 At 31 December 2008 and 2007 all cash and cash equivalents were in the form of cash balances. During the year the Company recorded total dividend income from subsidiary undertakings of £343 million (2007: £470 million), of which only cash dividends from Skandia UK Holdings Limited of £55 million were received during the year ended 31 December 2008 (2007: Nil). Page 267 l i s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2008 Year ended 31 December 2008 Attributable to equity holders of the Company Number of shares issued and fully paid Millions Share capital £m Share premium £m Other reserves £m Retained earnings1 £m at beginning of the year 5,510 551 757 2,554 Proﬁ t for the year Total recognised income and expense for the year Dividends for the year Shares repurchased in the buyback programme Net purchase of treasury shares Issue of share capital by the Company Exercise of share options Fair value of equity settled share options Attributable to equity holders of the Company – – – – – – 6 – – – – – – – 1 – – – – – – 5 4 – – – – – – – – 7 435 368 368 (214) (175) (5) – – – Perpetual preferred callable securities £m 688 43 43 (43) – – – – – Total £m 4,985 411 411 (257) (175) (5) 5 5 7 at end of the year 5,516 552 766 2,561 409 688 4,976 Year ended 31 December 2007 Attributable to equity holders of the Company Number of shares issued and fully paid Millions Share capital £m Share premium £m Other reserves £m Retained earnings1 £m at beginning of the year 5,501 550 746 2,544 Proﬁ t for the year Total recognised income and expense for the year Dividends for the year Shares repurchased in the buy back programme Net purchase of treasury shares Issue of share capital by the Company Exercise of share options Fair value of equity settled share options Attributable to equity holders of the Company – – – – – – 9 – – – – – – – 1 – – – – – – 3 8 – – – – – – – – 10 430 416 416 (228) (176) (7) – – – Perpetual preferred callable securities £m Total £m 688 4,958 40 40 (40) – – – – – 456 456 (268) (176) (7) 3 9 10 at end of the year 5,510 551 757 2,554 435 688 4,985 1Included within retained earnings of £409 million (2007: £435 million) are distributable reserves of £158 million (2007: £334 million). Other reserves Merger reserve Share-based payment reserve Attributable to equity holders of the Company at end of the year At At 31 December 31 December £m £m 2008 2007 2,532 29 2,561 2,532 22 2,554 Page 268 Old Mutual plc Annual Report and Accounts 2008 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 1 Investments and securities Unlisted equity security at fair value through income statement Other Total investments and securities At At 31 December 31 December £m £m 2008 2007 38 1 39 44 1 45 Investments and securities are regarded as current and non-current assets based on the intention with which the ﬁ nancial assets are held as well as their contractual maturity proﬁ le. Of the amounts shown above, £38 million (2007: £44 million) are regarded as current and £1 million (2007: £1 million) are regarded as non-current. 2 Other assets Other receivables Corporation tax Accrued interest and rent Other prepayments and accrued income Amounts owed by Group undertakings: Current Non-current Total other assets At At 31 December 31 December £m £m 2008 2007 10 27 65 2 – 2,839 2,943 11 27 52 2 2 2,849 2,943 Page 269 i l s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 3 Derivative ﬁ nancial instruments The following tables provide a detailed breakdown of the contractual or notional amounts and the fair values of the Company’s derivative ﬁ nancial instruments outstanding at the year end. These instruments allow the Company and its customers to transfer, modify or reduce their foreign exchange and interest rate risks. The Company undertakes transactions involving derivative ﬁ nancial instruments with other ﬁ nancial institutions. Management has established limits commensurate with the credit quality of the institutions with whom it deals, and manages the resulting exposures such that a default by any individual counterparty is unlikely to have a materially adverse impact on the Company. At 31 December 2008 Exchange rate contracts Swaps Forwards Interest rate contracts Swaps Total At 31 December 2007 Exchange rate contracts Swaps Forwards Interest rate contracts Swaps Total Notional principals Fair values Positive values £m Negative values £m Assets £m Liabilities £m 602 205 807 1,041 1,848 356 544 900 – 900 149 7 156 41 197 57 34 91 – 91 Notional principals Fair values Positive values £m Negative values £m Assets £m Liabilities £m 508 – 508 569 1,077 318 273 591 300 891 64 – 64 8 72 16 7 23 8 31 Total £m 91 Total £m 31 The contractual maturities of the derivatives held are as follows: At 31 December 2008 Derivative ﬁ nancial liabilities At 31 December 2007 Derivative ﬁ nancial liabilities Balance sheet amount £m Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m No contractual maturity date £m 91 | Balance sheet amount £m 31 | 34 – 57 – – Less than 3 months £m More than 3 months less than 1 year £m Between 1 and 5 years £m More than 5 years £m No contractual maturity date £m 1 6 24 – – Page 270 Old Mutual plc Annual Report and Accounts 2008 4 Borrowed funds Senior debt securities and term loan Subordinated debt securities Total borrowed funds Fair valued through income statement Amortised cost Total borrowed funds (i) Senior debt securities and term loan Floating rate notes Fixed rate notes Revolving credit facility Total senior debt securities and term loan The contractual maturities of the senior debt securities and term loan are as follows: At 31 December 2008 Floating rate notes Fixed rate notes Revolving credit facility Total senior debt securities and term loan At 31 December 2007 Floating rate notes Fixed rate notes Revolving credit facility Total senior debt securities and term loan At At 31 December 31 December £m £m Notes 4(i) 4(ii) 2008 496 541 2007 324 810 1,037 1,134 At At 31 December 31 December £m £m 2008 884 153 1,037 2007 1,090 44 1,134 At At 31 December 31 December £m £m 2008 2007 49 153 294 496 Greater than 1 year and Less than 1 year £m less than Greater than 5 years £m 5 years £m 7 96 – 103 – – – – 42 57 294 393 43 29 161 233 – – – – 76 15 – 91 119 44 161 324 Total £m 49 153 294 496 119 44 161 324 The Company has a £1,250 million ﬁ ve-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 £1,232 million of the facility until September 2012. At 31 December 2008 £826 million (2007: £413 million) of this facility was utilised, £294 million (2007: £161 million) in the form of drawn debt and £532 million (2007: £252 million) in the form of irrevocable letters of credit. During the year, the Company repaid a $150 million ﬂ oating rate note and issued a €100 million Eurobond note. Page 271 l i s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 4 Borrowed funds continued (ii) Subordinated debt securities £300 million repayable 21 January 2016 (5.0%)1 €750 million repayable 18 January 2017 (4.5%)2 Total subordinated debt securities At At 31 December 31 December £m £m 2008 2007 239 302 541 291 519 810 1 This bond, issued on 20 January 2006, has a maturity date of 21 January 2016 and pays a coupon of 5.0 percent to 21 January 2011 and six month LIBOR plus 1.13 percent thereafter. The coupon on the bonds was swapped into a ﬂ oating rate of six month STIBOR plus 0.50 percent. The Company has the option to repay the bonds at par on 21 January 2011 and at six monthly intervals thereafter. 2 This bond, issued on 16 January 2007, has a maturity date of 18 January 2017 and pays a coupon of 4.5 percent to 17 January 2012 and six month EURIBOR plus 0.96 percent thereafter. The principal and coupon on the bond were swapped equally into Sterling and US Dollars with coupons of six month LIBOR plus 0.34 percent and six month US LIBOR plus 0.31 percent respectively. The Company has the option to repay the bonds at par on 17 January 2012 and at six monthly intervals thereafter. 5 Provisions Post employment beneﬁ ts 6 Other liabilities Accruals Amounts owed to Group undertakings: Current Non-current Other liabilities Total other liabilities At At 31 December 31 December £m £m Notes 2008 7 20 2007 23 At At 31 December 31 December £m £m 2008 98 2,012 2,549 20 4,679 2007 87 26 1,610 22 1,745 Page 272 Old Mutual plc Annual Report and Accounts 2008 7 Post employment beneﬁ ts The Company holds a provision in respect of the Old Mutual Staff Pension Fund Deﬁ ned Beneﬁ t pension scheme, which provides beneﬁ ts based on ﬁ nal pensionable pay for members within the Group. The assets of the scheme are held in separate trustee administered funds. Pension costs and contributions relating to the scheme are assessed in accordance with the advice of qualiﬁ ed actuaries. Actuarial advice conﬁ rms that the current level of contributions payable to the scheme, together with existing assets, are adequate to secure members’ beneﬁ ts over the remaining lives of participating employees. The scheme is reviewed on a triennial basis. In the intervening years the actuary reviews the continuing appropriateness of the assumptions applied. During the year 4 employees (2007: 2) were directly employed by the Company. The costs for these Directors and ex-Directors are disclosed within the Remuneration Report on pages 118 to 134. Liability for deﬁ ned beneﬁ t obligations Year to 31 December Change in projected beneﬁ t obligation Projected beneﬁ t obligation at beginning of the year Interest cost on beneﬁ t obligation Actuarial gains Projected beneﬁ t obligation at end of the year Change in plan assets Plan assets at fair value at beginning of the year Actual return on plan assets Company contributions Plan assets at fair value at end of the year Net liability recognised in balance sheet Funded status of plan Unrecognised actuarial gains Net amount recognised in balance sheet Expense recognised in the income statement Year to 31 December Expected return on plan assets Interest costs Total Principal actuarial assumptions Year to 31 December Discount rate Future salary increases Price inﬂ ation Pensions in payment and deferred pensions inﬂ ation Plan asset allocation Year to 31 December Equity securities Debt securities Other investments Pension plans £m 2008 £m 2007 56 3 (4) 55 37 (6) 4 35 20 – 20 56 3 (3) 56 32 2 3 37 19 4 23 Pension plans £m 2008 £m 2007 2 (3) (1) 1 (3) (2) Pension plans % 2008 5.50 4.10 3.10 3.10 % 2007 5.50 4.65 3.40 3.40 Pension plans % 2008 34 62 4 % 2007 61 36 3 Page 273 i l s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 8 Principal subsidiaries Balance at beginning of the year Acquisitions Additions Balance at end of the year At At 31 December 31 December £m £m 2008 2007 4,792 1,844 959 7,595 4,682 100 10 4,792 On 27 February 2008, the Company completed the purchase of the entire share capital of Skandia UK Holdings Limited for a total consideration of £1,844 million. During the year the Company made further cash investments in Skandia Europe and Latin America (Holdings) Limited on 4 April 2008 and 28 May 2008 of SEK 58 million and $USD of 0.3 million. On 21 October 2008, the Company purchased one Ordinary share valued at £1 in Old Mutual Holdings Limited. On 27 October 2008, the Company purchased one Ordinary share valued at £26,656 in Sandlord Limited. On 10 November 2008, the Company purchased 100 Ordinary “B” shares in Pointspirit for a total consideration of £100. On 12 December 2008, the Company increased its investment in the Ordinary share capital of OM Group (UK) by £950 million via a reduction in loan ﬁ nancing. Also, included within additions is the Company’s investment in subsidiary undertakings in respect of movements on the share based payments reserve (£6 million). The following companies were dissolved during the year: Old Mutual Properties Limited (6 May 2008); Old Mutual Finance (Cayman Islands) Limited (27 August 2008); and Old Mutual (UK) Nominees Ltd (18 November 2008). The Company holds the following interests in Group companies: At 31 December 2008 Country of incorporation Class of shares % interest held Commsale 2000 Ltd Constantia Insurance Company (Guernsey) Limited Försäkringsaktiebolaget Skandia (publ) Millpencil Limited OM Group (UK) Ltd Old Mutual Asset Solutions Ltd Old Mutual Capital Funding (Jersey) Limited Old Mutual Finance (No.2) Limited Old Mutual Finance (No.4) Limited Old Mutual Holdings Limited Papercoast Limited Sandlord Ltd Selestia Holdings Limited Skandia (London) Ltd Skandia Europe and Latin America (Holdings) Limited Skandia UK Holdings Limited England and Wales Guernsey Sweden England and Wales England and Wales England and Wales Jersey England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 9 Investments in associated undertakings The company holds the following interest in associated undertakings: At 31 December 2008 and 31 December 2007 Kotak Mahindra Old Mutual Life Insurance Limited Page 274 Old Mutual plc Annual Report and Accounts 2008 Country of operation % interest held India 26 10 Commitments and guarantees Commitments At At 31 December 31 December £m £m 2008 532 2007 252 The commitments relate to letters of credit issued in support of the operations of a subsidiary company. Any liability arising from these letters of credit would be recovered from the subsidiary company. In February 2008, the Company issued a guarantee to a third party over a subsidiary’s (Old Mutual Bermuda) obligations under the reinsurance contracts relating to the offshore investment products sold by a third party. The maximum payment under this guarantee is $250 million. This guarantee is accounted for as an insurance contract and payments will only arise should Old Mutual Bermuda be unable to meet its obligations under the relevant reinsurance contracts as they fall due. 11 Related parties Old Mutual plc enters into transactions with its subsidiaries in the normal course of business. These are principally related to funding of the Group’s businesses and head ofﬁ ce functions. Details of loans, including balances due from/to the Company and terms and conditions thereon are set out below. Disclosures in respect of the key management personnel of the Company are included in the Group related parties disclosures. There are no transactions entered into by the Company with associated undertakings. Balance sheet information At 31 December 2008 Subsidiaries: OM Group (UK) Limited1 Primemajor Skandia companies2 Old Mutual International companies3 Global Edge Technologies Pty Limited4 Bermuda Holding companies5 Old Mutual (SA) companies6 Old Mutual Financial Services companies7 Old Mutual Business Services Limited8 Old Mutual Capital Funding L.P.9 Constantia Insurance Company (Guernsey) Limited Old Mutual (Netherlands) BV10 Pointspirit11 Nedbank companies OMLA Holdings Limited Sandlord Limited Other related parties: Fairbairn Trust Company Limited12 Balance due from/(to) £m 2,504 4 (1,933) 4 1 (430) (922) (240) (95) (501) (2) (66) (36) – – (10) 30 1 The loan with OM Group (UK) Limited includes loan advances of $2,051 million, £700 million and A$38 million (2007: $2,115 million, £1,184 million and A$32 million). The Dollar facility expires on 30 September 2010, whilst the Sterling facility expires on 30 June 2010 and both facilities’ terms are at LIBOR +0.50 percent. The Australian Dollar facility expires 30 November 2011 and interest is charged at 8.60 percent per annum. In addition, the balance also includes a subordinated loan of £350 million (2007: £350 million), with a term agreement of 6.75 percent, switching to ﬂ oating rate (LIBOR +2.48 percent) after 12 years. 2 The balance with Skandia companies includes two loan notes with Skandia UK Limited, totalling £1,844 million, where the agreement states that interest is LIBOR + 0.30 percent margin and is due to mature on 27 February 2013. The Company has a term loan agreement with Skandia Insurance Company Ltd where the agreement states that interest is STIBOR + 0.50 percent margin and is due to mature on 30 January 2009. In addition, the balance also includes a £500 million revolving credit facility with Skandia Europe and Latin America (Holdings) Limited, where the agreement states that interest be received at LIBOR +0.15 percent. This facility is due to mature on 7 December 2012. 3 The balance with Old Mutual International companies includes one contingent loan facility of £4 million (2007: £4 million) where the agreement states that no interest is charged and no maturity date is set in place. 4 The subordinated loan with Global Edge Technologies Pty Limited of R6.5 million (2007: R6.5 million). There is no interest charged in respect to this advance as it has been fully provided for in the books of Old Mutual plc. 5 The balance with Bermuda Holding companies includes two ﬂ oating rate notes totalling $604 million. Interest charged is USD LIBOR + 0.45 percent margin and USD LIBOR + 8.45 percent on the $82 million note and $522 million note respectively. The notes mature on 28 April 2013 and 1 December 2013 respectively. 6 The balance with Old Mutual (SA) companies includes two ﬂ oating rate notes totalling $1,261 million (2007: $1,018 million). Interest charged is USD LIBOR + 0.45 percent margin and USD LIBOR + 2.50 percent margin on the $1,037 million note and $224 million note respectively. The notes mature on 28 April 2013 and 17 December 2013 respectively. 7 The balance with Old Mutual Financial Services companies includes long-term loan advances with no maturity dates of £197 million, on which interest is charged at the Bank of England base rate and £43 million, on which no interest is charged. 8 The loan with Old Mutual Business Limited represents a long-term loan advance with no maturity date of £95 million, on which no interest is charged. 9 The loan with Old Mutual Capital Funding L.P. is a $750 million subordinated cumulative perpetual note which bears interest at 8.00 percent per annum payable quarterly. The notes have no mandatory maturity dates. 10 The loan with Old Mutual (Netherlands) BV is made up of one discount note totalling £65 million (2007: nil) which matures on 3 April 2009. Interest is charged at LIBOR + 6.50 percent margin. 11 The loan with Pointspirit is a £500 million revolving credit facility where the agreement states that interest be charged at LIBOR +0.15 percent. This facility is due to mature on 17 May 2009. 12 This represents amounts paid to the Fairbairn Trust Company Limited in respect of an ‘ESOP’ for the purchase of the Company’s own shares. Page 275 l i s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 continued Balance due from/(to) £m 2,634 4 209 4 1 (306) (517) (224) (56) (377) (1) (108) (25) (22) (1) 25 Other Ordinary dividends received £m amounts received/ (paid) £m Interest received £m 5 343 (68) Interest received £m Ordinary dividends received £m Other amounts received/ (paid) £m 97 470 (48) 11 Related parties continued Balance sheet information At 31 December 2007 Subsidiaries: OM Group (UK) Limited Primemajor Skandia companies Old Mutual International companies Global Edge Technologies Pty Limited Bermuda Holding companies Old Mutual (SA) companies Old Mutual Financial Services companies Old Mutual Business Services Limited Old Mutual Capital Funding L.P. Constantia Insurance Company (Guernsey) Limited Pointspirit8 Nedbank companies OMLA Holdings Limited Sandlord Limited Other related parties: Fairbairn Trust Company Limited Income statement information 2008 Subsidiaries Income statement information 2007 Subsidiaries Page 276 Old Mutual plc Annual Report and Accounts 2008 12 Financial risk The Company is exposed to ﬁ nancial risk through its ﬁ nancial assets, ﬁ nancial liabilities and inter-company balances. The most important components of ﬁ nancial risk for the Company are interest rate risk, currency risk, liquidity risk and credit risk. These risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and speciﬁ c market movements. The principal risk the Company faces is currency risk. The Company’s functional and presentational currency is GBP, whereas the functional currencies of its principal subsidiaries are South African Rand, US Dollar, Swedish Krona and Euro. (a) Capital risk management Old Mutual plc is the holding company of the Group and is responsible for the raising and allocation of capital in line with the Group’s capital management policies set out in note 47 to the consolidated ﬁ nancial statements and for ensuring the operational funding and regulatory capital needs of the holding company and its subsidiaries are met at all times. (b) Currency risk The Company is exposed to effects of ﬂ uctuations in the prevailing foreign currency exchange rates on its ﬁ nancial position and cash ﬂ ows. The principal foreign currency risk arises from the fact that the Company’s functional currency is GBP, whereas the functional currency of its principal operations is South African Rand, US Dollar, Swedish Krona and Euro. The Company hedges some of this currency translation risk through currency swaps, currency borrowings and forward foreign exchange rate contracts. Exchange rate exposures are managed within approved policy parameters utilising forward exchange contracts and currency swap agreements. The table below summarises the Company’s exposure to foreign currency exchange rate risk: At 31 December 2008 Assets Investments in associated undertakings Derivative ﬁ nancial instruments – assets1 Cash and cash equivalents Investments and securities Other non-ﬁ nancial assets Total assets Liabilities Other borrowed funds2 Derivative ﬁ nancial instruments – liabilities3 Other non-ﬁ nancial liabilities Total liabilities At 31 December 2007 Assets Investments in associated undertakings Derivative ﬁ nancial instruments – assets¹ Cash and cash equivalents Investments and securities Other non-ﬁ nancial assets Total assets Liabilities Other borrowed funds² Derivative ﬁ nancial instruments – liabilities³ Other non-ﬁ nancial liabilities Total liabilities GBP £m ZAR £m USD £m Euro £m SEK £m Other £m Reclass- iﬁ cation £m 26 11 – 39 7,745 7,821 76 2,530 2,606 – – – – – – – 25 – 25 – 13 – – 1,408 1,421 420 7 1,847 2,274 GBP £m ZAR £m USD £m 25 29 18 45 5,108 5,225 272 8 484 764 – – 15 – – 15 – 5 1 6 – 33 8 – 1,111 1,152 359 1 1,220 1,580 – 24 – – 50 74 153 – 279 432 Euro £m – 4 – – 36 40 43 – 36 79 – – – – 1,311 1,311 296 2 35 333 SEK £m – – – – 1,466 1,466 470 1 27 498 – – 3 – 24 27 – – 8 8 – 149 – – – 149 92 57 – 149 Other £m Reclass- iﬁ cation £m – – – – 14 14 – – – – – 6 – – – 6 (10) 16 – 6 Total £m 26 197 3 39 10,538 10,803 1,037 91 4,699 5,827 Total £m 25 72 41 45 7,735 7,918 1,134 31 1,768 2,933 1 The derivative ﬁ nancial instruments of £149 million (2007: £6 million) represent currency hedges for borrowed funds and so have been reclassiﬁ ed and netted against USD borrowed funds. 2 The totals of £76 million (GBP) (2007: 272 million), £420 million (USD) (2007: £359 million) and £296 million (SEK) (2007: £470 million) of borrowed funds have been disclosed as net of hedges in derivative ﬁ nancial instruments of £114 million (2007: £6 million), £35 million (2007: nil) and £57 million (2007: £16 million) respectively. 3 The derivative ﬁ nancial instrument of £57 million (2007: £16 million) represents a currency hedge for borrowed funds and so have been reclassed and netted against SEK borrowed funds. A 10 percent deterioration in the values of the major currencies shown above in relation to GBP would result in an increase in the Company’s equity holders’ funds of £23 million (2007: decrease of £46 million). Page 277 i l s a c n a n F i FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2008 continued 12 Financial risk continued (c) Credit risk The Company is principally exposed to credit risk through cash at bank and the ability of the subsidiaries to repay debts, which it holds to back shareholder liabilities. Credit risk is managed by placing limits on exposures to any single counterparty, or groups of counterparties and to geographical and industry segments. Credit risk is monitored with reference to established credit rating agencies with limits placed on exposure to below investment grade holdings. The following table analyses the credit rating (Standard & Poor’s or equivalent) by investment grade of ﬁ nancial assets bearing credit risk: At 31 December 2008 Investments in associated undertakings Derivative ﬁ nancial instruments – assets Investments and securities Other assets (including inter-company) Cash and cash equivalents Financial assets bearing credit risk At 31 December 2007 Investments in associated undertakings Derivative ﬁ nancial instruments – assets Investments and securities Other assets (including inter-company) Cash and cash equivalents Financial assets bearing credit risk Investment Grade lower) £m Sub- investment Grade (BB and Not rated £m (AAA to BBB) – 197 – – 3 200 – 72 – – 41 113 – – – – – – – – – – – – Total £m 26 – 39 2,943 – 3,008 25 – 45 2,943 – 3,013 £m 26 197 39 2,943 3 3,208 25 72 45 2,943 41 3,126 (d) Interest rate risk Interest rate risk is the risk that ﬂ uctuating interest rates will unfavourably affect the Company’s earnings and the value of its assets, liabilities and capital. The Company employs currency and interest rate swap transactions to mitigate against the impact of changes in the fair values of its borrowed funds. Details of the arrangements in place are shown in the Group Accounts note 28 (Hedge accounting). (e) Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company has net current liabilities of £2,167 million (2007: £12 million), all of which represent liabilities to other group companies or ﬁ nance vehicles of loans that often have short maturity dates or embedded call options. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and continuously monitoring forecast and actual cash ﬂ ows of both the Company and its subsidiaries. Page 278 Old Mutual plc Annual Report and Accounts 2008 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION The directors of Old Mutual plc have chosen to prepare supplementary information on a market consistent embedded value basis. Old Mutual’s methodology adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008) issued in June 2008 by the CFO Forum (‘the Principles’) as the basis for the methodology. The Principles have been fully complied with at 31 December 2008 for all businesses with the exception of the use of an adjusted risk free rate due to current market conditions for US Life Onshore business as described more fully below and in the basis of preparation. The Principles were fully complied with for all businesses in respect of the 31 December 2007 restated MCEV ﬁ gures. In preparing the Old Mutual Market Consistent Embedded Value basis (‘Old Mutual MCEV’) supplementary information, the directors have: > prepared the supplementary information in accordance with the methodology described above and the basis of preparation as set out on page 284; > identiﬁ ed and described the business covered by the Old Mutual MCEV methodology; > applied the Old Mutual MCEV methodology consistently to the covered business; > determined assumptions on a market consistent basis and operating assumptions on a best estimate entity speciﬁ c basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; and > where relevant, made estimates that are reasonable and consistent. The Principles were designed during a period of relatively stable market conditions and their application could, in turbulent markets, lead to misleading results. In December 2008 the CFO Forum announced that they are reviewing the Principles and guidance of the application of these Principles to address the notion of market consistency in the current dislocated market conditions. The particular areas under review include implied volatilities, the cost of residual non-hedgeable risks, the use of swap rates as a proxy for risk free reference rates and the effect of liquidity premia. When the CFO Forum members agreed to the use of the swap curve as the basis for setting risk free reference rates, the additional return due to liquidity premiums, that could be justiﬁ ed was low and at a level where it did not signiﬁ cantly impact the results. However, there are substantial liquidity premiums embedded into corporate bond spreads in the current dislocated market conditions resulting in a liquidity adjustment being applied within the risk free reference rates for Old Mutual’s US Life onshore business as at 31 December 2008. Old Mutual believes that such an adjustment is required to maintain consistency with current market prices. Hence, Old Mutual plc does not comply with Principle 14 and Guideline 14.4, in respect of the 31 December 2008 disclosure for the US Life Onshore business, which does not allow any adjustments to be made to the swap yield curve to allow for liquidity premiums. This approach will be reviewed for use in future reporting periods once the CFO Forum has completed its own review on the application of Principle 14. Old Mutual fully complied with all of the Principles in respect of the restatement to MCEV for all of its businesses, at 31 December 2007. Further detail on the justiﬁ cation and quantum of the liquidity adjustment, being applied within the risk free reference rates for US Life onshore business as at 31 December 2008 is provided in note 3 of the Old Mutual MCEV supplementary information. Page 279 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i INDEPENDENT AUDITORS’ REPORT TO OLD MUTUAL PLC ON THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION We have audited the Old Mutual Market Consistent Embedded Value (‘Old Mutual MCEV’) basis supplementary information (‘the supplementary information’) of Old Mutual plc (‘the Company’) on pages 281 to 327 in respect of the year ended 31 December 2008, including conversion of its comparative supplementary information for 2007, previously prepared on the European Embedded Value (‘EEV’) basis, to an Old Mutual MCEV basis. The supplementary information has been prepared in accordance with the basis of preparation as set out on page 284. The supplementary information should be read in conjunction with the Group ﬁ nancial statements which are on pages 137 to 265. This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As described in the statement of directors’ responsibilities on page 279, the directors’ responsibilities include preparing the supplementary information in accordance with the basis of preparation set out on page 284. Our responsibilities, as independent auditor, in relation to the supplementary information are established in the United Kingdom by the Auditing Practices Board, by our profession’s ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to the Company our opinion as to whether the supplementary information has been properly prepared in accordance with the basis of preparation set out on page 284. We also report if we have not received all the information and explanations we require for this audit. Basis of audit opinion We conducted our audit having regard to International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. It also includes an assessment of the signiﬁ cant estimates and judgments made by the directors in the preparation of the supplementary information, and of whether the accounting policies applied in the preparation of the supplementary information are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁ cient evidence to give reasonable assurance that the supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of the supplementary information. Opinion In our opinion, the Old Mutual MCEV basis supplementary information for the year ended 31 December 2008 has been properly prepared in accordance with the basis of preparation set out on page 284. KPMG Audit Plc Chartered Accountants 8 Salisbury Square London EC4Y 8BB 4 March 2009 Page 280 Old Mutual plc Annual Report and Accounts 2008 OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 Statement of earnings on a Group Market Consistent Embedded Value basis Europe Covered business Asset management Banking South Africa Covered business Asset management Banking General insurance United States Covered business Asset management Other Asset management Finance costs Other shareholders’ expenses Adjusted operating Group MCEV earnings before tax* Adjusting items** Total Group MCEV earnings for the ﬁ nancial year before tax Income tax attributable to shareholders At At 31 December 31 December £m £m 2008 2007 505 (13) 23 515 463 102 545 76 372 26 14 412 359 98 622 89 1,186 1,168 (644) 97 (547) (17) (17) (140) (19) 978 (2,037) (1,059) 13 37 162 199 2 2 (119) (31) 1,631 21 1,652 (423) Total Group MCEV earnings after tax for the ﬁ nancial year (1,046) 1,229 Total Group MCEV earnings for the ﬁ nancial period attributable to: Equity holders of the parent Minority interests Ordinary shares Preferred securities Total Group MCEV earnings after tax for the ﬁ nancial year (1,284) 184 54 952 227 50 (1,046) 1,229 * For long-term business and general insurance businesses, adjusted operating MCEV earnings is based on short-term and long-term investment returns respectively, 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 deﬁ ned as minority interests in accordance with IFRS. For all businesses, adjusted operating MCEV earnings excludes goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, proﬁ t/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (proﬁ ts)/losses on certain Group debt movements. **The breakdown of the adjusting items is detailed in note 5. Page 281 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued Year ended Year ended 31 December 31 December £m £m Total Group MCEV earnings per share Basic total Group MCEV earnings per ordinary share Weighted average number of shares – millions Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders Adjusted operating Group MCEV earnings before tax Tax on adjusted operating Group MCEV earnings Adjusted operating Group MCEV earnings after tax Minority interests Ordinary shares Preferred securities Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders Adjusted operating Group MCEV earnings per share* (pence) Adjusted weighted average number of shares – millions 2008 (25.7) 2007 18.4 4,995 5,176 978 (135) 1,631 (414) 843 1,217 (214) (54) 575 (245) (50) 922 11.0 5,230 17.0 5,411 * 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 minority 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. Reconciliation of movements in Group Market Consistent Embedded Value (Group MCEV) (after tax) Year ended 31 December Opening Group MCEV* Adjusted operating MCEV earnings Non-operating MCEV earnings Total Group MCEV earnings Other movements in IFRS net equity Covered Non-covered business business IFRS MCEV £m £m Total Group MCEV £m Covered Non-covered business business IFRS MCEV £m £m Total Group MCEV £m 2008 2008 2008 2007 2007 2007 6,349 133 (2,270) (2,137) (29) 1,010 442 411 853 (784) 7,359 575 (1,859) (1,284) (813) 6,145 591 (77) 514 (310) 594 331 107 438 (22) 6,739 922 30 952 (332) Closing Group MCEV 4,183 1,079 5,262 6,349 1,010 7,359 * The Opening Group MCEV for the year ended 31 December 2007 is gross minority interest of £29m in Skandia. During 2007 all minority interests were purchased. Page 282 Old Mutual plc Annual Report and Accounts 2008 OLD MUTUAL NOTES TO THE MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 Components of Group Market Consistent Embedded Value (Group MCEV) Adjusted net worth attributable to ordinary equity holders of the parent Equity Adjustment to include long-term business on a statutory solvency basis: Europe South Africa United States Adjustment for market value of life funds’ investments in Group equity and debt instruments held in life funds Adjustment to remove perpetual preferred callable securities and accrued dividends Adjustment to exclude acquisition goodwill from the covered business: Europe United States Value of in–force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non–hedgeable risks Group MCEV Group MCEV value per share (pence) Return on Group MCEV (RoEV) per annum Number of shares in issue at the end of the period less treasury shares – millions At At 31 December 31 December £m £m 2008 2007 3,462 7,737 (2,749) 137 151 173 (688) (1,299) – 3,431 7,961 (2,581) 147 (621) 428 (688) (1,155) (60) 1,800 3,928 2,580 (261) (148) (371) 4,583 (199) (192) (264) 5,262 7,359 99.7 136.2 7.8% 13.7% 5,277 5,405 The adjustments to include long-term business on a statutory solvency basis reﬂ ect 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 intercompany loans). For some European territories the value excludes the write-off of deferred acquisition costs which remain part of adjusted net worth for MCEV purposes. The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and minority interests of £575 million (year ended 31 December 2007: £922 million) divided by the opening Group MCEV. Components of adjusted Group Market Consistent Embedded Value (Group MCEV) Pro forma adjustments to bring Group investments to market value Group MCEV Adjustment to bring listed subsidiaries to market value South Africa banking business South Africa general insurance business Adjustment for value of own shares in ESOP schemes* Adjustment for present value of Black Economic Empowerment scheme deferred consideration Adjustment to bring external debt to market value Adjusted Group MCEV Adjusted Group MCEV per share (pence) Number of shares in issue at the end of the period less treasury shares – millions At At 31 December 31 December £m £m 2008 2007 5,262 68 7,359 1,162 41 27 63 169 645 957 206 158 191 120 6,207 8,990 117.6 5,277 166.3 5,405 * Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2007 and 31 December 2008 is due to the reduction in the Old Mutual plc share price over the year. Page 283 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 1 Basis of preparation The Old Mutual Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 281 to 327 as ‘MCEV’) adopts Market Consistent Embedded Value Principles issued in June 2008 by the CFO Forum (‘the Principles’) as the basis for the methodology used in preparing the supplementary information. The Principles have been fully complied with for all businesses as at 31 December 2008, with the exception of the use of an adjusted risk free rate due to current market conditions for US Life Onshore business. The Group has replaced the European Embedded Value (‘EEV’) basis with the MCEV basis for the covered business and ﬁ gures for 31 December 2007 have been restated accordingly, and complies fully with all of the Principles. The Principles were designed during a period of relatively stable market conditions and their application could, in turbulent markets, lead to misleading results. In December 2008 the CFO Forum announced that they are reviewing the Principles and guidance of the application of these Principles to address the notion of market consistency in the current dislocated market conditions. The particular areas under review include implied volatilities, the cost of residual non-hedgeable risks, the use of swap rates as a proxy for risk free reference rates and the effect of liquidity premia. In respect of the 31 December 2008 disclosure, Old Mutual has made an adjustment to the risk free rate used in determining the value of the US Life Onshore business, to take account of the liquidity component of corporate bond spreads that is evident in the market as at 31 December 2008. The Directors consider this adjustment to be necessary so as to ensure a meaningful basis of reporting the value of the Group’s life and related businesses. The 31 December 2008 MCEV disclosure in respect of all other business units complies fully with the Principles. The detailed methodology and assumptions made in presenting this supplementary information, including the US adjusted risk free rate for 31 December 2008, information are set out in notes 2 and 3. This supplementary information provides details on the methodology, assumptions and results of the MCEV for the Old Mutual Group and includes conversion of comparative supplementary information for 2007, previously prepared on the EEV basis, to a MCEV basis. 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 and therefore includes the value of all non-covered business at the unadjusted IFRS net asset value detailed in the primary ﬁ nancial statements. > The adjusted Group MCEV, a measure used by the directors 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 as well as marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to market. The major change in Old Mutual’s overall approach for deriving its MCEV compared to the approach adopted for EEV is the allowance for risk. Under MCEV a bottom-up allowance is made for ﬁ nancial risks (in particular, asset and liability cash ﬂ ows are valued using risk discount rates consistent with those applied to similar cash ﬂ ows in the capital markets and ﬁ nancial options and guarantees are valued using market consistent models calibrated to observable market prices) and an explicit allowance is made for the cost of residual non-hedgeable risks in the covered business. In contrast, under EEV a top-down allowance was made for all risks by means of the risk margin included in the single risk discount rate applicable for each geography and the value placed on the time value of ﬁ nancial options and guarantees. The MCEV methodology therefore makes a more granular allowance for the differences in the risk proﬁ le of different blocks of business than the EEV methodology. Further detailed commentary of the key changes from an EEV to MCEV methodology and the impact of the transition from EEV to MCEV reporting on results for the ﬁ nancial year ended 31 December 2007 are provided in notes 12 to 18. 2 Methodology Introduction MCEV represents the present value of shareholders’ interests in the earnings distributable from assets allocated to the in-force covered business after sufﬁ cient 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 ﬂ ows generated by these assets and liabilities in a deep and liquid market. MCEV is therefore a risk-adjusted measure to the extent that ﬁ nancial risk is reﬂ ected 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-ﬁ nancial 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 – Required capital to support the covered business > Value of in-force covered business (VIF) Page 284 Old Mutual plc Annual Report and Accounts 2008 2 Methodology continued 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 minority 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 insurance business. This generally means that covered business includes all product lines where the proﬁ ts are included in the IFRS long-term business proﬁ ts in the primary Financial Statements. For the South African business, healthcare administration business is no longer recognised as part of the VIF or value of new business of covered business as previously reported under EEV. Some types of business are legally written by a life Company, but under IFRS this business is classiﬁ ed 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 classiﬁ ed as mutual fund 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 proﬁ ts 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 ﬁ nancial 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 as well as marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to market. Free surplus Free surplus is the market value of any assets allocated to, but not required to support, the covered in-force 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 reﬂ ects the level of capital considered by the directors to be appropriate to manage the business: > Economic capital; > Regulatory capital (i.e. the level of solvency capital at which the local regulators are empowered to take action) with appropriate deductions being made for any implicit items that are not allowed by local regulators; > Capital required by rating agencies in respect of our North American business in order to maintain our desired credit rating; and > Any other required capital deﬁ nition to meet internal management objectives. Economic capital for the covered business is based upon our own internal assessment of risks inherent in the underlying business. It measures capital requirements on an economic balance sheet, with MCEV as the available capital, consistent with a 99.93 percent conﬁ dence level over a one-year time horizon. For Europe and South Africa capital determined with reference to internal management objectives is the most onerous and is the capital measure used, whereas in the United States the required capital is based on the amount that management deems necessary to maintain the desired credit rating for the Company. The required capital in respect of the South Africa 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. 31 December 2008 Required capital(a) Regulatory capital(b) Ratio(a/b) 31 December 2007 Required capital(a) Regulatory capital(b) Ratio(a/b) Total £m Europe £m South Africa United States £m £m 2,025 1,293 1.6 1,906 1,257 1.5 371 229 1.6 323 226 1.4 1,070 819 1.3 1,159 866 1.3 584 245 2.4 424 165 2.6 Page 285 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 2 Methodology continued VIF Under the MCEV methodology, VIF consists of the following components: > Present value of future proﬁ ts (PVFP) from in-force covered business; less > Time value of ﬁ nancial options and guarantees; less > Frictional costs of required capital; less > Cost of residual non-hedgeable risks Projected liabilities and cash ﬂ ows are calculated net of outward risk reinsurance with allowance for default risk of reinsurance counterparties where material. PVFP 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 renewals 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 3. 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 ﬁ nancial 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 ﬁ nancial options and guarantees. Financial options and guarantees Allowance is made in the MCEV for the potential impact of variability of investment returns (i.e. asymmetric impact) on future shareholder cash ﬂ ows of policyholder ﬁ nancial options and guarantees within the in-force covered business. The time value of ﬁ nancial options and guarantees describes that part of the value of ﬁ nancial 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 ﬁ nancial options and guarantees. Projected cash ﬂ ows are valued using economic assumptions such that they are valued in line with the price of similar cash ﬂ ows that are traded in the capital markets. The time value represents the difference between the average value of shareholder cash ﬂ ows 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 ﬁ nancial options and guarantees also includes allowance for potential burn-through costs on participating business, i.e. the extent to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal capital management requirements or the extent to which reserves are inadequate to cover severely adverse experience. In the generated economic scenarios allowance is made, where appropriate, for the effect of dynamic management and/or policyholder actions in different circumstances: > Management has some discretion in managing exposure to ﬁ nancial options and guarantees, particularly within participating business. Such dynamic management actions are reﬂ ected in the valuation of ﬁ nancial options and guarantees provided that such discretion is consistent with established and justiﬁ able practice taking into account policyholders’ reasonable expectations (e.g. with due consideration of the 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 bonuses where circumstances warrant such action; – Dynamic persistency rates for the United States business and dynamic guaranteed annuity option take-up rates for the South African business driven by changes in economic conditions and management actions; – Changes in surrender values; and – Option take-up rates vary stochastically for the South African business to the extent that the value of those options change in different economic conditions. In determining the time value of ﬁ nancial options and guarantees at least 1,000 simulations are run to gain comfort that a reasonable degree of convergence of results has has been obtained. Where deemed appropriate, the number of simulations is increased to reduce sampling error. Page 286 Old Mutual plc Annual Report and Accounts 2008 2 Methodology continued Financial options and guarantees continued Europe Whilst certain products within the European businesses provide ﬁ nancial options and guarantees, these are immaterial due to the predominantly unit-linked nature of the business. South Africa The time value of the ﬁ nancial options and guarantees mainly relates to maturity guarantees and guaranteed annuity options. As required by the applicable Actuarial Society of South Africa guidance note, the time value of the ﬁ nancial options and guarantees included in the statutory reserves in the South African businesses as at 31 December 2008 has been valued using a risk-neutral market consistent asset model, and is referred to as an investment guarantee reserve. This reserve includes a discretionary margin as deﬁ ned by local guidelines to allow for the sensitivity of the reserve to interest rate movements. This discretionary margin is valued in the VIF. United States The time value of the ﬁ nancial options and guarantees mainly relates to minimum crediting (bonus) and growth rates. 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 to partly ﬁ nance 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. Cost of residual non-hedgeable risks Sufﬁ cient allowance for most ﬁ nancial risks has been made in the PVFP and the time value of ﬁ nancial options and guarantees by using techniques that are similar to the approach used by capital markets. In addition the modelling of some non-hedgeable non-ﬁ nancial risks is incorporated as part of the calculation of the PVFP (e.g. to the extent that expected operational losses are incorporated in the maintenance expense assumptions) or the time value of ﬁ nancial options and guarantees (e.g. dynamic policyholder behaviour such as the interaction of the investment scenario and the persistency rates). All residual non-ﬁ nancial risks (e.g. liability risks such as mortality, longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk) for which no or insufﬁ cient allowance is made in the PVFP or time value of ﬁ nancial options and guarantees, together with hedge risk and credit spread risk in the United States, are considered within the allowance for the cost of residual non-hedgeable risks. An allowance is made in the cost of residual non-hedgeable risks to reﬂ ect uncertainty in the best estimate of shareholder cash ﬂ ows 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 cost of residual non-hedgeable risks is calculated using a cost of capital approach, i.e. it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until run-off of the liabilities. The capital charge in each year is the product of the projected expected non-hedgeable risk capital held after allowance for some diversiﬁ cation beneﬁ ts 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 percent conﬁ dence 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. Page 287 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 2 Methodology continued Cost of residual non-hedgeable risks continued The following allowance is made for diversiﬁ cation beneﬁ ts in determining the residual non-hedgeable risk capital at a business unit level: > Diversiﬁ cation beneﬁ ts within the non-hedgeable risks of the covered business are allowed for. > No allowance is made for diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks of the covered business. > No allowance is made for diversiﬁ cation beneﬁ ts between covered and non-covered business. The table below shows the amounts of diversiﬁ ed economic capital held in respect of residual non-hedgeable risks. 31 December 2008 Non-hedgeable risk capital 31 December 2007 Non-hedgeable risk capital Total £m Europe £m South Africa United States £m £m 2,003 720 457 826 1,535 714 461 360 A weighted average cost of capital rate of 2.0 percent has been applied to residual symmetric and asymmetric non-hedgeable risks at a business unit level over the life of the contracts. This translates into an equivalent cost of capital rate of approximately 3.25 percent being applied to the Group diversiﬁ ed capital required in respect of such non-hedgeable risks. Participating business For participating business in South Africa and the United States, the method of valuation makes assumptions about future bonus or crediting rates and the determination of proﬁ t allocation between policyholders and shareholders. These assumptions are made on a basis consistent with other projection assumptions, especially the projected future 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 beneﬁ t levels are higher than can be supported by the existing fund assets together with projected investment returns, a downward ‘glide path’ is projected in beneﬁ t levels so that the fund would be exhausted on payment of the last beneﬁ t. Spread-based products A market consistent valuation of spread-based products (such as ﬁ xed indexed annuities in the United States 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 proﬁ t 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 rate less the anticipated margin to cover proﬁ t 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 zero percent ﬂ oor 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, 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 PVFP and the time value of ﬁ nancial options and guarantees are calculated using assets projected on 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. Page 288 Old Mutual plc Annual Report and Accounts 2008 2 Methodology continued Deﬁ ned beneﬁ t pension scheme Where a deﬁ ned beneﬁ t pension scheme within the covered business is in surplus or deﬁ cit, the employer pension fund expense assumptions incorporated within the VIF allow appropriately for the expected release of surplus or funding of the deﬁ cit. Look through principle PVFP and value of new business cash ﬂ ow projections look through and include the proﬁ ts/losses of owned service companies, e.g. distribution and administration, related to the management of the covered business. Any proﬁ t 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 signiﬁ cant proportion of these proﬁ ts arise from performance-based fees. Taxation In valuing shareholders’ cash ﬂ ows, allowance is made in the cash ﬂ ow 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) at a rate of 10 percent that may be payable in South Africa 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. In Europe tax has been allowed for on dividends to be remitted to Skandia UK from the Isle of Man. The value of any deferred tax assets is only recognised in the MCEV in so far as those tax assets are expected to be utilised in future by offsetting it against expected tax liabilities that are generated on expected proﬁ ts emerging from in-force business. Since projected investment returns are based on the risk free reference rates, MCEV may therefore understate the true economic value of such deferred tax assets. New business and renewals The market consistent value of new business (VNB) measures the value of the future proﬁ ts expected to emerge from all new business sold, and in some cases increases to existing contracts, during the reporting period after allowance for the time value of ﬁ nancial options and guarantees, frictional costs and the cost of residual non-hedgeable risks associated with writing the new business. VNB includes contractual renewal of premiums and recurring single premiums, where the level of premium is pre-deﬁ ned and is reasonably predictable, and changes to existing contracts where these are not variations allowed for in the PVFP. Non-contractual increments are treated similarly where the volume of such increments is reasonably predictable or likely (e.g. where premiums are expected to increase in line with salary or price inﬂ ation). Any variations in premiums on renewal of in-force business from that previously anticipated including deviations in non-contractual increases, deviations in recurrent single premiums and re-pricing of premiums for in-force business are treated as experience variances on in-force business and not as new business. VNB is calculated as follows: > Using economic assumptions at the start of the reporting period. > Using demographic and operating assumptions at the end of the reporting period. > 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 reﬂ ect 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 minority 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 percent 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. Page 289 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 2 Methodology continued 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 should be 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 proﬁ ts 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 reﬂ ect the impact of deviations of the actual operational experience during the reporting period from the expected operational experience. It is analysed before operating assumption changes, i.e. such variances are assessed against opening operating assumptions, and reﬂ ects 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. > 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 reﬂ ected 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. An analysis of MCEV earnings requires 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 total covered business where the calculations are performed in Sterling. 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. Page 290 Old Mutual plc Annual Report and Accounts 2008 3 Assumptions Non-economic assumptions The appropriate non-economic projection assumptions for future experience (e.g. mortality, persistency and expenses) are determined using best estimate assumptions of each component of future cash ﬂ ows, are speciﬁ c to the entity concerned and has regard to past, current and expected future experience (e.g. longevity improvements and AIDS-related claims) as derived from both entity speciﬁ c 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 only exception is in respect of the United States business which is currently undergoing a major restructuring and cost-cutting exercise. The expense assumption used in the calculation of MCEV takes into account cost reductions already achieved in the ﬁ rst quarter of 2009, but not any of the additional planned cost reductions. 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 life assurance business include 35 percent of the Group holding Company expenses, with 14 percent allocated to South Africa, 4 percent allocated to United States and 17 percent allocated to Europe (31 December 2007: 37 percent of the Group holding Company expenses, with 15 percent allocated to South Africa, 5 percent allocated to United States and 17 percent allocated to Europe). 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 normally only makes provision for future development costs and one-off exceptional expenses (such as those incurred on the integration of businesses following an acquisition and restructuring costs) to the extent that such project costs are known with sufﬁ cient certainty. However no such costs are allowed for as at 31 December 2008 (or 31 December 2007). Legislative changes were introduced in Germany in 2008 specifying the proportion of miscellaneous proﬁ ts 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. To model this, Skandia Leben has adopted an approach consistent with German market practice. This approach is to set best estimate assumptions for the amount to be shared with policyholders in future years after allowing for the acquisition expenses in relation to the new business expected to be written over the next three years as per their business plan projections. Economic assumptions An active basis is applied to set pre-tax investment and economic assumptions to reﬂ ect 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 ﬂ ows are valued in line with the prices of similar cash ﬂ ows that are traded on the capital markets. Thus, risk free cash ﬂ ows are discounted at a risk free reference rate and equity cash ﬂ ows at an equity rate. In practice for the PVFP, where cash ﬂ ows 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 and all the cash ﬂ ows are discounted using risk free reference rates 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 inﬂ ation 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 ﬂ ows. For Europe the swap yield curve is obtained from a number of sources including Bloomberg, Nordea Bank and Reuters. For the South African and United States businesses, the swap yield curve is sourced from the third party market consistent asset model that is used to generate the economic scenarios that are required to value the time value of ﬁ nancial options and guarantees. No adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity adjustment to the United States Life onshore business at 31 December 2008. Any other risk premiums are recognised within the MCEV as and when they are earned. Following a review of a wide range of market data and literature, such as Barrie+Hibbert calibration of US corporate bond spreads at 31 December 2008, it is the directors’ view that the signiﬁ cant widening of corporate bond spreads during the recent ﬁ nancial market turmoil is partly a function of an increased liquidity premium rather than only heightened 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 United States onshore business we considered the currency, credit quality and duration of our actual corporate bond portfolio and derived adjusted risk free reference rates at 31 December 2008 by adding 300bps of liquidity premium to swap rates used for setting investment return and discounting assumptions (31 December 2007: no liquidity adjustment was applied as we did not anticipate at that time the extent to which the bond markets would become even further dislocated). This adjustment reﬂ ects the liquidity premium component in corporate bond spreads over swap rates that we expect to earn on our portfolio. We believe that the difference between market yields on our United States onshore bond portfolio and the adjusted risk free reference rate still provides an adequate implied margin for defaults. Page 291 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 3 Assumptions continued Economic assumptions continued Risk free reference rates and inﬂ ation continued No liquidity adjustment is applied to risk free reference rates for other geographies or for Old Mutual Bermuda because: > the nature and management of the products sold onshore in the United States is materially different to those sold elsewhere in the Group, with greater opportunity for managing assets in such a manner as to realise liquidity premiums by holding corporate bonds to maturity; > the widening of corporate bond spreads has been more pronounced in the United States compared to other geographies; and > it is the only geography with a signiﬁ cant concentration of investments in the corporate bond market. At those durations where swap yields are not available, e.g. due to a lack of a sufﬁ ciently liquid or deep swap market, the swap curve is extended using appropriate interpolation and extrapolation techniques. Consumer price inﬂ ation assumptions are determined as those implied by index-linked government stocks or real swap yields if a liquid market of sufﬁ cient size exists. In other markets, the consumer price inﬂ ation assumptions are modelled considering a reasonable spread compared to swap rates. However, where modelling system capabilities are restricted, consumer price inﬂ ation is set as a ﬂ at assumption. Other types of inﬂ ation such as expense inﬂ ation are derived on a consistent basis and, where deemed appropriate, include a percentage addition to the consumer price inﬂ ation rate as life Company expenses for example include a large element of salary related expenses. The risk free reference spot yields (inclusive of any applicable liquidity adjustments) and expense inﬂ ation rates at various terms for each of the signiﬁ cant geographies 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 % 1 year % 5 years % 10 years % 20 years 2.0 2.4 4.3 9.3 1.8 5.5 4.6 4.2 11.5 4.7 3.1 3.3 5.1 8.0 2.9 5.1 4.6 4.2 10.1 4.8 3.4 3.8 5.6 7.8 3.2 5.0 4.7 4.7 9.1 4.9 3.5 3.9 5.8 6.7 3.2 4.8 5.0 4.9 8.1 4.9 1 year % 5 years % 10 years % 20 years % 0.1 2.0-3.0 3.0 6.1 0.2 3.8 2.5-3.0 3.0 7.7 3.6 1.5 2.0-3.0 3.0 5.4 1.0 3.6 2.5-3.0 3.0 7.1 3.4 2.8 2.0-3.0 3.0 5.5 1.8 4.1 2.5-3.0 3.0 6.5 3.5 4.1 2.0-3.0 3.0 4.6 2.1 4.5 2.5-3.0 3.0 5.8 3.6 31 December 2008 GBP EUR USD* ZAR SEK 31 December 2007 GBP EUR USD ZAR SEK Expense inﬂ ation 31 December 2008 GBP EUR USD ZAR SEK 31 December 2007 GBP EUR USD ZAR SEK * After 300 bps adjustment to the risk free rate to recognise the liquidity premium. Page 292 Old Mutual plc Annual Report and Accounts 2008 3 Assumptions continued Economic assumptions continued Volatilities and correlations Where cash ﬂ ows contain ﬁ nancial options and guarantees such that they do not move linearly with market movements, asset cash ﬂ ows are projected and all cash ﬂ ows 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 rate. Apart from the risk free reference yields speciﬁ ed above, other key economic assumptions for the calibration of economic scenarios include the implied volatilities for each asset class and correlations 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 in respect of guarantees that are dependent on changes in equity markets or swaptions in respect of guarantees that are dependent on changes in interest rates) 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, e.g. volatilities for property returns. Where 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 South African 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 be invested 50 percent in local equities and 50 percent 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 31 December 2008 1 year swap 5 year swap 10 year swap 20 year swap Equity (total return index)* Property (total return index) 31 December 2007 1 year swap 5 year swap 10 year swap 20 year swap Equity (total return index)* Property (total return index) Option term 1 year % Option term 5 years % Option term 10 years % Option term 20 years % 30.8 32.9 30.8 26.9 37.6 23.2 14.9 14.5 14.3 14.0 24.4 14.8 35.1 33.6 30.3 25.1 31.6 19.0 14.5 14.1 13.7 13.1 24.4 13.5 32.9 30.2 25.9 19.8 29.2 15.6 13.6 13.2 12.8 12.1 25.4 13.7 25.4 22.5 18.7 13.9 28.1 15.4 13.3 12.9 12.5 11.7 26.0 13.6 * Due to limited liquidity in the ZAR equity option market, the market consistent asset model has been calibrated by extrapolating equity option implied volatility data beyond a term of 3 years. USD volatilities 31 December 2008* 1 year swap 5 year swap 10 year swap 20 year swap 31 December 2007 1 year swap 5 year swap 10 year swap 20 year swap Option term 1 year % Option term 5 years % Option term 10 years % Option term 20 years % 44.9 34.1 27.7 24.7 35.0 20.6 16.1 14.8 23.9 22.8 21.2 20.1 26.9 18.7 15.4 14.1 18.3 17.9 17.1 16.3 22.2 17.4 14.7 13.5 16.1 16.0 15.4 14.5 19.8 15.8 13.3 12.4 * Due to limited liquidity in the USD swap market, the market consistent asset model has been calibrated by reference to volatility data as at 30 September 2008. Page 293 l i l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 3 Assumptions continued Economic assumptions continued International equity volatilities (Old Mutual Bermuda)* 31 December 2008 SPX RTY TPX HSCEI TWSE KOSP12 NIFTY SX5E UKX BCAI 31 December 2007 SPX RTY TPX HSCEI IBOV FTSE SBBIG Option term 1 year Option term 5 years Option term 10 years % 38 46 41 57 36 42 39 38 37 4 22 28 21 40 35 21 4 % 35 45 39 51 34 43 33 37 36 4 24 10 22 30 28 26 4 % 27 34 31 43 30 36 31 31 28 4 10 12 10 10 10 10 4 *These volatilities refer to price indices. Note that due to improvements in fund mapping during 2008, some different indices are referenced at 31 December 2008 than those referenced at 31 December 2007. Exchange rates All MCEV ﬁ gures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in note 2 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. Such 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 geography. Pre-tax real-world economic assumptions are determined as follows: > The equity risk premium is 3.5 percent for Africa and 3 percent for Europe and the United States. > The cash return equals the risk free reference rate less a deduction of 2 percent for Africa and 1 percent 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 2.5 percent in Africa and 2 percent in Europe. Tax The effective tax rates for Nordic, United Kingdom and the balance of Europe were a range of 2 to 28 percent (2007: 2 to 28 percent), 29 percent (2007: 28 percent) and a range of 8 to 31 percent (2007: 14 to 30 percent) respectively. The effective tax rate was 33 percent for South Africa (2007: 34 percent) and zero percent for Namibia (2007: zero percent), except for the investment return on capital for which the attributed tax was derived from the primary accounts. For the United States the effective rate was under 1 percent. Page 294 Old Mutual plc Annual Report and Accounts 2008 4 (i) Adjusted Group Market Consistent Embedded Value presented per business line MCEV of the covered business Adjusted net worth* Value of in-force business** Adjusted net worth of the asset management businesses Europe South Africa United States Value of the banking business Europe (adjusted net worth) South Africa (market value) Market value of the general insurance business South Africa Net other business Adjustment for present value of Black Economic Empowerment scheme deferred consideration Adjustment for value of own shares in ESOP schemes*** Perpetual preferred securities (US$ denominated) Perpetual preferred callable securities GBP denominated Euro denominated Debt Rand denominated USD denominated GBP denominated SEK denominated Euro denominated Adjusted Group MCEV Year ended Year ended 31 December 31 December £m £m 2008 2007 4,183 2,383 1,800 1,577 98 292 1,187 1,976 285 1,691 219 (161) 169 63 6,349 2,421 3,928 1,637 160 232 1,245 2,716 305 2,411 405 (35) 191 158 (203) (378) (304) (174) (130) (652) (328) (324) (1,312) (1,401) (213) (537) (191) (252) (119) (215) (408) (272) (506) – 6,207 8,990 *Adjusted net worth is after the elimination of inter-company loans. **Net of minority interests. *** Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2007 and 31 December 2008 is due to the reduction in the Old Mutual plc share price. Page 295 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 4 (ii) Adjusted operating MCEV earnings for the covered business Adjusted operating MCEV earnings before tax for the covered business* UK Nordic Europe and Latin America OMSA Rest of Africa United States Tax on adjusted operating MCEV earnings for the covered business UK Nordic Europe and Latin America OMSA Rest of Africa United States Adjusted operating MCEV earnings after tax for the covered business UK Nordic Europe and Latin America OMSA Rest of Africa United States Tax on adjusted operating MCEV earnings comprises Tax on adjusted operating MCEV earnings for the covered business Tax on adjusted operating MCEV earnings for other business Tax on adjusted operating MCEV earnings At At 31 December 31 December £m £m 2008 324 333 164 8 441 22 (644) 191 98 15 4 116 – (42) 133 235 149 4 325 22 (602) 191 (56) 135 2007 768 288 83 1 355 4 37 177 82 17 (6) 78 – 6 591 206 66 7 277 4 31 177 237 414 *Adjusted operating MCEV earnings before tax are derived by grossing up each of the components of the earnings after tax at the expected tax rates. 4 (iii) Components of Market Consistent Embedded Value of the covered business MCEV of the covered business Adjusted net worth Value of in-force business UK Adjusted net worth Free surplus Required capital Value of in-force business Present value of future proﬁ ts Frictional costs Cost of non-hedgeable risks Page 296 Old Mutual plc Annual Report and Accounts 2008 At At 31 December 31 December £m £m 2008 2007 4,183 2,383 1,800 278 121 157 6,349 2,421 3,928 276 89 187 1,393 1,255 1,439 (7) (39) 1,305 (10) (40) 4 (iii) Components of Market Consistent Embedded Value of the covered business continued Nordic Adjusted net worth Free surplus Required capital Value of in-force business*** Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of non-hedgeable risks Europe and Latin America Adjusted net worth Free surplus Required capital Value of in-force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non-hedgeable risks OMSA Adjusted net worth* Free surplus Required capital Value of in-force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs** Cost of residual non-hedgeable risks Rest of Africa Adjusted net worth Free surplus Required capital Value of in-force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non-hedgeable risks United States Adjusted net worth Free surplus Required capital Value of in-force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non-hedgeable risks At At 31 December 31 December £m £m 2008 2007 163 58 105 882 943 – (8) (53) 126 17 109 587 659 (13) (13) (46) 905 (128) 1,033 1,040 1,228 – (113) (75) 70 33 37 48 57 – (4) (5) 841 257 584 (2,150) (1,746) (248) (3) (153) 122 47 75 992 1,058 – (9) (57) 50 (11) 61 522 574 (1) (10) (41) 1,392 266 1,126 1,154 1,344 – (122) (68) 76 43 33 48 55 – (2) (5) 505 81 424 (43) 246 (198) (38) (53) * 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 South African business there has been a material change in the asset allocation of assets backing required capital from 31 December 2007 to 31 December 2008. As at 31 December 2008, signiﬁ cantly fewer assets are held in equities and more in cash compared to 31 December 2007. ** * The deﬁ ned beneﬁ t plan funds allocated to the Nordic covered business are currently showing an aggregate surplus of £45m on an IAS 19 basis. This amount has not been incorporated within the VIF by allowing for the expected release of surplus, nor has it been allowed within the ANW of the business. Page 297 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 4 (iii) Components of Market Consistent Embedded Value of the covered business continued For the United States, the material decrease in frictional costs from £38 million as at 31 December 2007 to £3 million as at 31 December 2008 reﬂ ects the changed tax position of the business between these two reporting dates on a market consistent basis. The fact that there are greater losses projected on an MCEV basis at 31 December 2008 compared to 31 December 2007 (mainly due to lower risk free reference rates) means that future income on the capital required to back the business is to a large extent not subject to tax as such future income can be offset against current projected losses. For the United States, the material increase in the cost of residual non-hedgeable risks from £53 million as at 31 December 2007 to £153 million as at 31 December 2008 results mainly from the introduction as at 31 December 2008 of an allowance for hedge risks on the Variable Annuity portfolio. This allowance was not backdated to 31 December 2007 as issues with the effectiveness of the hedging programme, which has improved in the second half of 2008, only emerged during 2008. The position at 31 December 2007 was restated based on the knowledge at the time, which included an expectation that the guarantee hedges would be more effective than actually experienced during 2008. 4 (iv) Analysis of covered business MCEV earnings (after tax) Total covered business* Year ended 31 December Opening MCEV** New business value Expected existing business Free surplus £m 2008 Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 515 (608) 1,906 172 2,421 (436) 3,928 540 MCEV £m 2008 6,349 104 Free surplus £m 2007 Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 199 (588) 1,903 181 2,102 (407) 4,043 637 MCEV £m 2007 6,145 230 contribution (reference rate) 63 117 180 289 469 15 127 142 269 411 Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance 4 15 19 81 100 3 19 22 67 89 939 160 (55) 172 675 (722) (111) (158) 1 (22) 23 (189) (75) – (156) (116) 5 43 (68) 187 – 187 750 85 (55) 16 559 (717) (68) (226) 188 (22) 210 (750) (250) (375) 39 (426) (1,485) – (1,911) (217) – (217) – (165) (430) 55 133 (2,202) (68) (2,137) (29) (22) (7) 850 132 26 102 540 190 (5) 725 (409) (412) 3 (201) (29) (1) (121) (25) 13 3 (9) 12 – 12 649 103 25 (19) 515 203 (2) 716 (397) (412) 15 (649) (119) (226) 97 76 (364) 86 (202) 87 – 87 – (16) (201) 78 591 (161) 84 514 (310) (412) 102 Closing MCEV 358 2,025 2,383 1,800 4,183 515 1,906 2,421 3,928 6,349 Return on MCEV (RoEV) % per annum 2.1% 9.6% * Note that results for the ‘Rest of Africa’ are included in the analysis of total covered business MCEV earnings, but that no separate analysis is shown for such business from a materiality perspective. ** The opening MCEV for the year ended 31 December 2007 is gross of minority interest of £29 million in Skandia. During 2007 all the minority shares were purchased. Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in Sterling. Page 298 Old Mutual plc Annual Report and Accounts 2008 4 (iv) Analysis of covered business MCEV earnings (after tax) continued UK covered business Year ended 31 December Opening MCEV New business value Expected existing business Free surplus £m 2008 89 (189) Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 187 (1) 276 (190) 1,255 257 MCEV £m 2008 1,531 67 Free surplus £m 2007 73 (190) Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 162 12 235 (178) 1,090 259 MCEV £m 2007 1,325 81 32 58 90 (2) 15 13 56 contribution (reference rate) 31 Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance – 294 26 (3) 11 170 (59) 8 119 (87) (82) (5) 1 – (15) (10) – – (25) (9) (1) (35) 5 – 5 – 20 20 – 279 16 (3) 11 145 (68) 7 84 (82) (82) – (279) 1 59 (26) 90 51 (10) 131 7 – 7 – 17 56 (15) 235 (17) (3) 215 (75) (82) 7 225 25 (8) – 50 1 – 51 (35) (35) – 89 – (5) 3 (1) – 24 – – 24 1 – 1 – 17 220 28 (9) – 74 1 – 75 (34) (35) 1 (220) 3 17 – 132 5 27 164 1 – 1 69 17 – 31 8 – 206 6 27 239 (33) (35) 2 Closing MCEV 121 157 278 1,393 1,671 187 276 1,255 1,531 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i Return on MCEV (RoEV) % per annum 15.3% 15.5% The ‘expected existing business contribution (in excess of reference rate)’ is not signiﬁ cant. This is reasonable for business comprised mostly of unit-linked products where most of the proﬁ ts 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 experience variances were driven by a higher level of fund rebate than that assumed, offset by a write-down of capitalised software costs. The main operating assumption changes related to an increased recognition of fee income which was partly offset by a strengthening of expense assumptions. The other operating variances mainly reﬂ ect the impact of modelling and methodology improvements. The capital and dividend ﬂ ows consist mainly of dividends. The other non-operating variance is due to the implementation of a new actuarial system. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Sterling. Page 299 NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 4 (iv) Analysis of covered business MCEV earnings (after tax) continued Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 122 (47) 992 79 MCEV £m 2008 1,114 32 Free surplus £m 2007 (154) (36) Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 Nordic covered business Year ended 31 December Opening MCEV New business value Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance Closing MCEV Return on MCEV (RoEV) % per annum Free surplus £m 2008 47 (50) 2 – 85 10 – (1) 46 9 (85) (30) 41 31 10 58 75 3 2 – 1 18 – – 24 (20) 19 23 7 – 7 4 – 86 28 – (1) 70 (11) (66) (7) 48 31 17 50 54 23 (86) (17) 32 (2) 79 (296) (3) (220) 110 – 110 882 23 – 11 32 (3) 149 (307) (69) (227) 158 31 127 1,045 12.9% 1 – 67 (4) – (5) 23 10 – 33 168 165 3 47 105 163 46 2 1 – 2 20 – 5 30 (5) – 25 4 – 4 75 (108) (34) 2 – 69 16 – – 53 5 – 58 172 165 7 122 MCEV £m 2007 863 23 41 21 – 20 (39) – 66 (30) 1 37 214 165 49 971 57 39 21 (69) 4 (39) – 13 (35) 1 (21) 42 – 42 992 1,114 7.6% The experience variances were largely driven by tax gains, a higher level of fee income than assumed and a contribution from proﬁ ts from healthcare business which is not valued within the VIF. These were partially offset by one-off persistency effects due to a Swedish legislative change relating to the level of tax deductible savings contributions. The main operating assumption changes related to a release of reserves set up for costs in the corporate business partially offset by strengthened persistency assumptions. The other non-operating variance is mainly driven by legacy issues, such as the settlement of the Skandia Liv arbitration and strengthening of various legacy provisions. The capital and dividend ﬂ ows mainly represent dividends received, repayment of loans and settlement of the Liv arbitration. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Swedish Krona. Page 300 Old Mutual plc Annual Report and Accounts 2008 4 (iv) Analysis of covered business MCEV earnings (after tax) continued Europe and Latin America covered business Year ended 31 December Opening MCEV New business value Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance Closing MCEV Return on MCEV (RoEV) % per annum Free surplus £m 2008 (11) (108) 1 – 136 (5) – 2 26 11 (34) 3 25 25 – 17 Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 50 (103) 522 113 MCEV £m 2008 572 10 Free surplus £m 2007 59 (103) 61 5 1 – – (6) – – – (17) 25 8 40 – 40 2 – 136 (11) – 2 26 (6) (9) 11 65 25 40 23 25 5 5 (136) (10) (22) 5 (22) (54) (5) (81) 146 – 146 587 – (21) (22) 7 4 (60) (14) (70) 211 25 186 713 0.6% – – 136 (2) – (5) 26 (2) (1) 23 (93) (88) (5) (11) 109 126 Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 MCEV £m 2007 56 4 1 – (3) (4) – (6) (8) 3 – (5) 10 – 10 61 115 (99) 1 – 133 (6) – (11) 18 1 (1) 18 (83) (88) 5 50 470 137 18 5 (133) (1) (49) 12 (11) (7) 25 7 45 – 45 522 585 38 19 5 – (7) (49) 1 7 (6) 24 25 (38) (88) 50 572 1.5% i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i The experience variances are mainly driven by expense overruns offset by positive mortality and morbidity experience. The main operating assumption changes related to strengthening of retention levels in Austria and revision of expense assumptions in Southern Europe and Italy. The other non-operating variance is mainly due to legislative changes that have been introduced in Germany in 2008 which speciﬁ es the proportion of miscellaneous proﬁ ts to be shared with policyholders. The capital and dividend ﬂ ows mainly represent capital injections into Southern Europe to support new business, dividends and repayments. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Euro. Page 301 NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 4 (iv) Analysis of covered business MCEV earnings (after tax) continued OMSA covered business* Year ended 31 December Opening MCEV New business value Expected existing business Free surplus £m 2008 Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 266 (81) 1,126 68 1,392 (13) 1,154 67 MCEV £m 2008 2,546 54 Free surplus £m 2007 Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 112 (75) 1,212 63 1,324 (12) 1,089 62 MCEV £m 2007 2,413 50 contribution (reference rate) 23 98 121 142 263 Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance 3 14 17 13 30 286 13 21 161 426 (139) – 287 (681) (640) (41) (130) (18) – (157) (125) 51 – (74) (19) – (19) 156 (5) 21 4 301 (88) – 213 (700) (640) (60) (156) (17) (18) (7) 24 (135) 18 (93) (21) – (21) – (22) 3 (3) 325 (223) 18 120 (721) (640) (81) 9 2 296 33 8 95 368 201 (1) 568 (414) (419) 5 92 101 131 232 17 19 8 (131) (30) – (120) (109) 21 – (88) 2 – 2 165 3 8 (25) 259 222 (1) 480 (412) (419) 7 (165) (19) (33) 34 18 8 33 59 6 – 6 27 – (16) (25) 9 277 230 32 539 (406) (419) 13 Closing MCEV (128) 1,033 905 1,040 1,945 266 1,126 1,392 1,154 2,546 Return on MCEV (RoEV) % per annum 14.4% 11.7% *The MCEV for South Africa is presented after the adjustment for market value of life funds’ investments in Group equity and debt instruments. The experience variances were driven by negative persistency experience and one-off and special project costs which were partially offset by favourable mortality and disability experience and positive maintenance expense experience. The main operating assumption changes related to maintenance expense savings being reﬂ ected in the updated assumptions and the positive impact of changes in annuitant mortality assumptions which were offset by the negative impact of changes to persistency assumptions that have been reviewed in light of the recent adverse experience. The other operating variances mainly include improvements in valuation models and methodology. The other non-operating variances relate to reduction in the corporate tax rate from 29 percent to 28 percent and the impact of changing the asset allocation backing required capital. The capital and dividend ﬂ ows mainly include dividend payments (net of dividends received from Nedbank and Mutual & Federal) and increased investment in Old Mutual plc loan notes and the purchase of additional shares in Nedbank and Mutual & Federal. These capital ﬂ ows arose from excess capital and did not adversely affect the solvency position of the South African life company. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Rand. Page 302 Old Mutual plc Annual Report and Accounts 2008 4 (iv) Analysis of covered business MCEV earnings (after tax) continued United States covered business Year ended 31 December Opening MCEV New business value Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) Transfers from VIF and required capital to free surplus Experience variances Assumption changes Other operating variance Operating MCEV earnings Economic variances Other non-operating variance Total MCEV earnings Closing adjustments Capital and dividend ﬂ ows Foreign exchange variance Closing MCEV Return on MCEV (RoEV) % per annum Free surplus £m 2008 81 (177) Required capital £m Adjusted net worth £m Value of in-force £m 2008 2008 2008 424 93 505 (84) (43) 18 MCEV £m 2008 462 (66) Free surplus £m 2007 64 (181) Required capital £m Adjusted net worth £m Value of in-force £m 2007 2007 2007 390 96 454 (85) 371 116 2 – 128 113 (74) – (8) (529) – (537) 713 651 62 257 12 14 10 24 1 1 20 21 (41) (58) – – 7 – – 7 153 – 153 584 87 55 (74) – (1) (529) – (530) 866 651 215 (87) (206) (425) 69 (601) (1,047) – (1,648) (459) – (459) – (151) (499) 69 (602) (1,576) – (2,178) 407 651 (244) 841 (2,150) (1,309) 3 – 115 84 26 18 65 (30) – 35 (18) (18) – 81 15 18 20 2 (59) (15) – – 39 – – 39 (5) – (5) 2 56 69 26 18 104 (30) – 74 (23) (18) (5) 424 505 16 (56) (99) (123) 53 (73) (333) – (406) (8) – (8) (43) MCEV £m 2007 825 31 38 18 – (30) (97) 71 31 (363) – (332) (31) (18) (13) 462 -121.4% 4.1% The segment results of United States include Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States Life Companies, and Old Mutual (Bermuda) Limited. The negative experience variances were largely driven by higher than expected lapses on the ﬁ xed deferred and indexed annuity products and by reinsurance deals which were priced to be broadly cost-neutral on a real-world basis. Other negative experience variances included lighter than expected mortality on the immediate annuity book and an expense overrun. There was an offsetting positive tax variance. The main operating assumption changes related to a strengthening of mortality assumptions on part of the immediate annuity book, changes to variable annuity reserving and increased expense assumptions. The capital and dividend ﬂ ows were mainly due to capital injections from Old Mutual plc during the year. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in US Dollar. Page 303 l i l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 5 Adjustments applied in determining total Group MCEV earnings before tax Analysis of adjusting items Year ended 31 December Covered Non-covered business business IFRS MCEV £m £m 2008 2008 Total Group MCEV £m 2008 Covered Non-covered business business IFRS MCEV £m £m 2007 2007 Income/(expense) Goodwill impairment and amortisation of non-covered business acquired intangible assets and impact of acquisition accounting Economic variances Other non-operating variances Acquired/divested business Closure of unclaimed share trust Dividends declared to holders of perpetual preferred callable securities Adjusting items relating to US Asset Management equity plans and minority holders Fair value gains on Group debt instruments Adjusting items – (2,480) (79) – – – – – (2,559) (12) (72) – 53 – 43 7 503 522 (12) (2,552) (79) 53 – 43 7 503 – (114) 48 (1) – – – – (2,037) (67) (11) (7) – 25 1 40 11 29 88 6 Other movements in net equity impacting Group MCEV Total Group MCEV £m 2008 – (281) Covered Non-covered business business IFRS MCEV £m £m 2007 2007 – – 21 (13) 18 13 29 68 39 (177) 3 9 36 (22) 52 102 (1) (49) (279) (395) (175) 5 5 26 (813) – – 102 (412) – – – – (310) Analysis of adjusting items Year ended 31 December Fair value gains/(losses) Net investment hedge Currency translation differences/exchange differences on translating foreign operations Aggregate tax effects of items taken directly to or transferred from equity Other movements Net income recognised directly into equity Dividend for the year Share buy back Net issues of ordinary share capital by the Company Exercise of share options Fair value of equity settled share options Other movements in net equity Covered Non-covered business business IFRS MCEV £m £m 2008 – – (7) – – (7) (22) – – – – (29) 2008 – (281) 59 (1) (49) (272) (373) (175) 5 5 26 (784) Page 304 Old Mutual plc Annual Report and Accounts 2008 Total Group MCEV £m 2007 (11) (121) 48 24 1 40 11 29 21 Total Group MCEV £m 2007 21 (13) 120 13 29 170 (373) (177) 3 9 36 (332) 7 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. Year ended 31 December IFRS net asset value* Adjustment to include long-term business on a statutory solvency basis Adjustment for market value of life funds’ investments Total £m 2008 UK £m 2008 Nordic £m 2008 ELAM £m 2008 5,907 2,064 1,323 1,228 (2,461) (1,200) (973) (576) in Group equity and debt instruments 236 – – – Adjustments to exclude acquisition of goodwill from the covered business (1,299) (586) (187) (526) MCEV adjusted net worth 2,383 278 163 126 Year ended 31 December IFRS net asset value* Adjustment to include long-term business on a statutory solvency basis Adjustment for market value of life funds’ investments Total £m 2007 UK £m 2007 Nordic £m 2007 6,199 2,017 1,222 ELAM £m 2007 945 (3,055) (1,160) (931) (490) in Group equity and debt instruments 492 – – – Adjustments to exclude acquisition of goodwill from the covered business MCEV adjusted net worth (1,215) 2,421 (581) 276 (169) 122 * 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: OMSA £m 2008 536 133 236 – 905 OMSA £m 2007 757 143 492 – Rest of Africa £m 2008 66 4 – – United States £m 2008 690 151 – – 70 841 Rest of Africa £m 2007 United States £m 2007 72 1,186 4 – – (621) – (60) 505 (405) 50 1,392 76 > 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 proﬁ ts 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 proﬁ ts have already been taken into account in the IFRS equity. Page 305 l i l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 8 Value of new business (after tax) The tables below set out the geographic analysis of the value of new business (VNB) after tax. New business proﬁ tability 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 percent of single premiums. As mentioned earlier for the South African business, healthcare administration business is no longer recognised as part of the VNB of covered business as previously reported under EEV. A similar consideration applies to other new business measures such as PVNBP and APE. Year ended Year ended 31 December 31 December £m £m 2008 2007 202 174 100 212 11 33 732 3,938 384 679 1,248 51 2,475 186 128 102 213 11 39 679 5,540 193 879 1,073 43 2,962 8,775 10,690 4,902 991 1,238 2,317 120 2,694 6,311 690 1,494 2,268 98 3,185 12,262 14,046 4.8 3.5 5.6 5.1 6.0 6.7 4.3 3.9 6.1 5.6 5.0 5.7 Annualised recurring premiums UK Nordic Europe and Latin America OMSA Rest of Africa United States Single premiums UK Nordic Europe and Latin America OMSA Rest of Africa United States PVNBP UK Nordic Europe and Latin America OMSA Rest of Africa United States PVNBP capitalisation factors* UK Nordic Europe and Latin America OMSA Rest of Africa United States Page 306 Old Mutual plc Annual Report and Accounts 2008 8 Value of new business (after tax) continued APE UK Nordic Europe and Latin America OMSA Rest of Africa United States VNB UK Nordic Europe and Latin America OMSA Rest of Africa United States PVNBP margin UK Nordic Europe and Latin America OMSA Rest of Africa United States APE margin UK Nordic Europe and Latin America OMSA Rest of Africa United States Year ended Year ended 31 December 31 December £m £m 2008 2007 596 213 168 336 17 281 740 147 190 321 15 335 1,611 1,748 67 32 10 54 7 (66) 81 23 38 50 7 31 104 230 1.4% 3.3% 0.8% 2.3% 5.8% -2.4% 0.8% 11.0% 15.0% 6.0% 16.0% 41.0% -23.0% 1.3% 3.3% 2.6% 2.2% 7.1% 1.0% 1.7% 11.0% 16.0% 20.0% 15.0% 47.0% 9.0% 6.0% 13.0% *The PVNBP capitalisation factors are calculated as follows: (PVNBP – single premiums/annualised recurring premiums). The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the South Africa long-term business, which amounted to £458 million in the year ended 31 December 2008 (year ended 31 December 2007: £435 million), is excluded as the proﬁ ts on this business arise in the asset management business. The value of new business also excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of in-force business. The value of new institutional investment platform pensions business written in the United Kingdom, the gross premium of which amounted to £239 million for the year ended 31 December 2008 (year ended 31 December 2007: £165 million), is excluded as this is more appropriately classiﬁ ed as mutual fund business. Page 307 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 9 Product analysis of new covered business premiums UK Year ended 31 December Total business Unit-linked assurance Life Nordic Year ended 31 December Total business Unit-linked assurance Life Europe and Latin America Year ended 31 December Total business Unit-linked assurance Life OMSA Year ended 31 December Total business Individual business Savings Protection Annuity Retail mass market Group business Savings Protection Annuity Rest of Africa Year ended 31 December Total business Individual business Savings Protection Annuity Retail mass market Group business Savings Protection Annuity Page 308 Old Mutual plc Annual Report and Accounts 2008 Recurring £m 2008 202 202 – Recurring £m 2008 174 174 – Recurring £m 2008 100 94 6 Recurring £m 2008 212 199 48 65 – 86 13 5 8 – Single £m 2008 3,938 3,938 – Single £m 2008 384 384 – Single £m 2008 679 401 278 Single £m 2008 1,248 595 451 – 143 1 653 423 1 229 Recurring £m 2007 186 183 3 Recurring £m 2007 128 128 – Recurring £m 2007 102 100 2 Recurring £m 2007 213 198 47 74 77 15 5 10 Recurring £m 2008 Single £m 2008 Recurring £m 2007 11 10 3 3 – 4 1 1 – – 51 27 26 – 1 – 24 21 – 3 11 10 3 3 4 1 1 – Single £m 2007 5,540 5,540 – Single £m 2007 193 193 – Single £m 2007 879 873 6 Single £m 2007 1,073 617 472 5 139 1 456 376 1 79 Single £m 2007 43 25 23 – 2 – 18 18 – – 9 Product analysis of new covered business premiums continued United States Year ended 31 December Total business Fixed deferred annuity Fixed indexed annuity Variable annuity Life Immediate annuity 10 Drivers of new business value* Total covered business** Year ended 31 December Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Exchange rate movements Margin at the end of the period UK covered business*** Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Margin at the end of the period Nordic covered business*** Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Margin at the end of the period Recurring £m 2008 33 – – – 33 – Single £m 2008 2,475 327 627 1,339 43 139 Recurring £m 2007 39 – – – 39 – PVNBP Margin % 2008 1.7 0.1 -0.2 0.0 -0.3 -0.3 -0.2 0.8 1.3 0.0 0.0 0.0 0.1 0.0 1.4 3.3 0.4 0.2 0.0 -0.5 -0.1 3.3 Single £m 2007 2,962 97 960 1,757 18 130 APE Margin % 2008 13.5 0.2 -1.8 0.0 -2.7 -2.6 -0.5 6.1 11.1 -0.5 0.2 0.0 1.0 -0.5 11.3 15.7 2.9 -0.2 0.0 -2.2 -0.9 15.3 Page 309 l i l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 10 Drivers of new business value* continued Total covered business** Year ended 31 December ELAM covered business*** Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Margin at the end of the period OMSA covered business*** Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Margin at the end of the period United States covered business*** Margin at the end of comparative period Change in volume Change in product mix Change in country mix Change in operating assumptions Change in economic assumptions Margin at the end of the period 2.6 2.2 PVNBP Margin % APE Margin % 2008 2008 20.4 -0.7 -0.3 0.0 -0.8 0.0 0.8 15.4 0.2 -0.1 0.0 0.1 -0.1 2.3 1.0 -0.2 -0.7 0.0 -1.3 -1.2 -2.4 -5.2 -1.9 -0.3 -6.8 -0.2 6.0 1.8 -0.7 0.0 0.5 -0.9 16.1 9.4 -2.1 -6.5 0.0 -12.7 -11.5 -23.4 * Prior year MCEV comparatives of drivers of new business value are not available as no restatement was performed for VNB and PVNBP in 2006. Also note that results for the ‘Rest of Africa’ are included in the drivers of new business value of total covered business, but that no separate analysis is shown for such business from a materiality perspective. **The PVNBP and APE percent margin changes are calculated in Sterling. ***The PVNBP and APE percent margin changes are calculated in local currency. Page 310 Old Mutual plc Annual Report and Accounts 2008 11 Sensitivity tests The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2008 and the value of new business for the year ended 31 December 2008 to changes in key assumptions. Note that no sensitivity results are shown for the ‘Rest of Africa’ from a materiality perspective. 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 ﬂ ows 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 ﬂ ows 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 pre-tax investment and economic assumptions and an increase/decrease in equity and property market values allow for the change in the time value of ﬁ nancial options and guarantees that form part of the investment guarantee reserves. 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 percent 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. UK 31 December MCEV £m 2008 Value of in-force Value of business new business £m £m 2008 2008 Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related 1,671 1,393 1,674 1,396 1,633 1,364 1,712 1,426 1,720 1,442 1,623 1,671 1,671 1,671 1,742 1,703 1,672 1,671 1,345 1,393 1,393 1,393 1,464 1,425 1,394 1,393 expenses increasing by 10 percent, with no corresponding increase in policy charges – – Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model 1,676 1,398 1,660 1,381 67 67 61 74 – – – 67 67 79 70 67 67 60 68 66 Page 311 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 11 Sensitivity tests continued Nordic 31 December Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model Europe and Latin America 31 December Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no increase in policy charges For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model Page 312 Old Mutual plc Annual Report and Accounts 2008 MCEV £m 2008 1,045 1,045 1,016 1,076 1,092 998 1,045 1,045 1,045 1,077 1,081 1,048 1,045 – 1,057 1,032 MCEV £m 2008 713 716 674 755 728 699 713 713 707 733 741 716 713 – 715 704 Value of in-force Value of business new business £m £m 2008 882 882 853 914 929 835 882 882 882 914 918 885 882 – 894 869 2008 32 32 31 33 – – – 32 32 40 35 33 32 31 34 31 Value of in-force Value of business new business £m £m 2008 587 591 549 628 602 574 587 587 581 607 615 590 587 – 589 578 2008 10 10 5 16 – – – 10 10 13 13 10 10 7 10 10 11 Sensitivity tests continued OMSA 31 December MCEV £m 2008 Value of in-force Value of business new business £m £m 2008 2008 Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 1,945 1,040 1,968 1,064 1,920 1,014 1,967 1,064 2,035 1,094 Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding 1,858 1,948 1,920 1,919 1,975 2,020 increase in policy charges 2,007 Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges* 1,932 For value of new business, acquisition expenses other than commission and commission related 990 1,040 1,015 1,015 1,071 1,115 1,102 1,027 expenses increasing by 10 percent, with no corresponding increase in policy charges – – Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model 1,968 1,063 1,927 1,023 *No impact on with-proﬁ t annuities as the mortality risk is borne by policyholders. 54 56 52 55 – – – 54 54 63 60 61 54 48 56 53 Page 313 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 11 Sensitivity tests continued United States 31 December MCEV £m 2008 Value of in-force Value of business new business £m £m 2008 2008 Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Increasing all pre-tax investment and economic assumptions by 3 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 3 percent, with credited rates and discount rates changing commensurately Recognising the present value of an additional 1 percent of credit and liquidity spreads on corporate bonds over and above the risk free reference rate over the lifetime of the liabilities with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre–tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre–tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related (1,309) (2,150) (1,308) (2,148) (1,177) (2,017) (66) (66) (36) (1,494) (2,335) (128) (883) (1,723) 41 (1,874) (2,715) (274) (610) (1,450) (36) (1,276) (2,116) (1,339) (1,246) (1,698) (1,217) (1,289) (2,180) (2,087) (2,539) (2,058) (2,129) (1,298) (1,329) (2,139) (2,169) expenses increasing by 10 percent, with no corresponding increase in policy charges – – Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model (1,221) (2,062) (1,345) (2,186) Page 314 Old Mutual plc Annual Report and Accounts 2008 – – – (87) (62) (63) (64) (66) (72) (51) (71) 11 Sensitivity tests continued The 2007 tables are as follows: UK 31 December MCEV £m 2007 Value of in-force Value of business new business £m £m 2007 2007 Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related 1,531 1,255 1,536 1,260 1,497 1,230 1,566 1,282 1,575 1,299 1,488 1,531 1,531 1,531 1,587 1,556 1,532 1,531 1,212 1,255 1,255 1,255 1,311 1,280 1,256 1,255 expenses increasing by 10 percent, with no corresponding increase in policy charges – – Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model 1,543 1,267 1,510 1,234 81 81 75 89 – – – 81 81 96 84 82 81 72 84 77 Page 315 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 11 Sensitivity tests continued Nordic 31 December Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model Value of in-force Value of business new business £m £m MCEV £m 2007 1,114 1,110 1,092 2007 992 988 970 1,137 1,016 1,183 1,061 1,045 1,114 1,114 1,114 1,142 1,145 1,116 1,114 – 923 992 992 992 1,020 1,023 994 992 – 1,131 1,009 1,100 978 2007 23 23 22 24 – – – 23 23 29 25 23 23 22 24 22 Europe and Latin America 31 December Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model Page 316 Old Mutual plc Annual Report and Accounts 2008 MCEV £m 2007 572 571 546 598 588 556 572 572 571 591 588 574 572 – 576 562 Value of in-force Value of business new business £m £m 2007 522 521 497 547 538 507 522 522 521 541 538 524 522 – 526 512 2007 38 38 33 43 – – – 38 38 41 41 38 38 36 38 37 11 Sensitivity tests continued OMSA 31 December MCEV £m 2007 Value of in-force Value of business new business £m £m 2007 2007 Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in equity and property implied volatilities 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges* 2,546 1,154 2,575 1,182 2,522 1,127 2,568 1,178 2,693 1,210 2,398 2,549 2,526 2,540 2,577 2,625 1,096 1,154 1,134 1,147 1,185 1,233 2,600 1,208 2,537 1,145 For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges – – Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model 2,567 1,175 2,530 1,138 *No impact on with-proﬁ t annuities as the mortality risk is borne by policyholders. 50 52 48 50 – – – 50 50 57 55 57 49 44 51 48 Page 317 l i l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued Value of in-force Value of business new business £m £m 2007 2007 (43) (20) (252) 75 (22) (42) (44) (11) (99) 31 (40) (41) (58) – (12) (56) 31 37 52 2 52 – – – (17) 56 35 32 23 25 41 27 11 Sensitivity tests continued United States 31 December Central assumptions Effect of: Required capital equal to the minimum statutory requirement Increasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 percent, with credited rates and discount rates changing commensurately Recognising the present value of an additional 1 percent of credit and liquidity spreads on corporate bonds over and above the risk free reference rate over the lifetime of the liabilities, with credited rates and discount rates changing commensurately Equity and property market value increasing by 10 percent, with all pre-tax investment and economic assumptions unchanged Equity and property market value decreasing by 10 percent, with all pre-tax investment and economic assumptions unchanged 10bps contraction on corporate bond spreads 25 percent multiplicative increase in swaption implied volatilities Voluntary discontinuance rates decreasing by 10 percent Maintenance expense levels decreasing by 10 percent, with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 percent, with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 percent, with no corresponding increase in policy charges For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10 percent, with no corresponding increase in policy charges Residual non-hedgeable risk capital reduced to incorporate diversiﬁ cation beneﬁ ts between hedgeable and non-hedgeable risks for covered business Economic capital for residual non-hedgeable risks calculated assuming a 99.93 percent conﬁ dence level which is targeted by an internal economic capital model MCEV £m 2007 462 485 253 580 754 463 461 494 406 536 465 464 447 – 493 449 Page 318 Old Mutual plc Annual Report and Accounts 2008 12 Key changes in MCEV methodology and assumptions Notes 2 and 3 describe the methodology and assumptions used under the MCEV reporting framework. The major change in Old Mutual’s overall approach for deriving its MCEV compared to the approach adopted for EEV is the allowance for risk. Under MCEV a bottom-up allowance is made for ﬁ nancial risks (in particular asset and liability cash ﬂ ows are valued using risk discount rates consistent with those applied to similar cash ﬂ ows in the capital markets and ﬁ nancial options and guarantees are valued using market consistent models calibrated to observable market prices) and an explicit allowance is made for the cost of residual non-hedgeable risks in the covered business. In contrast, under EEV a top-down allowance was made for all risks by means of the risk margin included in the single risk discount rate applicable for each geography and the value placed on the time value of ﬁ nancial options and guarantees. The MCEV methodology therefore makes a more granular allowance for the differences in the risk proﬁ le of different blocks of business than the EEV methodology. A summary of the key changes arising in the move from the EEV to MCEV reporting framework previously adopted is set out in the table below. EEV MCEV Overall allowance for risk Economic assumptions Risk discount rates are calibrated to produce EEV results which are equal to an Embedded Value that is approximated using bottom-up market consistent techniques that were considered acceptable market practice at the time of implementation of the EEV Principles in May 2005. Investment return assumptions are set with reference to real-world assumptions, which include allowance for expected risk premiums on assets such as equities and corporate bonds, without directly adjusting for the risk inherent in these returns. A margin is added to the discount rate to reﬂ ect the risks within the business. Treatment of unrealised Any decrease/increase in credit spreads has corporate bond gains/ a limited impact on Embedded Value as only losses for US business the assets backing the adjusted net worth, which in the past were largely cash assets, are marked to market. For example, an increase in credit spreads would be modelled as follows: > On existing assets the only losses capitalised would be on realised losses on projected sale of assets. > For new bond purchases credit is taken for the increased spread which is recognised as higher expected future income within VIF, offsetting some of the losses on the sale of existing assets. The aggregate allowance for risk across all businesses under EEV is not aligned with the requirements under the new MCEV Principles. Both investment return and discount rate assumptions are set in relation to risk free reference rates, deﬁ ned as swap yields. As a result of current dislocated markets, adjusted risk free reference rates for US onshore business include a liquidity adjustment at 31 December 2008 to reﬂ ect the large liquidity premium inherent in corporate bond spreads at that date. No up-front value is placed on any risk premiums in excess of the adjusted risk free reference rates. Such risk premiums are only recognised in MCEV reporting as and when they are earned. All assets are marked-to-market. Since investment return assumptions are set with reference to swap rates, any increase in credit spreads will have a direct impact on the Embedded Value to the extent that such losses can not be passed onto policyholders through changes in future bonus /crediting rates (where these are set subject to contractual guarantees and taking into account competitive considerations and consequent lapse activity) over the remaining lifetime of the in-force policies. Valuation of time value of ﬁ nancial options and guarantees Not all stochastic models are required to be market MCEV reporting requires the use of market consistent stochastic models with volatility assumptions being set consistent with real world stochastic models being with reference to market implied volatilities, as derived used in the US. from derivative quotes in the capital markets for the relevant term and instrument type. Cost of capital vs. frictional costs EEV includes allowance for the ‘cost of required capital’. MCEV explicitly allows for frictional costs, deﬁ ned as the tax and investment expenses associated with required capital. Cost of residual non-hedgeable risks No explicit allowance is made for such risks, although an implicit allowance is permitted in the risk discount rate for each geography. Explicit allowance is made for the cost of these risks which represents a charge for the uncertainty arising in the best estimate of shareholder cash ﬂ ows resulting from such residual non-hedgeable risks. Page 319 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 12 Key changes in MCEV methodology and assumptions continued EEV MCEV PVNBP Under EEV the PVNBP is calculated by discounting Discounting uses term dependent risk free reference rates. the projected premiums using single risk discount rate applicable in each geography. As risk discount rates used under EEV are on average greater than the risk free reference rates used under MCEV, MCEV provides an increase in PVNBP and a corresponding decrease in PVNBP margins (assuming all other things including VNB being equal). Presentation of earnings The EEV Principles do not prescribe the format of the presentation of earnings. The expected existing business contribution is calculated as the sum of the unwind of the VIF at the risk discount rate and the expected real world returns on the adjusted net worth. Sensitivities EEV Principles prescribe less mandatory sensitivities than the MCEV Principles. Adjusted Group MCEV The treatment of all business other than the covered business is the same as in the primary ﬁ nancial statements. MCEV Principles prescribe the formats for the presentations of analyses of MCEV earnings and Group MCEV earnings. The following material changes in the presentation of the analyses of MCEV earnings have been adopted: > MCEV calculates the expected existing business contribution 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 for the 1-year period. > Contrary to previous EEV treatment, the impact of changes in local regulations and taxation are excluded from operating MCEV earnings. > Changes and improvement to models and methodology are reﬂ ected as other operating variances rather than being included as part of operating assumption changes. Apart from the mandatory sensitivities, a number of additional sensitivities are disclosed in order for users of the supplementary information to better understand the impact of adopting MCEV. Adjusted Group MCEV includes the impact of marking all Group debt to market value, the market value of the Group’s listed banking and general insurance subsidiaries as well as marking the value of deferred consideration due in respect of the Black Economic Empowerment arrangements in South Africa (‘ the BEE schemes’) to market. 13 Restatement of adjusted Group Embedded Value per share The table below provides a restatement of the adjusted Group Embedded Value per share as at 31 December 2007 from an EEV to MCEV basis. Previously published adjusted Group EEV per share Change in Embedded Value of covered business as a consequence of the move to MCEV Marking the present value of future BEE scheme deferred consideration to market Adjustment to bring external debt to market value Total impact Adjusted Group MCEV per share Percentage impact At 31 December 2007 173.3p -9.4p +0.2p +2.2p -7.0p 166.3p -4.2% The change in the adjusted Group Embedded Value per share from 173.3p on an EEV basis to 166.3p on an MCEV basis is driven mainly by the change in the Embedded Value of the covered business which is analysed in detail in note 15. Page 320 Old Mutual plc Annual Report and Accounts 2008 14 Restatement of adjusted Group MCEV operating earnings per share The table below provides a restatement of the adjusted Group operating earnings per share for the year ended 31 December 2007 from an EEV to MCEV basis. Previously published adjusted Group EEV operating earnings per share Change in operating earnings of covered business as a consequence of the move to MCEV Adjusted Group MCEV operating earnings per share Percentage impact Year ended 31 December 2007 17.2p -0.2p 17.0p -1.2% The conversion from EEV to MCEV reporting has no impact on the operating earnings of our non-life business and hence the small change in the adjusted Group operating earnings per share from 17.2p on an EEV basis to 17.0p on an MCEV basis is driven entirely by the change in the operating earnings of the covered business which is analysed in more detail in note 18. 15 Restatement of Embedded Value of covered business The tables below reconcile the Embedded Value of the covered business as at 31 December 2007 and 31 December 2006 from the previously published EEV basis to the MCEV basis. The transition from the top-down real-world EEV approach to the bottom-up MCEV approach can be broken down into the following key steps: a. Release of cost of required capital in published EEV – The cost of required capital under the previous EEV approach is released and this component of EEV is replaced by frictional costs (see step c) under the MCEV approach. This step increases the Embedded Value. b. Economic assumption changes incorporate a combination of the following: > Any risk margins in the single weighted average EEV discount rate for each of the geographies are removed and the EEV discount rates are replaced by term dependent risk free reference rates. This step increases the Embedded Value for proﬁ table business as expected future proﬁ ts are discounted at lower rates, and gives rise to a greater Embedded Value loss for loss making business, as a result of discounting losses at lower rates. > Any risk margins in real-world EEV investment return assumptions are removed and the real-world EEV investment return assumptions are replaced by term dependent risk free reference rates and thereby removing any capitalisation of investment risk margins. This step decreases the Embedded Value as expected future investment returns are projected at lower rates. > Other related model reﬁ nements including updating all stochastic models to be market consistent. For the United States business such model reﬁ nements also include a revision of assumptions for dynamic policyholder behaviour within the stochastic models to allow for lower average returns from risk-neutral market consistent scenarios compared to the scenarios in the real-world stochastic model that was used under EEV. c. Allowance for frictional costs – As mentioned in step (a) above, the cost of required capital under the previous EEV approach is released and replaced by an allowance for frictional costs under the MCEV approach. This step decreases the Embedded Value. d. Explicit allowance for cost of residual non-hedgeable risks – Previously under the EEV approach an implicit allowance was permitted for such risks in the determination of the risk discount rate for each geography. This step decreases the Embedded Value. In-force covered business 31 December Previously published EEV Release of cost of required capital in published EEV Economic assumption changes Allowance for frictional costs Allowance for cost of residual non-hedgeable risks Total impact MCEV Total £m 2007 6,861 377 (433) (192) (264) UK £m 2007 1,451 50 80 (10) (40) Nordic £m 2007 1,084 27 69 (9) (57) (512) 80 30 ELAM £m 2007 580 30 13 (10) (41) (8) OMSA Rest of Africa United States £m £m £m 2007 2007 2007 2,549 175 12 (122) (68) (3) 128 4 (1) (2) (5) (4) 124 1,069 91 (607) (38) (53) (607) 462 6,349 1,531 1,114 572 2,546 Percentage impact -7.5% +5.5% +2.8% -1.4% -0.1% -3.1% -56.8% Page 321 i l l s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 15 Restatement of Embedded Value of covered business continued In-force covered business 31 December Previously published EEV Release of cost of required capital in published EEV Economic assumption changes Allowance for frictional costs Allowance for cost of residual non-hedgeable risks Total impact MCEV Percentage impact *Gross of minority interests. Total* £m 2006 6,413 393 (225) (186) (250) UK* £m 2006 1,255 69 50 (14) (35) (268) 70 6,145 1,325 Nordic* £m 2006 846 23 56 (8) (54) 17 863 ELAM* £m 2006 600 49 (8) (9) (47) (15) OMSA Rest of Africa United States* £m £m £m 2006 2006 2006 2,433 179 – (129) (70) (20) 135 4 2 (2) (5) (1) 134 1,144 69 (325) (24) (39) (319) 825 585 2,413 -4.2% +5.6% +2.0% -2.5% -0.8% -0.7% -27.9% The impact as at 31 December 2007 of moving from an EEV to an MCEV methodology is a reduction in Embedded Value of the covered business of 7.5 percent (31 December 2006: 4.2 percent) from £6,861 million to £6,349 million (31 December 2006: from £6,413 million to £6,145 million). Most of the reduction in Embedded Value is attributable to the United States business which decreased by -56.8 percent at 31 December 2007 (31 December 2006: -27.9 percent) from £1,069 million to £462 million (31 December 2006: from £1,144 million to £825 million). The frictional costs calculated under MCEV are signiﬁ cantly less than the cost of required capital under EEV which reﬂ ects the difference between the risk discount rate in each geography, inclusive of an explicit risk margin, and the expected post-tax investment return on the assets backing the required capital. Under MCEV risks are modelled explicitly and the risk margin in each geography is not required. The impact of the transition from EEV to MCEV also varies by product type. Under EEV a weighted average risk discount rate was applied to all products within a speciﬁ c geography whereas under MCEV separate explicit allowances are made for ﬁ nancial and non-ﬁ nancial risks for each product. > Risk products, for example term assurance, generally increase in value under MCEV compared to EEV. Product proﬁ tability is mainly driven by non-ﬁ nancial pricing margins which are discounted at lower risk free reference rates under MCEV. > The impact on savings products, for example unit-linked policies, is broadly neutral as the reduced assumed future investment returns which are set in relation to risk free reference rates are largely offset by the increase in value due to the lower discount rates (which are also set in relation to risk free reference rates) that are applied to future cash ﬂ ows. > Products with a high proportion of ﬁ nancial risk, for example spread-based contracts such as immediate annuities where proﬁ tability relies on achieving a return in excess of the risk free reference rates to support the pricing bases, tend to reduce in value under MCEV. No risk premiums in excess of the risk free reference rates are recognised under MCEV until realised in a particular year, when it emerges as a combination of expected existing business contribution and economic variance in that year. In contrast EEV recognises the capitalised expected proﬁ ts from taking on ﬁ nancial risk, i.e. capitalises returns on more risky assets, without necessarily making appropriate adjustments at a per product level for the fact that the returns under these assets have a greater degree of inherent risk. Further commentary on the impact of moving from an EEV to an MCEV methodology for each geography, in particular for United States business, is provided below. Europe and Africa Within the European and African businesses, the aggregate allowance for risk within the EEV and MCEV approaches is broadly aligned and hence relatively minor impacts are experienced on these businesses when moving from an EEV to an MCEV approach for valuing the covered business. United States The aggregate allowance for risk under EEV was not aligned with the requirements under the new MCEV Principles and the major contributors are discussed below. > Treatment of unrealised corporate bond losses – Under EEV any increase in credit spreads has a limited impact on Embedded Value as only the assets backing the adjusted net worth, which in the past were largely cash assets, are marked to market. This methodology is largely driven by the book-value accounting basis used for statutory reporting in the United States. Therefore on existing assets the only losses capitalised following an increase in credit spreads would be on realised losses on projected sale of assets. The EEV is only reduced to the extent that the losses realised in the projections are not passed on to policyholders by reducing future crediting/bonus rates (subject to contractual guarantees and competitive considerations that impact on policyholder persistency behaviour) over the remaining lifetime of the in-force policies. For new bond purchases credit is taken from the increased spread which is recognised as higher expected future income within VIF, offsetting some of the losses on existing assets. Page 322 Old Mutual plc Annual Report and Accounts 2008 15 Restatement of Embedded Value of covered business continued – However under MCEV all assets are marked-to-market and any increase in credit spreads will be fully recognised in the value of the asset portfolio. Since investment return assumptions are set with reference to swap rates under MCEV, in the modelling of future liability cash ﬂ ows such losses can not necessarily be passed onto policyholders through changes in future crediting (bonus) rates, which are subject to contractual guarantees and constrained by competitive considerations, over the remaining lifetime of the in-force policies. > Pricing basis vs. MCEV basis – Many of the United States Life products are priced on the basis that a part of the spread between risk free or swap rates and corporate bonds will be passed onto policyholders in the form of better crediting (bonus) rates. The spread of corporate bond yields over risk free rates is assumed to consist of both a credit default component and a non-credit component. The credit default component compensates the holder of the instrument for the risk that the issuer may default. The non-credit related component, generally referred to as the liquidity premium, compensates the holder of the instrument for the fact that they may not be able to trade out of the instrument at their choosing. – For many of the products sold by the US business, proﬁ tability therefore depends on the spread, over risk free rates, earned on corporate bond assets. For such spread-based business, there is no recognition in the MCEV at 31 December 2007 or 31 December 2006 of any liquidity or credit risk premiums in excess of risk free reference rates until such proﬁ ts have been realised. The earnings from corporate bond spreads in excess of the risk free reference rates, which had previously been capitalised at point of sale under EEV, are now only recognised as an additional source of earnings in each future time period as the margin over risk free reference rates is earned. Hence the timing of recognition of proﬁ ts under EEV and MCEV for such business is materially different. – A similar issue occurs with the deferred tax assets currently held. As earnings are expected to emerge over time, it is anticipated that these assets could be utilised to offset future tax liabilities. However since in the current economic environment taxable proﬁ ts are not projected in aggregate on an MCEV basis, these deferred tax assets are not recognised in the MCEV. Hence it is expected that the beneﬁ t of this asset will emerge over future periods as returns in excess of risk free reference rates are earned. – It is important to appreciate that the change in reporting basis does not change the underlying proﬁ tability of spread-based business, but merely the representation of proﬁ tability, particularly early in the life of such contracts. > Financial guarantees – To expand further on why the impact of the move to MCEV reporting is so marked on spread-based business, crediting (bonus) rates are generally set with anticipation of earning some risk premiums over and above the risk free reference rates. However this non-recognition of projected investment risk premiums under MCEV reporting can not necessarily be offset by reduced policyholder crediting rates as, once these crediting rates are locked in or guaranteed over a future period, they must be valued at that level. For example, for annuities in payment claim payments are locked in for the duration of the contract at a level which was priced taking into account the expected future corporate bond spreads to be earned. Hence an initial loss will be shown under MCEV as the annuity payments are larger than can be supported by risk free reference returns on the asset portfolio on a prospective basis, and the Embedded Value valuation assumes that none of these future margins are earned. – For other spread-based products (such as ﬁ xed indexed annuities where there is an accumulation phase), the loss of capitalised risk premiums upfront can be partially offset to the extent that crediting (bonus) rates are not ﬁ xed for the full term of the contract and that management can adjust future crediting rates relative to modelled investment returns – generally aiming to target a margin to cover proﬁ t and expenses. However future investment returns based on risk free reference rates are much lower than expected real-world returns, which means that any underlying guarantees in the policies (including any crediting rates that have been declared prospectively until the next reset date) are more likely to take effect in risk-neutral market consistent stochastic scenarios. There may thus be a shortfall of projected proﬁ ts relative to proﬁ ts that are expected to emerge on a real world pricing basis, which we refer to as ‘spread compression’. Additionally some of the deferred annuities still have crediting rates locked in for several years (e.g. Multi-Year Guaranteed Annuities). – Market volatility assumptions that are used to calculate the time value of ﬁ nancial options and guarantees under MCEV are higher than the long-term expected volatilities assumed under EEV. This has increased the time value of ﬁ nancial options and guarantees under MCEV. > Discounting of projected MCEV losses – Under MCEV reporting the discount rate is set in relation to risk free reference rates which are lower than the risk discount rates used under EEV reporting. In the instance where low risk free projected investment returns under MCEV lead to lower investment income, but overall still reﬂ ect proﬁ table products, the discounting effect of using a lower rate tends to offset the removal of the risk premium in investment returns. However in instances where low risk free projected investment returns under MCEV lead to a projected loss on the business, the resulting losses are also discounted at a lower rate, which has the effect of increasing the present value of the projected future losses. – As a consequence, MCEV results at a time of very low risk free reference rates of return need to be carefully considered: • An increase in risk free yields can rapidly turn a market consistent VIF that is negative into a positive VIF if the risk free reference rate starts at a level below guaranteed crediting (bonus) rates and increases to one which leads to a surplus in investment income relative to crediting rates. • In the event that an increase in risk free reference rates does not fully cover the required guaranteed crediting rate, the resulting loss will still be smaller than the starting point, and the effect of discounting this at a higher rate could be that the VIF loss reduces substantially. • There is hence a severely ‘non-linear’ outcome when risk free reference rates are close to guaranteed crediting rates, with small changes in risk free rates (up or down) leading to large changes in VIF. Page 323 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 15 Restatement of Embedded Value of covered business continued Considering the above, the more pronounced impact of the move from EEV to MCEV reporting at 31 December 2007 of -7.5 percent compared to the impact at 31 December 2006 of -4.2 percent results mainly from the following changes in economic conditions: > A widening of corporate bond spreads and reductions in market values of such assets – marking all assets to market value means that unrealised capital losses are no longer expected to remain largely unrealised even if portfolio cash ﬂ ow matching means that those assets are held to maturity. Or practically, it is assumed that at 31 December 2007 a larger portion of corporate bond assets will default before maturity than assumed at 31 December 2006. > Reductions in risk free reference rates and as a consequence all guarantees being in the money to a greater extent. > An increase in implied market volatilities which are used to assess the time value of ﬁ nancial options and guarantees, relative to the real-world approach of using historic volatilities that was previously adopted under EEV. In conclusion, compared to EEV reporting, MCEV reporting merely changes the timing of recognition of proﬁ ts and not the ultimate proﬁ tability that will emerge on covered business. Over time it is therefore expected that risk premiums in excess of risk free reference rates will be realised and will contribute to MCEV earnings. 16 Comparison of components of Embedded Value on EEV and MCEV bases The tables below provide a comparison of the components of Embedded Value of the covered business as at 31 December 2007 and 31 December 2006 between the previously published EEV basis and the MCEV basis. The change in MCEV to a bottom-up evaluation of the risks inherent in the business requires a change in the presentation of the components underlying the MCEV. In-force covered business 31 December Total £m 2007 UK £m 2007 Nordic £m 2007 ELAM £m 2007 Previously published EEV 6,861 1,451 1,084 580 2,549 OMSA Rest of Africa United States £m £m £m 2007 2007 128 2007 1,069 Adjusted net worth Free surplus Required capital Value of in-force business Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Cost of required capital MCEV Adjusted net worth Free surplus* Required capital 2,423 516 1,907 276 89 187 4,438 1,175 4,864 1,225 (49) (377) (0) (50) 122 47 75 962 989 – (27) 50 (12) 62 530 561 (1) (30) 1,394 268 1,126 1,155 1,330 – (175) 76 43 33 52 56 – (4) 6,349 1,531 1,114 572 2,546 124 2,421 515 1,906 276 89 187 122 47 75 992 Value of in-force business 3,928 1,255 Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non-hedgeable risks 4,583 1,305 1,059 (199) (192) (264) – (10) (40) – (10) (57) 50 (11) 61 522 574 (1) (10) (41) 1,392 266 1,126 1,154 1,344 (0) (122) (68) 76 43 33 48 55 (0) (2) (5) *For the South African business, the value of the asset related to the deferred CGT liability recognised in the adjusted net worth was recalculated on a market consistent basis. Page 324 Old Mutual plc Annual Report and Accounts 2008 505 81 424 564 703 (48) (91) 462 505 81 424 (43) 246 (198) (38) (53) 16 Comparison of components of Embedded Value on EEV and MCEV bases continued In-force covered business 31 December Previously published EEV Adjusted net worth Free surplus Required capital Total £m 2006 UK* £m 2006 6,413 1,255 2,104 202 1,902 235 73 162 Value of in-force business 4,309 1,020 Nordic* £m 2006 846 (108) (154) 46 954 Present value of future proﬁ ts Additional time value of ﬁ nancial options 4,780 1,089 1,004 and guarantees Cost of required capital MCEV Adjusted net worth Free surplus* Required capital (51) (420) – (69) 6,145 1,325 2,102 199 1,903 235 73 162 Value of in-force business 4,043 1,090 – (50) 863 (108) (154) 46 971 Present value of future proﬁ ts Additional time value of ﬁ nancial options and guarantees Frictional costs Cost of residual non-hedgeable risks 4,644 1,139 1,033 (165) (186) (250) – (14) (35) – (8) (54) ELAM* £m 2006 600 115 59 56 485 538 (4) (49) 585 115 59 56 470 531 (5) (9) (47) OMSA** Rest of Africa United States £m £m £m 2006 2,433 1,326 115 1,211 1,107 1,286 – (179) 2,413 1,324 112 1,212 1,089 1,333 (45) (129) (70) 2006 135 2006 1,144 82 45 37 53 57 – (4) 134 82 45 37 52 60 (1) (2) (5) 454 64 390 690 806 (47) (69) 825 454 64 390 371 548 (114) (24) (39) *Gross of minority interests. **For the South African business, the value of the asset related to the deferred CGT liability recognised in the adjusted net worth was recalculated on a market consistent basis. Page 325 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i NOTES TO THE OLD MUTUAL MARKET CONSISTENT EMBEDDED VALUE BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2008 continued 17 Restatement of value of new business (after tax) of covered business The table below reconciles the value of new business and new business margins for the year ended 31 December 2007 from the previously published EEV basis to the MCEV basis. The same steps have been applied in the reconciliations as for the total in-force covered business as set out in note 15. Total £m 2007 266 32 (9) (20) (39) (36) 230 Value of new business 31 December Previously published VNB under EEV basis Release of cost of required capital in published EEV basis Economic assumption changes Allowance for frictional costs Allowance for cost of residual non-hedgeable risks Total impact VNB on MCEV basis Percentage impact % EEV PVNBP EEV APE EEV PVNBP margin % EEV APE margin % MCEV PVNBP MCEV APE MCEV PVNBP margin % MCEV APE margin % UK £m 2007 Nordic £m 2007 ELAM £m 2007 OMSA* Rest of Africa United States £m £m £m 2007 2007 2007 76 2 10 – (7) 5 81 19 2 7 (1) (4) 4 23 38 3 2 (2) (3) 1 38 53 11 – (8) (6) (4) 50 8 – – – (1) (1) 7 -13.6 6.6 21.1 2.7 -6.7 -10.4 13,878 1,760 1.9 15 14,046 1,748 1.7 13 6,297 740 1.2 10 6,311 740 1.3 11 643 147 2.9 13 690 147 3.3 16 1,465 190 2.5 20 1,494 190 2.6 20 2,224 333 2.4 16 2,268 321 2.2 15 99 15 7.9 51 98 15 7.1 47 72 14 (28) (9) (18) (41) 31 -56.9 3,150 335 2.3 21 3,185 335 1.0 9 *Note that OMSA healthcare administration business was included in the EEV basis, but is excluded on an MCEV basis. The impact on VNB of the covered business written in 2007 due to moving from an EEV to MCEV basis is a decrease of 13.6 percent from £266 million to £230 million. Most of the reduction is attributable to the United States business where VNB decreased by 56.9 percent from £72 million to £31 million. The EEV risk discount rate for each geography was calibrated for total in-force business and hence the EEV methodology did not make allowance for different levels of risk for different portfolios of asset and liability risks. The MCEV methodology makes a more granular allowance for the differences in the risk proﬁ le of different product lines and different generations of policies. The relative impacts on VNB of each of the steps outlined above therefore differ from the impacts on VIF as outlined in note 15 because the risk proﬁ les of new business are different to the risk proﬁ les of in-force business. Also note that in calculating PVNBP, the projected premiums are discounted with risk free reference rates under MCEV rather the higher risk discount rate which is applicable in each geography under the previous EEV methodology. PVNBP under MCEV reporting is therefore greater than under EEV reporting with a corresponding decrease in PVNBP margins (assuming all other things including VNB being equal). Page 326 Old Mutual plc Annual Report and Accounts 2008 18 Restatement of Return on Embedded Value of covered business Return on Embedded Value (RoEV) for covered business is calculated as the operating earnings after tax divided by opening Embedded Value in local currency. The table below provides summaries of the drivers in the change of RoEV for the year ended 2007 from the previously published EEV basis to the MCEV basis. For this purpose the impact on RoEV of the recalibration of risk margins under EEV has been treated as an assumption change. No results are shown for the ‘Rest of Africa’ from a materiality perspective. In-force covered business 31 December Previously published RoEV% on an EEV basis MCEV RoEV% Difference Drivers of change for the covered business: New business value Expected existing business contribution Experience variances Assumption changes Other operating variances* UK % 2007 17.2 15.5 -1.7 0.0 0.5 0.5 -2.7 0.0 Nordic % 2007 4.6 7.6 3.0 0.4 -0.9 1.2 2.4 0.0 ELAM % 2007 6.1 1.5 -4.6 0.4 -0.3 0.3 -5.2 0.2 OMSA United States % % 2007 11.2 11.7 0.5 -0.2 1.2 -0.6 0.3 0.4 2007 3.8 -4.1 0.3 -2.5 0.6 -1.5 -5.2 8.9 * Changes and improvement to models and methodology are reﬂ ected as other operating variances under MCEV rather than being included as part of assumption changes as treated under EEV. The impact on VNB as a result of moving from an EEV to MCEV basis has been outlined in note 17. Other key drivers of the change in RoEV for each geography are discussed below. UK and ELAM As mentioned earlier in note 12, contrary to previous EEV treatment, the impact of changes in taxation under MCEV is excluded from operating earnings. Such reallocation of tax changes to non-operating variances is the major reason for the signiﬁ cantly reduced contribution of assumption changes. Nordic The contribution from assumptions changes is impacted positively by treating the negative impact of the recalibration of risk margins under EEV as an assumption change. In addition the impact from the introduction of annuitisation of the corporate business is higher under MCEV than under EEV since the MCEV effects are discounted at risk free reference rates rather than the higher risk discount rate under EEV. South Africa The major reasons for the change in RoEV from an EEV to MCEV basis is the signiﬁ cantly higher expected existing business contribution. As mentioned earlier in note 3, the expected existing business contribution under MCEV is now derived with reference to the one-year forward risk free reference rate at the start of the reporting period as opposed to the 10-year government bond yield curve. The downwards sloping swap yield curve in South Africa therefore leads to a higher expected existing business contribution under MCEV. United States The positive impact of model improvements and changes in methodology on an MCEV basis has been re-classiﬁ ed from assumption changes to other operating variances. Going forward, rates of return on Embedded Value for the US should be higher than under EEV as the opening MCEV is starting from a much lower base value compared to EEV and, other things being equal, higher actual operating earnings will emerge than projected under MCEV at the valuation date as corporate bond credit spreads are realised and margins (such as the cost of residual non-hedgeable risks) are released. Page 327 l l i s a c n a n ﬁ V s E a C c M n a n ﬁ V E C M i 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. The high and low prices at which the Company’s shares are recorded as having traded on the two main markets on which they were listed during 2008 and 2007 were as follows: London Stock Exchange JSE High 2008 Low 2008 High 2007 Low 2007 169.3p R20.15 39.0p R6.97 187.5p 144.0p R26.23 R20.94 At 31 December 2008, the geographical analysis and shareholder proﬁ le of the Company’s share register were as follows: Register UK South Africa Zimbabwe Namibia Malawi Treasury shares (UK) Total Source: Computershare Investor Services Size of holding 1-1,000 1,001-10,000 10,001-100,000 100,001-250,000 250,001+ Treasury shares (UK) Total Source: Computershare Investor Services Total shares % of whole 3,070,938,252 2,081,375,567 103,308,097 15,762,500 5,322,056 239,434,888 55.67 37.73 1.87 0.29 0.10 4.34 Number of holders 12,646 29,1761 32,3281 5791 4,8261 1 5,516,141,360 100 79,558 Total shares % of whole 23,335,254 31,629,297 40,516,061 35,628,331 5,145,597,529 239,434,888 0.42 0.57 0.74 0.65 93.28 4.34 Number of holders 66,206 11,232 1,346 222 551 1 5,516,141,360 100 79,558 Note 1 The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 1,686,317,256 shares, including 367,627,820 shares held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the beneﬁ t of 360,643 underlying beneﬁ cial owners. The registered shareholdings on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 779,100 shares as nominee for 3,507 underlying beneﬁ cial owners. The registered shareholdings on the Namibian section of the principal register included Old Mutual (Namibia) Nominees (Pty) Limited, which held a total of 5,024,986 shares as nominee for 7,233 underlying beneﬁ cial owners. The registered shareholdings on the Malawi branch register included Old Mutual (Blantyre) Nominees Limited, which held a total of 46,200 shares as nominee for 136 underlying beneﬁ cial owners. Page 328 Old Mutual plc Annual Report and Accounts 2008 Registrars The Company’s share register is administered by Computershare Investor Services in conjunction with local representatives in various jurisdictions. The following are the contact details: UK Computershare Investor Services PLC The Pavilions, Bridgwater Road Bristol BS99 6ZY Tel: +44 (0)870 707 1212 email: web.queries@computershare.co.uk South Africa Computershare Investor Services (Pty) Ltd 70 Marshall Street, Johannesburg 2001 (PO Box 61051, Marshalltown 2107) Tel: 0861 100 940 or +27 (0)11 870 8211 Malawi Trust Finance Limited Delamere House Ground Floor PO Box 1396 Blantyre Malawi Tel: +265 1 823 245 Fax: +265 1 824 494 email: trust@trust.co.mw Namibia Transfer Secretaries (Pty) Limited Kaiserkrone Centre Shop No. 12, Windhoek (PO Box 2401, Windhoek) Tel: +264 (0)61 227 647 Sweden Euroclear Sweden AB Box 7822 SE-103 97 Stockholm Tel: +46 8 402 9000 Zimbabwe Corpserve (Private) Limited 2nd Floor, Intermarket Centre Corner 1st Street and Kwame Nkrumah Avenue, Harare (PO Box 2208, Harare) Tel: +263 (0)4 751559/61 Fax:+263 (0)4 752629 email: corpserve@corpserve.co.zw Computershare share dealing services The Company’s South African registrars, Computershare Investor Services, administer a telephone and postal sales service for shares held through Old Mutual (South Africa) Nominees (Pty) Limited on the South African branch register and shares held through Old Mutual (Namibia) Nominees (Pty) Limited on the Namibian section of the principal register. If you hold your shares in this way and wish to sell your shares by telephone, Computershare may be contacted on 0861 100 940 (a South African number) between 8.00 a.m. and 4.30 p.m. (local time) on Mondays to Fridays, excluding public holidays. A service fee is payable based on the value of the shares sold. Internet share dealing This service provides shareholders with a facility to buy or sell Old Mutual plc ordinary shares on the London Stock Exchange. The commission for deals through the internet is 0.5 percent, subject to a minimum charge of £15. In addition, stamp duty, currently 0.5 percent, is payable on purchases. There is no need to open an account in order to deal. Real-time dealing is available during market hours. Orders may also be placed outside market hours. Up to 90-day limit orders are available for sales. To access the service, log on to www.computershare.com/ dealing/uk. Shareholders should have their Shareholder Reference Number (SRN) available for the purposes of sales. The SRN appears on share certiﬁ cates. A bank debit card will be required for purchases. At present, this service is only available to shareholders in certain European jurisdictions. Computershare’s website contains an up-to-date list of these countries. Telephone share dealing The commission for deals through Computershare’s telephone share dealing service is 1 percent, subject to a minimum charge of £15. In addition stamp duty, currently 0.5 percent, is payable on purchases. The service is available from 8.00 a.m. to 4.30 p.m. Monday to Friday, excluding bank holidays, on telephone number 0870 703 0084. Shareholders should have their Shareholder Reference Number (SRN) ready when calling about sales. The SRN appears on share certiﬁ cates. A bank debit card will be required for purchases. Detailed terms and conditions are available on request by telephoning 0870 873 5836. At present, this service is only available to shareholders resident in the UK and Ireland. These services are offered on an execution-only basis and subject to the applicable terms and conditions. This is not a recommendation to buy, sell or hold shares in Old Mutual plc. Shareholders who are unsure of what action to take should obtain independent ﬁ nancial advice. Share values may go down as well as up, which may result in a shareholder receiving less than he or she originally invested. To the extent that this statement is a ﬁ nancial promotion for the share dealing service provided by Computershare Investor Services PLC, it has been approved by Computershare Investor Services PLC for the purpose of section 21(2)(b) of the Financial Services and Markets Act 2000 only. Computershare Investor Services PLC is authorised and regulated by the Financial Services Authority. Where this has been received in a country where the provision of such a service would be contrary to local laws or regulations, this should be treated as information only. n o i t a m r o n f i r o t s e v n I Page 329 Page 329 SHAREHOLDER INFORMATION continued Rule 144A ADRs The Company has a Rule 144A American Depositary Receipt (Rule 144A ADR) facility through The Bank of New York. Each Rule 144A ADR represents 10 ordinary shares in the Company. At 31 December 2008, 107,500 of the Company’s shares were held in the form of Rule 144A ADRs. Any enquiries about the Company’s Rule 144A ADR facility should be addressed to The Bank of New York, 101 Barclay Street, New York, NY 10286, USA, tel: 1-888-BNY-ADRS (1-888-269-2377) if you are calling from within the USA. If you are calling from outside the USA, please call +1 212 815 3700. You may also send an email enquiry to shareowners@bankofny.com. Websites Further information on the Company can be found on the following websites: www.oldmutual.com www.oldmutual.co.za Electronic communications and electronic proxy appointment If you would like to receive future communications from the Company by email, please log on to our website, www.oldmutual.com, select the “Shareholder Information” section, click on “Electronic Communications” and then follow the instructions for registration of your details. In order to register, you will need your shareholder reference number, which can be found on the payment advice notice or tax voucher accompanying your last dividend payment or notiﬁ cation. The number is also printed on forms of proxy (but not voting instruction forms) for the Annual General Meeting. Before you register, you will be asked to agree to the Terms and Conditions for Electronic Communications with Shareholders. It is important that you read these Terms and Conditions carefully, as they set out the basis on which electronic communications will be sent to you. You should bear in mind that, in accessing documents electronically, you will incur the cost of online time. Any election to receive documents electronically will generally remain in force until you contact the Company’s Registrars (via the online address set out earlier in this section of the Report or otherwise) to terminate or change such election. The use of the electronic communications facility described above is entirely voluntary. If you wish to continue to receive communications from the Company by post, then you do not need to take any action. Electronic proxy appointment is available for this year’s Annual General Meeting. This enables proxy votes to be submitted electronically, as an alternative to ﬁ lling out and posting a form of proxy. Further details are set out on the form of proxy. Electronic submission is not, however, available for voting instruction forms. Unclaimed demutualisation beneﬁ ts Policyholders of the South African Mutual Life Assurance Society (the Society) who qualiﬁ ed for free shares in the Company when the Society demutualised in May 1999, but who did not claim their shares by the closure date of the Unclaimed Shares Trusts (31 August 2006), should contact the Trust Administration and Conﬁ rmation Department on 0861 61 9061 (a South African number) or on +27 (0)21 509 8383 between 8.30 a.m. and 4.30 p.m. (South African time) on Mondays to Fridays, excluding public holidays. The Company has indicated that it will continue until 31 August 2009 to settle valid claims to demutualisation beneﬁ ts on an ex-gratia basis by reference to the cash value at 31 August 2006 of the shares to which the policyholder would have been entitled. Strate Since January 2002, all transactions in the Company’s shares on the JSE have been required to be settled electronically through Strate, and share certiﬁ cates are no longer good for delivery in respect of such transactions. The Company wrote to certiﬁ cated shareholders on its South African branch register in October 2001 to inform them of these changes and of the courses of action available to them. The Company also wrote separately to certiﬁ cated shareholders on the Namibian section of its principal register in January 2002 to explain the impact of Strate. These included participating in Issuer-Sponsored Nominee Programmes to dematerialise (in the case of South Africa) or immobilise (in the case of Namibia) their previously certiﬁ cated shareholdings in the Company. Shareholders who have any enquiries about these programmes or about the effect of Strate on their holdings in the Company should contact Computershare Investor Services in Johannesburg on +27 (0)861 100 940 or +27 (0)11 870 8211. Checking your holding online An online service is situated at the Investor Centre option within the website address www.computershare.com which gives shareholders access to their account to conﬁ rm registered details, to give or amend dividend mandate instructions, and to obtain a current shareholding balance. A simple calculator function places a market quote against each holding and allows shareholders to estimate its value. There are also a number of downloadable forms from this site such as change of address, dividend mandate and stock transfer forms. Finally there is an extensive list of frequently asked questions and the facility to contact Computershare Investor Services by email. Financial calendar The Company’s ﬁ nancial calendar for the forthcoming year is as follows: Annual General Meeting and ﬁ rst quarter business update Interim results 7 May 2009 5 August 2009 Third quarter business update 5 November 2009 Final results for 2009 March 2010 Page 330 Page 330 Old Mutual plc Old Mutual plc Annual Report and Accounts 2008 Annual Report and Accounts 2008 GLOSSARY We have written this glossary to help readers understand certain words and jargon used in our industry. In line with our aim of writing this report in plain English, the deﬁ nitions are not precise or technical: they should not be used as the basis for making investment or other decisions. Actuary Someone who uses mathematics (in particular, probability) to provide solutions to insurance-related problems. Actuarial techniques are used to design new insurance products and to assess the proﬁ tability of new and existing business. Annual premium equivalent (APE) An industry measure of the level of new life, pensions and long term investment business. It enables comparisons between companies with a different mix of single and regular premium business. Annuity A regular payment from an insurance company made for an agreed period of time (usually up to the death of the recipient) in return for either a cash lump sum or a series of premiums which the policyholder has saved during their working lifetime. Asset management An investment management service provided by ﬁ nancial institutions on behalf of their customers. Assumptions Variables applied to data used to project expected outcomes. In the life insurance business this might include assumptions on average life expectancy and policy surrender rates. Bancassurance An arrangement whereby banks and building societies sell life, pension and savings products on behalf of other ﬁ nancial providers. Boutique A small investment ﬁ rm specialising in offering speciﬁ c services to a select number of individuals. Covered business A concept deﬁ ned in the Market Consistent Embedded Value (MCEV) principles and guidelines. It refers to long-term business which includes traditional life insurance, long-term healthcare and accident insurances, savings, pensions and annuities. Deferred acquisition costs (DAC) A method of accounting whereby the acquisition costs on long-term business (eg. sales commissions) are recognised over the life of the contracts rather than up-front at the time of sale. The costs are deferred on the balance sheet as an asset and amortised over the contract life. Deferred annuity An annuity due to be paid from a future date or when the policyholder reaches a speciﬁ ed age. A deferred annuity may be funded by the policyholder by payment of a series of regular contributions or by a capital sum. Demutualisation The process by which a mutual organisation owned by its members, such as a building society or insurance company, converts to a public limited company owned by its shareholders. Old Mutual demutualised in 1999. Embedded value (EV) Life insurance contracts are usually long-term and may involve complex payment ﬂ ows. This means it is difﬁ cult to measure the value of a life insurance business or how much income it is likely to generate over time. EV is a way of indicating what the underlying business is worth based on the total of the net assets already invested in the business and the proﬁ ts expected to emerge in the future. Experience variance In calculating embedded value of life business it is necessary to make assumptions about items such as lapses or surrenders, mortality experience, etc. In any period the actual result for these items will differ from the assumed experience; this is known as the experience variance. Financial Groups Directive (FGD) A ﬁ nancial regime applying to EU-based companies whose activities span both the banking and investment sectors and the insurance sector. It lays down requirements for the Company’s capital position and is intended to improve the stability of the ﬁ nancial system, thereby protecting customers. FGD surplus This represents the amount of capital in the Company which is surplus to the statutory solvency requirement for insurance groups as laid down by the Financial Groups Directive. Financial Services Authority (FSA) The main regulatory body of the ﬁ nancial services industry in the UK, covering the savings, insurance and investment businesses. Financial Services Board (FSB) The regulator of ﬁ nancial services in South Africa. Funds under management (FUM) The total value at market prices, of funds managed by a company on behalf of shareholders and customers. General insurance/Property & Casualty insurance Non-life insurance mainly concerned with protecting the policyholder from loss or damage caused by speciﬁ c risks. Examples include motor, contents and buildings insurance. Property insurance covers loss or damage through, for example, ﬁ re or theft. Casualty insurance covers losses arising from accidents that cause injury to other people or damage to their property. In force An insurance policy is said to be “in force” from its start date until the date it is terminated. Independent ﬁ nancial adviser (IFA) In the UK an IFA is a person or organisation authorised to give advice on ﬁ nancial matters and to sell the products of all ﬁ nancial services providers. IFAs are regulated by the Financial Services Authority. Insurance A contract taken out with an insurer to give ﬁ nancial protection against loss from a perceived risk. The person taking out the insurance is called the insured. Payments for the policy are called premiums. Jaws ratio The difference between the year-on-year rate of growth in income and the year-on-year rate of growth in costs. An increase in the ratio signiﬁ es increasing proﬁ tability. n o i t a m r o n f i r o t s e v n I Page 331 Page 331 Lapses/surrenders/withdrawals The voluntary termination of a policy by a policyholder before the maturity date. Life insurance An insurance contract which promises the payment of an agreed sum of money upon the death of the insured within a speciﬁ ed period of time. Also known as life assurance. Long-term business Collective term for life insurance, pensions, savings, investments and related business. Mark-to-market adjustment An accounting adjustment to the book value of an asset or liability to reﬂ ect its market value. Market consistent embedded value (MCEV) MCEV is the standard of reporting for life insurance companies. It provides a common set of principles and guidelines for use in calculating embedded value. MCEV attempts to measure the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty in future investment returns. It is designed to provide an accurate reﬂ ection of the performance of long-term savings business and a method of comparing companies on a consistent basis. Maturity The date that an insurance policy or other ﬁ nancial contract ﬁ nishes or “matures” and the beneﬁ t becomes payable. Mutual fund/unit trust Fund of shares, bonds and other assets held by a manager for the beneﬁ t of investors who buy units in the fund, effectively pooling their money with that of other investors. It enables investors to achieve a more diversiﬁ ed portfolio than they might have done by making an individual investment. Net client cash ﬂ ow (NCCF) The difference between money received from customers (eg. premiums, deposits and investments) and money given back to customers (eg. claims, surrenders, maturities) during the period. Non-proﬁ t policy Insurance cover guaranteeing certain beneﬁ ts but where the policyholder bears no investment risk and does not gain or lose if returns differ from expectations. Pure risk business such as annuities and health insurance is normally written on a non-proﬁ t basis. Open architecture Where a company offers investment products from a range of other companies in addition to its own products. The advantage for customers is that it gives them a wider choice of funds to invest in and access to a larger pool of money management professionals. Orphan assets/unclaimed assets Funds held by ﬁ nancial institutions that have been left untouched by their owners for a considerable period of time – eg. dormant bank accounts or forgotten life insurance policies. Pension A regular payment received by an individual during their retirement until their death. A pension is usually bought through the payment of regular contributions during the individual’s working lifetime. Page 332 Page 332 Old Mutual plc Old Mutual plc Annual Report and Accounts 2008 Annual Report and Accounts 2008 Platform Online services used by intermediaries and consumers to view and administer their investment portfolios. Platforms provide facilities for buying and selling investments (including generally ISAs, SIPPs and life insurance) and for viewing an individual’s entire portfolio to assess asset allocation and risk exposure. Premium The payment a policyholder makes in return for insurance cover. A single premium contract involves a single lump sum payment made at the start of the contract. Under a regular premium contract the policyholder agrees at the start to make regular payments throughout the term of the contract. Sum assured The lump sum beneﬁ t payable under an insurance policy or contract in circumstances which are deﬁ ned within the policy; eg. the amount payable on the death of the policyholder. Technical provisions Amounts set aside on the basis of actuarial calculations to meet forecast future obligations to policyholders. Underwriting The process of deciding which risks an insurance company will cover, the terms of acceptance and the premiums it will charge. Unit-linked policy A type of long-term savings plan where premiums are used to buy units in an investment fund, such as a unit trust, and the beneﬁ ts will be linked to the value of the underlying units rather than being ﬁ xed or guaranteed at the start of the plan. Value of in-force business (VIF) Part of the embedded value of a life insurance company. It represents the discounted value of the proﬁ ts expected to arise from the in-force business. VIF is calculated using a set of actuarial, economic and operational assumptions. Value of new business (VNB) The discounted value of the future proﬁ ts expected to arise from all new business sold during a reporting period. VNB is calculated by using actuarial assumptions. With-proﬁ t A type of investment policy in which extra amounts (bonuses) may be added to the sum assured to reﬂ ect proﬁ ts earned during the course of the contract. Regular bonuses are usually added each year and, once declared, are guaranteed. A ﬁ nal or “terminal” bonus may be added when the policy becomes payable. Wrap account An account in which a broker or fund manager executes investment decisions on behalf of a client in exchange for a fee. These decisions might include share holdings, investment funds, pensions and life insurance contracts. Wrap platform An investment platform which enables investment funds, pensions, direct equity holdings and some life insurance contracts to be held in the same administrative account rather than as separate holdings. Forward-looking statements This Report contains certain forward-looking statements with respect to Old Mutual plc’s and its subsidiaries’ plans and expectations relating to their ﬁ nancial condition, performance and results. By their nature, 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 general economic and business conditions, market-related risks such as ﬂ uctuations in interest rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inﬂ ation, deﬂ ation, 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 regulations in territories where Old Mutual plc or its subsidiaries operate. As a result, Old Mutual plc’s or its subsidiaries’ actual future ﬁ nancial condition, performance and results may differ materially from the plans and expectations set forth in such forward-looking statements. Old Mutual plc undertakes no obligation to update any forward-looking statements contained in this Report or any other forward-looking statements that it may make. Acknowledgements Old Mutual plc would like to thank all those who participated in producing this Report, particularly the members of staff for their contributions. Designed and produced by Merchant in collaboration with JohnstonWorks. This Report is printed on Symbol Freelife paper, which is FSC certiﬁ ed, 100% ECF (Elemental Chlorine Free) and totally recyclable. This Report is available on our website: www.oldmutual.com If you have ﬁ nished reading this Report and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste. Old Mutual plc Registered in England and Wales No. 3591559 and as an external company in each of South Africa (No. 1999/004855/10, Malawi (No. 5282), Namibia (No. F/3591559) and Zimbabwe (No. E1/99) Registered Ofﬁ ce: 5th Floor Old Mutual Place 2 Lambeth Hill London EC4V 4GG www.oldmutual.com

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