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 Office:
5th Floor
Old Mutual Place
2 Lambeth Hill
London EC4V 4GG
www.oldmutual.com
AnnuAl RepoRt
& Accounts 2009
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n Fast ReaD
01 Our Group in transition
02 Our business at a glance
04 Our strategy
05 Key performance indicators
06 Key features
n Man aGeMent stateMents
08 Chairman’s statement
10 Group Chief Executive’s statement
16 Group Finance Director’s statement
n BUsiness ReView
Long-Term Savings
28 Group Executive Committee
30
72 Banking
84
90 US Asset Management
98 Bermuda
Short-Term Insurance
n RisK anD ResPonsiBilitY
102 Risk and capital management
129 Responsible business introduction
132 Customers
134 Employees
n GoVeRnanCe
142 Board of Directors
144 Chairman’s introduction
145 Directors’ report on corporate governance and other matters
161 Remuneration report
136 Environment
138 Society
140 Suppliers
n FinanCials
n MCeV
335 Statement of Director’s responsibilities
339
340 Group Market Consistent Embedded Value Basis
Independent auditors’ report
supplementary information
344 Notes to the MCEV basis supplementary
information
178 Statement of Directors’ responsibilities
179
Independent auditors’ report
180 Consolidated income statement
181 Consolidated statement of comprehensive income
182 Reconciliation of adjusted operating profit to profit after tax
183 Consolidated statement of financial position
184 Consolidated statement of cash flows
186 Consolidated statement of changes in equity
190 Notes to the consolidated financial statements
n shaReholDeR inFoRMation
395 Shareholder information
396 Glossary
The directors' report of Old Mutual plc for the year ended 31 December 2009 is set out on pages 1 to 160
and includes the sections of the Annual Report referred to in these pages.
Cover picture: We sponsor the Old Mutual Two Oceans Marathon in South Africa: long distance running
reflects our philosophy of investing for the long-term.
what’s online
n Annual Report 2009
http://www.oldmutual.com/annualreport2009
n Corporate site
http://www.oldmutual.com
> About Old Mutual
> Old Mutual Worldwide
> Investor Relations
> Corporate Responsibility
> Media Centre
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 financial 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 fluctuations in interest rates and exchange rates, policies
and actions of regulatory authorities, the impact of competition,
inflation, deflation, the timing and impact of other uncertainties or
of future acquisitions or combinations within relevant industries,
as well as the impact of tax and other legislation and regulations
in territories where Old Mutual plc or its subsidiaries operate.
As a result, Old Mutual plc’s or its subsidiaries’ actual future
financial 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
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Fast Read
The following 6 pages give
a high level summary of the
report
The report in detail
starts on page 8
FAST READ
OUR GROUP IN TRANSITION
Our strategy is to build a long-term savings,
protection and investment group by leveraging
the strength of our capabilities in South Africa
and around the world. We will focus, drive and
optimise our businesses to enhance value for
shareholders and customers.
Our vision is to be our customers’ most trusted
partner – passionate about helping them
achieve their lifetime financial goals.
Introduction from Patrick O’Sullivan
As the Group embarks on significant change, I am very pleased to be asked to add my
experience to the Board in helping us meet the challenges ahead. One of my initial priorities
has been to spend time getting to know as much about our business and people as possible.
It is clear we have some very strong businesses and others that are positioned strategically to
win in increasingly competitive markets.
The management team has also identified numerous opportunities for generating value from
these businesses working together, which will be a real area of focus during 2010. We have
a clear strategy and vision for the Group predicated on improving the value we offer both
customers and shareholders. My thanks go to all our employees for their exceptional
commitment to the Group during very difficult times. I am sure they will show the same
dedication to change in the year ahead.
Patrick O’Sullivan
Chairman, Old Mutual plc
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
1
1
FAST READ
OUR bUSINESS AT A GLANcE
Our Values
>
Integrity
> Respect
> Accountability
> Pushing beyond
boundaries
For how we manage our
social and environmental
impact see page 129
And how we approach
Risk Management see page
102
GROUP
LONG-TERm
SAvINGS (LTS)
Old Mutual is an international
long-term savings, protection and
investment Group.
Our primary operations are in the
following geographies:
LTS – Southern Africa, Europe,
Colombia, Mexico, India and China
US Asset management – US
Banking – Southern Africa
Short-term insurance –
Southern Africa
We provide innovative life assurance
based solutions which address both
protection and retirement savings
needs.
Contribution to group
AOP*
FUM**
58.5%
39.4%
Adjusted operating profit (AOP) 2009
Adjusted operating profit (AOP) 2009
£1,170m
2008: £1,136m
£685m
2008: £452m
Funds under management 2009
Funds under management 2009
£285bn
2008: £265bn
£112.2bn
2008: £91bn
Number employed
Number employed
53,7061
2008: 56,546
22,269
2008: 24,515
Operational highlights
Operational highlights
> Good earnings growth in the second half
> Positive second half sales momentum with
of the year after a difficult first half
a particularly strong fourth quarter
> Excellent progress in delivering against the
five strategic priorities set in March 2009
> Capital position strengthened: FGD surplus
> Net client cash inflow of £1.9bn
> Strong profitability in Emerging Markets
> Good growth in funds under management
increased from £0.7bn to £1.5bn
> Return to paying a dividend:
Final dividend 1.5p per share.
in Nordic and Wealth Management
> US Life returned to profitability.
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Old Mutual plc
Annual Report and Accounts 2009
READ MORE p10
READ MORE p30
* Pre-tax AOP of operating segments less finance and other corporate costs.
** Pie charts do not include Bermuda’s contribution to the total Groups Funds under management.
1 Includes Group Head Office and Bermuda.
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bANKING
SHORT-TERm
INSURANcE
US ASSET
mANAGEmENT
We have a majority shareholding
in Nedbank, one of South Africa’s
leading banks, which also has
banking interests in other countries
in southern Africa.
We provide short-term insurance
solutions in southern Africa through
Mutual & Federal.
We aim to grow our customers’
savings and wealth, whether through
active and direct asset management
or the selection of funds and
managers for customers to invest in.
Contribution to group
Contribution to group
Contribution to group
AOP*
FUM**
AOP*
FUM**
AOP*
FUM**
40.2%
2.9%
6.0%
0.1%
7.1%
56.7%
Tier 1 Capital Adequacy Ratio
Adjusted operating profit (AOP) 2009
Adjusted operating profit (AOP) 2009
11.5%
2008: 9.6%
Total Assets
£47.9bn
2008: £41.3bn
£70m
2008: £76m
Combined ratio
98.0%
2008: 96.1%
£83m
2008: £97m
Funds under management 2009
£161.5bn
2008: £164.9bn
Number employed
Number employed
Number employed
27,346
2008: 27,570
2,331
2008: 2,703
1,544
2008: 1,600
Operational highlights
Operational highlights
Operational highlights
> Performance affected in 2009 by the impact
of the global recession, a difficult local
economic environment and overall lower
interest rates
> Profits down on 2008 but a good recovery
in the second part of the year after a very
difficult first half
> New system implemented to enable
> Growth in net interest income and
efficient growth
non-interest revenue was offset, like other
South African banks, by rising bad debts,
resulting in operating profit down on 2008
> Further strengthened capital and
liquidity positions.
> 100% owned by Old Mutual with effect from
February 2010.
READ MORE p72
READ MORE p84
> Second-half operating profit 83% higher
than the first half due to market growth and
the success of cost-management initiatives
within the business
> Nearly half the affiliates maintained positive
net client cash flows although NCCF was
negative and worse than 2008 for the
business as a whole. This is very much in
line with industry trends this past year
> Long-term investment performance remains
strong.
READ MORE p90
Old Mutual plc
Annual Report and Accounts 2009
3
FAST READ
OUR STRATEGY
Our strategy is to build a long-term savings, protection
and investment group by leveraging the strength of
our capabilities in South Africa and around the world.
We will focus, drive and optimise our businesses to
enhance value for shareholders and customers.
OLD mUTUAL STRATEGIc PRIORITIES
1
Develop the customer
proposition and experience
We are passionate about developing the best proposition for our
customers, by building on our history of innovation and resolute
customer focus. This includes expanding our product range,
developing our advice capability which is a fundamental part of the
value we provide to our customers and endeavour to treat customers
fairly everywhere.
Deliver high performance
in all business units
To ensure that we provide value to shareholders and customers, we
need to drive high performance in our businesses by delivering profitable
growth, operational efficiency, and by optimising risk and return.
Share skills and experience
across the Group
We will utilise our provide capabilities in South Africa and around
the world to drive revenue and cost improvements across the Group,
by leveraging policy administration capabilities in South Africa,
driving global IT and procurement synergies and sharing product
development ideas.
2
3
4
5
Build a culture
of excellence
Simplify our structure
to unlock value
bUSINESS DRIvERS
To do this we expect businesses in our portfolio
to make a meaningful contribution to the Group.
They are required to:
4
Old Mutual plc
Annual Report and Accounts 2009
A key to our success is that we demand and reward excellence in
leadership, teamwork and delivery of results – for all our people.
This includes defining and embedding a high-performance
leadership model, against which we can assess, develop and
remunerate our leaders.
To deliver the full value of the Group to shareholders we need to optimise
our structure. This means that we will exit non-core and sub-scale
businesses, reduce exposure to businesses that fall outside our Group
risk appetite, run-off non-disposable assets for value and optimise our
structure for strategic, regulatory, capital and governance purposes.
> Operate within our capital and risk requirements
> Be capable of achieving 15% ROE
> Add value to another part of the Group
> Have growth potential in their markets
> Have a clear plan to deliver profitable, sustainable growth
> Create shareholder value into the future.
FAST READ
KEY PERFORmANcE INDIcATORS
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Set out below are the KPIs used to monitor
the financial performance of the business
FUNDS UNDER MANAGEMENT
ADJUSTED MCEV PER SHARE
£285bn
09
08
07
171p
09
08
07
(£bn)
285.0
264.8
278.9
(p)
171.0
117.6
166.3
ADJUSTED OPERATING PROFIT BEFORE TAX (IFRS)*
ADJUSTED OPERATING PROFIT BEFORE TAX (MCEV)
£1,170m
09
08
07
£1,014m
09
08
07
(£m)
1,170
1,136
1,624
ADJUSTED OPERATING EARNINGS PER SHARE (IFRS)*
IFRS BOOK VALUE PER SHARE
12.1p
09
08
07
NET CLIENT CASH FLOW
£(3.1)bn
09
08
07
147p
09
08
07
RETURN ON EQUITY*
9.1%
09
08
07
(p)
12.1
14.9
16.9
(£bn)
(3.1)
(1.2)
23.4
PROFIT BEFOR E TAX (IFRS)
BASIC EARNINGS PER SHARE (IFRS)
£247m
09
08
07
(7.8)p
09
08
07
(£m)
247
595
1,750
*2007 figures include Bermuda. Under the Group’s AOP policy this is now treated as non-core and excluded from 2008 and 2009 figures.
(£m)
1,014
978
1,631
(p)
147
134
135
(%)
9.1
11.3
13.2
(p)
(7.8)
8.6
19.2
Old Mutual plc
Annual Report and Accounts 2009
5
FAST READ
KEY FEATURES
Below are some of the key features
of the business that support the delivery
of our vision to our customers.
LONG-TERm SAvINGS –
EmERGING mARKETS
Number 1 insurance
company by funds
under management
in South Africa*
R473bn
*As at 30.12.09. Equivalent in GBP £39.7bn
LONG-TERm SAvINGS –
WEALTH mANAGEmENT
Number 1 in terms of
market share in UK
platform business
(by assets)
Source: Lipper
US ASSET mANAGEmENT
bANKING
61%
of assets outperformed
benchmarks over
a 5 year period
14.9%
Total Capital Adequacy
Ratio (up from 12.5%
in 08) and better
than the regulatory
requirement of 9.75%
LONG-TERm SAvINGS – NORDIc
LONG-TERm SAvINGS –
EmERGING mARKETS
Skandia Link awarded
“Best average return to
customers on 3 and 5 year
basis” for 3rd year in a row
in the Swedish market
1 in 4 South Africans*
are an Old Mutual
customer
Source: Risk & Försäkring
*Economically active adult population
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Annual Report and Accounts 2009
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US ASSET mANAGEmENT
25%
of client base
international (ex US)
LONG-TERm SAvINGS –
EmERGING mARKETS
Biggest market share
of Life businesses in
South Africa
31%Source: LOA stats
LONG-TERm SAvINGS –
WEALTH mANAGEmENT
Winner of Outstanding
Service in both Life
and Pensions and
Investment Provider
Categories (Financial
Adviser Service awards)
bANKING
2nd
largest retail deposit
base in South Africa
and one of the top three
corporate banks
LONG-TERm SAvINGS
OLD mUTUAL GROUP
12%
LTS APE margin
(2008: 11%)
449,208
retail shareholders in
South Africa
as at 31.12.09
LONG-TERm SAvINGS –
EmERGING mARKETS
Number 1 in client service
– Ask Africa, Service
Excellence Award,
Long-term insurance
category – in South
Africa
Old Mutual plc
Annual Report and Accounts 2009
7
mANAGEmENT STATEmENTS
cHAIRmAN’S STATEmENT
Our new Chairman reflects on a challenging year for the Group
Following a year of de-risking the balance sheet,
the Board and management are aligned in the
goal of simplifying the Group structure and
improving performance. Our international savings
business is critical to achieving long-term growth
and will be a special focus as we progress with
implementing our strategy.
READ MORE ABOUT OUR STRATEGY p13
Patrick O’Sullivan
Chairman
I am privileged to have joined Old Mutual plc as its new
Chairman at a pivotal point in its long history. You can rest
assured that I and my fellow Board members are focused on
delivering enhanced value to all our shareholders and building
strong relationships of trust with our key stakeholders.
8
Old Mutual plc
Annual Report and Accounts 2009
1.5p The Board is pleased that we can now begin again to reward our many shareholders
who have remained loyal to the Company with a final dividend of 1.5p per share
■ Overview of 2009
Following the turmoil in global financial markets in
2008, 2009 was a difficult year for financial services
companies, reflecting the recessionary environment
that prevailed in many of the world’s major
economies. Despite this, the Company achieved
adjusted operating earnings per share on an IFRS
basis of 12.1p, which compared to 14.9p in the prior
year. I believe this was a very acceptable result in
these difficult circumstances. While there are non-
cash charges (such as that arising on the revaluation
of our own debt) which gave rise to a reported net
loss, overall the Company has improved its financial
strength and increased its IFRS book value (from
134p per share to 147p per share).
■ Board
Chris Collins retired as Chairman at the end of 2009,
having served on the Board since the original listing
of the Company in 1999. We are very grateful to
him for his contribution and wish him a happy and
fulfilling retirement.
Mike Arnold joined the Board as an independent
non-executive director in September and also
immediately became a member of our Group Audit
and Risk Committee. His actuarial expertise is a
valuable addition to the Board’s skills, following his
role as Chairman of the International Association
of Consulting Actuaries and Principal/Consulting
Actuary and Head of Life practice at Milliman.
From April 2010, we are splitting the Group Audit
and Risk Committee into separate Audit and
Risk Committees, in line with recommendations
contained in the Walker Review, and Mike has kindly
agreed to take on the Chairmanship of the newly
established Risk Committee. We expect this new
committee will play an important role in ensuring that
risk matters continue to be appropriately addressed
at Board level.
The Board conducted a self-assessment exercise
during 2009 in conjunction with external facilitators
and one of my first tasks will be to ensure that the
findings from this are implemented. There are also
other increasingly onerous expectations of boards
of banks and other financial institutions that I will
address during the coming year.
On behalf of my Board colleagues, I would like to
express our appreciation for all the dedication of
the Group’s employees during 2009 and for the
resilience and commitment they showed during one
of the most difficult years in the Group’s history.
■ Dividend
We are pleased that the Company’s improved capital
position has enabled the Board to recommend a
dividend for the year ended 31 December 2009 of
1.5p per share (or its equivalent in other applicable
currencies) to be paid on 25 June 2010, subject
to approval by shareholders at the Annual General
Meeting (AGM) in May. The Board is pleased that
we have been able to resume payment of a dividend
and that we can now begin again to reward our
many shareholders who have remained loyal to the
Company during this difficult period.
■ AGM 2010
This year’s AGM will be held at our offices in London
on Thursday, 13 May 2010. In response to requests
from some of our South African shareholders, we are
also arranging this year for the AGM to be webcast.
There is also an opportunity for shareholders,
if they wish, to submit questions ahead of that
meeting, which will be dealt with during the AGM.
The Notice relating to our AGM enclosed with
this Report includes further details of the webcast
arrangements, and the various resolutions to
be proposed and the procedure for submitting
questions ahead of the Meeting.
■ Future
Following a year of de-risking the balance sheet,
the Board and management are aligned in the goal
of simplifying the Group structure and improving
performance. Our international savings business
is critical to achieving long-term growth and will be
a special focus as we progress with implementing
our strategy.
Patrick O’Sullivan
Chairman
11 March 2010
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Old Mutual plc
Annual Report and Accounts 2009
9
MANAGEMENT STATEMENTS
GROUP CHIEF EXECUTIVE’S
STATEMENT
Our improved operating results for 2009 reflect
better market conditions in the second half as
well as our aggressive expense management
as part of our drive to improve business
performance. In the fourth quarter we saw
especially good sales growth, with the strongest
Long-Term Savings (LTS) quarterly sales
performance for two years.
Julian Roberts
Group Chief Executive
■■ Review of Operations
Introduction
Our operating results for 2009 are ahead of
the previous year despite the highly volatile
markets over the period. This is largely due to
the improvement in market conditions during the
second half, which resulted in greater demand for
equity-based products from our clients and our
drive to improve business performance, including
the aggressive expense management programme
completed in the US. We had especially good
sales growth during the fourth quarter, the
strongest quarterly sales performance for the
LTS business for at least two years.
During 2009 our priority was to address the issues
facing the Group, exacerbated by the global financial
crisis. The turnaround in US Life is complete, the
business in Bermuda is in run-off, we have built a
strong capital and liquidity base and implemented
strong central governance and controls. Despite
previously announced expectations, we did not need
to make any further capital injection in US Life in the
early part of this year and do not anticipate any capital
injection will be required during 2010.
10 Old Mutual plc
Annual Report and Accounts 2009
£100m Group-wide cost savings in the next three years
We have made good progress in the process of
simplifying our portfolio of businesses and improving
operational performance, with a particular focus on
our long-term savings, protection and investment
businesses. These represent the heart of the Group
and building them is central to our future strategy,
which is set out in my Strategy Update below. We are
confident that by leveraging our core capabilities and
applying them consistently across the Group we will
deliver sustainable long-term value for all our stakeholders.
One of the strategic priorities announced in March last
year was to strengthen and maintain our capital and
liquidity position. I am pleased to report that we now
have good balance sheet stability, as demonstrated by
an increase in our FGD surplus to £1.5 billion as at 31
December 2009, from £0.7 billion at the end of 2008,
and total liquidity of £1.2 billion. With the Group now in
good financial health, we are able to turn our attention
to the future.
■ Long-Term Savings (LTS)
Our LTS division delivered strong results for the year
with operating profits up 52% from 2008, largely
driven by the turnaround in US Life. Sales were down
just 6% for the year and were up 5% in the second
half compared to the same period in 2008. Margins
improved, and net client cash flows and funds under
management grew considerably during the year.
Two further strategic priorities that were announced
in March last year were to leverage scale in our
Long-Term Savings businesses and to streamline our
portfolio of businesses. During the year we integrated
our Long-Term Savings businesses into a single
division under Paul Hanratty, Chief Executive Officer of
LTS. The division was restructured around geographic
and customer-related market segments, with a focus
on identifying where we could extract costs and
generate profitable organic growth through enhancing
the customer value proposition.
We sold a number of businesses and exited a number
of markets where we lacked scale and where the cost
of building scale would not deliver sufficient returns,
including Australia, Portugal, Hungary, the Czech
Republic and Chile. We also sold Bankhall in the UK
and closed our Asia Pacific regional office and our
ELAM head office as part of the restructuring.
LTS: Emerging Markets
In South Africa, we have shown good resilience with
strong profitability and a continuing high return on
equity in very difficult economic conditions. Like-for-like
sales on an APE basis were up marginally compared to
the prior year. We continued to invest in our distribution
capability and, as a result, we grew market share in our
core product ranges and are well positioned to benefit
from the recovery in consumer confidence.
WE EXPEcT bUSINESSES IN OUR PORTFOLIO TO:
> Operate within capital and risk requirements
> Be capable of achieving 15% ROE
> Add value to another part of the Group
> Have growth potential in their markets
>
Have a clear plan to deliver profitable, sustainable growth
> Create shareholder value into the future.
In Latin America, profits were up 133% in very difficult
market conditions and we have developed a new retail
mass product in Mexico which will be launched this
year. In India, sales were down by 19%, which was
better than the industry average and in China, sales
were up 19%. Drawing on our South African expertise,
we are developing several new products which we
believe are highly suitable for these markets, some
of which we have already begun selling in India.
Despite South Africa emerging from recession in
the third quarter, consumer confidence remains low.
However, the outlook for the Long-Term Savings,
protection and investment environment is positive
given South Africa’s low dependence on credit,
prudent economic policies, growing emerging black
middle class and affluent markets, and improving
regulatory frameworks and transparency of financial
products. During 2010 we will continue our transition
from a traditional life insurer to a modern savings,
protection and investment business, while focusing
on growing distribution, improving investment
performance and service levels, and reducing cost.
LTS: Nordic
Life APE sales were up 8% on 2008 as our retail
market continued to demonstrate resilience to the
adverse economic environment, partly buoyed by
increased direct sales of certain products through
Skandiabanken. The recession did have an adverse
impact on occupational pension sales in the corporate
sector although we saw lower outflows from maturities
and surrenders. Mutual fund sales were strong, up
47% on 2008 in line with wider market trends.
All of this contributed to very strong positive net
client cash flows representing 13% of opening funds
under management. Along with the improvement
in equity markets, this helped to boost overall funds
under management by 38% to a record level from the
position at the end of 2008. Skandia Link in Sweden
generated excellent investment returns during 2009 as
customers’ risk appetite improved, as demonstrated
by their increased weighting in equities. Our relationship
Old Mutual plc
Annual Report and Accounts 2009
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with Skandia Liv is improving, although normalising
the corporate and economic linkages will take time to
come to fruition.
We are focused on protecting our improving margins
through continued expense management, further
growth in sales and new product development,
including products designed for direct distribution.
We are increasingly focused on our customers’ needs
and business profitability, while our strong brand,
broad product mix and good market position give us
excellent competitive advantage. Although the financial
markets continue to be volatile, the outlook for the
Nordic markets is favourable.
LTS: Retail Europe
The difficult economic environment had a much more
marked impact in our Retail Europe countries. Unit-
linked markets were considerably weaker as demand
for guarantee products increased, resulting in lower
than anticipated new business in the second half. Life
APE sales were down 34% compared to the prior year,
and IFRS profit was adversely affected by a substantial
one-off charge in respect of policyholder profit sharing
agreement with the regulatory authorities in Germany
between 2005 and 2007. The performance of the
business improved dramatically in the fourth quarter,
with sales up 57% compared to the previous three
months, driven particularly by the German and
Polish markets.
Overall net client cash flows for the year remained
strong compared to 2008, remaining flat against
2008 levels and representing 15% of opening funds
under management, driven by improved surrender
experience. Funds under management were up 27%
on the 2008 year-end position, supported by our asset
mix and improved client investment appetite during the
second half.
After the change in structure in LTS, we focused on
laying the foundations for business improvement and
growth. We are developing single-premium products
in line with growing customer demand and through
improved distribution of regular-premium products
have good prospects for over two-thirds of anticipated
sales for 2010. With further product expansion out of
South Africa, from which lower cost administration will
also be provided for the business, we will now seek to
grow market share and sustainable profitability.
LTS: Wealth Management
Again, the volatile markets during 2009 had a
considerable impact on customer confidence, although
sentiment improved in the second half which helped
to grow sales, net client cash inflows and assets under
management. Despite the tough first half, net client
cash inflows for the year were up 25% and funds under
management were up 21% as at 31 December 2009.
In the UK, the transition to our platform-enabled
model was evidenced by the 22% increase in non-
covered mutual fund business over 2008 versus a 6%
decline in covered business, as clients’ investment
preferences shifted from more traditional life products
into mutual funds. On the back of our strong distributor
relationships, APE sales in Italy increased significantly
as we grew our share of the unit-linked market
from 4% to 12%, while in France sales remained
steady with good growth in the fourth quarter. Total
Wealth Management APE sales for the fourth quarter
increased 38% over the previous quarter.
We remain the leading UK platform provider with a
market share of 33% of total assets as at the end
of 2009. We have launched a significant operational
efficiency drive as well as seeking to enhance our
new product offerings using the skill base in South
Africa, where we develop our own technology. This is
a distinct advantage over our competitors and when
marketing to new customers. We are well positioned
to capture the strong anticipated inflows as a result
of increased customer demand for low cost and
transparent products, and as they look to exit maturing
traditional products such as with-profits bonds and
endowments.
LTS: US Life
2009 was a transformation year for US Life. Having
reduced the product profile, scaled back distribution
and reduced the overhead base by 33%, the business
returned to profitability on an AOP basis. As planned,
Life APE sales were down 57% but despite this
decrease in sales volume, we maintained strong
relationships with the top-tier producing agents through
whom we are now selling more profitable, capital light
products. Margins for the year were strong at 20%.
The business did not need additional capital from the
Group in the early part of this year and we believe
we will not need to inject any further capital during
During 2010 we will continue our transition from
a traditional life insurer to a modern savings,
protection and investment business
12 Old Mutual plc
Annual Report and Accounts 2009
2010. The business is now self-sustaining and is well
positioned to deliver improved returns during 2010 on
higher sales levels and a lower cost base, with new
FIA and Universal Life products due to be introduced
in the second quarter.
■ Bermuda
Our Bermuda business is now closed to new business,
is in run-off and is treated as non-core. During 2009
the focus has been on de-risking, maintaining a stable
operating environment, reducing costs, and managing
capital and liquidity. We have continued to improve
our understanding of the liabilities, with all positions
monitored and marked to market on a daily basis.
Most guarantees remain 'in the money' and the level
of redemptions has remained low. However, if markets
continue to rise and the value of customers’ contracts
move above the guarantee level, we anticipate a
pronounced increase in the level of redemptions, which
will accelerate the run-off.
■ Nedbank
The South African banking industry experienced an
exceptionally tough and volatile year in 2009. Demand
for credit grew at historically low rates and retail
impairments increased dramatically as consumers
came under severe pressure from falling income, job
losses, declining asset prices and record high debt
burdens. Despite the negative economic trends,
underlying trading conditions showed early signs of
improvement from the third quarter, when South Africa
emerged from recession.
Nedbank’s net interest income grew 0.8% to R16.3
billion and non-interest revenue, including the
consolidation of the Bancassurance & Wealth joint
ventures, grew by 11% to R11.9 billion. However, in
line with expectations and with the other South African
banks, earnings were impacted by rising bad debts.
Although Nedbank’s credit loss ratio declined to 1.47%
for 2009, its liquidity position remains sound and its
capital ratios remain above target levels. The Tier 1
capital adequacy ratio improved from 9.6% at the end
of 2008 to 11.5% at the year-end, and the total capital
adequacy ratio increased from 12.4% to 14.9%.
The rebound in the South African economy is likely
to be slower than in previous cycles given weak
consumer and business confidence and tighter lending
criteria. However, retail trading conditions are expected
to improve and interest rates are likely to remain steady
at current levels, leading to lower impairments. The
strength of Nedbank’s balance sheet positions it well to
capitalise on growth opportunities and to benefit from
the expected turnaround in economic conditions.
■ US Asset Management
Although market conditions in 2009 were challenging,
we took a number of actions to drive more profitable
growth in this business. We have reorganised our
central distribution structure, and strengthened our
shared services offer to our affiliates and key aspects
of our successful multi-boutique model. We reduced
operating expenses by 22% and carried out a
reorganisation of Old Mutual Capital, our retail mutual
fund business, which will deliver $15 million to $20
million of annual expense savings from 2010.
Our track record of investment performance has
positioned us well relative to competitors, and our
diversified asset mix between equities, fixed income
and alternatives helped us weather market volatility.
While net client cash flows were down, they were
broadly in line with the average of our peer group for
the year. This partially offset a 16% rise in asset values
resulting in funds under management for the year
increasing by 9% to $261 billion.
Non-US clients already represent 25% of total funds
under management as at the end of the period, and a
key objective is to grow and diversify by expanding our
international distribution capability. Prior to the recent
market turmoil, clients were migrating asset allocation
decisions toward international, global and alternative
strategies. We believe these trends will continue in
2010, and our track record of investment performance
and global business focus positions us well to capture
these asset flows. Churn of underperforming managers
in traditional domestic equity and fixed income mandates
will also present opportunities to win new mandates.
■ Dividend
The Board has carefully considered the position in
respect of a final ordinary dividend for 2009, and is
recommending the payment of a final 2009 dividend
of 1.5p per share (or its equivalent in other currencies).
The Board intends to pursue a dividend policy
consistent with our strategy, and having regard to
overall capital requirements, liquidity and profitability,
and targeting dividend cover of at least 2.5 times
IFRS AOP earnings over time.
■ Strategy Update
During 2009 our priority was to stabilise the business
by addressing the issues in US Life and Bermuda
and restoring the capital and liquidity positions of the
Group, whilst at the same time implementing more
effective governance and controls. With substantial
improvements in place, we also started the process of
simplifying our portfolio of businesses and improving
our operational performance, while further examining
the Group to determine its optimal future shape. We
now have a clear strategy to build a cohesive long-term
savings, protection and investment group by leveraging
the strength of our capabilities in South Africa and
around the world.
The strategy is designed to focus, drive and optimise
our businesses to enhance value for both our
Old Mutual plc
Annual Report and Accounts 2009
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customers and shareholders. It will increase our
international cash earnings and overall return on equity.
It will result in a rationalisation of our activities over time,
reducing substantially the complexity of the Group, and
optimise our structure as we manage our businesses
with a disciplined approach to risk management,
governance and allocation of capital.
We will reduce our exposure to the US by exploring
the disposal of US Life. We anticipate the listing of a
minority shareholding in US Asset Management. We
will continue to sell or exit markets where we do not
have scale, have no prospect of achieving satisfactory
returns or where the operations are outside of our
risk tolerance. We expect the proceeds from this
rationalisation and from retained earnings will be used
to reduce debt by at least £1.5 billion and improve the
quality of the Group’s balance sheet.
We will retain businesses which meet our capital and
risk requirements, can achieve a 15% return on equity,
add value to other parts of the Group, have scope for
sustainable future growth and are capable of creating
future shareholder value. We will be ruthless in our
application of these criteria and our businesses will
be subject to continual review. By leveraging our core
capabilities and maximising available synergies, we
will deliver a good blend of profit growth, improved
cash returns and generation of long-term embedded
value. We will transfer technology and intellectual
capital through shared skills and infrastructure, based
on utilising our strong capabilities in South Africa
and around the world to drive revenue and cost
improvements.
We will focus on developing our customer proposition
which is relevant to their needs, backed up by good
distribution, support and service. We aim to deliver
high performance in each of our businesses by
driving profitable growth and operational efficiency,
optimising risk and return and aligning reward schemes
to activities that deliver value, with strengthened
governance and control from the centre.
We have set specific targets of reducing costs by
£100 million by the end of 2012, including £15
million of Group-wide corporate cost savings as the
Group structure evolves. We have also set specific
performance targets for our individual LTS businesses
and for LTS as a whole, as set out below.
Long-Term Savings
Our LTS businesses can be categorised into three
groups: those in mature markets which have scale and
deliver high cash returns, such as Old Mutual South
Africa (OMSA) within Emerging Markets; those that
are established and growing but where profitability
can be improved, such as Wealth Management and
Nordic; and those that are sub-scale but have strong
prospects for growing embedded value and delivering
good return on equity, such as Retail Europe and,
within Emerging Markets, India and China.
We have set targets to deliver cost savings of £75
million per annum and to improve overall return on
equity from 14.9% (excluding US Life and reflecting
the LTIR rate for Emerging Markets for 2010) as at
31 December 2009 to between 16%-18%, both by
the end of 2012. To achieve this, we have set specific
return on equity and cost savings targets for each of
our LTS businesses.
Over and above this, we have identified opportunities
for further cost and revenue synergies in three principal
areas: in IT, by extending outsourcing to a global
level, rationalising technology platforms and sharing
applications; in administration by taking advantage
of the efficient cost base in South Africa; and in
product development, through sharing products and
investment funds across our businesses.
In Emerging Markets, we are already distributing
products designed in South Africa into India and
expect to do the same into the other large and under-
penetrated markets such as China and Mexico. South
Africa has a well regulated long-term savings industry
and a growing middle income and affluent market,
which we are penetrating through our strong brand
and powerful distribution platforms. We are therefore
co-ordinating our Emerging Markets business, which
includes our Africa operations, from OMSA. Having
acquired the minorities in Mutual & Federal, we are also
developing Old Mutual branded short-term insurance
products for the South African middle income market.
We have set a cost reduction target for Emerging
Markets of £5 million per annum and a return on equity
target of between 20%-25% by the end of 2012.
In Sweden, we already have a strong market share and
are now broadening our product and service offering to
the direct market through Skandiabanken, the region’s
most successful internet bank. For example, through
Skandia Investment Group (SIG) we have exported the
highly successful Spectrum concept of risk-targeted
funds from the UK to Sweden, and Skandia Nordic
has developed its own supporting web-based advisory
tools for its direct customers. For the Nordic business
we have set a cost reduction target of £10 million per
annum and a return on equity target of between 12%-
15% by the end of 2012.
In Retail Europe, we are already making good progress
in transferring IT and back office functions to South
Africa, which will significantly improve margins. We
will also broaden its product set, including introducing
protection products. We have set a cost reduction
target for Retail Europe of £15 million per annum and
return on equity target of 15%-18% by the end of 2012.
14 Old Mutual plc
Annual Report and Accounts 2009
We have commenced an expense reduction exercise
in Wealth Management which is intended to deliver
cost savings across the business of £45 million per
annum by 2012, with associated one-off restructuring
costs at approximately the same level. The bulk of this
is in Skandia UK, which is aiming to reduce its cost
base in order to operate profitably and sustainably in
the new low-margin environment. We already have
an excellent platform capability and will be developing
increased functionality and new products, sourced
in South Africa, which are capital-light but provide
good downside protection. We have also set a Wealth
Management return on equity target of between 12%-
15% by the end of 2012.
We have made a number of new appointments in
LTS to help ensure delivery against these targets. We
have appointed a new head of product development
from within OMSA, and expanded the roles of other
senior OMSA executives to enhance operational
efficiency and distribution across our LTS businesses.
We are also in the process of appointing a new head
of IT. They will all report directly to Paul Hanratty, Chief
Executive Officer of LTS.
Following the completion of the expense management
programme in US Life, the business is now profitable
on an AOP basis and is able to grow without further
support from the Group. However, it lacks scale, has
little overlap with the rest of our LTS businesses and,
given its capital intensive nature, the risk-adjusted
return on further investment does not meet our hurdle
rate. As a result, with market conditions improving,
we are exploring the disposal of US Life to allow
the business to achieve its potential under different
ownership. We remain firmly committed to supporting
the business at an RBC ratio of 300%.
Asset Management
We have excellent, well established asset management
businesses which are highly profitable and generate
good cash flow. In South Africa, we are already the
market leader and with investment performance
improving we are confident of driving future net client
inflows. In Europe, we expect guided architecture to
complement our open-architecture platform, allowing
us to capture significant inflows within SIG, our
manager-of-managers business.
In the US, there are considerable opportunities for
growing the business and expanding our existing
franchises into international markets. We have already
completed an expense management programme
which reduced costs by 22%. The resulting margin
improvement, together with anticipated growth in
performance fees in line with the recovery in markets,
will drive strong profitability and cash flows to the
centre. We have also set a new cost reduction target of
£10 million per annum and margin target of 25%-30%
by the end of 2012.
We believe this will position the business well for
a future listing and anticipate a partial IPO for the
business within the next three years. The timing
is dependent on margin progression, investment
performance and market conditions. The IPO will
allow it to benefit from an enhanced market profile and
more visible valuation. It will provide access to capital
markets and a mechanism for growth, and allow us to
continue to improve the alignment of management.
Banking
In line with the South African banking industry,
Nedbank’s result was affected by the cyclical credit
stress in the domestic economy. Despite the increased
level of retail impairments, Nedbank has continued to
strengthen its capital base. The sophisticated and well
regulated South African banking system has ensured
that the banks in South Africa were well insulated
from the worst of the global financial crisis, while
Nedbank’s strong management team has continued
to drive world-class risk management practices and
outstanding performance in nearly all areas of the
business. Despite the negative economic trends in
2009, underlying trading conditions showed early
signs of improvement around the third quarter.
I am pleased to welcome the new Nedbank Chief
Executive, Mike Brown and look forward to his
contributions to our Group Executive Committee.
As Mike and his team develop their future banking
strategy, I look forward to discussing any changes
Mike would like to make to the Nedbank strategy to
continue its growth. We thank Tom Boardman for his
tremendous success in the rehabilitation of Nedbank
after we led its refinancing in 2004.
Outlook
We are determined that over the medium to long-term
these measured and fully-funded actions will provide
considerable value for shareholders. Together with
further growth in assets under management as market
conditions continue to improve, these actions will have
a significantly positive impact on underlying operating
profitability and return on equity. Accordingly, the Board
has every confidence in the Group’s prospects, as
reflected by the resumption of a dividend.
Julian Roberts
Group Chief Executive
11 March 2010
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Old Mutual plc
Annual Report and Accounts 2009
15
mANAGEmENT STATEmENTS
GROUP FINANcE DIREcTOR’S
STATEmENT
The Group delivered a solid performance in
2009 which is a satisfying result against a difficult
economic background, particularly during the
first half of the year. In the second half strong
sales performance, the success of expense
management activities and recovering equity
markets helped generate good earnings growth.
Philip Broadley
Group Finance Director
The Group delivered a solid performance in
2009, which is particularly satisfying given the
volatile market and weak operating conditions
seen during the year, particularly during the first
half. Our performance improved significantly in
the second half of the year, when strong sales
performance in the third and fourth quarters and
recovering markets helped deliver good earnings
growth. Across the Group as a whole, we have
seen sales return to similar levels as in the first
half of 2008. The decline in profitability in Europe
and Nedbank was more than offset by the
increase in profitability of the US Life business,
following reserve strengthening and impairment
losses in 2008.
IFRS adjusted operating profit (AOP) for 2009 of
£1,170 million was £34 million higher than the
comparable 2008 profit. Adjusted operating profit in
the second half of 2009 was £636 million compared
to £316 million for the second half of 2008. Adjusted
operating profit earnings per share were 12.1p for
2009 compared to 14.9p for 2008. The AOP EPS
for the second half of 2009 was 6.8p compared to
6.2p for the second half of 2008. In 2008 results
had been significantly affected by the need to
strengthen reserves in the US Life and Bermuda
business: these businesses both made a profit
16 Old Mutual plc
Annual Report and Accounts 2009
£1,170 million Adjusted operating profit
before tax (IFRS basis)
VIRTUOUS CIRCLE OF FINANCE
Earnings
resilience
Capital
strength
Customer
confidence
Shareholder
value creation
in 2009. Bermuda is now treated as a non-core
business and its profit is therefore excluded from the
IFRS adjusted operating profit and the 2008 IFRS
adjusted operating profit has been restated on the
same basis.
In particular the performance of our LTS business
showed the benefits of the geographic split of the
business between Europe and Emerging Markets.
While the profits from our Emerging Markets
business were broadly evenly spread across the
two halves of the year, both Nordic and Wealth
Management showed significant improvements in
the second half. Lower earnings on shareholder
funds, increased levels of credit impairment in the
banking businesses, and lower asset management
profits in South Africa and the US restricted profits
despite a creditable sales performance for the
year overall.
■■ Overview of 2009 Group results
Group Highlights (£m)
IFRS results
Adjusted operating profit (IFRS basis)(pre-tax)*
Adjusted operating earnings per share (IFRS basis)*
Basic earnings per share
(Loss)/profit after tax
Sales statistics
Life assurance sales – APE basis*
Life assurance sales – PVNBP basis*
Value of new business*
Unit trust/mutual fund sales
MCEV results
Adjusted Group MCEV (£bn)
Adjusted Group MCEV per share
Adjusted operating Group MCEV earnings (post-tax)
Adjusted operating Group MCEV earnings per share
Financial metrics
Return on equity*
Return on Group MCEV
Net client cash flows (£bn)
Funds under management(£bn)
Dividend
FGD (£bn)
* Treating Bermuda as a non-core business
£m
2009
1,170
12.1
(7.8p)
(118)
1,380
10,202
167
7,567
9.0
171.0p
562
10.7p
9.1%
10.7%
(3.1)
285
1.5p
1.5
£m
2008
% Change
1,136
14.9
8.6p
683
1,466
10,814
158
6,600
6.2
117.6p
575
11.0p
11.3%
7.8%
(1.2)
265
2.45p
0.7
3%
(19%)
(191%)
(117%)
(6%)
(6%)
6%
15%
45%
45%
(2%)
(3%)
(158%)
8%
114%
Old Mutual plc
Annual Report and Accounts 2009
17
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International Finance Directors who all report to Philip Broadley
Katie Murray
Group Head Office
Diane Radley
Emerging Markets
Marek Ryden
Nordic
Christer Hager
Retail Europe*
Mark Satchel
Wealth Management
Barry Ward
US Life
Raisibe Morathi
Nedbank
Debbie Loxton
Mutual & Federal
Matt Berger
US Asset Management
Valerie Smart
Bermuda
*From March 2010 Markus Deimel will represent Retail Europe
Net client cash flows were £1.9 billion positive in
LTS as a whole, although Group net client cash
flows were negative £3.1 billion as a result of the
net £4.5 billion outflow in US Asset Management,
of which £4.1 billion occurred in the fourth quarter.
Adjusted Group MCEV per share for 2009 increased
to 171.0p from 117.6p at the year end 2008, and
from 143.8p for the first half of 2009. The increase in
the adjusted Group MCEV per share over the period
was largely driven by the substantial reduction
over the period in corporate bond credit spreads
in US Life, an increase in equity markets, positive
exchange rate movements, operating earnings
from covered business, and an amendment arising
from an allocation of assets between covered and
non-covered businesses at the beginning of the
year. This was partially offset by a lower result in
operations in Europe, and by an increase in the
market value of listed debt and fair value of non-
listed debt (where applicable). As anticipated, Wealth
Management benefited from a tax gain in aggregate
of £205 million following the changes made to the
corporation tax treatment of dividends received
from overseas subsidiaries by the Finance Act
2009. MCEV data still includes Bermuda as covered
business for both 2008 and 2009.
Adjusted operating Group MCEV earnings per share
for 2009 of 10.7p were 3% lower than the 2008
year end results. Adjusted MCEV operating earnings
in US Life and Bermuda increased significantly,
mainly resulting from higher expected returns in
2009 from the corporate bond portfolio. This was
offset by lower operating earnings from the other
long-term insurance businesses (in particular,
Wealth Management) due to lower short-term swap
rates, adverse operating assumption changes in
relation to persistency and capitalisation of planned
development and project expenditure, and lower
earnings in both the asset management and banking
businesses. These fell on a pre-tax basis from
£97 million to £83 million, and from £575 million to
£470 million respectively.
The ROEV of 10.7% has increased significantly from
2008 largely as a result of the lower opening MCEV
for 2009.
■ Reconciliation of IFRS
and AOP profits
The IFRS after tax result for 2009 was a loss of
£118 million, compared to a profit of £683 million
in 2008. This movement was largely driven by the
impact of marking-to-market of Group debt, as the
improvement in the external valuation of Group debt
in 2009 negatively impacted profit after tax by £263
million for the year, reversing the positive impact of
£503 million of marking-to-market our own debt
instruments in 2008. The movement was also driven
by the unusually high effective tax rate on the IFRS
results. In accordance with our AOP policy, a charge
relating to acquisition accounting of £443 million and
negative short-term fluctuations in investment return of
£316 million represent the other significant deductions
from the adjusted operating profit (pre-tax) to arrive at
the 2009 loss after tax. As usual at the year-end, we
have reviewed our goodwill balances, and we have
18 Old Mutual plc
Annual Report and Accounts 2009
£285bn Funds under management
recognised a goodwill impairment (included within the
acquisition accounting charge noted above) of £187
million in respect of Retail Europe business and £79
million in respect of Wealth Management which arose
specifically in continental Europe. This impairment
reflects a downgrading of our view of the value of
these businesses since the time of acquisition given
the changed economic circumstances in Europe and
market readjustments. We continue to recognise
goodwill of around £200 million for Retail Europe
which we believe is supportable going forward, and
the goodwill for the continental Europe part of Wealth
Management has been written off. There was also a
release of other provisions relating to long-standing
litigation matters of £61 million.
■ Management Discussion and
Analysis of Results for 2009
The principal businesses of the group are the Long-
Term Savings division, Nedbank, Mutual & Federal
and US Asset Management. During the year,
Old Mutual owned on average 55% of Nedbank
and 74% of Mutual & Federal. At 31 December
2009, the market capitalisation of Nedbank
was £5.2 billion and of Mutual & Federal was
£610 million. Since 31 December 2009, Old Mutual
has completed the purchase of the remaining
minorities of Mutual & Federal.
Long-Term Savings
The key financial metrics for the Long-Term Savings
division are shown in the table below:
2009
Life assurance sales (APE)
PVNBP
Value of new business
Unit trust/mutual fund sales
NCCF (£bn)
FUM (£bn)
Adjusted operating profit
(IFRS basis) (pre-tax)
Operating MCEV earnings
(covered business) (post tax)
Emerging
Markets
393
2,834
65
2,765
(1.6)
43.5
446
212
Nordic
235
1,150
44
393
1.0
11.0
62
81
Retail
Europe
Wealth
Management
US Life
Total
£m
67
537
(5)
24
0.5
4.1
22
(44)
617
5,042
49
3,210
2.5
46.9
106
(4)
68
639
14
–
(0.5)
6.7
49
266
1,380
10,202
167
6,392
1.9
112.2
685
511
£m
2008
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Total
Life assurance sales (APE)
PVNBP
Value of new business
Unit trust/mutual fund sales
NCCF (£bn)
FUM (£bn)
Adjusted operating profit
(IFRS basis) (pre-tax)
Operating MCEV earnings
(covered business) (post tax)
362*
2,482*
61*
2,708
(1.8)
40.3
415
343
213
991
32
262
0.6
8.0
88
149
91
555
10
47
0.5
3.5
29
14
664
5,540
67
2,561
2.0
38.9
150
229
136
1,246
(12)
–
–
0.3
(230)
(364)
1,466
10,814
158
5,578
1.3
91.0
452
371
* Includes Nedgroup Life sales. The comparative figures excluding Nedgroup Life are as follows: APE: £334m; PVNBP: £2,399m; VNB: £53m
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Old Mutual plc
Annual Report and Accounts 2009
19
mANAGEmENT STATEmENTS
GROUP FINANcE DIREcTOR’S
STATEmENT
cONTINUED
LTS reported strong results with IFRS operating
profits up 52%, margins improved, and there was
strong growth in funds under management, with
positive net client cash flows. Sales for the whole
of LTS were down only 6% for the full year, but
up 5% for the second half compared to the same
period in 2008. Emerging Markets sales in the first
half were strong relative to those of other parts of
LTS reflecting the later entry of South Africa into
recession. Wealth Management sales performance
in the second half was particularly strong, as was
Nordic with very good NCCF and funds under
management. Sales in Europe accounted for 67%
of the APE and 53% of the value of new business.
US Life sales were as planned, and the turnaround
in the US Life business, which has delivered a small
AOP profit, as compared to a significant loss in
2008, led to the increase in IFRS operating profits.
The APE margin of 12% for the year held up well
relative to the comparative period (2008: 11%)
despite the lower sales, and given the greater focus
on product pricing. The PVNBP margin has also
remained steady.
Further discussion on the drivers for the movements
within the individual units of LTS, namely Emerging
Markets, Nordic, Retail Europe, Wealth Management
and US Life is given in the Business Review which
follows.
Shareholder allocation and long-term
investment return
The AOP result includes the long-term investment
return (LTIR) result. The most significant portion of
this return arises in the Emerging Markets unit, and
in 2009 we have separated the return into those
assets supporting OMLAC(SA)'s Capital Adequacy
Requirement (CAR) and the excess shareholder
assets. OMLAC(SA) is our principal legal entity in
the South African part of the Emerging Markets
Business Unit. The analysis of the investment return
for this business is shown in the table below:
In 2009, the OMLAC(SA) LTIR fell from £133 million
to £126 million and reflects a lower expected
return of 13.3% (2008: 16.6%) combined with a
lower average asset base. In 2010, the LTIR rate
for OMLAC(SA) and M&F is 9.4% reflecting the
expected asset mix of 25% equities and 75% cash.
OMLAC(SA)’s investible asset base at the year end
was £1.2 billion, with £1 billion being the assets
supporting their capital requirement. The LTIR rates
for the European business units reflect the shift
towards a higher proportion of cash investment.
The LTIR rates for the other businesses have not
changed materially in 2009, and are expected to
remain stable in 2010.
Currency development
The South African rand strengthened this year by
14% against sterling and the US dollar strengthened
against sterling by 15% on an average basis over
the year. This had the effect of improving rand-
denominated and dollar earnings whilst decreasing
the sterling value of dollar-denominated debt at the
year-end rates.
Return on Equity
Return on Equity for the Group declined to 9.1% in
2009 from 11.3% in 2008, primarily due to the lower
profits from Nedbank, a return to a normalised tax
rate and lower European profits, partially offset by
improvements in US earnings.
Funds under management and net client cash flow
Funds under management at 31 December 2009
were £285 billion compared to £265 billion at the
end of 2008. During 2009, Old Mutual delivered
robust investment performance in challenging
markets. Group net client cash flows were negative
£3.1 billion, as a result of the net £4.5 billion outflow
(net of Group transfers) in US Asset Management,
although net client cash flows were £1.9 billion
positive in LTS as a whole. We produced positive
flows of £4.0 billion in our Wealth Management,
Nordic and Retail Europe businesses combined,
£m
31 December 2009
as currently reported
31 December 2008
restated
31 December 2008
as previously reported
OMLAC(SA) LTIR
Other operating segments
Total
126
91
217
133
108
241
241
0
241
20 Old Mutual plc
Annual Report and Accounts 2009
offset by outflows of £1.6 billion in our Emerging
Markets business and £0.5 billion in our US Life
business. The USAM negative net client cash flow
was a result of outflows from several of our US Asset
Management affiliates.
The overall FUM and NCCF result is pleasing,
considering the challenges of delivering on absolute
investment performance in the extremely volatile
markets of the past two years. While over the course
of 2009, the FTSE-100, the JSE Africa All Share
Index and S&P 500 all grew more than 15%, within
the period there has been significant fluctuation
in many asset classes. The US and South African
equity portfolios showed the greatest volatility. Given
the movement in monthly funds under management
during the period, there were adverse impacts on
both management fees and performance fees in
the first half of 2009, and these reversed in the
second half of 2009. Our large fixed income assets
under management performed well. Investment
performance in South Africa improved on prior
years. Benchmark performance of the US Asset
Management business was mixed, with ‘quant’
underperforming and ‘credit’ out-performing.
■ Key actuarial and MCEV
developments in 2009
Old Mutual reports its supplementary embedded
value information in accordance with the Market
Consistent Embedded Value Principles (the
‘Principles’) issued in June 2008 by the CFO Forum
and updated in October 2009 to reflect the inclusion
of a liquidity premium. The risk-free reference rate
to be applied under MCEV should include both
the swap yield curve appropriate to the currency
of the cash flows and a liquidity premium where
appropriate. The CFO Forum is performing further
work to develop more detailed application guidance.
The Principles have been fully complied with for all
businesses at 31 December 2009.
For the US Life business and OMLAC(SA)’s Retail
Affluent Immediate Annuity business we considered
the currency, credit quality and duration of our
actual corporate bond portfolios, together with a
wide range of liquidity market data and literature,
and derived adjusted risk-free reference rates at
31 December 2009. It is the Directors’ view that a
significant proportion of corporate bond spreads
at 31 December 2009 is attributable to a liquidity
premium rather than credit and default risk and that
returns in excess of swap rates can be earned on
our portfolios, rather than entire corporate bond
spreads being lost to worsening default experience.
Liquidity premiums of 100 basis points for the US
Life business (31 December 2008: 300 basis points;
30 June 2009: 175 basis points) and 50 basis points
for OMLAC(SA)’s Retail Affluent Immediate Annuity
business (31 December 2008: zero allowance;
30 June 2009: 50 basis points) were added to
swap rates used for setting investment return and
discounting assumptions. We believe that the
differences between market yields on our US Life
and OMLAC(SA)’s Retail Affluent bond portfolios and
the adjusted risk-free reference rates still provide
adequate implied margins for defaults. No liquidity
adjustment is applied for other regions.
When the liquidity premium adjustment was
calibrated and introduced for US Life business at
31 December 2008, similar research was not yet
concluded for South Africa to estimate the quantum
of the liquidity premiums inherent in South African
corporate bond spreads. In addition, the impact of
a liquidity premium adjustment on US Life business
was far more material than for OMLAC(SA)'s
Retail Affluent Immediate Annuity business as the
concentration of investments in the corporate
bond market is far greater and the widening of
corporate bond spreads has been more pronounced
in the US compared to other regions. Hence the
application of a liquidity premium adjustment was
initially focused on the US and an adjustment was
only introduced for OMLAC(SA) at 30 June 2009 for
consistency in methodology.
The recovery of global equity markets together with
the contraction of corporate bond spreads, whilst
partly offset by the reduction in the liquidity premium
adjustment for US Life, were the main factors driving
positive economic variances of £1.0 billion for 2009.
In addition there was also a strong contribution from
foreign exchange movements mainly caused by
strong rand appreciation against sterling.
Adverse persistency was experienced across
a number of operations and the organisational
restructure led to negative expense variances,
although this was partly offset by positive mortality
variances across all operations.
Persistency assumptions were strengthened, partly
to allow for temporary worsening in persistency,
and planned development and project expenditure
has been capitalised in the value of in-force
(VIF). This was partly offset by positive mortality
assumption changes, in particular because of a
weakening of mortality assumptions in OMSA’s
Retail Mass business following positive experience
for assured lives.
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Old Mutual plc
Annual Report and Accounts 2009
21
mANAGEmENT STATEmENTS
GROUP FINANcE DIREcTOR’S
STATEmENT
cONTINUED
The MCEV of Wealth Management was boosted
by the removal of dividend tax in the International
business.
Following the purchase of the minority interests in
respect of Mutual & Federal on 8 February 2010
in exchange for 147 million Old Mutual plc shares,
Mutual & Federal has been delisted and will be
incorporated in the adjusted Group MCEV at its
IFRS equity amount from 2010 onwards. If the
transaction had completed on 31 December 2009, it
would have diluted the 2009 adjusted Group MCEV
per share by approximately 6p.
The anticipated expected existing business
contributions (or expected ‘unwind’ of the MCEV)
at the 'reference rate' of £262 million as well as
'in excess of the reference rate' of £189 million for
the twelve months following the year ended 31
December 2009 are provided to assist users of the
MCEV supplementary information in forecasting
operating MCEV earnings. Note that the exchange
rates that are used for such disclosure are the same
rates that are used to translate current year earnings
for comparability purposes. Therefore the ultimate
expected existing business contribution for the
financial year ending 31 December 2010 may differ
from these results.
■ Lapses and Surrenders
We continue to monitor and manage actively the
lapse and surrender behaviour of customers and
specific agents. The pattern of surrenders in the US
during 2009 was more volatile than in 2008 in the
fixed annuity book, similar to industry-wide trends,
and terminations were above assumption levels
for the first half of 2009. A moderation through the
second half brought about by an active lapse and
surrender management programme had the effect
of reducing fixed annuity termination rates close
to assumption levels. Termination experience for
life products was below assumed levels and fixed
annuity experience improved during the course of
the year.
Emerging Markets saw some indications of
deteriorating persistency in certain regular premium
Retail Mass products given the economic conditions
in the first half of 2009, which led to increased
unemployment. Lapse and surrender management
programmes in the unit are well established, but
we have nevertheless strengthened operating
assumptions for our Emerging Markets unit, partially
short-term, and this reduced MCEV by £83 million.
The experience in Wealth Management, particularly
in the UK and International businesses, reflected
anxiety around equity-based investments although
this stabilised in the second quarter and onwards
for the rest of 2009. However, given the changes
in the operating model of the UK business and
the migration to the platform business from the
older product lines, we have also made a negative
operating assumption change of £81 million in
respect of persistency.
Elsewhere in LTS, trends were generally in line with
assumptions.
Surrenders in Bermuda occurred mainly on the
non-guaranteed book as asset values recovered.
Conservation activity here focused on managing
cash flow and profitability, and efforts in this regard
are likely to develop further in 2010 in a way that is
consistent with maximising long-term value for the
Group.
Overall the financial circumstances of our customer
base remain the key driver of lapse and surrender
behaviour. For example, rising unemployment in a
number of markets has led to what we believe to
be a temporary deterioration in persistency, which
should revert back to long-term assumptions as
economic conditions improve.
■ Capital, liquidity, leverage and
dividends
Capital
The Group’s regulatory capital surplus, calculated
under the EU Financial Groups Directive, at
31 December 2009 was £1.5 billion (31 December
2008: £0.7 billion; 30 June 2009 £1.0 billion). This
represents a coverage ratio of 135%, compared
to 121% at 31 December 2008 and 128% at
30 June 2009. The increase since 31 December
2008 comprises the statutory earnings in the
period, rand strength and a Nedbank Tier 2 capital
raising offset by modest rises in statutory bank
capital requirements in South Africa. There was
a positive £0.1 billion movement in FGD arising
from management actions including the disposal
of Australia, closure of Bermuda to new business,
and a change in the investment mix of Emerging
Markets’ shareholder funds held to back the Capital
Adequacy Requirement. The Group FGD surplus
was reduced by £42 million compared to 2008, as
US Life is now included at 200% of local capital
required rather than 150% as in prior periods.
22 Old Mutual plc
Annual Report and Accounts 2009
Our Group capital is structured in the following way:
Ordinary Equity
Other Tier 1 Equity
Tier 1 Capital
Tier 2
Deductions from total capital
Total Capital
2009
4,218
611
4,829
2,550
(1,597)
%
73
11
84
44
(28)
2008
3,048
573
3,621
2,430
(1,724)
5,782
100
4,327
£m
%
70
13
83
56
(39)
100
Tier 1 includes £174m of the hybrid debt capital
reported for accounting purposes as Minority
Interests and Tier 2 includes £338 million of
capital hybrid debt, which is reported as Group
Preference Shares.
The Solvency II Directive was approved by the
European Union in November 2009, and is
scheduled to come into effect in October 2012.
The Group is actively participating in the industry
consultations, such as the Quantative Impacts
Studies, which are taking place to develop the
more detailed implementation measures which the
European Union will agree over the next two years.
The Solvency II Directive is intended to align the
regulatory capital regime for insurers more closely
with the economic risk view of the business.
However, it also changes the qualifying criteria
for regulatory capital in response to the market
events of the past couple of years, and in addition,
has considerable implications on the governance
structures and operating models for EU insurance
businesses. Although the Solvency II Directive
applies to EU insurers only, it applies to the Group’s
businesses globally; furthermore we expect other
jurisdictions, notably South Africa, to implement
equivalent regimes shortly afterwards.
Our subsidiary businesses continue to have strong
local statutory capital cover.
We remain committed to supporting the US Life
capital ratio at a level above 300% RBC. In February
2009, $225 million of cash was injected into the
US Life business. Since then, the improvement in
performance has meant that the Group has not
been required to provide any net additional capital
to the US Life businesses. This compares favourably
with our previous guidance where we stated the
business could require between $200-300 million.
The development for 2010 capital needs in US Life
depends upon a wide range of factors including
our statutory earnings, market movements, ratings
migration and the implementation of possible
changes to both US GAAP and NAIC accounting
rules which are currently under consideration.
Such developments may result in a release of
statutory capital requirements in due course.
Given the capital position of the business and our
expected level of IFRS impairments for 2010 of
$55 million, we do not anticipate a capital injection
into the business during 2010.
Liquidity and Cash Flow
As a Group we concentrate on maintaining effective
dialogue and strong commercial relationships with
our banks and fixed income investors. In 2009
we have successfully extended two existing bank
facilities of £250 million, have put in place an
additional three-year bank facility of $200 million,
and in October 2009, we successfully placed
Statutory Entity
OMLAC(SA)
Mutual & Federal
US Life
Nordic
UK
Nedbank*
* This includes unappropriated profits.
At 31 December 2009
At H1 2009
At 31 December 2008
Ratio
Ratio
Ratio
4.1x
172%
312%
10.8x
2.9x
Core Tier 1: 9.9%
Tier 1: 11.5%
Total: 14.9%
3.9x
141%
281%
10.8x
3.0x
Core Tier 1: 8.6%
Tier 1: 10.0%
Total: 13.2%
3.8x
104%
305%
9.9x
2.5x
Core Tier 1: 8.2%
Tier 1: 9.6%
Total: 12.4%
Old Mutual plc
Annual Report and Accounts 2009
23
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mANAGEmENT STATEmENTS
GROUP FINANcE DIREcTOR’S
STATEmENT
cONTINUED
a £500 million seven-year 7.125% fixed rate
senior bond.
At 31 December 2009, the Group holding
company had total liquidity headroom of £1.2 billion
(2008: £0.6 billion), comprising cash of £0.4 billion
and undrawn facilities of £0.8 billion.
In addition to the cash and available resources
referred to above at the holding company level, each
of the individual businesses also maintains liquidity
to support its normal trading operations.
The Group generated £434 million of free surplus in
the year (2008: £83 million), of which £249 million
(2008: (£158) million) was generated from covered
business, and £551 million (2008: £308 million) was
generated by the LTS division. Bermuda continues
to be included as covered business for both 2008
and 2009.
Leverage
Our reported net debt at 31 December 2009 was
0.4% up on the 2008 year-end position at £2,273
million, but was £102 million lower than at 30 June
2009. This represented senior debt leverage of 1.8%
compared to 5.4% in 2008 and total debt leverage
was 20.1% in 2009, compared to 26.7% in 2008.
At 31 December 2009, our gross debt on an IFRS
basis was £2,842 million, and at market value it was
£2,526 million.
During the year, the business units contributed £529
million of inflows which were offset by £339 million
of operational expenses and organic investment
including the $225 million of capital injected into
US Life in the first quarter. During the period, cash
of £41 million was also used to exit the AA TEDA
transaction and £80 million was paid in respect of
the settlement of certain long-standing litigation
matters.
Dividend
The Board has carefully considered the position
in respect of a final ordinary dividend for 2009,
and is recommending the payment of a final 2009
dividend of 1.5p per share (or its equivalent in
other currencies). The Company is offering, for the
first time, a scrip dividend alternative for eligible
shareholders. The dividend timetable is set out
opposite.
The Board intends to pursue a dividend policy
consistent with our strategy, and having regard to
overall capital requirements, liquidity and profitability,
and targeting dividend cover of at least 2.5 times
IFRS AOP earnings over time.
The movement in the net debt position is shown below:
Opening net debt
Inflows from businesses
Outflows to businesses and expenses
Debt and equity movements
Ordinary dividends paid
Share repurchase
Equity issuance
Other non-cash movements
Closing net debt
Net decrease/(increase) in debt
£m
2008
(2,420)
822
(440)
(353)
(175)
5
298
2009
(2,263)
529
(339)
–
–
2
(202)
(2,273)
(10)
(2,263)
157
24 Old Mutual plc
Annual Report and Accounts 2009
Timetable for the final dividend
Currency conversion date
Currency equivalents and scrip calculation price announced
Last day to trade cum div for shareholders on the registers in Malawi,
Namibia, South Africa and Zimbabwe
Ex-dividend date for shareholders on the registers in Malawi, Namibia,
South Africa and Zimbabwe
Last day to trade cum div for shareholders on the UK Register
Ex-dividend date for shareholders on the UK Register
Record date for the dividend
Payment date and date of issue of shares under the scrip dividend alternative
5 May 2010
6 May 2010
7 May 2010
10 May 2010
11 May 2010
12 May 2010
14 May 2010 (Close of business)
25 June 2010
Share certificates and date of issue of shares under the scrip dividend alternative on the South African register may not be dematerialised or
rematerialised between 10 May 2010 and 14 May 2010, both days inclusive. Further details of the scrip dividend alternative are contained in
the separate shareholder circular.
■ US Life bond portfolio performance
The cash characteristics of the US Life business
are very different from that of the equivalent period
of 2008. We consider that the unusual market
conditions have validated our decision to hold a
higher than usual cash weighting in the US Life
Investment portfolio. In the second half of 2009, we
began to make selective purchases of new bonds.
We currently hold around $0.8 billion of cash and
other short-term holdings in the portfolio. The profile
for maturities from the bond portfolio and new
premium inflow, gives us considerable flexibility
when considering actions to mitigate against having
to realise losses on corporate bonds. The portfolio
is well matched with assets (including cash and
short-term holdings) of 5.6 years of average duration
compared to 5.8 years of liabilities.
On the US Life $15.3 billion fixed income security
portfolio, the unrealised loss was $0.5 billion at
the end 2009, and has continued to improve to
below $0.2 billion at the end of February 2010.
This compares to $1.6 billion at 30 June 2009
and $2.3 billion at 31 December 2008. All of the
above amounts are stated net of the impact of
reclassification of certain securities permitted by the
amendment of IAS 39, the unrealised loss on which
amounted to $45 million at 31 December 2009,
$283 million at 30 June 2009 and $387 million at
31 December 2008.
Of the portfolio, 50% is rated ‘A’ and above, 42% is
rated ‘BBB’ or below and 8% is not rated. The ten
largest holdings account for $1.3 billion (8.1%)
of the portfolio (31 December 2008: $1.1 billion
and 6.1%) with an average holding of $128 million
(2008: $107 million). The portfolio continues to have
approximately 15.7% in residential and commercial
mortgage-backed securities, with approximately
5% in preferred stock and hybrid instruments.
There have been a small number of defaults in the
portfolio in the year amounting to $14 million. Total
impairments amounted to $389 million in 2009
compared to $711 million in 2008. The valuation
of the bonds held in the portfolio has benefited
from the ongoing equity recapitalisations, mainly
of financial companies. As a result, we have taken
advantage of the opportunity to harvest gains so
as to improve the underlying features of the bond
portfolio further. The running yield of the portfolio is
5.82% (including cash and other invested assets).
■ Bermuda
Bermuda is in run-off and consequently is treated
as a non-core entity from 2009. The effect of this is
to remove its result from our AOP disclosures, but
to account for the interest on the loan notes to the
Group as a cost for AOP purposes of approximately
£40 million annually. It continues to be consolidated
for the purposes of IFRS reporting. The AOP EPS for
2008 has also been restated from 12.2p to 14.9p.
During most of 2009, hedges were applied to a
core number of components (interest rates, foreign
exchange, equity markets), with an average hedge
effectiveness of 95-96% achieved in the period
to September 2009. Given the improvement
in the capital position of the Group and the
stabilisation of the hedge effectiveness, combined
with management’s improved understanding and
management systems for tracking the underlying
risks, a process of selective and progressive release
of the external hedge position commenced in the
fourth quarter of 2009, with strict oversight and
within risk parameters agreed with the Group Risk
and Capital Committee. By 31 December 2009,
the majority of the equity market hedges had been
released. The release of the hedges is subject to
a stop-loss protocol, and controls are in place to
ensure that effective hedges can be reinstated
quickly if required.
The business remains well capitalised and able to
meet all its future obligations. Surrender behaviour
that is influenced by underlying fund performance
will determine the speed at which the Bermudan
book of business runs off over time, and the extent
and timing of any capital and cash release.
Old Mutual plc
Annual Report and Accounts 2009
25
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mANAGEmENT STATEmENTS
GROUP FINANcE DIREcTOR’S
STATEmENT
cONTINUED
■ Group restructuring, corporate
disposals and acquisitions and
related party transactions
The Group continues to simplify its structure and
reduce its spread of business to focus on areas
of key competence and competitive strength, and
drive operational improvements. As discussed in the
Group Chief Executive’s Report, we have announced
a programme of corporate restructuring designed to
simplify the Group and realise value for shareholders.
A number of operations have been identified for
potential exit. We expect proceeds from disposals
and from retained earnings will be deployed
to reduce debt as part of the Group Capital
Management Programme. Within each business and
in particular in the Wealth Management division of
LTS, reorganisations and efficiency programmes are
being launched, with a target of reducing costs by
£100 million across the Group by the end of 2012.
In aggregate, these will result in expected 2010
charges to AOP of around £50 million. While the
restructuring programme is put into effect, we will
be able to assess the impact on Group Head Office
resources required and the progress made from
iCRaFT and other risk management improvements.
Head Office costs for 2009 were £65 million, and
following the implementation of iCRaFT and the
completion of the restructuring, we anticipate that
we can maintain underlying Group Head Office costs
at less than £60 million per annum.
During 2009, the Group launched an offer for
remaining minorities of Mutual & Federal. This
transaction closed on February 2010 with the
issue of 147 million ordinary shares to the minority
shareholders. We also successfully completed
the acquisition of a 100% share in ACSIS, a
South African asset management firm, in August.
Disposals in 2009 were of the Chilean and Australian
businesses, and the withdrawal from the AA TEDA
acquisition in China in the first half of 2009, and
Bankhall in the UK in October 2009. Following the
disposal to Nedbank of several Old Mutual joint
ventures, Old Mutual has sold the shares received
from Nedbank in accordance with regulatory
approved processes. During February 2010,
Nedbank received final regulatory approvals to
acquire 100% of the ordinary and preference shares
in Imperial Bank.
■ Tax and non-controlling interests
The effective tax rate on adjusted operating profits
of 25% has returned to within its normal anticipated
range, from 8% in the comparative period. Factors
increasing the 2009 AOP tax rate compared to
2008 include a reduced proportion of profits being
earned on low-taxed dividends and capital profits,
partially offset by prior year adjustments and lower
secondary tax on companies (STC) costs on
reduced dividends. We anticipate a similar rate for
2010. Furthermore, the 2008 rate was anomalously
low due to the unprecedented market conditions,
the recognition of previously unrecognised deferred
tax assets and a release of provisions following
agreement of various issues with tax authorities.
The IFRS effective tax rate for 2009 was
anomalously high at 148% reflecting policyholder
contribution, losses carried forward not recognised
and non-deductible goodwill.
■ Risks and uncertainties
There are a number of potential risks and
uncertainties that could have a material impact
on the Group’s performance and that could
cause actual results to differ materially from
expected and historical results.
Continued volatility in world economic conditions
creates uncertainty in equity markets, currency
fluctuations, credit spreads, corporate bond defaults
and rating agency actions both on investments
owned by the Group and the Group underlying
entities. Unemployment conditions continue to
deteriorate and could adversely affect termination
experience in respect of the life insurance business
that could result in realising losses on illiquid assets,
particularly in the case of US Life, although this is
likely to be less than in 2008 and 2009. Credit losses
in South Africa’s banking system are subject to
uncertainty and volatility.
Economic uncertainty has contributed to reduced
consumer confidence. This has changed product
preferences to lower-risk investment products and
affected termination experience in respect of existing
and new business. These may have an impact on
earnings and present both risks and opportunities
for the Group.
26 Old Mutual plc
Annual Report and Accounts 2009
The Group is continually monitoring these
uncertainties and taking appropriate actions
wherever feasible. The Group continues to meet
Group and individual entity capital requirements
and day-to-day liquidity needs.
The implementation of the new operating model
will present challenges, yet reduce risk across the
Group. The Group continues to strengthen and
embed its risk management framework, whereby
we actively monitor and manage risk through the
three-lines-of-defence at both a business unit and
Group level, where risks exceeding pre-determined
thresholds are escalated to management and risk
officers, who are responsible for the appropriate
mitigating action. Each business regularly reviews
its overall business risk exposure against risk
appetite set in conjunction with Group Head Office.
Further detail on risk management is provided in
the Group Risk Report.
Philip Broadley
Group Finance Director
11 March 2010
At 31 December 2009 the Group’s regulatory
capital surplus was £1.5 billion and the Group
holding company had total liquidity headroom of
£1.2 billion. In addition our subsidiary businesses
maintain strong local statutory capital cover
and sufficient liquidity to support their normal
trading operations.
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Old Mutual plc
Annual Report and Accounts 2009
27
mANAGEmENT STATEmENTS
GROUP EXEcUTIvE cOmmITTEE
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. In addition to the Group Chief
Executive and the Group Finance Director, there are seven other
positions on the Group Executive Committee.
Standing:
Don Hope, Paul Hanratty, Philip Broadley,
Don Schneider, Andrew Birrell
Seated:
Paul Maddox, Julian Roberts, Tom Turpin,
Mike Brown
28 Old Mutual plc
28 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
■ Julian Roberts (52), B.A., F.C.A., M.C.T.
Group Chief Executive
Julian has been Group Chief Executive of Old Mutual
plc since September 2008. Julian joined Old Mutual
in August 2000 as Group Finance Director, moving
on to become CEO of Skandia following its purchase
by Old Mutual in February 2006. Prior to joining
Old Mutual he was Group Finance Director of Sun Life
& Provincial Holdings plc and previously Chief Financial
Officer of Aon UK Holdings Limited.
■ Philip Broadley (49), M.A., F.C.A.
Group Finance Director
Philip has been Group Finance Director since
November 2008. He was previously Group Finance
Director of Prudential plc from May 2000 to March
2008. Prior to joining Prudential, he was a partner in
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 (40), B.Bus. Sc (Hons),
FASSA, FFA, ASA, CERA
Group Risk and Actuarial Director
Andrew has been Group Risk and Actuarial Director
since March 2009. He joined Old Mutual South
Africa in August 2007 as Chief Risk Officer and was
appointed Group Chief Actuary at Old Mutual plc in
July 2008. Previously he was Chief Operating Officer
and Chief Financial Officer at Investec Securities. Prior
to this he was Chief Financial Officer at Capital Alliance
Holdings. His early career was at Metropolitan Life.
Andrew is a Fellow of the Faculty of Actuaries, Fellow
of the Actuarial Society of South Africa, an Associate
of the Society of Actuaries and a Chartered Enterprise
Risk Analyst.
■ Mike Brown (43), BCom,
Dip Acc, CA (SA), AMP
Chief Executive, Nedbank Group
Mike Brown has been Chief Executive of Nedbank
Group Limited since March 2010. He was previously
the Chief Financial Officer of Nedbank Group and
Nedbank Limited from November 2004. Prior to that
he headed Property Finance at Nedbank and before
that he was an executive director of BoE Limited.
■ Paul Hanratty (48), B.Bus Sc. (Hons). FIA
Chief Executive Officer, Long-Term
Savings and Chairman, Old Mutual
South Africa
Paul was appointed Head of Long-Term Savings in
March 2009 and Chairman of Old Mutual South Africa
in September 2009. He 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 Managing Director of OMSA in 2006.
■ Don Hope (53), Head of Strategy
Development
Don was appointed Head of Strategy Development at
Old Mutual in March 2009. He joined Old Mutual as
Group Treasurer in May 1999, with responsibility for
developing the Group's international treasury function.
He was appointed to the role of Chief Executive Officer
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 (49), M.A., F.C.A.
Head of 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, including the highly
successful Chip and Pin Programme, which was the
biggest change in the UK payments industry since
decimalisation. Paul started his career by qualifying
as a Chartered Accountant with Deloitte Haskins
and Sells.
■ Don Schneider (53), B.A., M.A.
Group Human Resources Director
Don joined Old Mutual in May 2009 from Merrill
Lynch, where he was Senior Vice President and
Head of Human Resources for their Global Wealth
Management Division. Prior to that, he headed HR for
their Global Markets and Investment Banking Division.
Don originally joined Merrill Lynch in 1997 as Head
of International Human Resources, based in London,
where he was responsible for all HR activities outside
the US. Prior to joining Merrill Lynch, Don worked for
Morgan Stanley for 13 years and he held a variety of
senior HR roles. Don started his career as a consultant
in human resources.
■ Tom Turpin (49), BS (Accounting)
President and Chief Executive Officer,
Old Mutual Asset Management (US)
Tom was appointed President and Chief Executive
Officer, Old Mutual Asset Management (US) in June
2008. He previously served as Chief Operating
Officer of Old Mutual (US). Prior to that, he was
Managing Director and Head of Defined Contribution
Plans at Putnam Investments. From 1982 to 1993
he held a variety of leadership positions with The
Boston Company. Tom is a member of the board of
Old Mutual (US) Holdings and a member of the boards
of directors of several affiliated companies and affiliate
managed investment funds.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
29
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IN THE RIGHT
DIRECTION
Exposure to diverse geographies helps LTS profitability
in difficult markets
LTS reported strong results, with improved margins and IFRS
operating profits up 52%. Funds under management grew
strongly, with positive net client cash flows. Sales for the whole of
LTS were down only 6% for the full year and returned to growth
in the second half − rising 5% compared to the same period in
2008. Emerging Markets sales were better in the first half than the
second, reflecting the later timing of the recession in South Africa.
Wealth Management sales performance in the second half was
particularly strong − as was Nordic, with very good NCCF and
funds under management. US Life sales were as planned.
LTS Adjusted operating profit* by division
Adjusted operating profit (AOP)
£m
2009
£685m
• Emerging Markets
• Nordic
• Retail Europe
• Wealth Management
• US Life
*IFRS basis (pre-tax)
Annual premium equivalent by division
Life assurance sales (APE)
2009
30 Old Mutual plc
30 Old Mutual plc
£000m
Annual Report and Accounts 2009
Annual Report and Accounts 2009
• Emerging Markets
• Nordic
• Retail Europe
• Wealth Management
• US Life
446
62
22
106
49
£m
393
235
67
617
49
BUSINESS REVIEW
LONG-TERM SAVINGS
The Long-Term Savings Division (LTS), brings all of the Group’s
long-term savings businesses together. The vision of LTS is aligned
to that of the Group’s vision, which is to be our customers’ most
trusted partner – passionate about helping them achieve their
lifetime financial goals. We intend to achieve this vision by being the
leader in the management of personal finances within our selected
markets, for predominantly middle income and affluent customers.
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KEY FACTS
Adjusted operating profit (AOP)
2009
£685m
2008: £452m
Net client cash flow (NCCF)
09
08
Funds under management (FUM)
2009
£112.2bn
2008: £91bn
(£bn)
1.9
1.3
Return on equity (ROE)
09
08
(%)
15.2
9.9
Number employed
Some of our brands
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22,269
LTS Executive Committee
1 Jonas Jonsson
CEO, Retail Europe
3 Chris Chapman
CEO, US Life
2 Kuseni Dlamini
4 Bob Head
CEO, Emerging Markets
and Old Mutual South Africa
CEO, Wealth Management
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5 Paul Hanratty
CEO, Long-term Savings
and Chairman, Old Mutual
South Africa
6 Bertil Hult
CEO, Nordic
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Old Mutual plc
Annual Report and Accounts 2009
31
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
By leveraging our expertise and capabilities,
identifying and delivering synergies and deploying
our technology more effectively we will unlock
value for customers and shareholders.
Paul Hanratty
CEO, Long-Term Savings and Chairman, Old Mutual South Africa
LONG-TERM SAVINGS
Paul Hanratty
CEO, LTS
Kuseni Dlamini
CEO, Emerging
Markets
Bertil Hult
CEO, Nordic
Jonas Jonsson
CEO, Retail
Europe
Bob Head
CEO, Wealth
Management
Chris Chapman
CEO, US Life
Rose Keanly*
Head, LEAN
Operations
Steven Levin*
Head of
Product
Development
*Appointed: March 2010
■■ Long-Term Savings Overview
In March 2009 we announced that one of our
five strategic priorities was to “Leverage scale in
our long-term savings businesses”. In order to
achieve this objective we announced the creation
of the Long-Term Savings Division (LTS), bringing
all of the Group’s long-term savings businesses
together for the first time. The vision of LTS is to
be our customers’ most trusted partner in helping
them achieve their lifetime financial goals, within
our selected markets. We intend to achieve
this objective through the unlocking of value for
customers and shareholders by:
> Leveraging the core expertise and capabilities
that we have within our businesses;
> Ensuring more effective deployment of
technology and platform; and
> Identifying and exploiting synergies.
The LTS Executive Committee includes the CEOs of
all the LTS Business Units (Emerging Markets, Retail
Europe, Nordic, Wealth Management and US Life).
This structure enables rigorous discussion within LTS
and brings to the surface areas where synergies can
be gained and capabilities replicated.
32 Old Mutual plc
Annual Report and Accounts 2009
£43.5bn Funds under management
in Emerging Markets
Highlights of the past year
2009 was a challenging, yet exciting, year for LTS.
Our goal as we began to develop the strategy
for the LTS division was to create more value for
customers and shareholders from combining
the LTS businesses. As part of this strategy, we
exited Australia, Chile and the Eastern European
countries where we did not have a meaningful
presence. In addition, we restructured our Wealth
Management and Retail Europe businesses for
optimal performance and combined China, India,
Colombia, Mexico, OMSA and the Rest of Africa into
an Emerging Markets business unit to leverage the
extensive knowledge of emerging markets already in
existence in OMSA.
Financial performance
See Group Finance Director’s report (page 16).
Looking forward to 2010
2010 is going to be a key year for LTS with our
focus centred around the delivery of our strategy
specifically in relation to the cost and revenue
synergies identified, the delivery of the Wealth
Management strategy as included in its section
below, and continuing to leverage our skills and
capabilities. We will prepare each of the businesses
in the LTS division for growth and optimal
performance in their respective markets, and while
the year ahead will be undoubtedly be testing as
the uncertainty of the markets continues, we are
confident that the LTS businesses will not only
exhibit the resilience evidenced by the 2009 financial
results, but also produce a strong performance in
2010 as a result of the newly-focused strategy.
What is LTS?
LTS is Old Mutual's long-term savings business.
This includes both life and non-life investment
products, which we provide to help our customers
improve their financial health or to manage their
personal finances. Across our various businesses,
we have real competitive advantage as a result of
the following:
1. Access to customers
We have excellent access to customers through a
range of different distribution channels, which are
founded on long and trusted relationships.
2. Excellent customer solutions
We have built up a reputation for having excellent
solutions which meet the needs of our customers.
These are generally tied to the provision of advice,
whether by us, or via independent distribution
channels.
3. Scale
The scale of our LTS business allows us to achieve
significant economies, including process and IT
efficiencies, which permit us to deliver excellent
customer service at a lower cost.
4. Delivering returns consistent with needs
Across our LTS business we have a common
approach to delivering investment returns for
customers. This is about delivering value and returns
consistent with their needs. Customer focus is the
hallmark of the LTS business. We believe it provides
us with a competitive advantage as it builds trust
amongst customers and can be related back to their
specific needs and risk profiles.
The rationale for the business
Within LTS, returns and growth rates are high. It is
well-balanced in terms of its financial characteristics,
having a mix of high return, cash-generative
businesses (OMSA, Namibia and Colombia), high
profit growth businesses (Wealth Management
and Nordic), and high embedded value growth
businesses (European Retail, Africa, Asia and
Mexico). The overall result of managing these
businesses together is to generate a good cash
return coupled with strong profit and embedded
value growth over the long-term. In addition, there is
a great opportunity to increase returns by identifying
and further developing synergies across the Group.
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Old Mutual plc
Annual Report and Accounts 2009
33
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
■■ Emerging Markets
LONG-TERM SAVINGS: EMERGING MARKETS
Emerging Markets
New Markets
Rest of Africa
South Africa
(OMLACSA)
Old Mutual Investment
Group South Africa
(OMIGSA)
Administration
(OMSTA)
Latin America
Corporate
Joint ventures in
China & India
Retail Mass
Retail Affluent
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
LTS Emerging Markets provides innovative financial
solutions addressing both protection and savings
needs in 10 countries with a combined population
of over 2.6 billion in Africa, Asia and Latin America.
Our biggest business is in South Africa, where we are
the largest financial services company (as measured
by assets under management). We also serve other
African countries through our operations in Namibia,
Zimbabwe, Malawi, Kenya and Swaziland. Under
New Markets we provide financial services to Latin
America through Skandia Colombia and Mexico,
and in Asia through joint ventures Old Mutual Kotak
Mahindra in India and Skandia:BSAM in China.
Our business comprises asset management, life
insurance, banking and short-term insurance. In
life insurance we provide wealth management,
investment products, retirement savings, life
insurance and disability insurance to individuals and
groups in all 10 countries in which we operate.
In South Africa we provide asset management
services through Old Mutual Investment Group South
Africa’s (OMIGSA) boutiques. OMIGSA’s investment
boutiques collectively span all key asset classes
and employ unique strategies that meet the different
needs and risk profiles of their customers. This gives
our customers access to a comprehensive range of
savings and investment solutions. We are expanding
our reach outside the traditional South African
customer base by offering property, infrastructure,
exchange traded funds (ETF) and hedge-fund
solutions that meets the needs of international
investors. The investment boutiques include:
> a number of specialist equity businesses;
> a fixed income capability in Futuregrowth;
> a number of businesses which blend multiple
asset classes to create risk profiled solutions
for investors;
> an index-tracker capability in Dibanisa Fund
Managers;
> a property asset management and property
management capability in Old Mutual
Investment Group Property Investments
(OMIGPI);
> a multi-manager capability through SYmmETRY,
which creates portfolios for institutional investors
blending best of breed asset managers across
multiple asset classes;
> a private equity and infrastructure investment
capability; and
> Old Mutual Specialised Finance (OMSFIN),
which is active in corporate lending, securities
lending and structured products.
We offer life insurance services in South Africa
through Old Mutual Life Assurance Company
(South Africa) (OMLACSA). This has three distinctive
business units:
> Retail Affluent business provides life, disability,
retirement annuities, savings and investment
products to individuals earning more than
R12,000 per month. Our multi-channel
34 Old Mutual plc
Annual Report and Accounts 2009
distribution approach gives us extensive reach.
Retail Affluent has 25% market share of its
2.9 million target market of customers. In 2009
we got R2.1 billion Life APE sales from all
distribution channels and R24.3 billion non-life
inflows.
> Retail Mass business meets the financial
services needs of the mass market, which is
defined as all those individuals who earn a
monthly personal income of less than R12,000:
an estimated 10.2 million individuals in South
Africa. In 2009 we received R1.5 billion APE from
all our channels. In the last five years, Retail Mass
doubled its APE driven by demographic shifts
(making it the fastest growing segment). Based
on the number of customers we have a market
share of 37% if we only take the traditional life
company competitors into account and 24% if
we incorporate all players (including banks) in
this space.
> Corporate segment provides investment,
retirement, insurance, structured products and
advisory services to corporate, institutional and
parastatal customers. Investment products
are customised depending on the investor’s
requirements. These include smoothed
bonus portfolios (where we have 70% of the
market), absolute growth portfolios, structured
solutions, annuity products (which account
for more than 60% of the SA market), group
assurance products as well as 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 defined contribution and open-
architecture. Through Old Mutual Actuaries and
Consultants (OMAC) we offer advisory services
to 150 sizeable retirement funds as well as
medical schemes.
In the rest of Africa most of our life products are
distributed by tied agents. In Zimbabwe we offer
short-term insurance through RM Insurance
Company and a range of banking services through
Central African Building Society (CABS), Zimbabwe’s
largest building society.
In Latin America we serve a mix of retail affluent,
retail mass and corporate customers with an open-
architecture of international and domestic unit trust
funds. In China we mainly serve the affluent market
and in India we mainly serve retail mass.
We continue to build on our strengths:
> Old Mutual South Africa has a strong balance
sheet and is one of the best capitalised
businesses in the industry: we have a higher
credit rating than any of our competitors.
> We have the largest distribution capability
in the South African long-term industry: our
combination of tied agents, independent
financial advisers, bank distribution, corporate
advisers and direct distribution enables us to
reach a full spectrum of potential customers.
> In the rest of Africa, our businesses dominate
the local markets in which they operate.
> Excellent risk management and sophisticated
product design capabilities make us a profitable
one-stop financial services provider with leading
products across all the customer segments
we serve.
> In Latin America we are a premier player in
managing corporate voluntary pensions, with a
rapidly growing market share.
> In China we are the market leader in unit-linked
investments.
■■ Business model
Our current business is designed to maximise
assets under management (AUM) and margin while
minimising expenses.
We maximise AUM by:
> Growing our sales through growing our
distribution ahead of our competitors,
segmenting our customer base to service
affluent, mass and corporate customers
appropriately, and providing class-leading
products.
> Providing attractive investment performance,
aided by our model of having multiple boutiques
with their own specialist focus.
> Ensuring that money does not leave the
company unnecessarily. We seek high
persistency though good customer management
and service, strong investment performance and
sales force training to manage sales quality.
We maximise margin by leveraging our risk
management and product development capabilities
to yield differentiated products where we can make
a good margin. For commoditised products we
leverage our brand and distribution footprint to reach
more customers than our competitors. As at the
end of December we had 2,535 tied agents serving
the Retail Affluent segment of OMSA. Our key
product offerings include Greenlight, a flexible
and comprehensive range of life, disability, and
future-needs cover. A range of retirement savings
plans, annuities, investment and income products
are provided through different wrappers – which
include the Max, Investment Frontiers and Galaxy
product ranges.
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
For OMSA’s Retail Mass segment, channels
to market include salaried tied agents selling
predominantly through worksite marketing, Group
Schemes, independent financial advisers (IFAs),
direct channels, partnerships with other retail chain
stores and banks. We offer savings, retirement and
life cover and funeral cover products. In 2009 we
started offering lending products to this market
through Old Mutual Finance. At the end of 2009
we had 2,694 tied agents.
In Latin America, we distribute primarily through
tied financial planners and in China through multiple
distribution channels.
In the rest of Africa most of the life products are
distributed by tied agents.
In South Africa, in 2009, the total contribution to Life
(APE) sales from agents in Retail Mass was 76% and
50% in Retail Affluent.
Generally we achieve higher margins in riskier
markets and segments, or where competition is
lower. Margin is also affected by liability profile.
We make higher margins on insurance contracts
than on pure investment contracts.
We manage expenses tightly, and costs per
policy are well below those in developed markets.
Customer service, technology and policy
administration service for the Retail Affluent,
Retail Mass and Corporate businesses in OMSA
and some of the other African businesses are
provided by Old Mutual Service Technology and
Administration (OMSTA). We established OMSTA
in 2003 to improve customer service and provide
IT capabilities while substantially reducing costs
through economies of scale. OMSTA services
all Old Mutual’s customers, intermediaries and
retirement fund members across our full product
range through our extensive network of service
centres, call centres and internet. It achieves
economies while enhancing service quality, and we
are looking to use its capability across the other LTS
divisions to benefit from its low cost base and boost
LTS’s competitiveness in other geographies.
Our business plan sets delivery targets that we
track monthly. The strategy development cycle,
running from November to May, feeds into the
business planning cycle which runs from June to
October. During the strategy development cycle,
the management team sets the strategy and
provides context and direction to guide business
planning. We set both financial and non-financial
objectives for a three year cycle. Delivery against
the agreed plan is reviewed monthly, quarterly
and annually and we take remedial action where
necessary. The plan forms part of the performance
agreements for business units and is directly linked to
how they are rewarded.
Sophisticated risk management processes ensure
that we deliver what we promise to customers.
Our capital adequacy reserves (CAR) ensure that
we can weather adversity, and we add a significant
margin to statutory requirements so that we can meet
substantial deviations. The life company in South
Africa currently holds at least 1.25 times statutory
CAR as a minimum internal CAR, which, together
with some strategic holdings such as investments in
Nedbank and M&F, is not distributed to shareholders.
We also determine economic capital (the minimum
capital needed to meet worst-case loss in economic
value, due to risks arising from business activities)
and working to integrate that with the existing capital
management framework. Staff incentives are based
on economic profit.
Our distribution through bank financial advisers
within Nedbank constitutes an important channel.
Our key relationships with Nedbank and Mutual and
Federal (M&F) are delivering real value. In Namibia and
Swaziland we have a bancassurance arrangement
with Nedbank. We launched the OM Investment
Credit Card in South Africa with Nedbank support and
are currently reviewing the possibility of transactional
banking with Nedbank. We distribute some of our
products through Nedbank Financial Planners,
which delivered R167 million APE of sales in 2009.
Procurement synergies with Nedbank and M&F are
delivering cost savings on both sides. We will continue
to leverage our relationship with M&F to grow the
value of our business.
■■ Product development
Among the most distinguishing features of
Old Mutual’s products are their simplicity and
transparency, so we take care to follow this
philosophy diligently when designing products and
updating features.
We use a host of surveys and focussed groups to
ensure that we continue to deliver on our promises
and meet our customers’ needs.
Experience has shown that we also develop
products relatively cheaply when compared to
competitors and that we are quick to market;
thereby enabling us to boost our return to
shareholders.
In line with international trends and the need
to ensure products are appropriate for today’s
environment, we are now continuously developing
investment and savings products which
have significantly lower charges (and capital
requirements), increased transparency and flexibility.
36 Old Mutual plc
Annual Report and Accounts 2009
5,229 tied distribution intermediaries in South Africa
■■ Market overview
South Africa
The impact of recession on the jobs market was
much worse than anticipated. Nearly eight hundred
thousand workers lost their jobs. Local equity
markets followed a similar pattern to international
markets, with a dramatic fall at the beginning of
the year followed by a significant recovery in H2.
The All Share Index rose by 29% in 2009, with
dramatic variances in sector performances. Inflation
fell, from a peak of 8.6% in March, to 6.3% in
December. The rand appreciated by 22% against
the US dollar and 14% against the British pound
mainly as a result of a narrowing trade deficit.
The local financial services sector was severely
affected by the South African recession as job losses
led to a decline in disposable incomes. Competition
has continued to increase as banks, life assurers
and asset managers increase their product offerings
in an effort to grow their share of customer wallets.
In addition, new market entrants unburdened by
legacy issues are challenging existing practices.
The overall savings rate in South Africa remains low,
with a large proportion of savings being channelled
into non-financial investment vehicles such as
property. Demographic shifts have seen a fast-
growing black middle-income market accumulating
savings and wealth while the “baby-boomer”
market enters the wealth-decumulation phase.
The economic growth of recent years has boosted
the emerging and middle-income market segments,
presenting us with significant opportunity. We see
further opportunities in the mass market, created
by growth in customer numbers and income as well
as low penetration of financial service solutions.
However, in 2009 this growth was threatened by
customers’ high levels of indebtedness, which
resulted in higher rates of early policy termination.
The regulatory regime has been evolving to
secure greater transparency and protection for
consumers over the past 10 years. New commission
regulations for savings policies were implemented
from 1 January 2009, moving from fully upfront
commission to part upfront and part spread over the
duration of a policy. This was a profound change for
the long-term insurance sector and we implemented
adviser retention strategies to ease advisers’
transition to the new regime. The government
also introduced a Consumer Protection Bill aimed
at establishing national norms and standards
for consumer protection and the Protection of
Personal Information Bill which will affect the way
we collect, store, process and use customer data.
Amendments to the Competition Act included
personal accountability for individuals who instigate
cartel activity, and new corporate governance
rules brought significant changes relating to Board
membership and remuneration.
Future regulations that will present opportunities
and threats to us are retirement fund reform and the
proposed introduction of a National Health Insurance
Scheme. The government is working on reforming
the retirement fund industry within a broader
framework of an integrated social security system,
aiming to secure retirement savings.
Other Emerging Markets
In the rest of Africa, economies are expected to
have achieved positive growth in 2009. According
to Central Bank of Kenya, Kenya is expected to
grow between 2.5% and 3.0%, while Swaziland is
expected to grow by 0.4% in 2009.
In Latin America economic growth was mixed,
with Mexican real GDP growth of 2.9% during
Q3 signalling that recovery has started while the
Colombian economy shrunk by 0.2%. However,
Colombian GDP was expected to grow strongly
in Q4 and we anticipate overall positive growth
in 2009. The Government of Mexico is facing a
decline in revenues and therefore it passed a new
tax law for 2010 which primarily raises income tax to
corporations and individuals.
Equity performance was mixed across the rest of
our emerging markets. The Kenyan NSE All Share
Index declined by 2.4% in 2009 and the Malawian
All Share Index dropped by 15.4%, while equities
rose 43% in Mexico and 53% in Colombia.
Inflation declined across many countries. In
Zimbabwe the introduction of a multi-foreign
currency regime helped to deliver lower inflation.
In Mexico the central bank left rates unchanged at
4.5% in November as inflation had declined below
expectation to 3.6%. During Q4 2009 Colombia’s
central bank reduced interest rates by 50 bps to
3.5% as inflationary had dropped to 2%.
Political stability generally increased across the rest
of Africa. Peaceful elections were held in Malawi in
May and in Namibia in November. Zimbabwe has
seen some political stability since the formation
of the all-inclusive government, although there
are still outstanding issues arising from the Global
Political Agreement on which it is based. Kenya
has remained calm and is busy with constitutional
reforms; however tensions in the alliance remain.
■■ Strategy
Our strategy for growth aims to transform us from
a traditional life insurer to a leading provider of
investment and savings solutions to every South
African. It will require us to:
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
HOW WE DO BUSINESS
SHARING ECONOMIC BENEFIT IN
SOUTH AFRICA
Old Mutual is committed to putting broad-based Black Economic
Empowerment (BEE) into action. Ensuring that our economic benefits
and opportunities are spread equitably across South African society
is part of our procurement policy. In 2009, OMSA Group Procurement
introduced a quarterly BEE procurement report collating information
from across Old Mutual SA. We are also working closely with
Masisizane to establish BEE supplier accreditation and supplier
development frameworks.
“The way we work with our suppliers is important for building strong
and mutually beneficial relationships so that we participate actively in
the economic transformation of South Africa.” – Heidi Kincaid, Head of
Procurement, OMSA
> Become a consistently top performing asset
manager in every asset class – creating a
compelling profile for OMIGSA boutiques,
improving our investment performance,
expanding the boutique offering and growing
the number of boutiques to occupy niche
positions
> Build a leading investment brand – we are
already seen as the No1 long-term insurance
brand in our markets and are increasingly
recognised as a leading savings and investment
brand
> Broaden our offerings to meet customers’
needs – updating and improving our current
product range and expanding it to include
products aimed at the Foundation Market
> Grow access to customers and distribution
ahead of our competitors – this is the key to
competitive advantage in our market
> Maintain cost efficiency – operational excellence
and cost control will enable us to offer our
customers affordable and competitive products
at a sustainable margin, and through OMSTA
we will continue reducing the operational cost
of the business, leveraging IT and improving
customer service to provide a solid platform for
growth
> Position Old Mutual as the leading South African
corporate citizen in financial services – OMSA
has always played a leading role in supporting
the economy and people of South Africa, and
we will continue doing this through broad-
based initiatives that create opportunities for
disadvantaged people and businesses alike
38 Old Mutual plc
Annual Report and Accounts 2009
> Use our strong operating position in South
Africa to expand selectively further into Africa
– this is a source of immense growth potential,
and in the parts of Africa where we already
operate we intend to grow by optimising
existing operations and developing wider
financial services
> Grow the value of our business in Latin America
by building the brand, sharing best practice with
our South African operations, extending product
ranges and expanding to reach a wider range of
customers.
■■ Operational highlights 2009
South Africa
OMSA has committed to transform itself from a
traditional life assurer to a modern savings and
investment business. This journey has necessitated
a shift in focus and step forward in performance
across all areas of the business, and we have
made great strides in leveraging technology to gain
competitive advantage, reduce costs and raise
service levels.
We continue to improve our customer value
proposition by enhancing our product offering and
by becoming more customer-centric. In June we
launched a credit card account that lets users invest
for the future every time they shop. The relaunched
Severe Illness Benefit on Greenlight was well
received. We launched a new bonus series for the
Absolute Growth Portfolios to enhance the product
attractiveness to Corporate customers following
negative bonus smoothing account balances after
the market fall in Q1 2009.
We aim to give our customers outstanding long-term
investment performance and remain committed to
our embedded boutique asset management model.
At the 2009 Raging Bull Awards, Old Mutual Income
Fund was named ‘Best Domestic Fixed Interest
Income Fund’ and the Old Mutual Mining and
Resources Fund was named ‘Best Domestic Equity
Resources & Basic Industries Fund’.
We have continued to focus on selectively growing
our distribution footprint by retaining and attracting
intermediaries and building relationships with them.
Despite the economic challenges we expanded
our tied distribution from 5,181 to 5,229 advisors
in 2009. In August we gained access to a niche
market of private and retirement fund customers
by acquiring ACSIS. In its first full year of trading
Old Mutual Finance expanded its distribution reach
and had 63 branches by the year-end.
We successfully integrated Futuregrowth into
the rest of the asset management business,
with remarkably high retention of key investment
professionals and customers.
In South Africa we reviewed our shareholder portfolio
to hold more cash and reduce exposure to equities.
As a result our capital position remained strong:
the ratio of admissible capital for the life company
to the statutory capital adequacy requirement was
4.1 times, compared to 3.8 times at the end of 2008.
Other Emerging Markets
To extend our product offering we introduced
Retail Mass products in Kenya and we have started
expanding nationally utilizing innovative forms
of distribution and money collection including
cell phone.
In Zimbabwe, we successfully managed the transition
to a dollarised environment and our strategy to
maintain this business through the political and
economic difficulties is starting to bear fruit. We are in
the process of upgrading our infrastructure, obtaining
operational efficiencies and launching new products.
We are well positioned in Zimbabwe given our broad
range of financial services.
In Swaziland we completed our first full year of
operation and also launched a range of Corporate
products.
In Namibia we developed and rolled out an
innovative lending product. In addition we
successfully implemented a new retirement
administration system.
In Malawi we made great strides in developing a
local asset management capability and this has
laid the foundation for unit trusts – the first to be
provided in Malawi.
■■ Performance in 2009
Excellent results is a tough operating environment
For key figures see highlights table on page 40.
Overview
Emerging Markets’ economies rallied strongly during
the second half of 2009, benefiting from a weaker
dollar and higher commodity prices after the credit
crisis. South Africa experienced a comparatively
modest and short recession in the first half of 2009,
but returned to growth in the third quarter and
ended the year with positive quarterly GDP growth.
We expect this momentum to continue into 2010.
The South African equity market enjoyed a very
strong final quarter as local and foreign investors
moved into equities. Growth also resumed in Latin
America and Asia from the third quarter onwards.
Markets rallied strongly during the second half of the
year and emerging markets’ currencies generally
appreciated strongly against both the pound and
dollar, with the closing rand rate rising against those
currencies by 13% and 22% respectively. The
impact of the economic volatility led to an increase
in the share of risk product sales across our product
lines relative to savings and investment products.
South Africa constitutes approximately 94% of the
IFRS adjusted operating profit of our Emerging
Markets Business Unit.
South Africa
In South Africa, our business has been resilient
with strong profitability and high return on allocated
capital in very difficult economic conditions, with
our like-for-like sales on an APE basis up marginally
compared to prior year (after excluding Nedgroup
Life sales in 2008). We continued to invest in our
distribution capability and as a result, we grew
market share in our core product ranges and are
well positioned to benefit from the recovery in
consumer confidence. Nevertheless, the demand for
our products during 2009 was adversely affected by
rising unemployment and generally low consumer
confidence across the economy. These factors,
among others, have put pressure on disposable
income, resulting in a number of customers
terminating their policies. This poor persistency
experience adversely affected the claims experience
in the year. However, through continued investment,
we improved the service levels to our customers.
This is evidenced by the number of service awards
we continue to win. We were awarded first place
for service excellence in the long-term assurance
category in the 2009 Ask Afrika Orange Index
national surveys as well as the 2009 award for Best
National Call Centre. We continued expanding our
distribution footprint by retaining and attracting
intermediaries and growing our relationships
with them. Despite the economic challenges, we
have expanded our tied distribution from 5,181
intermediaries in 2008 to 5,229 intermediaries
in 2009, and we successfully completed the
acquisition of a 100% share in ACSIS, a South
African asset management firm, in August, thereby
gaining access to a niche market of private and
retirement fund customers. 2009 was also the first
full year of trading of Old Mutual Finance (OMF), our
new retail loan business, which has expanded our
distribution reach by establishing 65 OMF branches
in 2009.
In June 2009 we sold our shares in the Nedgroup Life
and BOE Private Client joint ventures to Nedbank.
As a result we now exclude Nedgroup Life sales from
our life sales and embedded value for both 2009 and
2008 sales and margin numbers. However, for IFRS
and AOP profit reporting, these businesses have still
been included for the first 5 months to 1 June 2009
and for the full year in 2008.
Old Mutual plc
Annual Report and Accounts 2009
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
Highlights (Rm)
2009
2008
% Change
Long-term business adjusted operating profit
Asset management adjusted operating profit
Long-term investment return (LTIR)
Adjusted operating profit (IFRS basis) (pre-tax)
Return on allocated capital (OMSA only)
Operating MCEV earnings (covered business) (post-tax)
Return on embedded value (covered business) (post-tax)
Life assurance sales (APE)
Unit trust/mutual fund sales
PVNBP
Value of new business
APE margin
PVNBP margin
Net client cash flows (NCCF) (Rbn)
Highlights (Rbn)
Total funds under management
Of which, SA client funds under management
3,263
958
1,658
5,879
26.0%
2,794
9.8%
5,178
36,421
37,339
853
16%
2.3%
(20.5)
3,398
921
2,032
6,351
27.8%
5,237
14.4%
5,105*
41,418
36,675*
813*
16%
2.2%
(27.3)
(4%)
4%
(18%)
(7%)
(47%)
1%
(12%)
2%
5%
25%
2009
2008
% Change
518.4
448.7
552.6
443.0
(6%)
1%
* Excludes Nedgroup Life sales. The comparative including Nedgroup Life are as follows: APE: R5,537 million; PVNBP: R37,959 million;
VNB: R934 million; APE margin: 17%; PVNBP margin: 2.5%
Other Emerging Markets
Namibia
We achieved remarkable results in a year of
immensely tough trading conditions. Sales of
recurring premium products, which is core to the life
company, ended 12% up on the prior year. There
was a swing to investment business and we grew
our Unit Trust sales by 62% from 2008. The bulk
of our Unit Trust sales went into the money market
fund, which is competing effectively with similar
funds run by banking institutions.
We developed and rolled out an innovative lending
product. In addition, we successfully implemented a
new retirement fund administration system.
Rest of Africa
We continue to manage our investments in the Rest
of Africa for value, although they remain small relative
to our profile in South Africa in 2009.
Latin America
Whilst our businesses in Latin America are small
relative to others in the Emerging Markets Business
Unit, we have had an excellent profit growth of 133%
(in rand terms) in very difficult economic conditions.
Non-life sales were strong despite the slow start
of the year following the H1N1 outbreak. We have
developed a new Retail Mass product in Mexico to
be launched in 2010 and we are confident that this
will significantly boost sales. We also intend to tap
into the expertise in South Africa to develop a range
of transferable and suitable product-types such as
the “smoothed bonus” and “umbrella” products.
Asia
Old Mutual’s operations in Asia consist of a joint
venture with the Beijing State-owned Asset
Management Company in China (Skandia:BSAM)
which sells unit-linked and universal life products,
and a 26% share in Kotak Mahindra Old Mutual
in India, a life assurance joint venture with the
Indian-listed financial services company, the Kotak
Mahindra Group.
India accounts for the bulk of our Asian sales,
with APE of R1.8 billion (INR10.3 billion) and,
despite our business there growing faster than the
rest of the sector during the first quarter of 2009,
sales were down 26% in rand terms from the
2008 comparative (19% in local currency terms).
Its strategy has subsequently changed to focus on
more profitable growth, as opposed to pure revenue
generation. Kotak Mahindra Old Mutual is still
growing at an encouraging rate on a relative basis
and now occupies 10th position in the industry
for Individual business, with 1 million lives insured,
and 9th position in the industry for Group business,
with 1.4 million lives insured.
40 Old Mutual plc
Annual Report and Accounts 2009
2.6bn Population of the countries served by Emerging Markets
APE sales in sterling terms in China (Skandia:BSAM)
increased by 19% in local currency terms from
CNY77 million (R92 million) to CNY92 million
(R113 million) for the year. The increase in APE
sales was largely a result of a strong growth in
single premium sales, up 112% to CNY679 million
(R836 million). Our business in China continued
to experience strong competitive pressure from
a number of direct competitors in the market.
The industry ranking for Skandia:BSAM, measured
on a gross written premiums basis, improved from
40th at H1 2009 to 38th by year-end. A number of
new products are currently in the pipeline for 2010.
Life sales summary
Over the whole year, life sales improved by 1% from
2008, despite the tough environment. In South
Africa, this was mainly as a result of strong growth of
recurring-premium sales of 8% which was partially
offset by a 6% drop in single-premium sales.
Recurring-premium sales
Risk
Recurring-premium risk sales increased primarily
due to:
> promotion of the Severe Illness Benefit on the
Greenlight product, where sales in the Affluent
Market grew by 11%;
> 5% growth in our sales force in Retail Mass and
an increased focus on risk products, which led
to a 31% growth in the Retail Mass market; and
> success in securing large schemes in
Corporate, leading to a 62% increase in Group
Assurance sales over the 2008 level.
Savings
OMSA sales of recurring-premium savings products
declined 7% relative to prior year. Lower sales in
our Retail segments, which were partially offset by
strong sales in the Corporate segment. Sales of
recurring-premium savings products were down
23% in the Retail Affluent segment as customers
were reluctant to commit to long-term savings
products in light of the higher risk of job losses
and lower disposable incomes. In the Retail Mass
segment, recurring-premium savings sales were
down 5% mainly as a result of economic pressures.
The new commission structure on savings products
also contributed to the lower sales of recurring-
premium savings products in the Retail segments.
However, we grew our recurring-premium savings
sales by 139% in the Corporate segment as a result
of higher sales of our umbrella funds, our increased
focus on building the direct sales channel and
expanded distribution through retail intermediary
channels.
Single-premium sales
Single-premium sales were down 6% on prior year
due to lower annuity sales. Corporate annuity sales
were affected by volatility in the market during the
first half of the year which led to greater caution
by trustees, as well as some pension funds being
under-funded and, hence unwilling to transfer
their business to us and having to make a net
contribution to the fund.
Life sales in the second half of the year improved
by 35% in rand terms compared to the first half and
by 1% compared to 2008, as confidence began to
return to the economy and markets rallied. In Retail
Affluent, life sales improved by 26% in the second
half after we enhanced our Investment Frontiers
fixed bond and Greenlight products. In Retail Mass,
we improved our life sales by 33% in the second half
as a result of the increase in productivity of our sales
team. We secured new customers into our umbrella
scheme, called Evergreen, in the last quarter of
the year, which boosted our Corporate recurring-
premium sales by 57% compared to the first half of
the year. The strong pipeline we had in Corporate in
the first half of the year materialised in the second
half of the year, resulting in 45% growth in single-
premium sales over the first half.
Unit trust sales
Unit trust sales were 12% behind 2008, with lower
flows through Old Mutual Investment Services
(OMIS) in 2009 partially offset by good flows into
money market unit trusts early in the year and
inclusion of Futuregrowth unit trusts in our product
range in 2009. Money market unit trusts slowed
down in the second half of the year as a result of
a decline in interest rates. The 2008 comparative
numbers were boosted by a one-off R2bn inflow into
the Money Market fund from the Galaxy platform.
Sales in the second half of R19.1 billion showed an
improvement on the first half levels of R17.4 billion.
IFRS AOP Results
Adjusted operating profit was down 7%, driven
mainly by a reduced LTIR, and the long-term
business profits declined by only 4% from prior year
level. This was mainly due to:
> impact of lower equity levels on asset-based
fees and investment variances;
> mortality and disability losses on Group
Permanent Health Insurance and Group Life
Assurance products;
> a small charge for share-based payments this
year compared to a large credit in the prior
year as a result of the strong Group share price
performance; and
> the loss of seven months’ contribution to profit
from joint ventures with Nedbank.
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Nordic
Retail Europe
Wealth Management
US Life
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Old Mutual plc
Annual Report and Accounts 2009
41
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
Excluding the contribution from Nedgroup Life in
both 2008 and 2009, profit on the life business was
flat compared to the prior year.
In South Africa, life business adjusted operating
profit declined by 19% in the second half of 2009,
mainly because the first half included higher
contribution from reserve releases than the second
half, as well as the absence of profits from Nedgroup
Life and BOE.
Asset management operating profit in South Africa
was down 16% on prior year as a result of:
> lower average asset values and a reduction
in the proportion of assets held in equities
(which attract higher fees) adversely impacting
base fees;
> lower third-party managed funds
> lower transactional revenue in Old Mutual
Properties business;
> mark-to-market losses in our Old Mutual
Specialised Finance (OMSFIN) business; and
> higher share-based payment costs.
The factors above were partially offset by higher
performance fees earned in the second half of the
year and higher revenue on the term portfolio of
OMSFIN as the interest rate cycle turned. Asset
management profits increased by 68% in the
second half of 2009 compared with the first half
following the recovery of equities and improved
OMIGSA investment performance, which resulted
in higher performance fees. The Emerging Markets
asset management result included an increase in
asset management profits in Latin America.
LTIR was 18% lower at R1,522 million after a
330 basis point decrease in the rate of expected
return (from 16.6% in 2008 to 13.3% in 2009),
combined with a marginally lower average asset
base. The asset class split for 2009 was 30%
equities, 70% cash and bonds, compared to 48%
equities and 52% cash and bonds for 2008.
Value of new business and margins
The value of new business margin (excluding
Nedgroup Life) remained flat at 16% on an APE
basis and improved from 2.2% in 2008 to 2.3%
in 2009 on a PVNBP basis mainly due to more
favourable operating assumptions changes for
new business.
MCEV Results
Market Consistent Embedded Value (MCEV)
operating earnings after tax declined by 47% from
the 2008 level. This was mainly due to lower than
expected returns which decreased by R1.7 billion
(based on lower one-year swap rates and a lower
opening embedded value of R28.4 billion compared
to R36.4 billion in 2008), and the impact of adverse
operating assumption changes (-R1.0 billion)
primarily related to persistency and the capitalisation
of certain project expenses.
Net Client Cash Flow
Retail net client cash flow was positive but overall
net client cash flow was R20.5 billion negative due
to the previously reported net outflow of R16.2 billion
from the Public Investment Corporation (PIC). Net
client cash flow in the Retail Mass and Retail Affluent
channels improved on the prior year as a result of
ACSIS and unit trust sales in the Affluent segment,
good sales protection sales growth and better than
expected mortality experience in the Mass segment.
Corporate and OMIGSA experienced net outflows.
This was a result of higher benefit withdrawals
(especially withdrawal benefits from pension funds
on the back of job losses across the economy), two
large terminations in Corporate, and net outflows
from Futuregrowth in OMIGSA, as well as the
PIC outflow previously mentioned. We anticipate
further withdrawals from PIC in 2010 as part of their
planned mandate reallocation.
Investment performance
Overall OMIGSA investment performance continues
to improve. Fifteen of our collective investment
scheme funds ended the calendar year in the top
quartile of their respective industry categories over
one year, with ten and eleven funds achieving
top quartile ranking over three and five years
respectively. Notable performance has come from
Macro Strategy, where all three of their Flexible,
Balanced and Stable Growth unit trusts are
positioned in the top quartile of their respective
categories over the calendar year to end December.
Similar recovery has come from Value Equity and
Select Equity, where their High Yield Opportunity
Fund, Growth Fund and Top Companies Fund are all
in the top ten funds (out of 76) in the General Equity
category over the year.
Funds under management
Funds under management of R518 billion decreased
for Emerging Markets as a whole, mainly due to
the inclusion in 2008 of Skandia Australia’s funds
under management (approximately R25 billion).
Skandia Australia was sold in March 2009. FUM in
OMSA improved by 2% from 2008 as a result of the
acquisition of ACSIS and positive market returns,
partially offset by negative net client cash flow.
■■ Marketing
In 2009 the strength of the Old Mutual brand
and its reputation for integrity, financial strength,
reliability and performance enabled us to perform
well in South Africa despite the difficult economic
environment.
42 Old Mutual plc
Annual Report and Accounts 2009
The strategic thrust of our brand communication
activity in 2009 was engagement and
communication with customers, distribution
channels, employees and stakeholders to amplify
reassurance and trust in OMSA. We took a multi-
faceted approach using advertising, advertorials,
material for face-to-face meetings, media activity,
digital marketing and sponsorship. The campaign
worked on many levels − from communicating
specific facts about capital strength, liquidity and
performance of smoothed bonus products to
emphasising the longer-term context by promoting
our investment principles and providing general
reassurance through ‘green’ TV commercials.
Our engagement and communication with
stakeholders and investors during the financial crisis
earned us first place among the JSE’s Top Ten listed
companies, ranked by revenue, in the New York-
based Reputational Institute’s Global Reputation
Pulse 2009 survey. We also came first in the Sunday
Times Top Brands Awards in the Long-Term
Insurance category.
In addition to this activity, our business segments
and OMIGSA maintained a stream of product
and service innovations − both to meet
immediate customer needs and to drive longer-
term competitive advantage. Examples include
The Money Plan from Old Mutual Finance,
which brings together a unique mix of financial
services, financial education and debt repayment
planning. Our Corporate business unit launched
a Financial Wellbeing Programme that provides
financial education to its retirement fund members
and employees.
Old Mutual’s thought leadership position continues
to strengthen. OMIGSA’s economists have been
quoted extensively on the markets and the economy
and the launch of the Old Mutual Savings Monitor
stimulated debate on the need for higher savings in
South Africa.
■■ Customer service
We focus relentlessly on becoming more customer
centred and enhancing the customer service
we deliver through our call centres, internet and
extensive branch infrastructure. We have combined
all customer servicing for the Retail Affluent, Retail
Mass and Corporate businesses in OMSTA to
ensure consistently high service levels across our
entire customer base and use IT to help improve
service. We are also driving service levels higher
by using LEAN methodology to re-engineer
business processes.
Our commitment to customer service is
demonstrated by:
> Top ratings for service in the long-term
assurance category in both the 2008 and 2009
Ask Afrika Orange Index Service Excellence
Benchmark surveys, which measured service
across 54 companies from 11 industries, and
> Winning the ‘Best Customer Service Centre’
award at the 2009 Business Process enabling
South Africa (BPeSA) Awards
■■ People
We maintain a working environment that supports
the recruitment of highly effective employees,
improves productivity and fosters relationships that
build on the diversity of the workforce. Of our total
workforce, about 85% are employed in South Africa.
Our employee engagement programme in South
Africa (Siyakhula) aims to foster staff participation
and innovation.
In line with our shift away from heavy capital
products, in 2007 we introduced an economic profit
based variable pay scheme for employees in South
Africa (outside OMIGSA) to incentivise efficient
management of capital as well as growth of profits.
Employees receive a proportion of the economic
profit generated in the year, to cultivate a culture
of teamwork while ensuring that we appropriately
reward individual effort.
In the rest of Africa we have crystallised our focus
on people by developing a comprehensive People
Strategy. A key element of the strategy is to
support a culture of delivery and high performance.
This is further supported by a robust performance
management practice that aims to ensure focus on
all aspects of the business.
Latin America has a performance management
process implemented with active participation of
the team leaders and their team members. For the
senior management the process is conducted
according to the balanced scorecards criteria from
the group.
■■ Risks
We continue to manage our risks and develop our
Risk Management capabilities in alignment with
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
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Old Mutual plc
Annual Report and Accounts 2009
43
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
The long-term outlook for the savings and
investment environment is positive and is supported
by a combination of factors:
> the prudent fiscal and monetary policies of the
past years are expected to continue the recent
trends of the economy returning to a robust
growth path by the end of 2010;
> the growing emerging black middle class and
affluent markets, supported by the reduction in
interest rates in 2009, the now-growing economy
and Black Economic Empowerment efforts
should sustain consumer spending growth;
> the Government’s continuing investment in
infrastructure and public sector employment
programmes;
> Governmental policies for the formulation of a
framework for mandatory retirement savings;
and
> improvements in the level of financial education
and the transparency of financial products.
The short-term picture looks increasingly optimistic,
but remains at risk from market volatility as well as
volatility in the rand. We are monitoring the current
situation with increasing vigilance and are well
positioned to react quickly to any unfavourable
eventualities.
■■ Priorities for 2010
In 2010 we will remain focused on:
> Growing sales through expanding distribution;
> Continue improving our investment
performance;
> Investment in service and continuously
improving the level of service delivery; and
> Tightly controlling our expenses.
We are also continuing to focus on our expansion
into the rest of Africa. Africa is an important
growth market given improvements in governance
and increased disposable wealth, leading to an
increasing demand for financial services products.
In Latin America we will continue to focus on how
to grow the business by leveraging strengths and
capabilities in OMSA and the rest of the group.
We will continue broadening our retail product
offering, expanding our distribution and developing
asset management capability for our corporate
business.
■■ Outlook
The South African economy emerged from recession
in the third quarter although consumer confidence
remains low. Latest government predictions are
for the South African economy to grow by 2.3%
in 2010, and consumer confidence is expected
to continue to increase. However, some concerns
remain as private debt levels are still above
sustainable levels and further job cuts are expected
despite the economic recovery.
We believe that the outlook for the rand is favourable
because of the high interest rates, a narrowing trade
deficit, the global recovery and growing confidence
regarding South Africa’s economic policy direction,
as evidenced in the recent Budget.
44 Old Mutual plc
Annual Report and Accounts 2009
■■ Nordic
LONG-TERM SAVINGS: NORDIC
Nordic
Corporate Sweden
Private Sweden
Norway
Denmark
Unit link, Traditional life
Healthcare, Investment
Management, Risk
Unit link, Traditional life
Healthcare, Banking
Mutual funds, Investment
Management, Risk
Banking,
Healthcare
Unit link, Traditional
life, Healthcare
Shared service and Common Functions
Our Nordic business operates in Sweden, Denmark
and Norway. We provide some 2.5 million retail
and corporate customers with a wide range of
products including traditional life, unit-linked,
healthcare insurance, banking, financial advisory
and mutual funds.
Skandiabanken, once a niche player in the Nordic
banking market, is now 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 solutions in
the Nordic savings market.
We are differentiated in the marketplace by our
broad product mix – combining insurance, banking
and investment business – and gain competitive
advantage from our market-leading expertise and
proven business model.
Skandia has operated in the Swedish market for
over 150 years and is a strong and well-respected
brand. It became part of Old Mutual in 2006. We are
organised into four business areas focused on sales
to specific customer groups:
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 financial advisers (IFAs), other external
partners and a directly-employed sales force.
Our Retail business operates in Norway and
Sweden, targeting affluent and mass affluent
customers. We serve this market mainly through our
directly employed advisers, the internet and IFAs.
> Private Sweden, our retail business in
Products offered include:
Sweden, offers savings products and financial
advice from our banking, unit-linked, mutual
funds and traditional life business
> Corporate Sweden offers products and
financial advice from our unit-linked, healthcare
and traditional life business
> Corporate Denmark offers products from
our unit-linked, healthcare and traditional life
business
> Private Norway, our retail business in Norway,
offers products and financial advice from our
bank business.
■■ Business model
In 1990 we launched Sweden’s first fund insurance
company, Skandia Link. Today Skandia Link offers
savings products for both private and corporate
business.
Unit-linked
We offer a wide range of unit-linked funds across
a variety of asset classes and risk profiles. These
funds, including those from our own fund companies,
are managed externally; we select and monitor
managers using our unique evaluation process.
Traditional life
Traditional life products are an important part of our
integrated product offering in the Swedish market.
As the market’s largest life company, Skandia Liv is
active in both the private and occupational pensions
segments. We provide insurance products with a
security profile featuring long-term savings with a
guaranteed yield plus protection. In 2009 Skandia
Liv was rated as one of the top traditional life
assurers by independent Swedish consultants and
distributors.
Old Mutual plc
Annual Report and Accounts 2009
45
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Mutual funds
We offer mutual fund products through our banking
subsidiary, Skandiabanken. Skandia Fund Products’
offering is accessible for unit-linked savings,
direct savings, individual pension savings through
Skandiabanken and for premium pension savings
through the national PremiePensionMyndigheten
(PPM) system. Customers decide how they wish
their money to be managed by choosing from PPM’s
range of funds.
Banking
Skandiabanken is an online retail bank offering a
full banking service. Its offering to private individuals
is strengthened by selling our non-insurance
products. It also serves as a direct distribution
channel for us, targeting self-service clients with a
full range of savings products through a new online
platform. In 2009 it won several awards in Norway
and Sweden for its outstanding service and we
strengthened the savings offering by widening the
fund range, introducing discounted share trading
and launching a number of new saving products.
Private healthcare
We offer private healthcare products to companies
and their employees. Our healthcare division also
supports our unit-linked and traditional life business
in Sweden and Denmark, adding value to the
pension scheme products and broadening our
product offering.
Skandia Liv
Skandia Liv is a traditional life assurance company
serving customers in Sweden and Denmark. It is
a wholly-owned subsidiary of Skandia but is run
on a mutual basis. It operates within a strict local
legal framework and the benefits usually associated
with share ownership accrue to Skandia Liv’s
policyholders rather than the holding company.
Consequently, Skandia Liv is not consolidated into
the Group’s accounts.
■■ Product development
We aim to develop products that meet our customers’
needs and demands, using customer surveys,
competitor benchmarks and market analysis. In parallel
to this, our product approval process assesses
how effectively each new product creates value for
customers – and for shareholders, for example in terms
of capital efficiency and long-term profitability.
New products developed in 2009 include Hälsa
in i Sjuk – a corporate healthcare product,
Garantipension Plus – an alternative product within
the new PA-KFS-plan, new pregnancy insurance,
property insurance in co-operation with Dina
Försäkringar, Skandia Vælger – a fund of funds
solution, and new funds such as the Lynx Dynamics
Fund. We launched Direktpension in Depå to replace
a previous unit-linked capital insurance product
which had become unprofitable because customers
are reducing the length of time for which they hold
savings products.
■■ Market overview
The personal market is increasingly important
in Sweden and Norway, as reduced state and
employer pension benefits place more responsibility
on individuals to secure their own future finances.
A growing number of people are approaching and
reaching retirement age and increasingly need to make
their own investment allocation decisions. This means
growing demand for holistic advice and close
customer relationships. All our major competitors in
Sweden are Nordic bancassurance entities.
The demand for advice and self-directed solutions,
combined with growth in the personal market, are
major business opportunities that we will focus
on in the coming years. The consumer market is
characterised by diversity of savings instruments and
customer preferences. The main types of savings
are insurance (a market worth SEK700 billion),
bank deposits (SEK700 billion), mutual funds
(SEK600 billion), equities (SEK600 billion) and
bonds (SEK100 billion). Total industry revenues in
the individual savings market are expected to grow
from between SEK40 billion and 50 billion in 2008
to between SEK70 billion and 80 billion by 2015 –
driven primarily by market appreciation, increasing
disposable income and asset reallocation.
Customer behaviour is changing in the Nordic
market. The new generation favours internet-
based services, which drives demand for increased
transparency and unbundling of products, services
and prices. Insurance products and pricing are
becoming less differentiated. The market for
insurance-based long-term savings products is
being impacted by the withdrawal of tax incentives.
The changing dynamics of the Swedish corporate
market are leading to increased focus on the
unaffiliated part of the market. Corporate pensions
are the dominant segment of the Swedish life
market, a sector in which we have traditionally been
very strong. However, our strategies to increase
sales in this segment need to reflect the way the
corporate market is changing, with growing use of
collective agreement procurements and increased
pressure on prices. Swedish brokers are responding
to these changes by shifting their focus to small and
mid-sized companies and to individuals.
In Denmark the authorities continue to focus on
increased transparency regarding cost of pension
products and tax reforms are reducing tax benefits
46 Old Mutual plc
Annual Report and Accounts 2009
2.5m Nordic business’ retail and corporate customers
on insurance. A complete commission ban in
Denmark will be introduced on 1 January 2011.
■■ Strategy
Our key objectives to 2012 are to:
> Grow in the private savings market in Sweden
and Norway
> Retain existing corporate business in Sweden
> Strengthen our position and grow in Denmark
> Improve and develop risk and capital
management
> Increase operational efficiency.
To achieve our vision of having the most satisfied
customers in the savings market we aim to move
from our current position as a product supplier
mainly offering insurance products to become a
more customer-oriented financial solutions provider
characterised by operational excellence.
We will improve and develop our customer
interface, enhance our product offering and make
our products available to customers through
different channels. The key challenge will be to build
attractive offerings that provide both end-customers
and distributors with advisory tools and quality
advice, innovative products, top-quartile returns and
the market’s best customer service.
> Private Sweden Although our current market
position is relatively small compared to main
competitors, we have important strengths: our
customer base, well-known brand and our
insurance platform and expertise. We aim to
grow by moving closer to the end-customer
with a new distribution model, integrated
channels, a full-range savings offering and well
defined service levels offering holistic advice.
Our focus segments are affluent and mass
market clients among our existing customer
base, particularly over-55s.
> Private Norway We are currently a niche
player positioned as an innovative daily
banking partner with a strong position as a
customer-friendly internet bank. We aim to
grow by expanding our product offering with
more savings, insurance and investment
products, adding advisory services to become a
savings partner.
> Corporate Denmark We are seen as a
challenger and innovator providing excellent
pension products for companies with under
100 employees. We aim to grow by increasing
our distribution power with new channels and
offerings to position us as a trustworthy deliverer
of products and services to larger companies.
We will focus on packaged offerings and
efficient customer solutions and administration.
> Corporate Sweden Our fundamentally strong
position faces price pressures and changed
market conditions. To maintain our market
position we are focusing on small and medium-
sized companies, owner-managed companies
and management plans, mainly for businesses
in our existing customer base. We will move
closer to our customers and develop attractive
new propositions, effective processes and
improved service levels.
■■ Performance in 2009
Continued strong net client cash flows, rising
FUM and strengthened relations with distributors
For key figures see highlights table on page 48.
Sales
New sales in Nordic increased by 8% compared to
the prior year, driven by the very successful Skandia
Depå product sold through Skandiabanken direct
sales, the internal advisory channel and brokers.
Retail business was strong with muted impact on
our particular target markets from the recession.
However, the effects of the economic downturn did
have an adverse impact on occupational pension
sales in the Swedish corporate sector with lower
inflows as a result of less workforce mobility,
lower salary increases, and higher than expected
premium cessations due to layoffs. We closed
down sales of an unprofitable unit-linked product in
September 2009 and this had a meaningful impact
on sales growth in the final quarter of 2009.
Nordic had excellent growth in mutual fund sales,
which increased by 47% compared to the prior year.
The driver behind this growth was Skandia Global
Hedge, one of the best performing hedge funds in
Sweden, which attracted SEK950 million of inflows.
In addition, during 2009 there was a material inflow of
customer fund holdings from other banks as the result
of a marketing campaign launched early in the year.
IFRS AOP results
IFRS AOP decreased 32% in 2009 compared to the
prior year. The fall in interest rates in Sweden and
specific differences in valuation basis between IFRS
assets and the liabilities under Swedish regulations
resulted in unrealised losses of SEK119 million in the
assets backing reserves in the unit-linked and health
businesses. Interest rates are now at a historical
low in Sweden. The health insurance business
(rebranded as Lifeline) was also negatively affected by
the higher cost of claims and lower premium income.
We have re-priced the business and made changes
to both products and policy conditions. In Denmark,
where similar actions were taken in early 2009, the
business showed considerable improvement in
the second half of 2009, and similarly the Swedish
business is expected to improve in 2010.
Old Mutual plc
Annual Report and Accounts 2009
47
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
Highlights (SEKm)
Long-term business adjusted operating profit
Banking business adjusted operating profit
Asset management adjusted operating profit
Adjusted operating profit (IFRS basis) (pre-tax)
Return on equity*
Operating MCEV earnings (covered business) (post-tax)
Return on embedded value (covered business) (post-tax)
Life assurance sales (APE)
Unit trust/mutual fund sales
PVNBP
Value of new business
APE margin
PVNBP margin
Net client cash flows (SEKbn)
Highlights (SEKbn)
Funds under management
2009
502
193
42
737
11.7%
965
8.1%
2,819
4,708
13,774
526
19%
3.8%
11.6
2008
% Change
754
283
39
1,076
17.0%
1,839
12.9%
2,599
3,207
12,108
397
15%
3.3%
7.0
(33%)
(32%)
8%
(32%)
(48%)
8%
47%
14%
32%
66%
2009
2008
% Change
127.2
91.9
38%
* Return on equity is IFRS AOP (post tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles
Skandiabanken’s results were weaker due to
lower net interest income following the repo rate
declines during the year and the impact on the
margin of prudent liquidity management. Credit
losses increased marginally, but the credit loss ratio
is still at a low level (0.14% in 2009 compared to
0.13% in 2008), reflecting the low-risk nature of
Skandiabanken’s lending business, and the stability
of the Nordic residential market.
IFRS AOP was positively affected by increased
investment value in the private equity portfolio of
SEK51 million. The second half of 2009 showed
strong results in the unit-linked business due to
positive growth in FUM driven by positive stock
markets trends, together with a strong NCCF,
thus increasing fund-based income.
We are continuing to review the expense base of the
business, and will seek to cut costs in 2010 where
we are able to do so.
Skandia AB and Skandia Liv have decided that for
the time being there will be no changes made to the
corporate form of Skandia Liv, but that they will be
moving forward with the objective “One Skandia”,
maintaining a close cooperation between the
two companies.
Value of new business and margins
The value of new business and profit margin
increased substantially during the second half
of 2009, due to a more profitable business mix,
positive operating assumption changes and sales
growth. The business mix was positively affected by
the closure of the private regular premium unit-linked
product referred to above, which was replaced by a
much more profitable, lower commission product.
The assumption changes are driven by changed
mortality pricing and positive experience as well
as high transfers into the unit-linked decumulation
product, thereby prolonging the duration significantly.
The effects came through during the second half of
2009, and PVNBP margin improved from 3.3% for
2008 to 3.8% for 2009, and APE margin from 15%
for 2008 to 19% for 2009.
The price pressure in the Swedish market continues,
especially in the corporate market. In the medium
term, the margin is still expected to remain in the
high teens, but this will require continued high new
sales, product development and cost control.
MCEV results
Operating MCEV earnings were down 48% on
the comparative period mainly due to lower than
expected existing business contribution arising from
historically low interest rates, capitalised one-off
developmental project costs, and increased outward
transfer assumptions during the accumulation
phase of corporate business. The closing MCEV
has increased substantially, especially in the second
half of the year, due to the impact on non-operating
earnings of strong stock market performance
leading to large positive investment variances, and a
48 Old Mutual plc
Annual Report and Accounts 2009
£11.0bn Funds under management in Nordic
release of provisions after the settlement of certain
longstanding litigation matters.
Net Client Cash Flow
Net client cash flow for the year was an exceptional,
and record high of, SEK 11.6 billion, representing
13% of opening funds under management. The
positive performance was largely driven by a
combination of strong Life sales, especially the
Investment Portfolio product, regular premium unit-
linked sales, and lower outflows related to maturities
and surrenders in the occupational pension
business. Positive flows in mutual funds also
contributed to this performance. Net client cash flow
increased 66% compared to the prior year, although
it weakened in the second half as a result of the
increase in the pace of corporate outflows.
Funds under management
Funds under management at 31 December 2009
were SEK127 billion, up 38% from the level at
31 December 2008, and 18% from 30 June 2009.
The increase was due to strong net client cash flow
and positive development on the equity markets.
This is a significant improvement compared to
previous periods.
Our 2009 investment performance was excellent.
For the third consecutive year, Skandia Link was
awarded best performance among the unit-linked
companies in the Swedish market. During 2009
Skandia Link’s average client enjoyed investment
performance of 29%. Average performance on a
weighted index (66% MSCI AC World and 34%
OMRX Total Market) during the same period was
15%. Customers are increasing their appetite for
investment risk by weighting a larger proportion of
their holdings in equities and, in particular, emerging
markets equities.
■■ Marketing
As indicated in the ‘Product development’ section
above, we had a busy year for new product
launches, which we supported with appropriate
marketing and promotion.
In Sweden, Skandia Link earned the Risk &
Försäkring award for ‘best average return to
customers on a three- and five-year basis’ for the
third year running. On the back of this we ran some
very successful marketing campaigns focusing on
our investment performance.
We believe that being a good corporate citizen
is good for business. For more than 20 years we
have run the Skandia Ideas for Life corporate social
responsibility programme, which works to protect
children and young people and support their social
development. Skandiabanken has teamed-up with
voluntary organisation ECPAT to block purchases
of child pornography using payment systems, and
this work won much positive PR and publicity in the
Swedish media during 2009.
Our PR activity in 2009 doubled our positive
exposure in the media, benefiting sales, net client
cash flow and our brand image.
We continuously run roadshows for both corporate
and private customers. These are very popular and
successful both for launching new propositions and
for disseminating information and education about
savings and investments.
■■ Customer service
We have launched our common vision – to have the
most satisfied customers in the savings market –
across the whole organisation, and this is beginning
to influence our processes and customer relations:
> Skandiabanken Sweden won the
Teleperformance award for ‘best customer
service in all categories’ in 2009 and the
Q Service ‘best bank customer service’ award
in 2010
> Skandiabanken Norway won the Norsk
Kundbarometer 2008 citation for ‘most satisfied
customers’ for the eighth year running
> We have simplified our customer
communications and application forms
> Skandiabanken Norway has introduced
enhanced self-service functionality for lending
> We have improved share trading facilities for
corporate and personal customers
> We have improved the information on our
Skandia.se website
> Corporate Sweden has improved its customer
invoicing processes.
In our customer satisfaction research, Skandia
Norway and Denmark both achieved strong
results: Skandia Norway’s customer satisfaction
levels are among the highest for all businesses in
Norway. Distributors in Sweden rated us extremely
highly and we remain one of the top two in this
market. Skandia Sweden’s satisfaction ratings were
affected by the crisis of confidence in all Swedish
financial institutions which followed the market
turmoil in Autumn 2008 and Spring 2009; despite
this, satisfaction was unchanged among private
customers and reduced only modestly among
corporate customers.
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Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
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Old Mutual plc
Annual Report and Accounts 2009
49
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
Satisfied customer
index Private Sweden
Satisfied customer
index Corporate
Sweden
Satisfied customer
index Corporate
Denmark
Satisfied customer
index Private Norway
Satisfied distribution
index Sweden
2008
Target
2009
Result
2009
63
64
63
58
59
56
63
64
64
80
80.5
80.5
57
58
63
■■ People
In 2009 we launched our Nordic People Strategy
initiative aimed at improving our people processes,
strengthening our performance culture and
supporting the overall business plan. This has
made very strong progress. We have established a
leadership development programme for new leaders,
a talent management review process is underway
and key decisions have been taken on training and
development. We have also produced guidelines for
handling underperformance, for implementation in
2010.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with the
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
HOW WE DO BUSINESS
ENCOURAGING SUSTAINABLE
VALUE CREATION
We want to improve the transparency of the companies we invest in.
So Skandia joined 12 of Sweden’s largest institutional investors in
2009 to launch a Sustainable Value Creation Initiative. As part of this
we published surveys of governance and policies for sustainable value
creation in the 100 largest corporations on NASDAQ OMX Stockholm
and the 74 companies in the Oslo Børs Benchmark Index.
“This index encourages companies to develop sustainably while at the
same time creating long-term economic value for their shareholders.”
– Hans Svensson, Head of Public Affairs and CR, Skandia Insurance
Company
50 Old Mutual plc
Annual Report and Accounts 2009
■■ Priorities for 2010
We will continue working towards our vision of
having the most satisfied customers in the savings
market. The focus will be on building high-quality,
innovative offers for end-customers and distributors
by providing advisory tools and quality advice,
innovative products, top-quartile returns and
excellent client service. We will continue to develop
new investment portfolio products, supported
by initiatives to achieve operational excellence.
Our priorities for 2010 to 2012 are:
> Drive growth in the Swedish and Norwegian
personal savings markets, strengthen our
position and grow in Denmark
> Achieve operational excellence by retaining
existing corporate business in Sweden and
increasing our operational efficiency
> Achieve excellence in risk and capital
management.
■■ Outlook
Although the financial markets continue to be
volatile, the outlook for the Nordic markets remains
positive. The mass corporate market is challenging
with an increasing movement towards low margin
tendered business. We continue to focus on
strengthening the market position by delivering
first-class products and offerings to customers
both on the private market, as well as the higher
margin segment of the corporate market. A key part
of this is the improvements to the Skandia Nordic
platform, Skandia.se, which was re-launched during
the second quarter of 2009. With the launch of a
series of combined offerings such as the Skandia
Investment Portfolio, Skandia Depå, we have started
to exploit the potential of decumulation products and
increased cross-selling. We have also strengthened
our ALM capacity, improved our operating model
to be more customer oriented, and announced
changes in the commission structure to improve
future profitability. With increased focus on customer
needs and profitability, we remain convinced that
we can turn this period of disruption into a lasting
opportunity. The broad product mix and market
position of our business gives us a competitive
advantage in a challenging market.
We are disposing of further private equity assets
and expect a pre-tax profit of approximately
SEK126 million from this source in 2010.
■■ Retail Europe
LONG-TERM SAVINGS: RETAIL EUROPE
Retail Europe
Markets
Control
Operations
Country Sales and
Broker Relationships
Finance, Actuary, Legal,
Compliance
Customer Service,
IT
Retail Europe consists of four local businesses:
Skandia Austria, Skandia Germany, Skandia Poland
and Skandia Switzerland. All are active in the same
product market − recurring unit-linked life business
focused on old-age provisioning − and have
similar business models. They serve the savings
and investment needs of similar retail customer
segments and operate on related platforms.
The core product range covers regular and single-
premium unit-linked products, supported by pure
investment solutions and disability solutions.
■■ Business model
We operate in interesting markets that offer
great opportunities: 140 million people – the
overwhelming majority of them retail customers
– threatened by financial uncertainty due to
fundamental demographic change and the ongoing
crisis in public retirement provision. Distribution is
primarily through co-operation with about 12,000
independent distributors. Our main strengths are our
innovative products, investment competence and
long-standing distributor relationships.
We follow a value-driven business model, applying
a strong key performance indicator focus to all
relevant business areas. In sales, for instance, we
are more concerned with the value of new business
than the quantity of new contracts. We also pay
close attention to the existing business book,
maintaining quality by rewarding low surrender rates.
We take business decisions at the appropriate levels
to ensure we stay close to our markets without
losing necessary central oversight.
■■ Product development
In our markets we are seen as one of the leading
unit-linked suppliers, with innovative and flexible
products and strong investment knowledge. While
our focus in the past has not been on guarantees,
we add guarantee features when sensible.
For instance, our businesses were the first in their
markets to offer guarantee funds as investment
options. In 2009 we introduced the new product
Safety Plan, which includes a guarantee at maturity,
in Switzerland.
We will continue to optimise our portfolio in 2010 –
aided by our collaboration with Skandia Investment
Group, which helps us provide innovative and
return-oriented solutions for our customers.
■■ Market overview
Driven by the European regulators, the increase in
regulatory and transparency requirements to improve
customer protection continues to put pressure on
small and mid-sized distributors and providers in all
markets. This was particularly evident in Germany
with the introduction of the new Insurance Contract
Law in 2008.
Regulatory pressure has led to some consolidation
and a significant decline in the number of
independent distributors. The impact was reinforced
by some insurers seeking to secure their access
to distribution by buying stakes in independent
distributors.
The financial crisis has undermined customers’
confidence in financial services generally and
unit-linked products in particular. More than ever,
they are now looking for orientation, simplicity
and reliability. Traditional life insurance products
from highly reputable companies could benefit
significantly from this uncertainty.
Uncertainty during the financial crisis drove some
customers to cut their investment in long-term
savings. In addition, increasing cost transparency
and customer uncertainty raised legitimacy issues
for distributors. As a result, life businesses suffered
from higher lapse rates and surrenders; and new
unit-linked business in Germany, for instance,
decreased by 33% compared to 2008. In response,
some competitors increased their commission
payments to compensate distributors for decreasing
market volume.
Old Mutual plc
Annual Report and Accounts 2009
51
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
■■ Strategy
Our federal model of standalone businesses in
Central Europe has been successful in growing
these businesses from the outset. But the model
needed some changes in response to increased
competition and consolidation, as well as the
increased burden of consumer protection and
regulation. So we created Skandia Retail Europe in
2009 to build one efficient business unit out of four
formerly autonomous local companies. This should
generate scale benefits and a better allocation of
resources through cross-border integration.
As a first step the new business unit appointed a
cross-border senior management team bringing
together new managers from other parts of the
Group and experienced managers of the local
companies. We then launched the new Skandia
brand in all markets. The main ambition of the new
senior management is to develop a common market
approach that serves as a catalyst for harmonising
capabilities, processes and workflows across
borders. The transformation project is currently
building a new harmonised operating model with the
intention to transfer parts of policy administration
and IT to South Africa in collaboration with OMSTA.
Our mid-term target is to increase the number of
contracts in force to 1 million by 2014.
■■ Performance 2009
Key foundations laid for the future development
of the business
Sales
The countries served by Retail Europe were
impacted by the difficult economic environment
which affected consumer confidence in our
products. Unit-linked markets decreased materially
in premium size during 2009, whilst the relative
attraction of guaranteed products increased.
This impacted the normal increase in new business
towards the year-end which did not materialise to
the same degree as in previous years. Overall APE
sales in Retail Europe decreased by 34% compared
to the prior year.
2009 was a critical year for Retail Europe during
which key foundations have been laid for the
future development of the business. In particular
an integrated senior management team has been
established and functional heads have been
appointed for key cross-European functions, such
as finance and risk. The business is now working
as a cross-border team whilst at the same time
maintaining focus on the distributor requirements in
each market.
In the second half of the year, efforts to tackle new
sales development were increased within all Retail
Europe businesses. The objective is to grow to
achieve critical mass in all our chosen niche markets.
Examples include intensifying the relationship with
special distribution partners in Germany, the initiation
of cooperation agreements with Deutsche Bank in
Poland, and the development of the new Safety Plan
product in Switzerland.
The combined impact of these initiatives and the
recovery of the stock market meant that in the fourth
quarter new sales rose by 57% compared to the
previous three months, driven particularly by the
German and Polish markets. The variance against
the fourth quarter of 2008 was reduced to 10%.
This impact was most marked in Poland where in
the final quarter sales were 145% above the same
period in 2008 and 73% above the previous quarter.
Similarly, German sales in the final three months of
the year exceeded the previous quarter by 76%.
Highlights (€m)
2009
2008
% Change
Adjusted operating profit (IFRS basis) (pre-tax)
Return on equity
Operating MCEV earnings (covered business) (post-tax)
Return on embedded value (covered business) (post-tax)
Life assurance sales (APE)
Unit trust/mutual fund sales
PVNBP
Value of new business
APE margin
PVNBP margin
Net client cash flows (€bn)
Highlights (€bn)
Funds under management
25
9.0%
(49)
(7.9%)
75
27
603
(6)
(8%)
(1.0%)
0.6
36
18.6%
18
2.6%
114
59
699
13
11%
1.8%
0.6
(31%)
(372%)
(34%)
(54%)
(14%)
(146%)
0%
2009
4.7
2008
% Change
3.7
27%
52 Old Mutual plc
Annual Report and Accounts 2009
140m Population in the markets served by Retail Europe
Overall, the rally in sales, underpinned by the rally in
equity markets, positioned the business well at the
end of the year after a very weak first half of 2009.
IFRS AOP Results
The IFRS AOP for 2009 was €25 million, 31% lower
than in 2008, mainly affected by reduced fees, a
lower investment result and a policyholder profit-
sharing agreement with the regulatory authorities
for the German business. The main contribution to
the IFRS AOP in 2009 was made by the Austrian
business, exceeding the prior year result, driven by
lower administration costs and reduced commission
expense. All markets achieved positive IFRS results.
All businesses realised substantial cost savings
in administration and staff costs in 2009, aligning
the cost base to the reduced sales environment.
However these savings were partially offset by
the investment to integrate the new management
structure, and the one-off costs from closing the
businesses in Hungary and the Czech Republic,
and our contribution towards the now-closed
ELAM office.
Value of new business and margins
The 2009 value of new business (VNB) was negative
€6 million, significantly below 2008 which was
€13 million.
The negative VNB and negative profit margin were
mainly driven by the decrease in new sales which
caused sales volume acquisition expense overruns
that could not be entirely compensated for by
savings in expenses. A reduction in higher margin
single-premium business also added to the shortfall.
Despite the lower new sales Poland maintained a
positive profit margin in 2009.
MCEV Results
The decrease in 2009 MCEV operating earnings
is mainly driven by the lower new business
contribution, adverse experience variances and
changes in operating assumptions.
In comparison to the 2008 results, experience
and assumption changes had a negative impact
of €24 million. This is as a result of the one-off
experience variances and a further assumption
change for profit-sharing in Germany, as well as
expenses overruns, other minor methodology
changes, and the recognition of one-off
developmental project costs. This was offset by
positive persistency assumption changes and less
adverse persistency experience than in 2008.
The management action taken in 2009 and the
rebound in the markets provide a positive backdrop
to the MCEV prospects for 2010.
Net Client Cash Flow
Net client cash flow (NCCF) in 2009 remained robust
at €551 million due to stable regular-premiums
and was flat relative to 2008. The continued strong
performance of the NCCF represented 15% of the
opening funds under management.
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
The strong result is driven by the positive
development of surrender experience which was
20% below 2008 in the unit-linked business.
Actions taken to increase customer and broker
communication led to this positive result despite the
ongoing volatility in financial markets.
Funds under management
Funds under management ended the year 27%
above the position at 31 December 2008, heavily
benefiting from market performance and stable
NCCF. This includes positive market movements on
portfolio values of 19% of opening FUM, reflecting
the rise in financial markets seen across the globe in
the second half of 2009. In the German business the
€2 billion mark was exceeded for the first time.
Equity funds particularly benefited from the capital
market developments in 2009. Actively managed
portfolios as well as guarantee funds rose in line
with total client funds (31% and 27% compared to
30% in total client funds). This was close to leading
market indices such as the MSCI World (in EUR)
which rose by 23%.
FUM was supported by the effective asset mix of the
portfolio and reflects the investment appetite of our
customers. Although client funds were impacted by
the fall in equity markets during the financial crisis
they have benefited from the recovery that started
in the second half of the year and this trend is
expected to continue throughout 2010.
■■ Customer service
All our national businesses have won awards
for their outstanding service to distributors and
customers alike.
■■ People
We strive to connect company and personal
targets for an optimal approach to performance
management. We reward employees for achieving
both company targets and individual goals. Sales
force compensation is based on value-oriented
targets, not mere volume.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
Old Mutual plc
Annual Report and Accounts 2009
53
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
■■ Priorities for 2010
> Grow through common approach to markets,
developing from product supplier to solution
provider
> Streamline and optimise business and
product portfolio
> Improve services to business partners and
customers
> Share know-how and capabilities within the
Group (e.g. the intended transfer of parts of
policy administration and IT to South Africa in
collaboration with OMSTA)
> Embed one lean retail organisation.
■■ Outlook
Retail Europe faces another challenging year, but
we are confident of increasing market share and
strengthening our position. Our core strength is the
flexibility of our unit-linked concept with embedded
guaranteed funds and our strong investment
expertise. We have established a systematic
change management approach to steer and
successfully implement the ongoing transformation
of the business in the challenging international
environment. We continue to explore opportunities
to create efficiencies by utilising the skills, and
capacity available in the South African business.
Despite the ongoing uncertainty in our markets,
we expect improved performance and profit growth
in 2010.
54 Old Mutual plc
Annual Report and Accounts 2009
■■ Wealth Management
LONG-TERM SAVINGS: OLD MUTUAL WEALTH MANAGEMENT
Wealth
Management
Markets
Centralised
capabilities
UK
International
offshore
Continental Europe
(France, Italy)
Fund range
development
Finance
IT & Strategy
Old Mutual Wealth Management provides advice-
driven, predominantly single-premium unit-linked
propositions to affluent and high-networth
customers across continental Europe, the UK and
a number of international markets. While our target
segment has a significant proportion of middle-aged
customers, demographic shifts over the longer term
are providing growth prospects through people living
longer and through growth in individual wealth levels.
Wealth transfer to the next generation provides
sustainability in market prospects. In the UK, the
affluent segment represents approximately 83%
of managed funds and between 50% and 60% in
the large European markets (Boston Consulting
Group, 2007).
Our organisation comprises three strong businesses:
> Skandia UK is a leading provider of long-
term investments with innovative solutions
for wealth building and wealth management,
offered through the independent financial
adviser (IFA) channel on our market-leading
platform. Our proposition is based on the belief
that financial services should be focused on
each individual’s goals, rather than on pushed
products. Our offer is built on choice and
transparency to enable customers to make
informed financial decisions.
> Skandia Wealth Management Continental
Europe targets the affluent segment in
continental Europe (predominantly Italy and
France). It offers high-quality service through
multiple distribution channels with a broad
product offering to meet affluent customers’
investment needs through the various phases of
their lives.
> Skandia International is the offshore wealth
management arm of the Old Mutual Group,
conducting business in Asia, the UK, South
Africa, the Middle East, Europe and South
America. Our aim is to offer and deliver
attractive offshore market-led solutions for the
long-term savings and investment needs of
high-networth customers internationally, building
sustainable and profitable growth in international
markets.
Combining these businesses into one Wealth
Management organisation provides significant
opportunities. Our common focus on affluent
customers, and the dominance of single-premium
investment business in this segment, create
significant prospects to leverage infrastructure, scale
opportunities and product knowledge.
Our customer offer includes unit-linked life
insurance, pensions and mutual funds. It is based
on open and guided architecture, giving customers
and their advisers access to a wide range of funds
managed by third-party providers. To meet customer
demand our offer includes both regular-premium
and single-premium products, although the latter
predominates. The product set is customised to the
needs of local markets:
> Our UK business has been transitioning over
time from providing an insurance-wrapped,
narrow product offer to an open-architecture,
platform-enabled offering in line with market
trends. Our product set is therefore divided
between a legacy portfolio and our market-
leading platform proposition. During 2009
we transferred a large portion of our portfolio
onto our platform product range, where our
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
customers have access to a wider choice of
products, funds and investment propositions.
The transition to platform enablement positions
us well in the UK market, which remains
primarily IFA driven. Advisers are increasingly
adopting platforms as a means of managing
customers’ investment portfolios, driven by
customer preferences for understandable and
transparent propositions, regulation that requires
regular review of investments, and new adviser
remuneration models. As a result, our business
is moving towards a more efficient structure that
services IFAs better through online technologies
and tools. We believe there are opportunities
to extend our UK platform to our other markets
across Europe and elsewhere.
We offer our UK customers several product
wrapper possibilities:
Pensions – a range of pension wrappers
to meet the retirement-planning needs of
individuals, employers and trustees. All our
pension products offer wide investment choice
in funds where the underlying investments are
through third-party fund managers. Assets are
invested either directly into third-party funds
or through our range of blended investment
solutions.
Investment bonds – our investment bond
offers access to third-party funds and blended
investment solutions, all managed by third-party
fund managers in a product structure that is
tax-efficient for certain customer segments.
Protection – we also offer premium protection
solutions in the form of unit-linked whole life
product and critical illness cover. Average
premium sizes are high and typical customers
include the self-employed and entrepreneurs as
well as customers seeking protection linked to
efficient inheritance tax solutions.
> In Continental Europe, our offer consists
predominantly of unit-linked business in a life
assurance wrapper, supplemented by a mutual
funds offer launched in 2009. An important part
of our proposition is the ability to customise
products for individual distributors’ clients.
Features such as automatic stop-loss enable
customers to take advantage of equity market
growth while managing downside risk.
> The most important product for our
International business is our award-
winning portfolio bond. This bond’s flexibility
enables customers to invest in virtually any
tradable asset and in a variety of currency
denominations. Its portability is another
attractive feature. Our product offer is supported
by a comprehensive suite of trust options and
online facilities.
Our distribution is advice-led, in line with the
preferences of the affluent customer segment. In the
UK, distribution is solely through IFAs. The larger
IFAs and networks, which we manage as key
accounts, represent approximately 60% of total
new business income. In the last quarter of 2009
we reviewed our UK sales structure to ensure our
business model is fit for the future and aligned to
advisers’ support needs. We closed a number
of regional offices and created a new, enhanced
sales organisation consisting of field consultants,
a complementary centralised business consultant
team and a team focused on delivering value to our
corporate partners. In our international markets we
distribute through international banks, private banks
and financial advisers. We distribute in continental
Europe through independent financial advisers,
banks, sales networks and our own sales force.
We also have an institutional sales force distributing
Skandia Investment Group (SIG) funds to institutional
customers. Our distributor offer is based on strong
relationship management, high-quality service and
responsiveness to market needs. Our partnering
approach has succeeded in delivering new business
even during 2009’s difficult market conditions.
Our business success has been based on core
capabilities stemming from our corporate heritage
as an open-architecture pioneer. Our independence
and track record of innovation continue to
distinguish us in the market, while our experience
in platform-enabled business is a strong asset.
We strive to deliver high-quality service and
responsiveness to our customers and distributors,
and see this as a sustainable source of competitive
advantage.
We are structured to stay close to our individual
markets while benefiting from centralised
capabilities, oversight and optimisation in fund range
development, strategy, finance and IT functions.
We believe this approach provides opportunities
to leverage infrastructure and management
processes across the business, especially as we
build a pan-European business based on common
infrastructure.
■■ Business model
Our business model is scale-driven, with part of
our income related to the value of funds under
management (FUM). As FUM are driven by the
attractiveness and relevance of the product
offer, we continuously strive to increase product
breadth and depth around local market needs. Our
distribution strategies aim to maintain and develop
56 Old Mutual plc
Annual Report and Accounts 2009
Number 1 Skandia’s position in the UK platform market (by assets)
our market presence and make us the provider
of choice to distributors. Our policy is to invest in
distribution channels with long-term sustainability
and good persistency in business. Our strong
market positions in product provision, relationships
and FUM give us strong bulk purchasing power in
the asset management market, which allows us to
offer our fund range at very competitive prices.
The global recession has hit providers’ volumes
across the world, but as local economies emerge
from recession we expect our new business
volumes to benefit from improved investor
confidence.
Since our distribution is centred mainly on
independent channels, a large proportion of total
expenses consist of sales incentives, which are fully
variable in line with volume. As our internal expenses
are, to a large extent, fixed, we achieve economies
of scale as volumes increase. Operational efficiency
remains important to keep costs at optimum levels.
Sharing technical, operational and management
infrastructure across the Wealth Management
business helps us to maximise efficiency.
Our planning and control processes are focused
on value creation over the long-term as well as
short-term capital usage. Our decision criteria take
into account the prospects of earning returns above
the cost of capital, to ensure that both customers
and shareholders receive added value.
■■ Product development
Our platform provides a convenient, transparent
and flexible online approach where customers are
able to grow, protect and use their wealth with the
support and guidance of a financial adviser. Through
Skandia’s platform, they can see their full investment
portfolio in one place, and can understand the
investment strategy that lies behind it. The platform
also enables advisers to manage their customers’
investments. It provides an end-to-end process
starting at risk-profiling the customer through to
sourcing the appropriate investments through
various tools and features. During the year we
further enhanced the functionality on the platform;
we now offer customers access to valuation and
online switching, recognising their increasing desire
for self-service in line with their experience in areas
such as online banking. We will further develop
these features and services in 2010 to ensure that
customers can access the information they need
when they need it.
> A Latin American MCB redemption product,
sold through existing distribution channels
to meet the growing market need for an
international non-contractual savings product
> A non-accredited product for Singapore,
launched to expand Skandia International’s
target customer base in this growing market
> A refreshed version of Old Mutual Guernsey’s
perennially successful life account range,
which offers a more competitive charging
structure while maintaining its flexible method
of investing overseas
> Daily trading features in Italy, which allow greater
investment flexibility and significantly enhance
our offer
> A number of distributor-specific products in
France, specifically targeted at the private
bank channel
> A number of new tools and features on our
platform in the UK, including an ISA allowance
tool and a tax-efficient withdrawals tool.
An important part of creating winning propositions
is our fund selection, development and packaging
capability. This is delivered through Skandia
Investment Group (SIG), which brings together all
Skandia’s investment research, analysis, portfolio
management, open-architecture and investment
product expertise. SIG works closely with the LTS
business units to deliver investment management
solutions that suit customer requirements in our
various markets and offer us attractive economics.
Central to SIG’s capability is the development of
blended solutions, such as the highly successful
risk-targeted Spectrum fund range launched in
2009, and multi-manager propositions such as the
Best Ideas range. During 2009, SIG evolved its fund
range to adapt to changing customer needs in the
light of the significant market changes experienced
since late 2007. The new fund range offers
customers a more compelling choice of investment
solutions with the benefit of improved performance.
The strength of our product offer was recognised
through a number of awards in 2009, including:
> ‘Best Multi-Manager’ in the Moneyfacts Awards
(Investment, Life and Pensions)
> ‘Best Regular Premium Investment Product
(UK Offshore)’, ‘Best New Product (Far East)’
and ‘Best Online Proposition (Far East)’ in the
International Adviser Life Awards
> ‘Best Fund Platform’ in the Logica UK
Platform Awards
Enhancing our product range to better serve the
needs of local markets is a priority. In 2009 we
launched a number of innovative products and
features, including:
> ‘Best International Life Group’ in the
International Fund & Product Awards
> ‘Best Fund Supermarket’ in the Professional
Adviser Awards.
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
HOW WE DO BUSINESS
TREATING CUSTOMERS FAIRLY
At Skandia UK treating our customers fairly is a top priority. We’ve
had Treating Customers Fairly (TCF) champions in place since 2005,
working on ways to develop and promote best practice within teams.
They also help ensure that their teams keep TCF in mind in everything
they do and every decision that affects customers. Whether running
TCF workshops, leading by example or measuring TCF standards,
these champions play a vital role in making sure we continue to treat
our customers fairly.
“In the Customer Service Division we communicate with our
customers daily. It’s vitally important to put ourselves in the
customer's shoes continually – both to ensure we treat them fairly, and
also to support our vision of delivering service excellence and process
efficiency.” – Kaila Bishop, Customer Services, Skandia UK Group
■■ Market overview
Demographic changes in Europe and across
the globe will continue to result in individuals
needing to save for the long term. The affluent
and high-networth segments of the market are
expected to grow as people become wealthier and
wealth transfers to the next generation. Although
competition in these segments is tough, we believe
that the economics remain attractive. As defined-
benefit schemes become increasingly unaffordable,
defined-contribution schemes are expected to
become the norm for employer-provided premium
obligations in the future, which will favour our
products in the market.
The global financial crisis has reinforced an
existing need for quality advice and transparency.
This favours our strategic focus on advice-led,
choice-driven investments – which will gain further
support from forthcoming regulatory changes.
In the UK, for example, the requirements proposed
by the Retail Distribution Review aim to provide
greater clarity about the services being provided,
with the charges for this service potentially being
specifically agreed between the adviser and the
customer. We expect that other global markets will
move to similar regulations in the future. Skandia’s
modern solutions already meet some of the new
requirements and the proposition will be developed
further to offer the necessary flexibility.
The credit crunch of 2008 and 2009 resulted in low
customer appetite for investing new money, putting
pressure on new sales in the financial sector. During
the crisis, customers moved away from riskier asset
classes such as equity into more stable categories
such as cash and fixed interest. More recently we
58 Old Mutual plc
Annual Report and Accounts 2009
have started to see a reversal of this trend as equity
markets recover.
Recent budget announcements in the UK have
curtailed the tax relief available to wealthier
individuals, making investments into pensions less
attractive. As a result, these customers may turn to
other types of savings for their retirement. We have
a full range of tax wrappers to meet their needs.
The recent changes to ISA allowances for over-
50s, increasing their annual allowance to £10,200,
caused a surge in ISA new business across the
industry during Q4.
Compared with single domestic markets, the
offshore financial services industry offers greater
diversity of geography, customer base, distribution,
risk management and competition – as well as
opportunities generated by variable macro and
micro conditions.
The implementation of Solvency II will emphasise
our low-risk, capital-efficient business model.
We expect to have an advantage over other market
players that carry product guarantees on their
balance sheets. This capital saving will enable us to
channel comparatively more capital into the further
development of business opportunities and to grow
our business.
■■ Strategy
In line with the Old Mutual Group’s overall strategic
initiatives, we are focused on building scale,
maintaining our strong capital positions and
streamlining our portfolio over time. To this end,
our strategy aims to:
> Deliver innovative products to meet local market
needs and increase the breadth and depth of
our product offer
> Evolve the customer and distributor proposition
as we anticipate and respond to changes in
preferences, behaviour and market dynamics
> Optimise our fund portfolio to the benefit
of customers
> Seek opportunities to expand our platform
technology and infrastructure across the
business
> Pursue volume in profitable products and
channels and improve profitability where
opportunities arise.
During 2009 we sold Bankhall, an organisation
offering support services to directly regulated
advisers, to increase focus on our core business.
■■ Performance in 2009
Improved sales performance in Old Mutual’s largest market
Highlights (£m)
2009
2008
% Change
Adjusted operating profit (IFRS basis) (pre-tax)
Return on equity*
Operating MCEV earnings (covered business) (post-tax)
Return on embedded value (covered business) (post-tax)
Life assurance sales (APE)
Unit trust/mutual fund sales
PVNBP
Value of new business (post-tax)
APE margin
PVNBP margin
Net client cash flows (£bn)
Highlights (£bn)
Client funds under management
106
7.9%
(4)
(0.3%)
617
3,210
5,042
49
8%
1.0%
2.5
150
9.7%
229
14.3%
664
2,561
5,540
67
10%
1.2%
2.0
(29%)
(102%)
(7%)
25%
(9%)
(27%)
25%
2009
46.9
2008
% Change
38.9
21%
* Return on equity is IFRS AOP (post tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles
Overview
Wealth Management operated in volatile markets
during 2009. The UK has experienced a severe
recession, while France and Italy have also been
impacted to a lesser degree. While stock markets
have now recovered somewhat, customer
confidence in savings has been significantly
affected by uncertainty. During the second half of
2009, sentiment improved and, as our customer
proposition became sharper, we saw good growth in
our sales, strong net client cash flows and a marked
uplift in funds under management. The fourth quarter
was particularly strong, contributing £203 million of
the total £617 million APE sales for the year, and
£1,066 million of the £3,210 million unit trust/mutual
fund sales for the year.
Sales
UK market
In the UK, our platform proposition is working
well. This was particularly evident in the second
half of the year when sales reached record levels
and we adjusted our product offering to sustain
its relevance in the changing market environment.
The degree to which business is transitioning to
our platform-enabled model is highlighted by the
material increase in contribution from non-covered
mutual fund business in the UK, which recorded
a 22% increase in sales when compared to 2008.
By contrast, our covered business sales in the
UK declined by 6% year-on-year as customer
investment preference continued to shift towards
mutual funds, and away from the more traditional life
product offerings. We remained the leader in the UK
platform market, with 33% market share (in assets)
(source: Lipper) at the end of the fourth quarter, well
ahead of our competitors. Our strong performance
in the UK platform market is aligned with our focus
on delivering transparent, convenient and efficient
services. We are pleased with the momentum in
this business which was recognised in the positive
responses from a syndicated study conducted
among pensions and investment providers by ORC,
a UK market research company, in the third quarter.
International markets
In the markets in which Skandia International
operates (primarily UK offshore, the Far East, Latin
America and the Middle East), the negative impact
of the global recession has had a lagged effect
compared to 2008 when new sales were relatively
unaffected, with 2009 showing falls in inflows
compared to 2008. However, sales in the second
half of 2009 showed some improvement on the first-
half. Single-premium business represents 44% of
our International business. In the UK single-premium
offshore market we have overtaken two competitors
and are now ranked second with a 14% market
share based on statistics for the third quarter of
the year (source: MSE), a 4% increase on previous
periods. The UK offshore market represents 26% of
our total business.
Following a change in government pension
legislation, we have decided to cease writing new
pension business in Finland and are reviewing our
other products. Pensions were a significant profit
generator for Skandia International in the past,
and the curtailing of that activity there will result
in changes to the emphasis of the business and
reduce the cost base.
Old Mutual plc
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Continental Europe
In continental Europe (France and Italy), we have
benefited from close and positive relationships with
distributors, resulting in sustained inflows throughout
the year. We continue to explore mechanisms to
improve traction in these markets both in terms
of the efficiency of our operational structure and
the nature of our relationships with distribution
channels. Our continental European business
overall delivered covered business APE sales 54%
higher than in 2008 (on a sterling basis), as both
new and existing distributor relationships generated
improved sales. In Italy our market share (assessed
as new sales in the unit-linked segment) grew from
approximately 4% at the end of 2008 to 12% at the
end of 2009 (source: Ania). In France, the market
remains oriented towards guarantee products but
sales in the last quarter showed some recovery,
rising by 33% over the previous quarter of 2009
in sterling terms. We have decided to reduce our
activity with financial planners in Spain given the
lack of business, and we will adjust our headcount
accordingly.
IFRS AOP results
IFRS pre-tax adjusted operating profit was 29%
below prior year levels. This reflects the operating
leverage of the business, with lower year-on-year
net sales and lower average levels of funds under
management over the course of the year resulting
in reduced management fee revenues. Lower
interest rates have negatively impacted shareholder
investment return and profit levels on the protection
business in the UK. These negative movements
were partially offset by increased policyholder
contribution profit recognition in accordance with the
three-year smoothing policy. The large contribution
to profits of the fourth quarter of 2008 following
the market weakness are smoothed over twelve
quarters and so the full-year impact is only felt
during 2009.
The IFRS AOP pre-tax result was negatively
impacted by one-off items in 2009. As previously
announced, there were a number of write-offs in the
first half of the year, relating to unit allocation errors
in International (£19 million) and France (£4 million),
a £6 million provision in the UK for legacy product
valuation and a write-down of £6 million on a
property unit trust investment relating to the
Glanmore fund.
On a post-tax basis, the IFRS AOP result was 8%
below 2008, due to a large reduction in the AOP
effective tax rate. The effective tax rate for 2008 was
unusually high at 38%, compared to 19% in the
current year.
A significant portion of the UK AOP result, in both
2008 and 2009, arises from gains in respect of
policyholder contribution. These gains fluctuate over
time, although we would expect a normalised level
of gains to be £30-£35 million per annum. In 2008
and 2009, the gains recognised within the adjusted
operating result amounted to £59 million (pre-tax)
and £96 million (pre-tax) respectively, reflecting the
market volatility experienced. In accordance with
industry practice and our stated accounting policy,
these gains have been smoothed through our results
over a three-year period, rather than recognised
immediately in AOP. In 2010 we expect the gain
to be approximately £100 million (pre-tax), falling
to £60 million (pre-tax) in 2011, before it reverts to
normalised levels in 2012.
Under the revised management structure of the
Wealth Management unit, a robust programme
is underway to adjust how we serve the market,
particularly in the UK, and to restructure the
operational infrastructure supporting the business.
Besides ensuring that our market offering is oriented
towards servicing the needs of our distributors,
the programme is expected to deliver cost savings
across the business of £45 million on a run-rate basis
by 2012, with associated one-off restructuring costs
at approximately the same level. £13 million of costs
have been already incurred in the 2009 AOP results,
with the majority of the balance anticipated to be
incurred during 2010, and an associated run-rate
saving of £11 million already achieved. We have also
streamlined the operations of Skandia Investment
Group (SIG), appointing a new head and announcing
the closure of the US sales office, which has resulted
in £1 million restructuring costs in 2009.
Value of new business and margins
Compared with 2008, the value of new business and
profit margins were influenced by three main factors:
> Lower sales volumes across all markets,
with APE down 7% year-on-year, which had
a negative impact of £5 million on VNB and a
10 basis point reduction in the PVNBP margin.
> This was offset by the positive impact of the
reduction in the effective tax rate on business
value created on new sales in our offshore
markets, delivering £11 million of VNB and
22 basis points of PVNBP margin.
> The internal expense base did not scale down
in line with reduced sales production. Rather the
internal acquisition expense base grew year-on-
year leading to a £15 million reduction in VNB
and a 30 basis point reduction in PVNBP margin.
The increase in expenses reflects investments
in the platform business, but highlights the
opportunity for further operational efficiencies in
the future.
60 Old Mutual plc
Annual Report and Accounts 2009
£46.9bn Funds under management in Wealth Management
MCEV results
The Market Consistent Embedded Value (MCEV)
operating earnings after tax declined from
£229 million in 2008 to a loss of £4 million in
2009. The change was mainly due to a lower than
expected existing business contribution (based on
lower one-year swap rates), a lower new business
contribution, adverse experience and operating
assumption changes partially offset by the removal
of dividend tax in International. For the latter effect,
the impact on adjusted net worth was recognised
within the operating earnings, while the impact on
VIF was recognised in non-operating earnings.
In 2009 the adverse operating assumption changes
of £99 million were the net impact of:
> strengthening persistency assumptions in
both the UK and International businesses
(-£81million, of which -£24 million was in
response to the new regulation in Finland),
> capitalisation of planned development and
project spend together with a strengthening of
maintenance expenses (-£66 million),
> a higher fee income assumption (£36 million),
and
> changing a morbidity risk assumption in the UK
to align with positive experience (£12 million).
The fall in operating MCEV earnings is the driver of
the 14.6% year-on-year fall in RoEV.
Net Client Cash Flow
Net client cash flow showed a 25% improvement on
the prior year, driven by good new sales inflows and
improving persistency.
On the UK platform, annualised surrender rates
improved from approximately 14% of average funds
under management at the beginning of the year to
12% by the end of 2009. As we migrate business
to the platform, the UK legacy business has seen
lower inflows coupled with higher surrender rates,
which resulted in negative net client cash flow for
the year from this part of the business. Surrender
rates on the legacy book appear to be stabilising,
and a retention team has been mobilised locally to
improve persistency, including assessing options for
controlled transfers to the platform where this would
serve customer investment objectives. However, we
do anticipate that the traditional book of business
will gradually decline as more investors move away
from the legacy products towards the platform-
enabled investment propositions.
Net client cash flow in our offshore business was
impacted mainly by lower sales levels, with surrender
levels remaining relatively high as a result of market
conditions. 2009 surrender experience, influenced
by broker-specific surrenders and changed
regulations in Finland, has prompted us to review
and strengthen our persistency assumptions, the
effect of which can be seen in the MCEV indicators.
With recent improvements in surrender rates our
outlook for persistency in the coming periods is
cautiously positive.
Strong inflows and maintained focus on persistency
have resulted in good net client cash flows in
continental Europe which were significantly higher
than in 2008 and reached 19% of opening funds
under management on a sterling basis.
Funds under management
Funds under management recovered strongly in
2009 as global equity markets lifted from their low
levels at the start of the year and as a result of
strong net client cash flows. 2009 full-year funds
under management were 21% above the 2008
closing position. Net client cash flow contributed
6% in asset growth, while market movements on
the portfolio added a further 15% to total funds
under management. Throughout the year, we
have witnessed gradual changes in the asset mix,
as customers started shifting from conservative
portfolios with high fixed income weightings into
relatively more risky asset classes as equity markets
recovered. This has a positive impact on the run-rate
of our revenue streams, which are substantially
driven by fund rebates.
Investment performance on funds selected and
managed by SIG showed a marked improvement in
2009, with both our core range of researched third
party funds and our proprietary funds performing
well, particularly since the restructure of the UK
fund range during 2009. In addition, SIG’s Asset
Allocation Model Portfolios have consistently
outperformed benchmark since launch, with
significantly lower levels of volatility relative to
benchmark. 2009 was an excellent year for SIG,
with overall fund range performance in the top
quartile in the industry, having 64% of funds ahead
of benchmarks.
The improvements in investment performance
in 2009 were aided by the establishment of a
dedicated portfolio management team, while the
UK fund range restructuring concentrated effort
and scale into funds, cut total expense ratios and
enabled the use of tactical asset allocation for the
first time. In addition, improving economic and
market conditions boosted risk appetite, with active
managers being rewarded for taking risk.
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
■■ Marketing
Throughout 2009 we continued our drive to increase
brand awareness with advisers and end-customers
and to deliver solutions tailored to customer needs.
Examples of our marketing activity during the
year were:
> The annual Skandia UK Trailblazer roadshows,
held in September, which earned excellent
feedback from the 1,600 advisers who
attended. Trailblazer is a series of events
designed to help distributors prepare for the
changing regulatory environment and build
long-term value in their business – giving us
an opportunity to share our distributor support
proposition
> Our sponsorship of the Sky Sports coverage
of golf and sailing during the year, to increase
consumer brand awareness among key target
segments. This initiative has successfully
increased Skandia brand awareness in the
market. Also in the sporting arena, Skandia
continued its sponsorship of the GBR sailing
team in 2009
> The launch of the Skandia Global Dynamic
Equity Fund in April 2009: offering customers a
focused and flexible global equity solution that
combines both manager selection and active
asset allocation in a single fund, it has been a
top-quartile performer from its inception
> The launch of the highly successful Skandia
Spectrum Funds – an investment solution
giving IFAs the tools to match a customer’s
risk appetite with funds that aim to create the
maximum return for that profile
> The launch of the Skandia European Best Ideas
Fund – an actively managed pan-European
fund solution, giving European customers the
benefits of robust asset allocation, manager
selection and manager blending through
our Multi-Manager approach. The fund has
performed in the top quartile since inception
> In France we introduced Skandia Initiatives,
a roadshow programme that aims to support
IFAs in business development, and again
participated in the annual Patrimonia trade
event. This was an opportunity to showcase our
new advisory option on the Archipel platform,
as well as our IFA segmentation programme.
Both initiatives have been very successful in
raising awareness of our products.
■■ Customer service
We are committed to providing consistently high
standards of service to customers and distributors.
Recognition of our drive for service excellence during
2009 included:
> Two five-star ratings (‘Investment Provider’ and
‘Life & Pensions Provider’) in the FT Adviser
Online Service Awards and a five star rating in
the industry Financial Adviser Awards for the
12th year running, recognising the high service
quality we maintained despite the platform
migration programme running throughout
the year
> ‘Best Commitment to Service’ in the
International Fund & Product Awards
> Second place for quality of service in the IFA
channel, in a study by a leading publication
in France.
■■ People
We use a balanced scorecard approach to
performance management, measuring and
rewarding employees based on their performance
across a range of financial, customer, operational
and organisational learning objectives. We believe
in benchmarking remuneration against the market
for specific roles, with variable pay reflecting the
achievement of objectives linked to customer and
shareholder value.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
■■ Priorities for 2010
> Build and expand the customer and distributor
proposition
> Build profitable volume through investment in
products, service and distribution
> Maintain and improve operational efficiency,
reducing duplication and streamlining processes
> Lay the foundations for extending our UK
platform infrastructure to other markets.
62 Old Mutual plc
Annual Report and Accounts 2009
■■ Outlook
Over the last quarter of 2009, we attracted markedly
better new business inflows on the back of
sustained financial market performance during 2009.
While the recovery in the global economy is still
fragile and individuals’ economic situations remain
constrained, we believe that customer appetite for
long-term investment is returning, while the gap
between the need to save and actual savings levels
is increasing. The sustainability, speed and strength
of the economic recovery are difficult to predict;
however, we are cautiously optimistic. We expect
that competition will be tough in 2010 as providers
race to capture the returning market. We believe that
those providers with market-relevant product offers
and high levels of service quality and responsiveness
will be the winners.
The aftermath of the recession and its long-term
impacts on customer behaviour, trust and risk
appetites is likely to be significant for the industry
over the next few years. However, we believe
we are well-positioned to respond to these
changes as we build out our product proposition
and offers with continued focus on transparent,
advice-led business.
Our market share has grown over 2009, which
demonstrates that our products and service quality
remain relevant in the market. As the market
recovers, we expect this to position us strongly
for further growth in funds under management.
The development of product spread and depth in
the UK platform market is critical to the success of
the business and we will be accelerating our focus
on this in the period to 2012.
Our efficiency programme is intended to align the
cost base of the business with the nature of the
lower-margin platform business. We expect that,
coupled with improving volumes and revenue,
this will have a positive effect on IFRS and MCEV
results in future years. Further restructuring costs
are expected in 2010. We have set ourselves goals
for 2012 of delivering a return on equity of 12-15%,
net client cash flow of at least 5% of opening funds
under management, as well as £45 million of cost
savings as previously mentioned.
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Old Mutual plc
Annual Report and Accounts 2009
63
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
■■ US Life
LONG-TERM SAVINGS: US LIFE
US Life
OM Financial Life
Insurance Company
OM Re
Sales Distribution
Management
Underwriting and
Risk Management
Investments and
Capital Management
Administration
US Life primarily consists of OM Financial Life
Insurance Company and its subsidiary, OM Financial
Life Insurance Company of New York. It covers all
50 US states as well as the District of Columbia.
Our products are designed to deliver excellent
profitability while providing customers with
transparency and value-driven benefits.
Fixed indexed annuities (FIAs)
Our FIA products have been highly ranked in the
top six companies for market share from 2004 to
2008 by Advance Index Product Sales & Marketing
Report. They guarantee the policyholder no loss of
principal due to market risk with a return derived
from the greater of a guaranteed fixed rate or a
formula relative to equity market index movements.
By hedging the potential equity index upside using
equity index options and futures, we give customers
the potential for equity market gains while managing
exposure to loss of principal. Under these contracts
we invest in a portfolio of bonds and other fixed
income securities that earn a spread above the cost
of options and futures and rate guaranteed to the
policyholder. Specific product names include the
OMIndex-Safety series (available in 4, 7 and 10-year
durations), OMIndex-Escalator (available in 6, 8 and
10-year durations), OMIndex-Accelerator (available
in 7 and 10-year durations) OMIndex-Spectrum 9,
OMNYIndex-Safety 7 and OMNYIndex-Spectrum 10.
Fixed annuities
Similarly to FIAs, under these fixed-rate contracts
we invest in a portfolio of bonds and other fixed
income securities that earn a spread above the
rate guaranteed to the policyholder. There are two
main types of fixed annuities: one aims primarily
to offer a tax-efficient way of saving money for
retirement, and the other to provide an income
stream for life. Our fixed annuity product offerings
include the OMGuarantee-Platinum series and the
OMGuarantee-Plus series.
Protection products
We offer one principal protection product line: fixed
indexed universal life (FIUL) products. These provide
flexible life assurance protection in the event of
death or disability. The indexed universal life product
is designed to provide supplementary retirement
income options for customers who use preferred
loan features for tax advantage. Our two core FIUL
products are OMLife-Choice and OMLife-Elite.
In the middle-income to upper-middle-income
segment of the market that we target, consumer
needs are not particularly complex. In the US, the
ratio of life insurance coverage to household income
is no more than 3:1, regardless of income level.
By contrast in Japan, where the ratio is 10:1, there is
greater understanding and appreciation of the value
of life insurance.
What our customers want is a product solution
for a particular financial objective, such as a tax-
advantaged supplemental retirement income or a
way to reduce the risk of financial loss. Customers
want to trust that these products will perform as
the company and agent represent. They want
information available at the touch of a keystroke or
within a minute of dialling a toll-free number. Meeting
service expectations is critical to the long-term
success of insurance companies operating in the
US market.
We are building products and services that cater
to customers in the 63% of American households
with incomes between $35,000 and $250,000
per year. Our niche will be in the $75,000 to
$150,000 household income market. Our products
will be distributed through independent agents
64 Old Mutual plc
Annual Report and Accounts 2009
78m Baby-boomers in the US, the target market for US Life
and managing general agents (MGAs) who are
focused on serving our target markets. Effectively
meeting the basic risk and retirement needs of this
customer segment will give Old Mutual tremendous
opportunity for growth and market share attainment
in the US.
Most US households have not saved an adequate
retirement account to assure the same quality of
life they enjoyed during their income-earning years.
With the market downturns of 2001 and 2008
many baby-boomers will struggle to accumulate
enough funds to retire comfortably. They will look
to companies to meet their income needs through
guaranteed minimum income benefits via annuities
and tax-free loans in cash value accumulation
life policies.
The market dynamics for the US will continue to
provide significant opportunities around the broader
middle market and the ageing baby-boomer
demographic.
■■ Business model
We distribute our products through independent
agents. The majority of sales are generated through
established groups of MGAs, similar to large
brokerage firms in the UK, who typically offer agents
a range of annuity and life assurance products from
various providers. In the US it is not economic for
insurance companies to target agents directly with
their products: the MGA is the intermediary between
the agents and the insurance companies, of which
there are about 20 core competitors in our chosen
markets. After a culling process earlier in the year,
we currently have contracts with some 260 MGAs.
Our relationships with our top distribution partners
continue to be an area of strength. Many individual
contacts date back a decade or more, and such
long-term relationships help us to weather change.
We provide differentiated support to our Power
Partners (key account MGAs) and their downstream
agents by offering:
> Excellent products − we will continue to offer a
broad portfolio of unique products built to serve
the needs of middle- and upper-middle-income
customers
> Educational workshops – we host workshops
designed to help advisers grow their practices
to the next level and regularly deliver actionable
sales programmes to agents in the field
> Special programmes for our top producers −
loyalty deserves to be rewarded, so we offer
a number of unique services for our most
productive advisers and our compensation
programs and services are tiered so that we give
the best service to the most productive agents.
People, products and processes are the keys to our
success, and we can be a key to the success of our
distribution partners. To be successful in both the
short- and long-run, we must:
> Be innovative – adding depth and breadth
to our product line and positioning ourselves
creatively in the marketplace by addressing
customers’ income replacement and retirement
income needs
> Develop excellence in recruiting and training
distribution partners – refining our processes to
recruit wholesale and retail distributors, bring
them into production and make them steadily
more productive
> Create positive experiences – making our
customers feel important. The little things
matter; positive service experiences matter.
Capital and cash management are our primary
drivers for decisions, particularly in light of the severe
change in the economic climate that began in
Q4 2008. Our capital level is substantially dictated
by regulatory and rating agency requirements, which
we meet by taking appropriate action regarding
types of assets, reinsurance, available product
features, benefits and mix of product offerings.
In our product development process, we aim for
designs that contribute to maintaining an overall
return in the 10% to 12% range while generating a
significant value of new business.
Our business planning and forecasting processes
include detailed analysis of the sources of actual
capital which is compared to the required capital
level. Components of each are monitored monthly
for management action, particularly on the asset
side. The process includes identifying and planning
for potential events that could either increase surplus
or reduce required capital as well as striving to
mitigate such events.
During 2009 we engaged Goldman Sachs Asset
Management (GSAM) as advisers to provide
oversight and additional analysis on the structured
securities in the US Life investment portfolio. After
a thorough review of GSAM’s capabilities, including
support of the impairment/audit process for
structured securities at the close of the first half of the
year, we engaged GSAM as lead asset manager of
the US Life investment portfolio, with responsibilities
spanning the full spectrum of fixed income securities.
As lead manager, GSAM is also responsible for
providing investment input that informs our overall
asset allocation, and has dedicated actuarial
resources to help us move towards portfolio
segmentation. We continue to work with our existing
affiliated asset managers, Dwight Asset Management
and Barrow, Hanley, Mewhinney and Strauss.
Old Mutual plc
Annual Report and Accounts 2009
65
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
■■ Product development
The growth in the US Life business since 2000
has been predicated on a partnership with core
distributors on product design and exploitation
of niche markets: for example, in the mortgage
term market we provide death benefit protection
to individuals financing or refinancing a home.
While we determine the retail strategy, the product
solutions are most often created in partnership with
distributors. This assures the partner company that
we are on-target with the product design while also
securing shelf space with MGAs that help in the
development process.
■■ Market overview
There is a push for federal regulation of the
insurance business to ensure 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 fixed products and do not wish
to entertain the associated upfront costs and new
business strain. Thus far, such a change appears
highly unlikely for the next few years because the
proposals under consideration in Congress generally
do not apply to the insurance business.
A regulatory change – US Securities and Exchange
Commission (SEC) Rule 151A − 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
licenses. Originally Rule 151A was scheduled to
go into effect in 2011 if it survived legal challenges.
The SEC has now agreed to an additional two-year
deferral, which means it is unlikely to take effect
before 2013; meanwhile, the SEC could decide not
to go forward with it, or it could be struck down in
legal challenges yet to be lodged if it is reissued.
At state level, regulators continue to impose
additional requirements to enhance consumer
protection during the sale of insurance products.
Many of our core competitors are in the early
phases of their own re-engineering efforts. Having
taken tough, swift action very early on in the market
downtown, we gained significant competitive edge.
Many of our key distribution partners commented
positively on our early action and transparency
throughout the transformation process in Q4 2008
and during 2009.
Many of the customers we aim to attract are baby-
boomers, a group totalling over 78 million people in
the US with estimated net worth of nearly $17 trillion
dollars and a need for wide-ranging life insurance
and savings products (Source: US Census Bureau).
The fact that many of these individuals can
expect to spend a quarter to a third of their life in
retirement (Source: Economist Jeffrey Brown) further
compounds their need for protection, accumulation
and income distribution products.
■■ Strategy
We have scaled the business to achieve profitable
growth. The agent-culling process and streamlined
product portfolio have focused the company on
steady, quality new business through our core
distribution partners. We have made early efforts
to garner support with this key group, including
the introduction of information-rich marketing
programmes and a more personalised approach to
handling day-to-day requests.
Our core products strategy reduced the annuity
portfolio from over 50 products to 23 and the life
portfolio from nine products to two. By taking
this streamlined approach we aimed to continue
providing our agents with sustainable solutions in
uncertain times: the products we continue to offer
today provide the flexibility and benefits to meet
customers’ future expectations.
The current risk to maintaining capital levels is having
to sell assets in a declining market to meet liability
obligations, and the impact on required capital of
declining credit ratings. Our action to mitigate these
risks included liquidity analysis, which resulted in
a higher than normal cash balance held through
September to avoid selling assets in a depressed
market, as well as monthly monitoring of ratings
migration. In addition, we actively monitored and
planned for beneficial regulatory action designed to
relieve the impact of ratings changes as well as other
surplus relief action. As surrenders have declined
we have invested more cash while maintaining a
prudent level based on our analysis. We have also
selected assets for sale where the loss is offset by
the release of required capital for asset risk.
As part of the business transformation initiative we
reduced the number of internal customer service
and IT staff and renegotiated all major Third Party
Administrator (TPA) contracts. These changes did
not reduce our service capability and we earned our
best-ever ratings from agents for overall customer
service levels and call centre responsiveness.
The average annual cost per contract for customer
service (including TPA and IT) has reduced by 22%
from over $54 in 2008 to under $43 for 2009.
Additional full year savings coming through in 2010
will further improve the average cost per contract.
66 Old Mutual plc
Annual Report and Accounts 2009
■■ Performance in 2009
Continued progress to improve profitability and enhance risk management
Highlights ($m)
2009
2008
% Change
Adjusted operating profit (IFRS basis) (pre-tax)
Return on equity
Operating MCEV earnings (covered business) (post-tax)
Return on embedded value (covered business) (post-tax)*
Life assurance sales (APE)
PVNBP
Value of new business
APE margin
PVNBP margin
Net client cash flows ($bn)**
Highlights ($bn)
Funds under management**
76
10.5%
417
22.7%
107
1,000
22
20%
2.2%
(1.5)
(425)
(25.3%)
(676)
(97.6%)
251
2,307
(21)
(8%)
(0.9%)
(0.4)
118%
162%
(57%)
(57%)
205%
(275%)
2009
16.7
2008
% Change
15.2
10%
* Calculated as the operating MCEV earnings (post-tax) divided by the absolute value of the opening MCEV
** Stated on a start manager basis as USAM manages $6bn of the funds on behalf of US Life
Overview
During 2009 we successfully transformed and
scaled back the business. The major actions
of reducing the product profile, scaling back
distribution with a focus on top-tier producing
agents, lowering staff numbers, and carrying out
a full review of our outsourcing model are now
complete. As a result of these actions, we made
significant strides in addressing the three core
focus areas in the business, which are operational
efficiency and cost control, product and assumption
risk, and the ongoing effort to de-risk the company’s
fixed income investment portfolio.
Sales
Total US Life sales (APE basis) were down 57%
over the comparative period as a result of a planned
reduction in the number of products offered as well as
focusing on top-tier producing agents and conserving
capital. As planned, total gross sales declined from
$1,950 million in 2008 to $860 million in 2009.
Elsewhere, the wider life insurance industry suffered a
decline in sales not seen since the end of World War II.
The product profile was streamlined to focus on
more profitable sales and products with lower
new business capital strain. Fixed indexed annuity
(FIA) sales were down 47% to $60 million on an
APE basis. This product line is our key offering,
contributing 56% of total APE for 2009 and currently
offers attractive margins. It meets the needs of
customers who seek principal protection, as well
as fixed interest guarantees or a guaranteed fixed
income. Immediate annuity sales represent 18% of
total 2009 APE and remain an important offering as
they contribute to capital in the year of sale.
APE for the Universal Life product suite was down
57% to $22 million on an APE basis and our core
life product, Indexed Universal Life, fared the best
out of all life product segments, partially due to
the elimination of Universal Life products other
than Indexed Universal Life. Indexed Universal Life
continues to offer attractive sales potential in the life
market due to indexed crediting options, and tax-
advantaged growth and income options. Term Life
sales were suspended in 2009 due in part to their
capital inefficiency as a product.
Although volumes were managed down by design,
key distributors that drive our sales remain largely
intact year on year. In the annuity distribution
channel, four of the top five and eight of the top ten
distributors are the same in 2009 as in 2008. In the
life distribution channel, three of the top five and
seven of the top ten distributors are the same in 2009
as in 2008. Having recently concluded our annual
distributor conference, general consensus was that
US Life exceeded expectations in dealing with difficult
economic conditions in 2009 through a transparent
communications plan, creating a new foundation for
future growth. Confidence from this group remains
high and key distributor relationships are strong.
IFRS AOP results
Pre-tax adjusted operating profit (IFRS basis)
was $76 million for 2009 compared to a loss of
$425 million for 2008. Gross margins (prior to DAC
amortisation) of $430 million in 2009 compared to
a loss of $54 million in 2008. The prior year was
impacted by a $436 million mortality assumption
change for the Immediate Annuity line. The underlying
additional $48 million of margin earned in 2009 is
Old Mutual plc
Annual Report and Accounts 2009
67
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
primarily driven by the annuity product lines which
showed better underwriting experience. Mortality
on the Immediate Annuity line improved over 2008
while 2009 includes a gain arising from commutation
of 17 large cases. The FIA line generated higher
surrender charges as a result of increased surrender
activity. Offsetting the better underwriting experience
was lower net investment income due to holding
cash at the low interest rates of the period and the
increased level of surrender activity. DAC amortisation
was $354 million and $368 million respectively for
2009 and 2008. Unlocking in 2008 was due to
prospective annuity assumption changes while that
of 2009 was due to the retrospective amortisation
impact of surrenders and the decline in premiums
from Universal Life sales.
IFRS operating expenses were $58 million or 33%
lower over the comparative period resulting from
tight expense management and cost renegotiations
of three key service providers.
Value of new business and margins
Value of new business increased by $43 million
over the comparative period, with the margin for
the year at 20%. The increase in margin was mainly
due to higher swap rates and the focus on selling
more profitable business. Management actions
to improve margins on fixed indexed annuities
have also increased the value of the in-force book.
The traditional life business has been shrunk
because of its capital inefficiency.
MCEV results
Operating MCEV earnings improved significantly up
$1,093 million from the prior year loss of $676 million.
This was mainly due to increased expected existing
business contributions, which accounted for
$363 million of earnings in this reporting period
compared to $44 million in the comparative period,
and the large negative experience variances and
assumption changes in 2008 which were not repeated
in 2009 (experience variances were negative $2 million
in 2009 compared to negative $280 million in 2008,
and assumption changes had a positive impact of
$47 million in 2009, compared to negative $619 million
in 2008). MCEV does not capitalise investment spreads
in excess of the adjusted risk free reference rate up-
front, as was the case under EEV. Were these spreads
to be capitalised, the increase in embedded value from
the 2008 level would be in excess of $900 million.
Unlike for 2008, guarantees on the policies in force in
2009 although above the low reference risk free rates
prevalent for the period, were generally less than the
actual yield earned on the portfolio.
During the period we commuted a block of our SPIA
contracts to the owners through their third party
advisors at a value less than the reserve established
for this block after the recent reserve strengthening,
giving a positive variance. Although the experience
from the total SPIA annuity block can be expected
to be volatile, since it is a small book with some large
individual contracts, we are confident that the reserve
adjustments made in previous periods are adequate
to cover the future expected outcomes in respect of
this business and the transaction described above
supports this view. Changes in lapse assumptions
due to improved experience resulted in a small gain,
while amendments to the opening TVOG (time value
of options and guarantees) balance and the lapse
methodology also gave a small net gain. We consider
that the anticipation of attractive crediting rates
available from the rise in equity markets during 2009
had a progressively beneficial impact on surrenders.
The large movements in non-operating earnings
demonstrate the sensitivity of the US Life MCEV
to changes in the economic environment, as
market consistent methodology means that results
move more directly in line with the movements in
the market in general. Since assets are marked
to market the high unrealised losses in the bond
portfolio have a large impact on the MCEV.
The $1.8 billion decrease in unrealised losses in
2009, partially offset by a significantly lowered
liquidity premium assumption (100 basis points in
2009 from 300 basis points in 2008), was the key
driver of a net positive $681 million and 8.30p per
share impact on non-operating earnings, to the
Group MCEV earnings per share respectively, at
31 December 2009.
Net Client Cash Flows
Net client cash flows were negative due to the
decision to reduce new business volumes and
also an increase in surrender activity during the
first half-year. We believe that this was driven by
policyholder liquidity needs and the adverse effect
that the equity markets had on our fixed index
annuity returns. During the second quarter of
2009, a conservation programme was introduced
to focus on the reduction of full surrender activity.
The programme delivered benefits and surrender
experience trended downwards in the second half of
2009. By the end of the year the four-week average
for full surrender activity was nearly half the level
seen at the peak in the second quarter of 2009 and
was in line with long-term expectations.
Funds under management
Funds under management ended the period
at $16.7 billion, up 10% from the opening
position primarily due to a $1.3 billion (10%)
increase in the market value of the investment
portfolio and investment income for the period.
This was partially offset by negative net client cash
68 Old Mutual plc
Annual Report and Accounts 2009
33% Reduction in operating expenses by US Life
flows of $1.5 billion, or 10% of opening funds
under management.
Investment portfolio
The fixed income portfolio continued to be affected
by poor economic and volatile financial market
conditions. However, the fair value of the portfolio
increased $1.3 billion from year-end 2008. The yield
on the book value of the fixed income portfolio was
5.82% (including cash and other invested assets),
and has not changed significantly from that of 2008,
as reinvestment of cash has not materially changed
the overall yield. We ended the year with $0.8 billion
(5% of holdings) in cash and short term holdings,
reflecting purchases of assets from cash inflows,
as well as with cash proceeds from de-risking and
gain-harvesting transactions. Purchase activity
has targeted NAIC 1 to 2 rated securities including
selectively into the financial services sector. The net
unrealised loss position on the fixed income security
portfolio improved to $0.5 billion at 31 December
2009 ($2.3 billion at 31 December 2008), reflecting
a broad recovery in financial markets in general, and
narrowing corporate credit spreads in particular and
selective de-risking. It has continued to improve to
below $0.2 billion as at the end of February 2010.
Continued Government purchases in the residential
mortgage bond markets, and increased support
to the commercial mortgage market through
programmes such as the Term Asset-Backed
Securities Loan (TALF) and Public-Private Investment
Program (PPIP) have also led to narrowing spreads
across structured securities, which have also been
favourable to the portfolio’s unrealised loss position.
As the Federal Reserve’s support of the Agency
market through explicit purchase of such securities
comes to an end in the first quarter of 2010, it is likely
that Agencies could retreat from current valuations.
As such, despite excellent collateral quality, we view
Agencies as posing potential spread-widening risk.
Similarly, very highly-rated, long maturity securities
are at risk of underperformance or negative price
action as long-dated Treasury yields move higher on
the back of mounting Federal deficits and the need
to fund ongoing stimulus programmes.
Approximately $1.5 billion of the fixed income
portfolio is classified as Loans and Receivables,
which are carried at amortised cost. As a result,
$45 million of unrealised losses on a mark-to-market
basis are not reflected in the balance sheet in
accordance with IAS 39.
During the last three quarters of the year, the
financial services sector securities were generally
the largest contributors to the improvement in the
net unrealised loss position for the fixed income
portfolio. With increased access to capital and
the prospect of stabilising and improving earnings
quality, the likelihood of coupon deferrals for weaker
financial hybrids, such as those of US regional
banks, appears to be diminishing. Against the
backdrop of improved liquidity in the capital markets
and a recovery in economic activity, high yield
default rates are expected to decline by around 50
to 75% from prior year levels and investment grade
downgrades are expected to return towards historic
norms. This implies that the worst of corporate
defaults and ratings downgrades has passed.
The fair value of the US fixed income investment
portfolio at 31 December 2009, after recognition of
the impairments, totalled $15.3 billion compared to
$14.0 billion at 31 December 2008.
Impairments
During 2009, there were three defaults in the
corporate bond portfolio of $14 million included in
the total $389 million of IFRS impairment losses
on 82 securities. These were partially offset by
$35 million of net investment trading gains. As of
31 December 2009 compared to 31 December
2008, $807 million of investment grade securities
were downgraded to non-investment grade and
$35 million of non-investment grade securities
have been downgraded further. Impairment losses
included $235 million related to structured securities,
with the losses being due to adverse changes in
expected future cash flows. The impairment losses
were primarily in residential mortgage-backed
securities ($138 million), commercial mortgage-
backed securities ($80 million), preferred stocks and
hybrid securities ($43 million net) and 13 corporate
holdings ($111 million), the most significant of which
were related to financial sector issuers.
The fixed income portfolio has exposure to
approximately $0.8 billion of preferred stock/hybrid
instruments amounting to approximately 5% of
the portfolio at 31 December 2009 compared to
$0.6 billion (5% of the portfolio) at 31 December 2008,
with the bulk of this exposure concentrated in the
financial services sector. During the first half of 2009,
these holdings came under pressure as concerns
about financial institutions continued to mount In the
second half of 2009, however, the fair value of these
securities have recovered sharply, as results from the
Federal Reserve’s “stress test” of banks were released,
and banks and other financial institutions successfully
raised capital to bolster their balance sheets.
We monitored closely and reduced our exposure
to hybrid preferred securities and other assets in
advance of adverse rating migration (e.g. Dubai
Ports in 2009) through trading activity. We also
selectively harvested gains to offset realised losses.
We are encouraged with the progress we have
Old Mutual plc
Annual Report and Accounts 2009
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BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
LTS
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
been able to make with better understanding and
anticipating the dynamics of the portfolio through
our own processes and close co-operation with our
expanded investment management roster.
Now, and for the foreseeable future, our approach
focuses on fresh, flourishing and grounded aspects
of nature – characteristics that we believe end-
customers can more easily relate to the products.
OM Financial Life Insurance Company regulatory
capital, including capital contributions, increased
slightly compared to statutory 2008 levels as strong
statutory operating earnings offset investment
impairments. OM Financial Life’s required capital was
essentially unchanged (at the targeted 300% level).
In the end, higher risk-based capital charges resulting
from credit rating migration of the portfolio due to
investment downgrades did not have a significant
impact in 2009. As expected, credit rating migration
took place within the corporate bond portfolio but this
was offset by improved charges on the structured
security portfolio. The main reason for this was the
NAIC RMBS rating initiative that adjusted the asset
risk required capital to account for loss severity in the
structured security portfolio. As yet no adjustment
to the CMBS ratings requirement has been agreed
although this and other relief measures are likely to be
discussed by the regulators and the Industry.
The risk-based capital ratio increased from 305%
at year end 2008 to 312% at 31 December 2009
based on the small movement in both capital and
required capital. The US Life business in aggregate
did not need additional capital from the Group in
2009, although capital was repositioned between
companies within the US Life Group through the
transfer of $30 million from OM Re to achieve the
312% year end result. Given our anticipated level
of impairments for 2010 of $55 million, and the net
capital consumption of our sales plans, we do not
consider it likely at this stage that we will require
further new capital for this business.
■■ Marketing
Our re-engineering and cost-cutting measures
eliminated the majority of our traditional print,
broadcast and web-based advertising. However, as
part of the product portfolio overhaul we enhanced
the look, feel and content of all the marketing
materials that help our agents to sell Old Mutual
products. The new materials feature more visually
appealing imagery, simplified product mapping
and naming to tie the product portfolio together,
highly stylised concepts and sales ideas to extend
Old Mutual’s brand recognition and revised content
to help agents understand and communicate key
benefits. Launched in October, they were warmly
welcomed by our field force.
Changing market dynamics dictated a shift in
our presentational approach. In the past we had
portrayed successful, wealthy baby-boomer types
living the high life in some style and splendour.
■■ Customer service
A key objective in 2009 was to deliver enhanced
and proactive customer service through a series of
initiatives:
> Introduce proactive service model through TPA
Perot Systems
> Implement in-force web capability
> Provide enhanced in-force illustration capability
> Establish case management services within
underwriting
> Establish and train sales support (pre-sales)
teams in Baltimore and Lincoln
> Implement customer relationship
management capability
> Review key distribution relationships and identify
service enhancement opportunities
> Review progress through independent research.
All these were successfully completed. Feedback
from MGAs and agents has been very positive,
and this anecdotal response has been confirmed
by independent surveys of our writing agents by
Service Quality Measurement (SQM) and LIMRA.
SQM benchmarks over 350 leading North American
call centres annually, asking customers about
their service experience. The 2009 survey showed
that we improved performance compared with
2008 and exceeded world-class benchmarks on
two key measures: first call resolution and overall
customer satisfaction. We asked LIMRA to conduct
a fifth survey of 7,000 life and annuity producers to
evaluate the service we give them and determine
if service had improved since the previous survey
in November 2008. Its overall finding: “Old Mutual
improved in four areas since the 2008 survey – ease
of doing business, call centre, sales support and
new business/underwriting. These translated to
a large increase in the company’s overall ratings.”
We received the best ratings for service delivery since
we started the survey in 2005.
■■ People
Our business transformation programme in late
2008 and early 2009 reduced our workforce by
approximately 50% and consolidated it into one site
in Baltimore, Maryland. The process was designed to
streamline and right-size the business while retaining
the key talent needed to move the company forward.
The impacted employees were handled with respect
and dignity and offered assistance with their career
transition. Communication throughout the process
was key to its success.
70 Old Mutual plc
Annual Report and Accounts 2009
We recognise that our future success depends
on having an engaged and committed workforce,
and the business is now staffed with talented
employees who are delivering on our business
strategy. We have a performance management
system that clearly aligns employee and business
goals and rewards employees for accomplishments
and contributions. A special recognition programme,
our Anchor Achievement Awards, rewards
individuals who go above and beyond their normal
work responsibilities and provide outstanding
performance. We have function-specific action plans
to engage every employee in our business. And our
development programmes prepare our managers for
the responsibilities of retaining employees and offer
the general staff opportunities to grow and develop
their skills. All these initiatives demonstrate our
commitment to our employees, their value, and their
importance to the success of the business.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with the
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
■■ Priorities for 2010
> Strengthen the core competencies of the
business in distribution channels, asset liability
spread management, product development and
platform outsourcing
> Embed risk management practices
> Maintain 300% RBC ratio through integrated
capital and sales management
> Optimise risk/return trade-offs on investments
> Strengthen employee experience and
retain talent.
■■ Outlook
By leveraging the business transformation successes
accomplished in 2009, we are well positioned to
generate modest, quality returns in the coming
year. Sales levels in 2010 are expected to increase
over 2009 levels, but within the capital utilisation
parameters set for the business and with a targeted
focus on profitable products. New FIA and Universal
Life products are expected to be introduced in the
second quarter of 2010. Expense actions taken
in 2009 will provide a lower cost base in 2010.
Capital self sufficiency is again the goal of the
business for 2010 and the balance sheet, including
invested assets, is more conservatively positioned
than prior quarter-ends. In 2010, we are assuming a
long-run rate of impairments at 30 basis points of our
bond portfolio for IFRS AOP.
The economic backdrop in the US continues to
be quite muddled, with financial market returns
reflecting a sense of optimism and confidence that at
times appears at odds with core economic metrics.
The impact of the government’s extraordinary stimulus
efforts has had a direct effect on the narrowing of risk
spreads across the board, and credit is flowing again
to corporate America. However, the labour market
remains challenging, with the unemployment rate
hovering at around 10%, and companies still reluctant
to materially expand payrolls. The backdrop of high
unemployment and below-average economic growth
continues to weigh on sentiment in the housing
market and this gives rise to risks to surrender levels.
The exposure of the US bond market to real estate
impairments represents a further source of uncertainty
as does the potential price impact on higher quality
bonds if rates rise.
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Old Mutual plc
Annual Report and Accounts 2009
71
CONTROLLED
THINKING
Improvement in non-interest revenue (NIR)
NIR, including the consolidation of the Bancassurance and
Wealth joint ventures, grew by 11.0% to R11,906 million
(2008: R10,729 million). Like-for-like NIR increased by 6.1% −
driven by good growth in commission, fee and trading income,
partially offset by a reduction in fair-value gains from R368 million
in 2008 to R44 million. Commission and fee income was 12.4%
higher, largely from volume growth in retail transactional banking
and increases in fees charged across the bank.
Non-interest revenue
09
08
(Rm)
11,906
10,729
72 Old Mutual plc
Annual Report and Accounts 2009
BUSINESS REVIEW
BANKING
Nedbank Group is South Africa’s fourth largest banking group
measured by assets. It has a strong retail deposit franchise and
its corporate lending market share is over 20%. Headquartered
in Johannesburg, Nedbank has large regional operational centres
and a distribution network throughout South Africa, with facilities in
other southern African countries.
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KEY FACTS
Total assets
2009
Return on equity (ROE)
2009
Total capital
adequacy ratio
£47.9bn 11.5% 14.9%
2008: £41.3bn
2008: 17.7%
2008: 12.4%
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Net interest income
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(£m)
1,238
1,057
Net interest margin
09
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(%)
3.39
3.66
Number employed
Some of our brands
27,346
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Tom Boardman
Former Chief Executive, Chief Executive,
Nedbank
Mike Brown
Nedbank
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Annual Report and Accounts 2009
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BANKING
CONTINUED
■■ Nedbank
BANKING: NEDBANK
Nedbank
Nedbank
Capital
Nedbank
Corporate
Retail & Business
Banking
Bancassurance
& Wealth
Central Support
Clusters
Nedbank Group Limited (‘Nedbank’) is a bank
holding company. Its principal subsidiary is Nedbank
Limited. The company’s ordinary shares have been
listed on the JSE Limited since 1969.
Nedbank Group is South Africa’s fourth largest
banking group measured by assets, with a strong
retail deposit franchise. Its corporate lending market
share is over 20%, Nedbank Capital is ranked as
one of the top three in key investment banking
league tables and the bank leads the commercial
property finance market with over 30% market
share. Nedbank Business Banking is the second
largest business bank in the urban areas and the
Retail business is the fourth largest retail bank in
South Africa by assets and transactional products
with the second largest retail deposit market share.
Nedbank operates a universal bank model through
five main business clusters; Nedbank Corporate,
Nedbank Capital, Nedbank Business Banking,
Nedbank Retail and Nedbank Bancassurance
and Wealth. Together these offer a wide range of
banking, bancassurance, asset management and
wealth management services.
In addition to its Johannesburg headquarters,
Nedbank has large regional operational centres and
a distribution network throughout South Africa with
facilities in other southern African countries. These
facilities are operated through Nedbank’s subsidiary
and affiliated banks, as well as through branches and
representative offices in key global financial centres.
Nedbank Group has a strategic alliance with the
pan-African banking group, Ecobank, enabling
Nedbank to provide its customers with a one bank
experience across 33 African countries.
The largest portion of Nedbank’s earnings and
economic profit are generated from its wholesale
business, supplemented by other income from
lending and deposit taking activities. A key focus
is to increase the non interest revenue (NIR) to
expenses ratio from the current 78.9% to above
85% in the medium-to-long term.
During 2009 the group structure was further
simplified through Nedbank’s acquisition of Old
Mutual’s minority stake in the Bancassurance and
Wealth joint ventures, and the outstanding 49.9%
share in Imperial Bank, resulting in Nedbank having
the second largest share of the vehicle financing
market at 30%. The Imperial Bank acquisition
became effective in February 2010.
■■ Product Development:
Nedbank Retail
In a largely commoditised business environment
Nedbank Retail has concentrated on ensuring that
its processes and systems are streamlined and
best suited to customers’ needs. We do not expect
Nedbank Retail’s major product offerings to change
dramatically in 2010. Some focus areas include:
> Expanding the range and distribution of foreign
exchange products
> Enhancing cash distribution strategies
> Prepaid and debit card acquisition strategies
> The introduction of further bundled product
options
> Continuing review of product profitability,
specifically in pricing for credit, where increased
price differentiation is key to attracting good
quality customers
> Leveraging the existing cost infrastructure as well
as a focus on cross-sell initiatives to grow non-
interest revenue.
Nedbank Business Banking
Nedbank Business Banking operates a unique
decentralised business model, allowing quicker
customer decisions with better credit assessment
using local knowledge. The solutions for customers
include:
74 Old Mutual plc
Annual Report and Accounts 2009
4 Nedbank’s market position in South Africa
(measured by assets)
> NetBank Business, an electronic banking
solution for customers with some of the most
advanced security technology available in
South Africa. The system allows for easy offsite
updating without impacting customer activity
> Unique cash handling solutions for customers.
Nedbank Corporate
Nedbank Corporate will also focus on initiatives
towards improving the level of non-interest revenue,
including:
> Bundling transactional products and services
to help reinforce cross-selling and collaboration
with other units of the bank
> Developing many new products, especially with
regard to cash handling solutions where several
“proof of concept” initiatives have already been
initiated
> Developing “value add” information based
solutions to meet customer needs. These include:
> A new cash management solution that offers
sweeping and offsetting of balances across
different accounts and currencies
> Auto reconciliation services
> Electronic bill presentation and payment
> E-statements.
> Further enhancing the primary customer
interface “NetBank Business”; in 2010 we will
complete the original programme, allowing us
to migrate the corporate client base and close
down the historical channels.
While some new products are being implemented
in the card and mobile space, the focus within the
Africa portfolio remains on updating existing systems
and ensuring that the current suite of products is run
effectively and that revenue collection is optimised.
Nedbank Capital
In this challenging economic environment Nedbank
Capital maintained a conservative stance in its
trading activities. This included trading less risky
foreign exchange and debt activities and a focus on
high quality larger stocks in equity trading activities.
The business also continues to grow its annuity
based income.
HOW WE DO BUSINESS
BACKING OUR SERVICE PROMISES
WITH CASH
Nedbank Retail’s AskOnce promise campaign guarantees that we
will continually enhance our customers’ banking experience through
excellent service. We remain fully committed to this, and in 2009
extended the six AskOnce propositions to include one for new clients
switching their current accounts to Nedbank: we’ll move their debit
orders for them, hassle-free. If we break an AskOnce promise and it’s
brought to Nedbank’s attention, we give R50 (£4) to charity. To date,
this has raised donations totalling more than R90,000.
“We believe AskOnce will set a new benchmark in the services
industry.” – Saks Ntombela, Managing Executive, Nedbank Retail
Changes in products and services envisaged for
2010 include:
> Extending the reach of current capabilities to
new markets and selected sub-segments of the
current customer base
> Managing product profitability and customer
requirements
> Focusing on allocation of capital and resources
to opportunities that generate higher non-
interest revenue, while continuing to offer existing
products to a wider range of customers.
Nedbank Bancassurance & Wealth
Bancassurance & Wealth delivered various new
products during 2009, primarily simple savings
and risk products, enabling customers to reduce
risks associated with the current economic cycle.
The asset management division successfully
launched new international investment products
including AAAf rated Money fund as well as the
international Best of Breed offering.
In 2010 we intend to expand the life assurance
product range beyond credit and simple life as
well as growing selectively our short-term offering
into personal accident, warranties and other
after-care products.
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Old Mutual plc
Annual Report and Accounts 2009
75
BUSINESS REVIEW
BANKING
CONTINUED
■■ Market overview
The South African banking industry experienced an
exceptionally tough and volatile year as a result of
the global recession combined with cyclical credit
stress in the domestic economy.
Increased focus on the cross-selling process yielded
more rigorous measurement and management
information, introduction of a sales steering
committee to provide oversight as well as roll-out of
additional training and coaching tools.
South Africa’s banking system has remained
resilient. This is reflected in the country's
improvement from 15th to 6th place in the latest
World Economics Forum Global Competitiveness
Report ranking on the soundness of banks.
■■ Strategy
South Africa accounts for over 60% of Africa’s
banking economic profit. Nedbank’s primary focus
is to “Win in banking in South Africa” by growing
its share of economic profit in South Africa and
southern Africa primarily through transactional
banking growth.
Nedbank Retail
Nedbank Retail aims to grow its footprint through
non-traditional channels, including cashless
branches and in-retailer branch expansion. It
continues to focus on growing deposits and its
share of transactional and savings account balances
at a rate ahead of its asset growth, in order to
reduce its reliance on expensive wholesale funding.
The acquisition of Imperial Bank will allow the
combined vehicle finance business to compete more
effectively through cost and process efficiencies that
come with scale.
Nedbank Business Banking
Business Banking’s strategy for 2010 is to deliver a
step change in revenue growth to achieve its vision
of becoming the leader in Business Banking for
South Africa by 2011. The foundations for this were
laid in 2009 and, despite the challenging external
environment, Business Banking maintained its focus
on customer acquisition and cross-selling and was
also able to ensure greater discipline and rigor with
respect to customer pricing and fee collection.
These initiatives will continue into 2010.
Nedbank Corporate
Corporate Banking is embarking on research
into the sectoral view of the various industries.
This research is expected to generate incisive value-
chain analysis and therefore increase understanding
of the various value drivers across the industries.
This should underpin Corporate Banking’s ‘guarded
growth’ strategy of growing selected assets that
generate positive and sustainable economic profit.
Property Finance is addressing the currently
depressed property market segments with a
selective asset growth strategy. Pricing of capital
and, subsequently, assets becomes key to winning
new deals. The division will be further expanded
through the addition of Imperial Bank’s property
finance business.
Nedbank Africa will continue improving efficiencies
and organic growth of its current businesses.
Key areas of focus for organic growth will be on
the businesses in Zimbabwe (MBCA) and Namibia.
The team will also continue to pursue selective
acquisitive growth within the SADC markets.
Strengthening the Nedbank-Ecobank alliance will
continue to be an area of focus and growth in 2010.
Nedbank Capital
Nedbank Capital is in the final stages of replacing its
derivative systems, allowing improved management
and risk analysis in the trading areas, and
implementing an enhanced foreign exchange and
money market system.
76 Old Mutual plc
Annual Report and Accounts 2009
Nedbank Group acquired the Old Mutual minority
stakes in the Bancassurance and Wealth joint
ventures with effect from 1 June 2009:
> 50% of BoE (Pty) Limited
> 50% of Nedgroup Life Assurance Company
> 29.7% of Fairbairn Private Bank
The purchase of the joint ventures has removed all
structural and legacy obstacles. This now presents
an opportunity to become more customer-centric
and focus on maximising value through cross-selling
and further penetration of the Nedbank and Imperial
Bank customer bases. As a result, the component
businesses of Bancassurance and Wealth have
been restructured to deliver on this strategy.
The most significant change to the structure includes
the consolidation of four previously independent
asset management operations and the alignment
of the local and international Wealth Management
businesses into a single high-networth proposition.
Leveraging the Ecobank alliance and penetrating
African countries in sectors where Nedbank Capital
has specific sector expertise remains an important
growth opportunity. In addition, alliances with
other institutions are being considered to address
strategic deficiencies in certain products and
geographies. Generation of non-interest revenue will
be to continue to be a focus when providing balance
sheet lending.
Nedbank was the first African bank to apply the
Equator Principles and Nedbank Capital has
successfully leveraged its carbon expertise to
develop the carbon strategy for Nedbank and to
help customers generate carbon credits.
Nedbank Bancassurance & Wealth
Bancassurance and Wealth was historically part
of Nedbank Retail but from August 2009 became
a separate business division. The positioning as a
customer-facing business has increased the focus
and opportunity to generate non-interest revenue
and economic profit.
The businesses within Bancassurance and Wealth
encompass life assurance, short term insurance,
financial planning and insurance brokerage,
fully-fledged private banking and fiduciary
services locally and internationally as well as
asset management.
■■ Performance in 2009
Resilient performance in a challenging environment
The full text of Nedbank’s results for the year ended 31 December 2009, released on 25 February 2010, can
be accessed on Nedbank’s website http://www.nedbankgroup.co.za
Highlights (Rm)
2009
2008
% Change
Adjusted operating profit (IFRS basis) (pre-tax)*
Headline earnings**
Net interest income**
Non-interest revenue**
Net interest margin**
Credit loss ratio**
Cost to income ratio**
ROE**
ROE (excluding goodwill)**
(30%)
(26%)
1%
11%
6,192
4,277
16,306
11,906
3.39%
1.47%
53.5%
11.5%
13.0%
8,800
5,765
16,170
10,729
3.66%
1.17%
51.1%
17.7%
20.1%
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Highlights (£m)
Adjusted operating profit (IFRS basis) (pre-tax)
2009
470
2008
% Change
575
(18%)
* Prior year AOP included an amount of R726 million in respect of the sale of Visa shares.
** As reported by Nedbank in their report to shareholders as at 31 December 2009
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Annual Report and Accounts 2009
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BUSINESS REVIEW
BANKING
CONTINUED
Banking environment
Demand for credit slowed dramatically and retail
impairments increased significantly as consumers
came under severe pressure from falling income, job
losses, declining asset prices and record high debt
burdens. By the end of 2009 growth in asset-based
finance had slowed to 1.0% year-on-year. Interest
rates were reduced by 450 basis points to cushion
the effects of a rapidly slowing economy and
increasing unemployment.
Corporate demand for credit lost momentum due
to weak global and local demand, which eroded
corporate profits through weaker pricing power,
lower commodity prices and a strong rand. Support
came from construction projects and increased
government spending, boosted primarily by the
public sector’s infrastructure drive and preparations
for the 2010 FIFA World Cup.
Despite the negative economic trends dominating
much of 2009, underlying trading conditions
showed early signs of improvement around the
third quarter. This was led by a rebound in growth
in emerging markets, especially China and India,
and was followed by initial indications of recovery in
most industrialised countries, chiefly brought about
by unprecedented government intervention and
massive fiscal and monetary stimulation. Improved
commodity prices and global demand brought an
element of relief to domestic export manufacturers,
lifting South Africa out of ‘official’ recession in the
third quarter. There are early signs that the sharp
drop in interest rates is starting to revive household
credit demand as house prices showed modest
signs of a slow recovery towards the end of the year.
Key to the outlook for 2010 will be employment
growth. After job losses of nearly one million during
the downturn, employment showed early signs
of stabilising in the fourth quarter of 2009. Job
creation in the formal sector is likely to be slow, with
an overall 2% employment gain for the year being
expected. This will support household income and
lead to some improvement in consumer finances
and therefore spending. The rebound is likely to be
slower than in previous cycles given weak consumer
and business confidence and tighter lending criteria.
Review of results
For Old Mutual reporting purposes, IFRS AOP
(pre-tax) profits fell by 30% to R6,192 million.
Headline earnings decreased by 25.8%
from R5,765 million to R4,277 million. Basic
earnings reduced by 24.7% to R4,826 million
(2008: R6,410 million).
Diluted headline earnings per share (EPS) decreased
by 29.8% from 1,401 cents to 983 cents. Diluted
basic EPS declined by 28.8% from 1,558 cents
to 1,109 cents. These results are in line with the
guidance given in the third-quarter trading update.
Nedbank's return on average ordinary shareholders'
equity (ROE), excluding goodwill, decreased from
20.1% to 13.0%. ROE decreased from 17.7% to
11.5% for the year. These declines were driven
primarily by increasing retail impairment levels and
the negative impact from lower endowment earnings
that reduced headline earnings, together with
strengthened capital levels as shareholders' equity
growth far exceeded growth in total assets.
Nedbank Retail's credit quality deteriorated in 2009,
with impairments worsening significantly, although
the rate of new defaults slowed in the second half of
the year. Business banking and wholesale banking
impairments ended the year at better levels than
originally anticipated.
Nedbank’s funding and liquidity levels have remained
sound as a result of ongoing focus on increasing
and strengthening liquidity buffers, lengthening
the funding profile, maintaining a low reliance on
interbank, foreign and capital markets, as well as
robust balance sheet management. A strong, broad-
based deposit franchise also provides Nedbank with
diverse funding sources.
Financial performance
Net interest income (NII)
NII grew 0.8% to R16,306 million. Following a
450 basis point interest rate cut during 2009 and
the resulting effect of lower endowment income,
Nedbank's net interest margin decreased in line
with expectations to 3.39% from 3.66% in 2008.
The primary drivers of margin compression were:
liability margin compression reflecting the higher
cost of term funding; lower endowment on capital
and non-repricing of transactional deposit accounts
that are not rate-sensitive; and quicker downward
repricing of interest-earning assets compared with
interest-earning liabilities. These were partially
offset by the repricing of asset margins in line with
Nedbank’s risk-based pricing policies.
Impairments charge on loans and advances
The credit loss ratio of 1.47% for 2009 (2008: 1.17%)
showed signs of improvement after having peaked at
1.67% at 31 March 2009.
The credit cycle has to date largely impacted
consumers and the smaller businesses, as reflected
in the continued deterioration of retail credit loss
ratios. High levels of unemployment, lower collateral
values due to weak housing and vehicle markets,
and delays in recoveries resulting from debt
counselling have all played a part in the increase in
defaulted advances in retail secured loans.
78 Old Mutual plc
Annual Report and Accounts 2009
£470m Nedbank’s adjusted operating profit (pre-tax)
Wholesale banking credit loss ratios have improved
since June 2009 and remained better than
anticipated for this part of the economic cycle.
On the whole credit quality in the Capital, Corporate
and Business Banking books has remained within
acceptable levels, although in this volatile economic
environment the risk of corporate default remains
high.
Bancassurance and Wealth NIR increased by
61.7% to R1,518 million for the year, driven primarily
from the consolidation of the joint ventures for
seven months and with good performances from
the asset management, financial planning and life
insurance businesses. On a like-for-like basis NIR for
Bancassurance and Wealth increased by 4.7%, with
good growth in the SA businesses.
Defaulted advances increased by 56.3% from
R17,301 million to R27,045 million and represent
6.0% of total advances. Total impairment provisions
increased by 24.7% from R7,859 million to R9,798
million. Although early arrears have improved for the
last seven consecutive months in the year, defaulted
advances have continued increasing albeit at a
slower rate.
Non-interest revenue (NIR)
NIR, including the consolidation of the
Bancassurance and Wealth joint ventures, grew by
11.0% to R11,906 million (2008: R10,729 million).
Like-for-like NIR increased by 6.1%, driven by
good growth in commission and fee income and
trading income offset to an extent by fair-value
gains, which dropped from R368 million in 2008 to
R44 million. The drop in fair-value gains is mainly
the result of Nedbank reporting, in 2008, fair-value
gains of R207 million from the mark-to-market of
its own debt, which we mentioned was unlikely to
be repeated and was highlighted as poor-quality
income that was not attributed to capital. In 2009
fair-value gains on Nedbank's debt amounted to
R6 million.
Commission and fee income was 12.4% higher,
largely from volume growth in retail transactional
banking and increases in fees charged across
the bank.
Trading income increased by 18.6% from
R1,553 million in 2008 to R1,841 million in 2009,
reflecting robust trading activity in treasury,
investment banking and the global market
businesses.
Expenses
Nedbank Group continued to maintain tight control
on discretionary spending while investing in strategic
areas of the business. Expenses increased by
9.9% to R15,100 million (2008: R13,741 million).
This increase was impacted by the consolidation
of the Bancassurance and Wealth joint-venture
acquisitions with effect from June 2009. On a
like-for-like basis, excluding the joint-venture
acquisitions, expenses increased by 7.7%.
Associate income
Associate income decreased to R55 million in 2009
(2008: R154 million) as a result of the BoE Private
Clients and Nedgroup Life Assurance Company joint-
venture acquisitions that were previously accounted
for as joint ventures under the equity method.
Taxation
The taxation charge (excluding taxation on non-
trading and capital items) decreased by 29.9% from
R1,757 million in 2008 to R1,232 million.
Non-trading and capital items
Income after taxation from non-trading and
capital items decreased to R549 million for the
year (2008: R645 million). The main contribution
in 2009 came from the accounting revaluation
of the Bancassurance and Wealth joint ventures
immediately prior to their acquisition, while in the
previous year the main contributor was R622 million
after-tax profit from the sale of Visa shares.
Capital
Nedbank Group remains focused on optimising and
strengthening its capital ratios. During 2009 these
ratios have increased significantly and continue to be
maintained above Nedbank's target ratios. Nedbank
holds a surplus of R13.5 billion above its minimum
total regulatory capital adequacy requirements.
Capital adequacy
Core Tier 1 ratio
Tier 1 ratio
Total capital ratio
2009 ratio
2008 ratio
Target range
Regulatory minimum
9.9%
11.5%
14.9%
8.2%
9.6%
12.4%
7.5% to 9.0%
8.5% to 10.0%
11.5% to 13.0%
5.25%
7.00%
9.75%
Capital adequacy ratios include unappropriated profit at year-end.
Old Mutual plc
Annual Report and Accounts 2009
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BUSINESS REVIEW
BANKING
CONTINUED
Regulatory capital adequacy ratios increased mainly
due to the retention of earnings and a key focus
on the optimisation of capital and risk-weighted
assets, enabled by enhancing data quality and more
selective asset growth using our economic-profit-
based 'managing for value' philosophy. This resulted
in risk-weighted assets decreasing by 8.1%, which
is well below overall balance sheet growth of 0.6%.
Nedbank was also able to maintain its dividend
cover at 2.3 times while increasing capital.
To increase conservatism, Nedbank increased its
target debt rating (solvency standard) from A- to A
for internal economic capital requirements in line
with the higher target ratios for regulatory capital
announced early in 2009. A more conservative
definition of available financial resources to cover the
economic capital requirements was also introduced.
Nedbank currently holds a surplus of R11.8 billion
against its economic capital requirements. This is
calibrated to the new A debt rating including a 10%
buffer, which is assessed against comprehensive
stress and scenario testing.
Nedbank's leverage ratio (total assets to ordinary
shareholders’ equity) at 14.4 times (2008: 16.2 times)
is conservative by international standards and in line
with the local peer group.
Liquidity
Nedbank’s liquidity position remains sound, with
a loan-to-deposit ratio of 95.9%. Management
continues to focus on diversifying the funding
base, lengthening the funding profile and further
strengthening and increasing the liquidity buffers.
In addition to the strong deposit franchise across
Nedbank Retail, Nedbank Business Banking and
Nedbank Corporate providing a diverse funding
mix, Nedbank successfully increased the size of its
liquidity buffer in 2009 and lengthened the overall
funding profile in order to achieved improved asset-
to-liability matching. Increased focus on capital
market issuance under the domestic medium-term
note programme, the introduction of innovative
fixed-deposit products for retail clients and a broader
offering of money market products were the primary
drivers behind the lengthening of the funding profile.
During the year the following programmes were
undertaken to diversify the funding base and
lengthen the bank's existing funding profile: the
issuing of R5.6 billion of senior unsecured debt,
which was five times oversubscribed; the raising
of R153 million in perpetual preference shares;
obtaining a $100 million credit line from a foreign
development bank; and focusing on the retail
deposit base through innovative products.
Nedbank maintains a low reliance on interbank,
capital market and foreign funding. Its small
proportion of foreign funding at just over 1.0% is
driven by its regional focus where 91.4% of its asset
base is in South Africa. Low historic reliance in the
abovementioned markets creates diversification
opportunities subject to pricing.
Nedbank continues to adopt a strategy of applying
best international practice, with the Basel principles
on sound liquidity management having been further
embedded during this financial period.
Total assets
Total assets increased by 0.6% to R571 billion
(2008: R567 billion). During the year: cash and
securities declined by 8.2% mainly from the
maturing of R10 billion of additional liquid assets.
This was offset by the purchase of replacement
government bonds of R4 billion to hedge long-term
debt instruments; and Nedbank showed lower
trading and derivative balances mainly arising from
foreign exchange movements.
This was balanced by: growth in intangible assets
related to the Bancassurance and Wealth joint-
venture acquisitions; growth in investments from the
first-time consolidation of Nedgroup Life; and an
increase in advances.
Advances and Deposits
Advances increased by 3.7% to R450 billion,
reflecting: ongoing growth in Nedbank Capital and
Imperial Bank; slower growth in Nedbank Corporate
and Nedbank Retail; and reduced advances in
Nedbank Business Banking due to a slowdown in
client demand for credit and a reduction of single-
product loans in line with the drive to reduce higher
risk exposures and focus on primary clients.
Growth in advances took place across a number
of categories, including personal loans, mortgage
loans, preference shares, deposits placed under
reverse repurchase agreements and other loans,
offset by a decrease in low-margin overnight loans.
Overall market share increased by 1.4%.
Nedbank has focused on managing for value and
selective asset growth while improving margins,
resulting in bank advances growth and lower levels
of advances in the trading portfolio.
Nedbank retained a strong ratio of advances to
deposits of 96%. It grew deposits in line with its
requirement to fund the growth in balance sheet
assets, with deposits increasing by 0.5% to
R469.4 billion (2008: R466.9 billion). In the retail
deposit market current and savings account balances
remain at low levels as consumers reduce debt levels.
In the wholesale deposit market current and savings
80 Old Mutual plc
Annual Report and Accounts 2009
accounts as well as fixed deposits have increased,
partially offset by a reduction in other term deposits.
Optimising and diversifying the funding mix and
lengthening the profile continued to be a key
management focus. Despite intense competition in
the local deposit market, Nedbank has maintained
its strong deposit franchise and continues to hold
the second largest share of household deposits at
24.2%. During the year a number of innovative retail
deposit products were successfully introduced,
including Nedbank's Equity-linked Deposit,
EasyAccess Deposit and Platinum Park-It.
■■ Marketing
Strategically aligned brand communications have
continued to position Nedbank as respected,
caring, understanding and aspirational bank. It has
placed increased emphasis on its green credentials,
community and customer involvement and range of
affinity offerings.
The Nedbank Cup made a significant contribution
to increasing brand awareness and positively
influencing consumer perceptions. Nedbank was
ranked as the number one bank sponsoring soccer
in South Africa. Overall awareness of Nedbank
as a soccer sponsor increased to 64% in 2009
(2008: 28%) and awareness in the mass market
has doubled since 2008 to 77%.
Retail marketing focussed on driving customer
acquisition, non-interest revenue, service and pricing
as well as assisting customers through a very difficult
year. A number of new transactional and investment
offerings were introduced as well as a free software
package enabling customers to budget and manage
their money more effectively. On the service front,
commitment to world-class service continued
through the Ask Once service offering.
Business Banking maintained a high profile in
the market, strengthening it’s positioning as a
bank that “partners for growth for a greater South
Africa”, whilst promoting specific investment and
transactional banking product offerings to selected
target markets.
In the corporate and capital markets, core positioning
campaigns have aimed at raising the brand profile
and communicating key business differentiators.
Ongoing attention has also been given to tactical
communications, highlighting selected deals as well
as localised events and strategic sponsorships.
The effectiveness of the overall marketing efforts
is reflected in the steady improvement in all
independently measured key brand metrics.
Nedbank continues to gain brand equity in
presence, relevance and advantage.
■■ Customer Service
Nedbank Retail
‘World class service’ is essential to Nedbank’s
customer-centric approach. In 2009 it extended
the ‘Ask Once’ campaign, which is Nedbank’s
guarantee to customers that it will continuously
enhance their banking experience, to include a
specific service promise for customers wishing to
switch their current accounts to Nedbank.
Nedbank Retail has made significant strides in
improving its customer service in recent years,
although competitors have narrowed the gap and it
is important that focus is maintained on improving
service further through investing in staff and
innovative systems, processes and offerings tailored
to customer requirements.
Nedbank Business Banking
The main focus in Business Banking was on
business alignment to clearly defined customer
segments. Higher complexity, high value customers
are now serviced by dedicated teams with the
appropriate support structure and staff experience
levels. For our high volume of smaller customers
with less needs and lower-value business we use
more streamlined processing and a lower-cost
support structure.
In the 2009 independent BMI-T survey, Nedbank
Business Banking was acknowledged as having
achieved the biggest improvement in customer
service out of the four big banks in South Africa.
The focus in 2010 will be on strengthening Business
Banking’s service culture through a series of
conversations, activities and campaigns.
Nedbank Corporate
Service remains a key priority for Nedbank
Corporate and their top customers are supported by
a dedicated service capability.
The Startrack Survey is one of the most important
measures used by Corporate Banking in assessing
the effectiveness of its relationship with customers
and is closely monitored each year. The survey
ranks the performance criteria that are important
to customers and how Corporate Banking rates on
those criteria. The top five performance criteria in
2009 relate to the turnaround of customer requests,
accessibility, efficiency in problem solving and the
relationship managers’ knowledge of systems
and products and their delivery on promises. In
comparison to previous years Nedbank Corporate
Banking improved its overall ranking. It was ahead
of its competitors in three of the top five criteria and
was ranked first on the criteria relating to turnaround
and accessibility.
Old Mutual plc
Annual Report and Accounts 2009
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BUSINESS REVIEW
BANKING
CONTINUED
The Ecobank alliance has provided a strong platform
to support customer needs across the continent and
the recently launched “Centre of Excellence” gives
customers a single interface for accessing services
across the alliance. Synergies are also materialising
as we introduce alliance customers to Nedbank
Corporate’s existing products, such as NedTreasury,
in order to meet their banking needs.
The outsourcing arrangement with Wells Fargo
(Wachovia) gives customers access to “self-service”
functionality enabling them to bypass historical
manual paper based systems.
Nedbank Capital
Nedbank Capital continues to focus on being an
integrated investment bank. During the year it won a
number of awards including:
> Africa Investor ICT/Telecoms Deal of the Year
award for the Neotel deal;
> Africa Investor Transport Deal of the Year award
for the Bakwena deal; and
> African Banker Deal of the Year award for the
Bakwena refinancing deal.
Nedbank Bancassurance & Wealth
Asset management performance, both across the
unitised and private client businesses, was well
above benchmarks. Nedgroup Investments recently
received the award of third place in the ‘Domestic
Management Company of the Year’, and received
two Raging Bull awards for individual funds.
The wealth businesses continue to excel in
customer service. BoE Private Clients was rated
No.1 in service and advice in an independent survey
by SMRC Marketing Solutions (Pty) Ltd and Fairbairn
Private Bank was voted ‘Best International Wealth
Manager 2009’.
The recent changes to the Wealth Management
structure will facilitate improvements in service
delivery by building a consistent advice process
and creating better alignment across the local and
international Wealth Management businesses.
■■ People
Nedbank’s Corporate Performance Management
(CPM) is based on the “Total Performance
Management” approach. It is used to monitor and
manage both corporate and individual performance
against key performance indicators, aligned to
the group’s business plan, which ultimately drive
economic profit.
Nedbank uses a Balanced Scorecard approach
to monitoring and managing performance.
Performance measures in the scorecard focus on
the delivery of the business strategy, organisational
culture and HR strategy and are weighted for
different roles within the bank. Executive scorecards
are signed off annually by the Board and are key
drivers for the staff remuneration and development.
Reward mechanism
Nedbank Group adopted a total-reward philosophy
that is integrated into its people management
processes. Remuneration schemes are not excessive
and are conservative when measured by both local
and global standards. In 2004 headline earnings
declined 3% and bonus pools were reduced by
33%. Bonus schemes were refocused in 2009 to
recognise headline earnings and economic profit
against pre-determined targets, as well as increased
capital and liquidity weightings in scorecards.
Performance is measured at a group, business unit
and individual level – against agreed financial and
non-financial targets – after the year-end results
are finalised. The incentive pools are based on a
combination of group economic profit (EP), headline
earnings and the individual business’ non-financial
driver performance.
Whilst market-related remuneration is distributed for
meeting the agreed targets, performance in excess
of these targets is rewarded through additional
incentives created through a short-term incentive
scheme and recognition programme.
Nedbank’s long-term incentive schemes are primarily
aimed at retaining key, high-impact employees.
They are intended to motivate high performers to
remain with Nedbank whilst aligning their individual
interests with those of shareholders.
■■ Risk
Refer to Risk and Responsibility section for details
relating to Risk Management.
■■ Priorities for 2010
> Improving the profitability of Nedbank Retail;
> Improving Nedbank's non-interest revenue,
particularly through bancassurance activities and
improved cross-selling in other areas;
> Increasing the number of new primary customers
across all parts of the business and maintaining
existing primary customers through improved
value-added services;
> Building on Nedbank’s inherent strengths and
substantive market share in the wholesale and
business banking sectors;
> Responding to opportunities arising from
increased broadband and mobile banking
accessibility and seeking innovative ways to
expand the retail distribution network;
> Optimising the allocation of capital to business
activities through the business cycle in order to
grow businesses with high forecast economic
82 Old Mutual plc
Annual Report and Accounts 2009
profits and to anticipate activities which are
vulnerable to large cyclical impairments;
> Expanding internationally within SADC and the
rest of Africa within acceptable risk limits;
> Building on Nedbank's leadership in
transformation, corporate social investment and
the environment.
■■ Outlook
Nedbank currently anticipates gross domestic
product (GDP) growth of around 2.2% in 2010,
indicating slightly better prospects for the banking
sector. The global environment and the 2010 FIFA
World Cup are primary factors influencing domestic
recovery, although the global recovery remains
fragile and reliant on continued government support.
Local retail trading conditions are expected
to improve as disposable incomes stabilise,
retrenchments ease, general labour conditions start
improving, debt burdens moderate and house prices
start to recover. Interest rates are likely to remain
steady at current levels and lead to lower impairment
levels. The 2010 FIFA World Cup is expected to lift
confidence and encourage an increase in household
credit demand and transactional banking volumes.
Fixed-investment activity is expected to remain
modest as a result of excess capacity in the
private sector and some loss of momentum in the
Government's infrastructure spending programme
as several large World Cup-related projects are
completed. These developments are likely to
constrain corporate demand for credit, while strong
competition will place pressure on margins.
Interest rate cuts from 2009 will continue to have
a negative endowment effect on banking interest
margins, but should be partially offset by a gradual
decrease in impairments as recoveries and arrears
levels improve. The reversal of provisions in the
balance sheet is expected to take longer as
defaulted advances continue to increase, albeit at
a slower rate. Nedbank remains cautious about
impairments as, although corporate impairments
have been benign, there could be large one-
off charges that are difficult to predict, and it is
uncertain how the current economic challenges
could further impact consumers.
While the economic environment remains fragile,
the business outlook inevitably remains uncertain.
The short-term outlook for 2010 assumes that
interest rates will remain unchanged for the year.
Nedbank Group's performance in 2010 is likely to
reflect: growth in advances in the mid single-digits;
continuing pressure on interest margins as a result
of a continued negative endowment effect and
anticipated to be compressed by a further 10 to 20
basis points; continued improvement in the credit
loss ratio but remaining above the target range; mid
double-digit growth in non-interest revenue, and
lower double-digit expense growth, resulting from
the consolidation of the Bancassurance and Wealth
joint-venture acquisitions for the full period in 2010,
compared with the seven months in 2009; a further
strengthening of capital adequacy ratios and focus
on funding and liquidity; and the drive to extract
value from the acquisitions made in 2009.
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Old Mutual plc
Annual Report and Accounts 2009
83
CONFIDENT
COVERAGE
Leveraging new technology
In order to deliver improved products and service to
our valued stakeholders we implemented a number
of new technology systems. As a result, we have seen
major improvements in our operational efficiency
and broker service.
The systems provide a strong foundation on which to run
our new and existing products.
The graph below, which illustrates improved efficiency, shows
a considerable decrease in the number of outstanding pieces
of work (e.g. registered claims, etc). The spike was as a result
of problems experienced with the implementation and
bedding down of the new system.
This project has been a great success.
Outstanding items
000's
20
15
10
5
0
Jun
2008
Sep
2008
Dec
2008
Mar
2009
Jun
2009
Sep
2009
Dec
2009
84 Old Mutual plc
Annual Report and Accounts 2009
BUSINESS REVIEW
SHORT-TERM INSURANCE
Mutual & Federal (M&F) is the second-largest short-term insurer in
South Africa, with offices in South Africa, Namibia and Botswana.
It provides a full range of insurance products to commercial
and domestic customers, principally in four major portfolios:
Commercial, Personal, Risk Finance and Credit.
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KEY FACTS
Adjusted Operating Profit (AOP)
2009
£70m
2008: £76m
Underwriting result
09
08
Combined ratio
2009
98.0%
2008: 96.1%
(£m)
10.63
19.56
Number employed
Our brand
2,331
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MD, Mutual & Federal
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Old Mutual plc
Annual Report and Accounts 2009
85
BUSINESS REVIEW
SHORT-TERM INSURANCE
CONTINUED
■■ Mutual & Federal
SHORT-TERM INSURANCE: MUTUAL & FEDERAL
Mutual & Federal
Business
development
and Sales
Support (including
product development,
underwriting, -
acturial, IT, etc)
Claims
Human
Resources
Services (Admin,
Finance, Accounting,
Investments,
Governance,
Secretarial, etc)
Mutual & Federal (M&F) is the second-largest
short-term insurer in South Africa, with offices in
South Africa, Namibia and Botswana. It provides
a full range of insurance products to commercial
and domestic customers, principally in four major
portfolios: Commercial, Personal, Risk Finance
and Credit.
The Commercial portfolio is the largest, with a
broad spectrum of customers ranging from small
businesses to large corporations. It covers primarily
property, accident, motor, engineering, marine and
crop insurance risks.
The Personal portfolio provides domestic
household, motor and all-risk short-term insurance
products to domestic customers of all ages and
various financial groups. It offers white-labelled
intermediary-branded products and an in-
house branded product, Allsure, which provides
comprehensive cover. It also includes a hospital
cash plan and personal accident policies as well
as low-cost products covering livestock and
informal dwellings.
The Risk Finance portfolio, comprising alternative
risk transfer products, is provided by a highly
capable team which is well regarded in the industry
as one of South Africa’s largest suppliers of risk
financing solutions, primarily to medium-sized
commercial customers.
The Credit portfolio is underwritten by a subsidiary
of M&F and is offered within a market segment
where the group dominates the market.
■■ Business model
The company’s success is built on strong
relationships with intermediaries, who introduce
more than 90% of its business. These intermediaries
range from small and medium-sized operations
concentrating on domestic business to large national
corporate brokers who provide specialised services
and manage large portfolios.
Each portfolio is managed in line with the market
within which it is offered. The Personal portfolio
comprises higher volumes of lower-value premiums
and generally requires less underwriting involvement,
while the Commercial portfolio includes larger
risks requiring detailed surveying, underwriting and
reinsurance structuring. Because we are able to offer
this full range of services, we can tailor products to
customers’ specific requirements and help them
with their overall risk management.
M&F operates centralised claims and administration
for the risks written. Management of the investment
portfolio is subcontracted to Old Mutual Investment
Group South Africa.
86 Old Mutual plc
Annual Report and Accounts 2009
21.2% Mutual & Federal return on equity
■■ Product and service developments
We are extensively overhauling the M&F policy
administration systems to ensure faster, better
service and greater processing efficiency. To date
we have widely implemented paperless transaction
processing and introduced a new customer-
orientated computer system for our flagship
domestic insurance product, Allsure.
Our claims service and settlement philosophy remain
a primary source of competitive advantage, and our
reputation for fast, efficient and fair claims settlement
continues to attract and retain customers and
intermediaries.
■■ Market overview
Although the short-tem insurance market grew
in 2009, the growth was slower than in previous
years due to the unfavourable economic climate.
There was a sharp decline in vehicle and home sales
and domestic business was particularly affected.
The market remains stable and established insurers
continue to generate underwriting surpluses, albeit
at a lower level than in the previous five years.
Market data suggests that bank- and broker-owned
insurers have shown above-average growth and
direct insurers have continued to expand faster
than the overall market. In some cases this has
been at the expense of traditional insurers, who are
continually seeking ways to regain market share.
The continuing emergence of a larger middle class
and the high levels of infrastructural spending in the
country have, to some extent, moderated the impact
on insurers of reduced consumer spending.
The market continues to be firmly regulated by the
Financial Services Board.
■■ Strategy
M&F aspires to be the strongest and most
successful short-term insurer in its chosen markets.
We remain focused on profitability while addressing
new and existing markets, channels and products to
generate growth.
We are strongly committed to the intermediary
channel and further development of broker
relationships.
A new management team is in place to deliver
the strategy that will make M&F a multi-channel,
process-efficient company that is able to service
all of its channels cost-effectively and in a way
that will drive end-customers to demand the
Mutual & Federal brand.
■■ Operational highlights 2009
In 2009 we implemented a regionalisation model
for our operations, introduced the Allsure computer
system and improved the group’s Business Process
Management capability. During 2010 and 2011 the
new computer system will be rolled out to other
portfolios and the business processes will be further
refined to enhance customer service.
The restructured group has brought a greater
proportion of customer-facing staff onto a widely
distributed platform, which will help to promote
growth.
These changes are also expected to deliver further
cost reductions in 2010 and 2011.
Underwriting profitability depends on the
fundamental soundness of the company’s portfolios,
management’s diligence in rate setting, and ongoing
adherence to responsible underwriting standards.
Combined with strong management measures, the
significant improvement in investment markets has
helped to strengthen overall company solvency.
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Old Mutual plc
Annual Report and Accounts 2009
87
BUSINESS REVIEW
SHORT-TERM INSURANCE
CONTINUED
■■ Performance in 2009
Return to stability
Highlights (Rm)
Underwriting result
Long-term investment return (LTIR)
Restructuring costs
Adjusted operating profit (IFRS basis) (pre-tax)
Gross premiums
Earned premiums
Claims ratio
Combined ratio
Solvency ratio
Return on equity* (1 year average)
FY 2009
FY 2008
% Change
140
791
(13)
918
8,456
6,874
69.4%
98.0%
55.9%
21.2%
299
925
(55)
1,169
9,159
7,669
67.1%
96.1%
41.0%
29.0%
(21%)
(8%)
(10%)
Highlights (£m)
FY 2009
FY 2008
% Change
Adjusted operating profit (IFRS basis) (pre-tax)
70
76
(8%)
* The ROE is now shown over a 1 year average equity base (previously 3 years average) to achieve consistency with the rest of the Group.
IFRS AOP results
Following adverse investment conditions and
high levels of claims in early 2009, the company
recovered well in the later parts of 2009.
Management action on profitability led to the
cancellation of some personal scheme business
in 2009. This contributed to a fall in premiums for
2009 as whole.
Despite the underwriting loss recorded in the
first half, there was a significant improvement in
underwriting results during the second half and an
overall underwriting surplus of 2% was achieved.
This followed the implementation of various
corrective measures and a generally improved
trading environment.
Investment returns were strongly higher in 2009 as
world financial markets returned to greater stability.
Total actual investment return for the year amounted
to R660 million compared to a loss of R146 million
in 2008.
During the year the company completed the
implementation of a sophisticated state-of-the-
art system for processing a large portion of the
personal portfolio. Whilst this caused unfortunate
declines in service levels in the first half these
were largely remedied by the year-end and have
resulted in substantial improvements in processing
opportunities for customers and intermediaries.
Solvency margin
Following improvements in investment return
and underwriting stability during the second
half, the solvency margin (the ratio of net assets
to net premiums) improved to 56% at year-end
(2008: 41%). This is well within our target range.
Acquisition of minority shares by Old Mutual
The acquisition of the minority shares in M&F was
concluded successfully in early February 2010.
Although the finalisation was delayed by certain
outstanding approvals, the overall process was
completed with limited disruption to staff and
customers. Management can look forward to closer
working relationships with Old Mutual and increased
opportunities for growth and profitability through joint
ventures and other cooperation.
■■ Marketing
We maintained our ‘short moments’ advertising
campaign and approach in 2009. This emphasised
the importance of reliable insurance and has a
strong ‘people’ theme to further reinforce the
relationship element of short-term insurance.
The advertisements also aim to foster relationships
with younger individuals from diverse cultural
and ethnic backgrounds, as our customer base
has traditionally been predominantly white and
middle-aged.
88 Old Mutual plc
Annual Report and Accounts 2009
The impact of our advertising and marketing has
been somewhat constrained over the past two
years by the potential sale of the company. But even
though this resulted in some loss of drive and focus,
market research indicates that the ‘short moments’
campaign has been successful in promoting name
and logo recognition.
■■ Customer service
Customer service suffered to some extent during
2009 as a result of the restructure, system
implementation and uncertainty surrounding future
company ownership. Management undertook
extensive roadshows to meet intermediaries and
discuss service difficulties; these meetings again
evidenced the strength of our broker relationships,
which will continue to improve as intermediaries
experience the significant benefits which the new
systems offer.
■■ People
M&F has always enjoyed a reputation for having the
most capable and qualified employees and is often
regarded as the training ground of the short-term
insurance industry. This is the result of our ongoing
commitment to training and effective operation of
recognition and reward programmes. We continue
to improve employee satisfaction and drive
transformation of the business; and we have made
significant strides towards meeting employment
equity objectives despite considerable difficulty in
recruiting suitably qualified staff.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with the
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Risk Management.
HOW WE DO BUSINESS
M&F HELPS BOOST FINANCIAL
LITERACY
At Mutual & Federal we’ve been investing in financial literacy
education as part of our membership of the South African Insurance
Association and the Financial Sector Charter. For example, our
‘Managing Your Money’ initiative is helping to improve the low levels
of mathematical literacy in South African schools. It provides training
workshops for teachers with lesson plans, worksheets and student
assignments all aligned with the school curriculum.
“By investing in financial literacy we’re not only benefiting the
communities we operate in but also increasing the potential for new
customers in the future.” – Michael McCann, Regional Sales Manager,
Mutual & Federal
■■ Priorities for 2010
M&F has been through a significant period of
restructuring and systems implementation over
the past two years. This was difficult but was an
important and necessary step towards creating
a sound base on which to grow revenue over the
coming years. We now have the following priorities:
> Growing the business through a multi-channel
distribution model
> Maintaining process enhancements and
optimisation by continuously improving and
bedding-down the business model
> Completing the IT strategy of moving to
state-of-the-art technology platforms
> Maintaining tight control over capital and
solvency.
■■ Outlook
Despite unusually heavy rains in the Johannesburg
area of South Africa, which led to higher than usual
personal-lines claims in the early months of 2010,
we remain confident with regard to our underwriting
prospects.
M&F has a strong brand in the southern Africa
market and good relationships with its intermediary
partners. The next few years promise much as we
look to leverage these relationships, as well as good
systems and processes, in order to drive profitable
and sustainable growth.
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Old Mutual plc
Annual Report and Accounts 2009
89
ALIGNED VIEW
Strength of diversity, power of focus
With 18 distinct investment firms, over 160 investment
solutions and £161.5 billion in assets under management,
Old Mutual Asset Management remained competitive with
strong operating earnings and free cash flow through the
worst of the market downturn. Through leading client service
practices, solid long-term investment performance and
decisive management actions, the business is poised to
perform well during market recovery. Early indicators point
to success as second half earnings were 83% ahead of first
half and operating margins had returned to 21% on a run rate
basis by year end.
We partner with diverse boutique investment firms to offer
investment disciplines focused on the financial needs of
our clients. This partnership coupled with the strength,
experience, and financial support of a £161.5 billion global
investment management platform serves as the foundation to
deliver exceptional results for clients and shareholders.
90 Old Mutual plc
Annual Report and Accounts 2009
BUSINESS REVIEW
US ASSET MANAGEMENT
Based in Boston, our business consists of 18 distinct boutique
investment firms managing $261 billion across all major investment
strategies for institutional clients, high net worth individuals and
retail investors around the world; some 25% of our clients are
non-US based. Our boutiques are headquartered predominantly
in North America, with two in London.
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KEY FACTS
Adjusted operating profit (AOP)
2009
£83m
2008: £97m
Margin
%
30
20
10
0
Funds under management (FUM)
2009
£161.5bn
2008: £164.9bn
H1
H2
H1
H2
2008
2009
Number employed
Some of our brands
1,544
US Asset Management Executive Committee
1 Matthew Appelstein
3 Tom Turpin
5 Julian Sluyters
Executive Vice President,
Head of Sales and Marketing
President and Chief
Executive Officer
President and Chief Executive
Officer, Old Mutual Capital
2 Matt Berger
4 Linda Gibson
6 Jim Mikolaichik
Senior Vice President, Chief
Financial Officer
Executive Vice President,
Chief Operating Officer
Executive Vice President,
Head of Strategy, Product
and Corporate Development
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Old Mutual plc
Annual Report and Accounts 2009
91
BUSINESS REVIEW
US ASSET MANAGEMENT
CoNTINUED
■■ US Asset Management
US ASSET MANAGEMENT
Old Mutual – US Asset Management
Affilated Investment
Firms (18 total)
Old Mutual Capital
(US mutual funds)
Old Mutual Asset
Management Trust
Company
Old Mutual Global
Funds (offshore
fund platform)
Old Mutual Asset
Management
International
(international
distribution)
We have built a leading asset management
business in North America through a combination
of acquisitions and strong organic growth.
Our business model provides a strategic framework
in which boutique asset management businesses
thrive. We continue to enjoy the privilege of serving
some of the largest and best-known institutions
(e.g. universities, corporations, defined benefit plans,
defined contribution plans, sovereign wealth funds)
around the world. Our strict adherence to pure
institutionalised investment processes, consistently
strong investment performance and concentration
on customer service provides long-term partnership
with our customers.
Based in Boston, our business consists of 18
distinct boutique investment firms managing
$261 billion across all major investment strategies
for institutional clients, high net worth individuals
and retail investors around the world; some 25% of
our clients are non-US based. Our boutiques are
headquartered predominantly in North America,
with two in London. Dwight Asset Management,
a fixed income manager, is the largest with 22%
of our total funds under management. The next
largest managers are Barrow, Hanley, Mewhinney
& Strauss, a value equity manager (21%), Acadian
Asset Management, an international equities
manager (19%), and Rogge Global Partners, a
global fixed income manager (14%).
Over time the largest firms in the business may
change, depending on investment performance,
market cycles and demand for particular investment
styles. The sources of profits within the affiliate
portfolio also change. However, the diversification
of asset classes in our portfolio mitigates to some
degree the risk of extreme earnings volatility,
reflected in our positive operating earnings and
competitive margins in the current difficult market
environment. As markets grow, operating leverage
provides for a degree of margin expansion.
Collectively, US Asset Management offers over
140 distinct investment strategies. We grow our
marketable investment capacity and maintain
diversification in our offerings by seeding strategies,
recruiting investment talent and acquiring
firms. Each member firm has its own vibrant,
entrepreneurial culture of investment management
capabilities focused on its particular area of
expertise. The institutional approach of the member
firms ensures consistency of style and process
across market cycles.
We have a distinct competitive advantage in our
ability to attract and retain talented investment
professionals through a consistent approach to profit
sharing and equity ownership structures – thereby
ensuring the longevity of the investment firms and
customer relationships. Most of the boutiques
have profit-sharing arrangements in which they
earn a percentage of operating profit. Most also
have long-term equity plans. The combination of
profit-sharing and equity plans ensures that each
boutique’s interests are closely aligned with those
of our shareholders and customers. A thoughtful
approach to succession planning, which provides
an orderly transfer of ownership and management
responsibilities to successive generations of
investment talent, also contributes to the longevity of
individual firms.
92 Old Mutual plc
Annual Report and Accounts 2009
18 Specialised boutique investment firms
■■ Business model
Our vision is to be a market-leading asset
management firm delivering high-quality investment
solutions to clients while providing exceptional
business results. Our business is structured as an
actively-managed holding company that fosters
investment autonomy among its specialised
boutique firms to achieve investment and operating
excellence.
We believe the current business model is best
positioned to achieve our long-term strategic vision.
It offers clear sources of competitive advantage,
including:
> Attraction of deep investment expertise with
entrepreneurial drive
> Low turnover of key investment talent
> Firm longevity
> Ability to source and integrate new investment
The operating model has five focus areas:
capabilities
> Investment excellence: We present clearly
articulated investment processes and solutions
to clients through our 18 boutique investment
management firms. These firms strive to exceed
performance expectations through consistently
applied investment processes. We recruit
and retain top investment talent by offering
investment autonomy and equity ownership.
> Customer service and distribution:
The 18 boutiques provide high-quality service
to support client objectives. Distribution
professionals embedded in boutiques, as well as
centralised distribution support, continually seek
opportunities to meet evolving client and market
demand.
> Diversification of investment solutions:
Our experienced management team regularly
reviews and positions the enterprise-wide offering
of investment solutions to maximise value creation
for clients and shareholders. It also aims to
minimise volatility in funds under management
and earnings, and to achieve diversification
benefits, through effective management of the
boutique portfolio.
> Global leverage: We use existing Old Mutual
Group capabilities to grow a global portfolio
of client relationships. We continue to pursue
partnerships and leverage existing global
infrastructure at Skandia, OMIGSA and other
business units to drive profitable expansion.
> Financial and operational management:
Our senior management team closely monitors
financial and operational objectives to create and
preserve value for shareholders aggressively.
This close oversight is critical to the generation
of free cash flow to provide strong returns and
support growth opportunities. Effective risk
management is the foundation of our business
relationships and we proactively seek full
compliance with internal controls and regulatory
requirements.
> Thought leadership in product development,
packaging and distribution
> Diversity of boutiques, providing value and
stability throughout market cycles
> Professional business management and a scaled
infrastructure platform with shared services and
robust governance.
■■ Market overview
The current market environment presents both
opportunity and challenge for the asset management
industry. There is continuing pressure on earnings
across the industry due to the volatility of change
in asset levels, although recovery of global markets
has provided a stronger asset base to finish the year.
The action taken by most firms to reduce headcount
and expenses will provide effective operating
leverage as markets return to growth in line with
historic averages. Firms operating from a position
of capital strength will continue to focus on adding
investment talent and acquiring complementary
investment capabilities. As market volatility returns
closer to normal there has been some consolidation,
with leading companies acquiring firms to strengthen
distribution and investment capabilities as well as
build scale. As part of this process, several firms
have sought external capital from the public markets
to fund strategic growth plans – and more will follow.
Competition in North America remains strong, with
each of our boutiques facing significant competition
from other specialist providers. The immediate
differentiating factors between firms are often
investment performance and product capabilities.
Our investment managers have a record of delivering
excellent long-term performance and we have the
ability to leverage the diverse styles of individual
investment teams. As a result, we are able to seek
targeted investment opportunities to broaden our
product capabilities.
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Old Mutual plc
Annual Report and Accounts 2009
93
BUSINESS REVIEW
US ASSET MANAGEMENT
CoNTINUED
Investment firms with undiversified portfolios,
dominant equity weightings or performance fees
with high water marks are the most susceptible to
earnings pressure. A significant number of asset
management firms restructured in late 2008 and
2009 to alleviate anticipated margin pressure.
However, many were careful not to reduce expenses
any more than necessary in the short term, to
avoid compromising their positioning for the next
wave of growth. Global market recovery and strong
performance will help to raise performance and
transaction fees.
Regulation is materially impacting the asset
management industry in response to significant
losses by investors across most markets. The US
Government expects to deliver continued change to
the nation’s financial regulatory framework, including
asset management organisations and retirement
plan sponsors. As a result, less-established
investment managers may face additional risk
management and market pressures. This will present
opportunities for traditional asset management firms
with strong governance to gather assets and acquire
new investment capabilities.
■■ Strategy
Our strategy directly supports four of the Group’s
five strategic priorities:
> Maintain and strengthen capital position:
Our business continues to be a source of
capital. We will continue to grow it prudently
by reinvesting earnings in talent and strategic
acquisitions that create shareholder value
over time.
> Streamline the portfolio over time: We made
progress in achieving operational efficiencies
in 2009. Old Mutual Capital’s retail platform
was realigned to focus on the professionally-
sold marketplace. We improved the boutique
investment firms’ earnings potential by closing
an underperforming boutique as well as targeting
general expense savings. Provision of shared
central services to our affiliates is a key benefit of
the multi-boutique model, delivering operational
leverage across the business, supporting lift-
outs and incubation of new teams, and allowing
investment professionals to maximise their focus
on customer service. One of our key initiatives
for 2010 will be to review and enhance the
current shared services structure to maximise
potential for further value creation.
> Leverage scale in long-term savings
businesses: We continue to seek ways to
leverage scale across the Old Mutual Group and
opportunities to work with Skandia Investment
Group and OMIGSA to drive further synergies.
> Strengthen governance: We work closely with
the Group on strategic business planning and
positioning US Asset Management within the
Group model for the future. We also continue
to monitor our operations closely for financial
and operational risk and openly participate in
implementing Group-level finance transformation
initiatives.
Our business is well positioned strategically to take
advantage of market, demographic and related
trends as we continue to develop innovative product
solutions, deliver strong investment performance
and grow our business. We maintain expertise in
sourcing, cultivating and integrating investment
talent and capabilities in our business. We have
also placed emphasis on thought leadership in
product development, packaging and distribution
while enabling investment professionals to focus
on investment management and delivering superior
investment results.
94 Old Mutual plc
Annual Report and Accounts 2009
25% Proportion of clients of US Asset
Management who are non-US based
■■ Performance in 2009
Earnings grew strongly in the second half of the year as markets recovered
Highlights ($m)
Adjusted operating profit (IFRS basis) (pre-tax)
Return on Capital
Operating margin
Net client cash flows ($bn)
Funds under management ($bn)
2009
2008
% Change
130
4.1%
18%
(7.1)
261
181
7.2%
20%
(5.2)
240
(28%)
(37%)
9%
Highlights (£m)
Adjusted operating profit (IFRS basis) (pre-tax)
2009
83
2008
% Change
97
(14%)
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Overview
While market conditions during 2009 were
challenging, it was a year in which we completed
successfully a number of long-term strategic
actions to reposition the business. These actions
included realigning our retail platform to focus on
the professionally-sold marketplace, integrating a
cash-management team at Dwight, reorganising
our central distribution structure and optimising our
shared services model to deliver further economies
of scale. Provision of central services to our affiliates
is a key aspect of the multi-boutique model,
delivering operational leverage across the business,
supporting lift-outs and incubation of new teams,
and allowing investment professionals to maximise
their focus on managing money for customers.
Investment Performance
Long-term investment performance from our
member firms remains strong. At 31 December
2009, 58% of assets had outperformed their
benchmarks over the trailing three-year period and
50% of assets were ranked above the median of
their peer group over the trailing three year period.
Over the trailing five-year period, 61% of assets
outperformed their respective benchmarks and 52%
of assets were ranked above the median of their
peer group. Value equity and global fixed-income
continue to rank amongst our top performing asset
classes. Recent challenges among our quantitative
managers are showing signs of improvement as
markets return to historical patterns of performance
with a bias toward higher-quality investments.
IFRS AOP results
Strong market growth and a reduction in the
expense base of the business drove significant
earnings growth during the second half of the year,
with IFRS adjusted operating profit of $84 million
increasing 83% ($38 million) over the first-half result.
IFRS adjusted operating profit of $130 million for
the full year was down $51 million (28%), This was
due largely to a decrease in management fees,
driven by lower average funds under management
as a result of market weakness in the first quarter
and cyclical lows in performance fees. However
the impact of lower revenues was partly offset
by continued success in managing expenses.
The result also includes $12 million in significant
one-time restructuring costs related primarily to our
retail business.
Operating margin and cost management
Operating expenses for 2009 were down 22%
compared to the prior year, enabling us to
experience significant leverage in 2010 from the
recent and ongoing recovery in market levels.
The full year operating margin of 18% was down
2% from 2008, driven by the pace and severity of
market declines and lower revenues late in 2008
and early in 2009. The margin for the second
half of 2009 was 21%, an improvement on our
2008 full year margin of 20%. This reflects the
success of expense management actions taken by
management in response to declining revenues.
As previously indicated, expense reductions in our
retail business will deliver $15 million to $20 million
of annual expense savings from 2010.
Net Client Cash Flows
Net client cash flows of ($7.1 billion), (3%) of opening
funds under management, were broadly in line with
the average of our peer group for the year. The
result was driven primarily by outflows at Acadian,
Barrow Hanley and Dwight, partially offset by strong
inflows at Heitman, Campbell and Thompson, Siegel
and Walmsley. Despite the challenging environment
nearly half of our managers experienced net cash
inflows for the year.
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Old Mutual plc
Annual Report and Accounts 2009
95
BUSINESS REVIEW
US ASSET MANAGEMENT
CoNTINUED
Funds under management
Funds under management increased 9% ($21 billion)
during 2009 with a 16% market uplift offset in
part by asset outflows. Growth and diversification
through international distribution remains a key
element of our strategy, with non-US clients
comprising 25% of total funds under management
at the end of the period.
Affiliate developments
As previously announced, equity plans were
implemented at five affiliates during 2009, and we
will complete the rollout for the remaining firms
during 2010. Alignment of the interests of affiliate
management was a key factor in the success of
our cost management initiatives during 2009 and
remains a vital component of our long-term strategy,
critical to talent retention and positioning the
business for sustainable long-term growth.
Retail developments
Efforts to reposition Old Mutual’s US retail platform
in 2009 were successful. A strategic assessment
of the business was completed and resulting
recommendations executed by the end of 2009.
Actions taken during the second half of 2009
provided a refreshed and more focused product
offering aligned with the best of Old Mutual’s
institutional investment capabilities. Retail
distribution will more specifically target Registered
Investment Advisors (RIAs), Family Offices, and
Bank Trust channels which are among the fastest
growing segment of the financial services industry.
The traditional and alternative investment expertise
of Old Mutual’s distinct institutional boutiques
aligns well with the needs of the professional buyer
market. Overall, retail efforts provided a reduction in
spending and increased margins for the business
while preserving a valuable retail shareholder
base with significant opportunity for growth in an
important distribution channel for the future.
■■ Marketing
We re-organised our distribution structure by
appointing internal candidates as heads of
the US and non-US institutional channels and
hiring a third senior executive to focus on the
professional buyer channel – which encompasses
Registered Investment Advisors (RIAs), family
offices and bank trusts. We also hired three
additional distribution specialists to support these
new roles. The reorganisation is intended to add
depth to individual boutiques’ sales efforts without
encroaching on their independence.
■■ People
We will achieve competitive advantage through the
strength and capability of our people. A continuing
goal in 2010 is to sustain a work environment that
manifests our core values and attracts and retains
the best people. Additional goals are to implement
strategies for building on the existing talent pool,
refining our talent assessment and management
process, and reinforcing a culture of pay for
performance that will drive key talent commitment
and motivation. We will also continue monitoring
potential legislation to ensure that current incentives
are in line with future requirements. All these
efforts are vital in an increasingly competitive asset
management industry.
■■ Risk
We continue to manage our risks and develop our
Risk Management capabilities in alignment with the
Group’s Enterprise Risk Management framework.
Refer to Risk and Responsibility section for details
relating to Group Risk Management.
96 Old Mutual plc
Annual Report and Accounts 2009
Prior to the current market troubles, customers
were migrating asset allocation decisions toward
international, global and alternative strategies and
we believe these trends will continue in 2010,
Churn of underperforming managers in traditional
domestic equity and fixed income mandates will
present opportunities to gain new client funds to
manage. Search activity steadily increased in the
second half of 2009 with the winners being those
investment firms that are truly institutional quality and
offer risk management, continuity of firm personnel,
strong ownership structures and transparency of
investment process with longevity of performance.
Our efforts to reposition the business and the
recovery in capital markets in 2009 position
us well for growth in 2010. In the absence of a
continued recovery in global equity markets, future
earnings growth for US Asset Management will be
restricted. However, our track record of investment
performance and global business focus has
positioned us well relative to our competitors, and
our diversified asset/client mix will continue to help
us weather market volatility.
■■ Priorities for 2010
For 2010 and beyond we have five strategic
priorities:
> Maximise the value of our client proposition by
delivering consistently high-quality investment
performance, innovative solutions and best-in-
class service
> Ensure excellence in distribution and service by
supporting boutiques’ distribution efforts
> Continue to diversify the marketable capacity of
our investment management capabilities
> Continue to leverage best practice in managing
boutique investment firms around the Group
and driving greater global distribution for our
existing boutiques
> Achieve all the above within a framework of
strong financial and capital management.
■■ Outlook
We remain cautiously optimistic on the recovery of
global markets in 2010. However, there may be a
wider dispersion of growth rates between regions
and historically high volatility throughout the year.
Difficulties within financial institutions have created
significant opportunities for investment businesses
with strong balance sheets to position for the next
growth cycle and win the war for investment talent
within the US. Market volatility has widened the gap
between top quartile and bottom quartile performers
with an expectation that clients will continue to
increase the rate of replacement for underperforming
managers and asset classes. While we have a
number of accounts at risk at certain affiliates, our
overall new business pipeline is robust and we
expect to remain in the top half of our peer group in
terms of net client cash flows.
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Old Mutual plc
Annual Report and Accounts 2009
97
BUSINESS REVIEW
BERMUDA
We closed Bermuda to new business in March
2009. During the run-off period we will maintain
high levels of customer service, continue to
deliver operational efficiencies and tightly
manage risk.
BERMUDA
Andrew Darfoor
CEO, Bermuda
Old Mutual
Bermuda
Global Accounts
& Relationship
Management
Hedging
Management
Investment
& Liquidity
Management
IT, Operations
and Administraion
From its inception in 2000, Old Mutual Bermuda
(OMB) sold over 51,000 policies, with an aggregate
premium value of over $9 billion, through a bank
distribution strategy. The business model addressed
a key customer niche by providing investment
products to international, non-US citizen and
non-US resident customers seeking a wide range
of investment choices (multiple funds and fund
families across a variety of international asset
allocation portfolios, equity, bond, money market
and fixed rate accounts), exposure to international
economies and confidentiality through participation
in a secure structure.
A significant attraction for customers was that
assets are held in segregated accounts, with our
trust participation model ensuring that all plans were
issued in Bermuda and governed by applicable
Bermuda law. Our core business competency
remains meeting the needs of large financial
institutions by providing innovative and competitive
investment solutions through an open-architecture
platform.
98 Old Mutual plc
98 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
2009 Long-term insurance business policyholder liabilities
Insurance contracts
51,000 Policies sold by Old Mutual
Bermuda since 2000
Generic own‐brand, private label and proprietary
versions of products were customised to
distributors’ needs and sold through over 70
financial institutions, primarily large international
banks. The business also served a range of private
and institutional customers.
■■ Key markets and products
As a leading and innovative provider of investment
products for international banks’ high net worth and
affluent customers, our product mix comprises three
investment plans which currently have funds under
management of $5.8bn:
Following a change of Group strategy and a
significant recapitalisation of the business in 2008,
after completion of a strategic review in 2009,
OMB was closed to new business on 18 March
2009 other than where contractually obliged to
accept premium add-ons up to the first policy
anniversary date.
> The Universal Investment Plan (UIP): an
international investment plan which offers long-
term growth potential with a variety of investment
options including international equity, bond,
hedge and money market funds, as well as fixed
rate accounts. This plan also offers strategies to
help protect and potentially grow the investment
> The Guaranteed Index Plan (GIP): an
investment plan with index options that link
returns to the values of the world’s major indices,
while guaranteeing a minimum of 105% of the
amount invested. This plan gives investors
full participation in any upside, subject to an
annual cap
> The Guaranteed Rate Plan (GRP): an
investment plan offering a fixed rate solution
that allows control over maturity and flexibility of
return. This plan enables investors to diversify by
allocating into multiple guarantee periods.
■■ Performance in 2009
Business transformed and delivering on run-off plan
Highlights ($m)
IFRS profit (pre-tax)
Insurance reserves (excluding those held in the separate account)
Operating MCEV earnings (covered business) (post-tax)
Highlights ($bn)
Funds under management*
Highlights (£m)
IFRS profit (pre-tax)
2009
2008
% Change
34
2,053
(29)
(675)
3,084
(436)
105%
(33%)
93%
2009
5.8
2009
22
2008
% Change
5.8
0%
2008
% Change
(365)
106%
* Stated on a start manager basis as USAM manages $1.1 billion of funds on behalf of Old Mutual Bermuda.
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Old Mutual plc
Annual Report and Accounts 2009
99
BUSINESS REVIEW
BERMUDA
CoNtINUED
Overview
The business performed credibly against its core
objectives, with all written policies passing their
first anniversary date meaning that no further
policyholder premiums have been permitted since
August 2009.
Old Mutual Bermuda (OMB)’s core focus in 2009
was to retain the key staff necessary to execute
the agreed run-off plan, reduce costs by half
over a three-year period, improve operational
efficiencies, strengthen the governance structure,
manage capital and liquidity, significantly improve
management information analytics and continue
de-risking the in-force variable annuity book through
a range of measures.
In 2009, management implemented a soft-close
strategy to restrict fund choices and continued to
improve hedge effectiveness by reducing basis fund
mismatches. The business has been transformed
with a significantly improved understanding of
liabilities and associated management information
systems developed, with robust financial metrics
and a return to profitability.
Significant reductions in the cost base were
delivered during 2009 (over 40% expense reduction
year-on-year), with further savings and operational
improvement initiatives targeted for 2010. Overall a
leaner business operating model has been adopted,
with ongoing cost efficiencies anticipated to drive
down costs by a further 5-10% annually.
Aggregate surrender activity remains in line with
expectations. Ultimately, surrender activity will
determine the speed of run-off and the extent and
timing of any associated capital, or cash, release.
The business remains well capitalised and able to
meet all its future obligations, with the knowledge
that retention packages are in place for key
employees needed to execute on the run-off plan.
IFRS results
Bermuda is now treated as a non-core business and
its profit is therefore excluded from the Group’s IFRS
adjusted operating profit. The 2008 IFRS adjusted
operating profit has been restated on the same
basis.
IFRS pre-tax profit of $34 million for 2009 was
significantly better than 2008 ($675 million IFRS
pre-tax loss for 2008) benefiting from expense
reductions, lower DAC expense (mainly due to
reduced unlocking) and lower guarantee losses,
primarily as a result of improved effectiveness
of the hedging programme, favourable equity
markets and currency movements, higher interest
rates, lower volatility and improved fund basis
development. The impact of selective releases of
hedge positions instituted in the fourth quarter of
2009 was also beneficial in reducing guarantee
losses in conjunction with reduced overall reserve
requirements as a result of favourable markets.
MCEV results
The post-tax loss on the MCEV operating earnings
of $29 million for 2009 was significantly better
than the prior year mainly due to the large negative
assumption changes made in 2008 for the GMAB
strengthening and lower interest rates. Surrender
development also led to persistency experience
variances.
Reserves
Of total insurance liabilities of $6,741 million
(2008: $7,018 million), $4,688 million (2008:
$3,934 million) is held in the separate account,
relating to Variable Annuity investments, where risk
is borne by policyholders. The remaining reserves
amount to $2,053 million (2008: $3,084 million).
Of this, $763 million (2008: $1,428 million) is in
respect of GMAB/GMDB liabilities on the Variable
Annuity business, and $1,290 million (2008:
$1,656 million) for policyholder liabilities which are
supported by the fixed income portfolio (these
liabilities include deferred and fixed indexed
annuity business as well as Variable Annuity fixed
interest investments). These non-separate account
reserves represent the discounted future expected
account balance needed to meet policy obligations.
OMB reserves are calculated on a policy-by-policy
basis and are updated frequently and verified
independently through both internal and external
actuarial review, as well as subject to internal and
external audit, as part of the normal statutory audit.
100 Old Mutual plc
Annual Report and Accounts 2009
New fund mappings developed in 2009
better allocated exposures to Asian and other
emerging markets (which require higher levels
of reserving given their inherent higher volatility),
thereby improving the accuracy of the reserves.
OMB maintains a very significant surplus to its
minimum capital requirement, and no further cash
or capital injections are anticipated.
Investment Portfolio
No defaults were recorded in the year, with reported
impairments of $20 million (2008: $56 million) for
2009. The net unrealised loss position improved to
$29 million as at 31 December 2009 ($277 million
as at 31 December 2008) as spreads continued to
narrow across key sectors.
The book value of the portfolio fell from $1.3 billion
at the end of 2008 to $1.0 billion at the end of
2009, primarily to meet surrenders and withdrawals.
The fixed income portfolio remains at an A2 average
quality, with an improvement to 95% investment
grade compared to 2008 of 93%.
As at 31 December 2009, the book value, fair value
and unrealised loss of the investment portfolio with a
market value to book value ratio of 80% or less was
$71 million, $50 million and $21 million respectively
(compared to $521 million, $324 million and
$197 million, respectively, at 31 December 2008).
Management of Hedging
The hedge policy originally adopted by OMB
focused on hedging the underlying economic risk
of the guarantees. Generally this strategy reduces
the income statement exposure but can result in
substantial cash flow movements as the realised
changes in value of the underlying derivatives are
offset by an unrealised movement reflected in the
reserves. In a falling market this will result in large
cash inflows while, in a rising market, there will be
cash outflows. During most of 2009, hedges were
applied to a core number of components (interest
rates, foreign exchange, equity markets), with an
average hedge effectiveness of 95-96% achieved in
the period to September 2009.
Given the improvement in the capital position of the
Group, combined with management’s improved
understanding and management systems for
tracking the underlying risks, a process of selective
and progressive release of the hedge position
commenced in the fourth quarter of 2009. This has
been subject to strict oversight and is operated
within risk parameters agreed with the Group Risk
and Capital Committee. The control systems in place
mean that the reinstatement of effective hedges
could be made very quickly if required. The new
approach continues to manage the underlying
economics, but is more dynamic in nature, striking
a balance between the potential changes in the
income statement, cash flow movements and the
transactional costs. Where considered appropriate,
the level of hedging activity may be adjusted, subject
to a strict stop-loss policy.
The OMB hedge team evaluates the hedging
strategy on a continuing basis, with any proposed
changes to the strategy subject to strict oversight.
A stop-loss protection protocol, and daily
management and reporting of Value at Risk cash
and profit & loss are used by the Group to monitor
business exposures.
■■ Priorities for 2010
With the business transformed in 2009, the key
priorities for 2010 are to:
> Further improve expense and operational
efficiencies delivered in 2009, maintaining cost
discipline and focus to deliver further planned
expense reductions
> Manage capital and liquidity effectively
> Further embed risk management into key
business decision making processes
> Continue to de-risk the in-force variable annuity
book, appropriately executing a dynamic
hedging program on key risks
> Implement conservation efforts to better retain
profitable non-guaranteed assets.
■■ Outlook
OMB aims to continue to aggressively execute
against its run-off strategy, whilst maintaining high
levels of customer service through continued
operational and service improvements. A return to
more normal market conditions will further underpin
the continued recovery in profitability, although the
business expects increased volatility in earnings in
the medium term, particularly as the peak of the
crystallisation of guarantees approaches in 2012 and
then 2017.
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Old Mutual plc
Annual Report and Accounts 2009
101
RISK and ReSponSIbIlIty
RISK and capItal management
Our risk management frameworks provide
essential tools to enable us to take timely and
informed decisions to maximise opportunities
and mitigate potential threats.
Andrew Birrell
Group Risk and Actuarial Director
RISK and capItal dRIVe ValUe
Value
Risk profile is
a key driver of
value creation
Capital allocation
is a key driver
of value
Every business activity in our Group requires us
to put capital at risk, in exchange for the prospect
of earning a return. In some activities, the level of
return is quite predictable, whereas in other activities
the level of return can vary over a very wide range,
ranging from a loss to a profit. Accordingly, over the
past year we have expended substantial energy
on improving our risk and capital management
framework, to focus on taking risks where we:
>> Understand the nature of the risks we are taking,
and what the range of outcomes could be under
various scenarios, for taking these risks
>> Understand the capital required in order to
assume these risks
Risk
Capital
>> Understand the range of returns that we can
earn on the capital required to back these risks
Required capital
is a function of
the risk distribution
>> Attempt to optimise the risk-adjusted rate of
return we can earn, by reducing the range of
outcomes and capital required arising from these
risks, and increasing the certainty of earning an
acceptable return.
We have embarked on a journey, which requires
us to undertake this analysis on an ongoing and
rigorous basis. We believe that this process will add
value for our shareholders, and provide security
to our other capital providers and clients. Value is
102 Old Mutual plc
Annual Report and Accounts 2009
added for shareholders if our process allows us to
demonstrate sustainable risk-adjusted returns in
excess of our cost of capital. The process provides
security to our capital providers and clients by
assuring them that we are not taking on incremental
risks which adversely affect the outcomes we have
contracted to deliver to them.
This section of the Annual Report discusses how our
Group manages Risk and Capital to generate value.
These methodologies are embedded into the Group
and business unit management decision-making
process, our ‘first line of defence’. The role of the
Group and Business Unit Chief Risk Officers (CROs)
is to provide robust challenge to the management
teams based on quantitative and qualitative metrics
as part of their ‘second line of defence’ mandate.
The Group Internal Audit team provides the ‘third line
of defence’ challenge.
The pursuit of value requires us to balance risk
assumed with capital required:
>> If risk assumed is greater than the capital
we have available, an adverse outcome will
prejudice solvency
>> If capital available is greater than the
risk-assuming opportunities that can be
identified, the result will be a low-risk but
low-return business
>> It is possible to have a high-risk, low-return
business, which represents the worst of all
outcomes
>> Our objective is an appropriate risk/capital
balance, which seeks to provide higher certainty
of achieved risk-adjusted returns within an
acceptable level of risk assumed and capital
required, but which does not expose us to
unacceptably high risk of capital depletion in the
event of adverse outcomes.
Our objective of balancing risk, return and capital
has led us to enhance substantially our risk and
capital management methodologies, in order
to be able to identify threats, uncertainties and
opportunities and in turn develop mitigation and
management strategies to achieve an optimal
outcome. The risk management community within
the businesses have worked alongside management
to develop and implement tools that assist in
identifying risk appetite, setting risk strategy and
making difficult decisions about which products
and businesses are likely to provide acceptable
risk-adjusted returns, with an acceptable capital
requirement and level of confidence about their
achievement, and to exit from all of those which
are not. Many of the outcomes of this work are
discussed elsewhere in the Annual Report, while
others will only emerge over time as the Group
implements its preferred strategy.
We view risk not only as a threat or uncertainty,
but also as a potential opportunity to grow and
develop the business, within the context of risk
optImISIng the UpSIde and
managIng the downSIde
Risk management is an integral part of our management
decision‑making process, enabling us to ensure that:
>> Risk‑taking is a consciously chosen strategic decision and not
accidental
>> Risk management is optimal and capital is effectively employed
>> The frequency and severity of surprises are reduced by timely
measurement, mitigation and control.
Successful risk management does not mean that downside events
will never occur but that they happen infrequently and with low
severity.
The Group also manages upside by exploring and exploiting risk
opportunities, while ensuring that risks associated with these
opportunities are fully understood and acceptable. This allows
the Group:
>> Greater flexibility for reallocation of capital and risk capacity
when opportunities arise
>> Competitive advantage through greater understanding of risk
types, pricing and management.
appetite. Hence our approach to risk management
is not limited to considering downside impacts
or risk avoidance; it also encompasses taking
risk knowingly for competitive advantage.
The requirements of Solvency II will demand that
companies consider their approach to risk, capital
and value management more robustly and we
believe that our initiatives to date fit well with these
requirements.
Risk management is integral to the Group’s
decision-making and management process.
The Group’s ambition is to embed it in the role and
purpose of all employees via the organisational
culture, thus enhancing the quality of strategic,
capital allocation and day-to-day business decisions.
The past year has tested all companies’ ability to
minimise downside risk resulting from upheavals
in the financial sector. Old Mutual’s own risk
management frameworks provided essential tools
to enable us to take timely and informed decisions
to maximise opportunities and mitigate potential
threats. I believe that our activities, as outlined in this
report, will provide you with a better understanding
of these frameworks, as well as providing some
insight as to how we intend to build on these to
create better outcomes and fulfil the requirements
of Solvency II.
Andrew Birrell
Group Risk and Actuarial Director
Old Mutual plc
Annual Report and Accounts 2009
103
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RISK and capItal management
contInUed
Objectives for the year ahead
We are committed to the continued development
of our risk management framework. Old Mutual’s
integrated Capital, Risk and Financial Transformation
programme (‘iCRaFT’) is at the heart of our objective
to embed a culture of managing for value. As a
business-owned initiative, rather than a risk and
actuarial programme, iCRaFT will deliver positive
benefit to the Group, with the additional benefit of
full compliance with the requirements of Solvency
II. We began the programme in April 2008 and it is
intended to be fully delivered by October 2012. Our
Financial Controls Initiative, now a project in its own
right since having become distinct from the Finance
2010 project, began implementation in 2008 and
is intended to ensure that the information that we
produce for internal and external stakeholders is
accurate and error-free, as a result of a thorough
review of all processes and controls in producing
such information and the application of best practice
in financial controls. Details of these projects are
discussed later in this report.
Accountability for risk management, and
transparency of risk issues are crucial to our
success. Responsibilities for managing risk are
allocated to all managers within the Group and risk
management requirements have been embedded in
our performance management programme.
Ultimately the success of risk management will be
determined by the extent to which it embeds in
the corporate culture and leads to demonstrably
better outcomes. The Group Operating Model work,
referred to in the Governance section of this report,
is designed to reinforce the governance structures
in place to support risk management across the
Group, and the transparency of information flows.
By setting minimum standards for business units
to adhere to, we aim to achieve consistency in our
approach across the Group.
■■ ■Achievements of 2009 and objectives
for the future
In the following section we set out our progress over
the past year and our objectives for the future, as we
instil risk management techniques to generate value.
Achievements of 2009
Events during the past year tested the ability of
financial sector participants to respond quickly to
significant market shifts. Old Mutual’s capability
has been evident in our response to the financial
crisis and the consequent events during 2009
which shook investor confidence. We faced risks
head-on and came through stronger than before.
Our consistent Group-wide ‘three lines of defence’
approach enabled us to quantify exposures quickly
and, where appropriate, implement strategies
to mitigate levels of risk deemed to be beyond
our appetite. It is important to note that certain
risk exposures are still higher than we would like,
and that it is difficult to take action to reduce
them immediately. In these instances we have
implemented arrangements that allow us to monitor
exposures continuously, implement proactive
measures and ensure that they do not increase
further.
In March 2009 our Group Chief Executive set out
the Group’s strategic priorities. One of these was
to improve governance and risk management.
The objectives of the Group’s risk management
community were wholly aligned with this
requirement. In the risk report contained in the
2008 Annual Report and Accounts we stated our
risk management priorities for 2009 were to embed
the enhancements made to the risk management
system during 2008 and strengthen our risk
management framework. During 2009 we have
taken significant strides in achieving those priorities,
particularly in quantifying exposures, increasing
the sophistication of the methodologies we use to
balance risk, capital and return, and implementing
three-year exposure determinations as part of our
business-planning processes. These processes
ensure risk exposure levels are effectively monitored
and managed in relation to the limits set. Over the
past year, Old Mutual’s capital and liquidity positions
have both strengthened substantially.
104 Old Mutual plc
Annual Report and Accounts 2009
FocUSed on the FUtURe
We continue to invest in our risk management
and controls framework. The benefits will serve
to protect stakeholders better, deliver greater
efficiencies and ensure we continue to meet
regulatory requirements, particularly Solvency
II. To illustrate some of these investments, there
follow details of two projects currently underway,
being iCRaFT and the Financial Controls
Initiative (FCI).
Launched in April 2008, iCRaFT is a key strategy
enabler and central to one of our strategic
priorities: “to increase operational efficiency,
strengthen governance and risk management”.
iCRaFT will elevate capital, risk, financial and
performance management methodologies, their
application and integration, to best practice
levels by the end of 2012.
It will deliver tangible benefits in four main areas:
>> Compliance with the EU’s new regulation for
insurance companies, Solvency II
>> Enhanced oversight and risk management
>> Improved financial performance
>> Enhanced external reporting of business
activities.
Example 1 of ‘Focused on the future’
iCRaFT in practice
“iCRaFT is a holistic approach to elevating capital, risk, financial and performance management, and their application
and integration, to best practice levels by the end of 2012, while incorporating Solvency II and Basel II compliance.
We refer to this as a culture of managing for value.”
Enablers
Outcomes
Objectives
Measurement
and methodology
Integrated key business applications
1
Strategic
planning
and capital
allocation
2
ALM* &
investment
management
3
Risk
optimisation
4
Allocation of
limits & risk
budgets
2
1
Optimise upside
Improved
financial
performance
Operational
implementation
Organisation
and governance
5
Solvency,
liquidity &
funding
6
Product
development
design, pricing
& underwriting
7
External
communication
& Pillar 3
disclosures
8
Performance
management
& executive
compensation
3
4
Comply with
regulation
Comfortable
compliance with
Solvency II and
Basel II
Contain and
manage
downside
Improved
oversight
and active
mitigation
Improve
external
perceptions
Enhanced
relationship
with external
parties
(regulators rating
agencies, etc)
*Asset Liability Matching
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Old Mutual plc
Annual Report and Accounts 2009
105
RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
FocUSed on the FUtURe (contInUed)
Solvency II will impact on products and capital
required and is expected to have significant impact
on the competitive landscape. The profitability
and capital intensity of business decisions and
products will become more transparent. However,
compliance alone will not lead to sustainable
strategic differentiation. Consequently, within
iCRaFT we are undertaking development work
to deliver a forward-looking view of integrated
risk and capital management linked to enhanced
performance management.
iCRaFT will significantly change current business
processes. We have developed an end-state
vision for the programme and completed
a comprehensive review with each of the
businesses to assess the size of the challenge
we face in achieving this vision. We have agreed
key design and solution decisions across the
eight major business applications that the
programme addresses, and during 2009 we
prioritised activities to ensure alignment with
existing business activities. As a result we have
commenced programme workstreams in key
business applications, including internal capital
model development, and initiated work on the IT
architecture to support the end vision.
We made significant progress on these
workstreams in 2009, even though the final
implementing measures for Solvency II were still
evolving rapidly. For example, the internal capital
model development project has specified a
detailed methodology, based on best practice, to
be applied when calculating our risk-based capital
requirements under Solvency II. We have selected
a third-party software vendor to enable us to do
this and begun piloting the required applications.
The risk monitoring and reporting project focuses
on delivering enhanced oversight and reporting
capabilities while ensuring closer integration of
functions across the Group. We are piloting an
application to give us a consistent operational
risk monitoring and reporting process across
the Group. We have also started reporting more
granular credit and counterparty exposures to
better understand our credit and counterparty
concentration risk across the Group. A full
application to facilitate this analysis will be
delivered in 2010.
The performance measurement workstream is
successfully rolling out risk-adjusted performance
measures aligned with the way we view risk
management in the Long-Term Savings division.
Executive compensation for 2010 has been
linked to risk-adjusted performance measures.
In order to ensure alignment between staff and
shareholders, the risk-adjusted metrics will also
be the primary future driver of capital allocation,
business performance measurement and
incentive pool determination.
Going forward, we believe the investment in
iCRaFT will bring a new level of maturity and
robustness to our risk management processes
and internal controls. Once complete, it will
give the Board improved tools for meeting its
responsibilities to shareholders by ensuring
that the Group is always operating to its target
best-practice standards.
Managing for value is at the heart of what
iCRaFT is trying to achieve: it will show that while
Old Mutual must be prepared to take on risks, we
will manage them in an integrated and consistent
way with proper care for our customers,
shareholders and employees.
Example 2 of ‘Focused on the future’
Managing the risk of errors in financial
statements: the Financial Control Initiative
Our Finance function routinely seeks continual
improvement in the quality, insight and timeliness of
financial information. During 2009, in response to
the challenges of operating in increasingly diverse
and complex markets, we continued to implement
the Old Mutual Finance Control Initiative (FCI).
FCI aims to improve the quality of the information
that we produce for internal and external
stakeholders and applies best practice in finance
control. The initiative has been led by the Group
Finance Director, supported by dedicated teams
in our individual businesses. It involves rolling
out risk identification, control monitoring practice
and control activity reporting technology in the
50 Old Mutual reporting entities where most
significant financial reporting risk resides.
106 Old Mutual plc
Annual Report and Accounts 2009
FocUSed on the FUtURe (contInUed)
FCI aims to increase risk awareness throughout
the Finance function. It requires identification of
financial reporting risk, and improved ownership
and monitoring of the performance of controls
that are fundamental to our ability to produce
reliable financial information. This project has
required close co-operation between the Finance,
Risk and Internal Audit functions. While Finance
employees have managed the implementation
and Finance will remain accountable for financial
reporting risk management, the project has been
implemented to integrate with Risk and Internal
Audit practices and will supplement the work of
the iCRaFT programme.
FCI has already enabled the Group to develop a
clearer view of financial risk ‘hotspots’ and develop
remediation plans to safeguard the quality of
information produced. The FCI methodology
■■ Robust, evolving enterprise risk
management
We believe effective risk management is more
than just the collection and analysis of data.
It also encompasses the insights delivered by
information which facilitate appropriate actions.
Old Mutual benefits from having enhanced its
Group risk management framework, which gives full
Group-wide coverage of a variety of risks.
Our annual risk cycle is designed to give management
relevant, up-to-date information from which trends can
be observed and assessed. The governance structure
supporting our risk cycle is designed to deliver the
right information, at the right time, to the right people.
In line with the industry’s increasingly sophisticated
management of risk, we continued to develop and
embed our risk appetite framework during 2009 −
particularly our risk appetite assessment techniques.
Risk management processes
will be embedded during 2010. Continual
improvement of controls will ultimately facilitate better
decision-making and enable more efficient finance
processes, harmonised around best practice and a
small, well-defined set of key controls.
Finance
Control
The following sections set out our risk management
framework, illustrating each layer of tools and
systems provide us with assurance to manage the
upside of risks better by maximising opportunities
while minimising the downsides, or threats. In this
context, this section covers:
>> Risk management governance
>> Group oversight, including:
>> Strategy and business planning
>> Risk appetite
>> Stress and Scenario testing
>> Policy setting
>> The risk framework employed by each of our
business units to provide consistent information.
Group strategy and business planning
Risk appetite limits and Policy setting
Risk
identification
Risk and control
assessments
Management
actions
Monitoring
Risk
reporting
Risk adjusted
performance
measurement
Capital
allocation
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Old Mutual plc
Annual Report and Accounts 2009
107
RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
■■ Risk Management Governance
We strengthened our risk governance framework in
2009 to encourage greater discipline, transparency
and discussion in relation to risk. This involved
consolidating our ‘three lines of defence’ approach
to provide greater solidarity within each of the lines.
Changes included:
>> Reviewing and enhancing the Group’s risk
governance structure by strengthening the
mandate of the Group Risk & Capital Committee
(GRCC), now renamed as the Group Executive
Risk Committee (GERC)
>> Creating stronger risk and capital interactions
between the key committees at Group level:
Group Executive Committee, the GERC, the
Group Capital Management Committee (GCMC)
and the Group Audit and Risk Committee,
clarifying the business unit mandate and
authority to execute risk responsibilities
effectively
Risk Governance framework
>> Strengthening the risk management role within
the business units by ensuring that each unit
has a Chief Risk Officer with direct access to the
Group Risk Director.
In this report, we focus on the responsibilities of the
two second line of defence committees illustrated
below, being the GERC and the GCMC. The
responsibilities and remit of the first and third line
forums can be found in the Governance section of
this report.
Group Executive Risk Committee
The GERC was established in July 2008. During
2009 it has proven to be a key decision-making
and oversight body, proactively setting risk appetite
limits, ensuring risk exposures are within established
parameters and overseeing the Group risk profile.
It has added value by overseeing the resolution
of Group issues in a timely and effective manner,
ensuring both short- and long-term business
strategy is in line with our agreed risk appetite.
The GERC committee comprises senior Group
executives, from Risk, Actuarial, Capital,
Old Mutual plc Board
Group Chief
Executive
Group Finance
Director
Group Risk &
Actuarial
Director
Group Audit
Committee*
Group Risk
Committee*
Group
Actuarial
Group
Risk
Group Executive
Committee
Group Executive
Risk Committee
Group Internal
Audit
Business Unit Chief
Executives
Business
Managers
Risk management
1st line of defence
Group Capital
Management
Committee
Sub-committee of the Board
Approvals Committee and
provides input to Group
Executive Risk Committee
Risk management
2nd line of defence
Business Unit Audit
Committees
Independent assurance
of 3rd line of defence
First line of defence
Second line of defence
Third line of defence
Day‑to‑day risk management
Management and employees
within each business
are responsible for the
identification, assessment, and
management and reporting of
risk data
Oversight
The risk community − including Chief
Risk Officers, the Risk Management
Committees and specialist risk
management and compliance
functions − provides assurance that
risks are being appropriately managed
across the business
Independent verification
Group Internal Audit provides
independent assurance
on the effectiveness of key
governance, risk management
and internal control processes
* The Group Audit Committee and Group Risk Committee operated as one Committee in 2009, and will be separated in 2010 in line with
the recommendations of the Walker review.
108 Old Mutual plc
Annual Report and Accounts 2009
Compliance, and Internal and External Audit. Its
main responsibility is to support the Group Risk and
Actuarial Director in understanding and overseeing
the implementation of the Group’s risk framework,
including risk appetite and capital management.
The GERC key responsibilities are:
>> Monitoring and reviewing the Group’s risk profile
including losses and control breakdowns
>> Setting risk appetite limits, allocating these to the
Group’s respective business units to optimise
results
>> Providing assurance that effective risk
optimisation is being fully achieved both within
business units and across the Group
>> Providing oversight of capital management to
ensure allocation is consistent with risk appetite
limits.
The GERC receives reports from Group Risk
and Actuarial, GCMC, Group Finance, Treasury
and iCRaFT. It provides input to the Group Executive
Committee and the Group Audit and Risk Committee.
The GERC works closely with the GCMC.
Group Capital Management Committee
The GCMC ensures that the Group’s capital is
managed in a consistent manner, aligned to the
expectations of our shareholders, and that this
capital is provided on the basis of the appropriate
level of prospective return versus risk, as identified
by the GERC. It is the mechanism by which the
Group ensures that capital is allocated to business
units in line with the Group’s strategy, and that
appropriate return rates are set and monitored.
If necessary it will reallocate capital where
appropriate for greater reward.
The GCMC committee comprises senior Group
executives, including the Group Chief Executive,
Group Finance Director and the Group Risk and
Actuarial Director, along with representatives from
Capital, Treasury, Strategy and Compliance.
The GCMC key responsibilities are:
>> Recommending to the Board the Group’s capital
allocation, capital structure and investment strategy
>> Setting an appropriate framework for managing
capital
>> Issuing guidelines and/or recommending targets
to ensure the appropriate management of capital
within the agreed risk appetite limits.
These committees support the second line of
defence to ensure that the Group Executive
Committee maintains clear sight of the risk exposure
and capital allocation across the Group to facilitate
first line of defence decisions.
In 2010 we expect the roles of these committees to
strengthen further, particularly in their interactions
with business unit risk and capital committees.
Recommendations arising from the Walker Review
of “Corporate governance in UK Banks and other
financial industry entities” were published on
29 November 2009. Old Mutual already has in
place a number of the recommendations proposed
by the Walker Review, such as the role of the
Board. We anticipate further benefits as we adopt
the recommendations to implement a Board Risk
Committee, distinct from the Board Audit Committee,
in April 2010. The separation of the disciplines
will reinforce the risk culture and increase risk
specific challenge to the benefit of the organisation,
shareholders and other stakeholders. The major
business units will mirror the Group governance
structure through business unit level Board Risk
Committees.
These changes are incorporated into the wider
Group Operating Model changes, details of
which are included in the Governance section of this
report.
■■ Group oversight approach
Setting the tone from the top is important for us,
providing the parameters within which we are able
to manage our capital and value objectives on a risk
sensitive basis. Our oversight starts with the strategy
setting and business planning process. These plans
help us articulate our appetite for risk, which is then
set as risk appetite limits for each business unit
to work within. Group also set out parameters in
policies for all business units to adhere to. Details of
these tools are set out below.
Strategy and business planning
Risk management is embedded in our business
strategy and planning cycle. Testament to this is the
inclusion of risk management as one of our strategic
priorities. By setting the business and risk strategy,
we are able to determine appropriate capital
allocation and target setting for the Group and each
of our businesses.
All business units are required to consider the risk
implications of their annual plans. As the following
section highlights, these plans include analysis of the
impact of objectives on risk exposure. Throughout
the year, we monitor business performance regularly
focussing both on financial performance and risk
exposure. The aim is to continue the process of
integrating risk management into the planning and
management process and to facilitate informed
decisions. Through ongoing review, the links between
risk appetite, risk management and strategic
planning are embedded in the business-as-usual
environment so that key decisions are made in the
context of the risk appetite for each business unit.
Old Mutual plc
Annual Report and Accounts 2009
109
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RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
Risk appetite limits
Risk appetite provides us with a basis for formally
reviewing and controlling business activities by
setting boundaries that ensure that business
activities are aligned to stakeholder expectations and
are of an appropriate scale, relative to the risk and
potential reward.
In 2009 we required all business plans to include
an analysis of risk appetite impact throughout the
3 year plan period. This increased transparency
highlighted where management actions have an
impact on our risk-adjusted performance, allowing
us to maximise our risk-adjusted return and
shareholder value. Early identification of areas that
could potentially breach limits has allowed the timely
formulation of action plans to avoid this.
Setting risk appetite limits for the businesses and
measuring their exposure against those limits allows
us, amongst other things, to:
>> Allocate capital on a risk-adjusted performance
basis
>> Consider risk-based pricing and product
development to set product pricing terms and
charging structures
>> Improve decisions regarding portfolio
management and optimisation.
This not only allows us to balance risk, capital and
return across the Group but also provides us with
an enhanced understanding of the risks embedded
in our business. It provides a framework for capital
allocation decisions taken by the Group Capital
Management Committee.
Throughout the year, business units calculate their
risk exposures against the appetite set by the
Group. The five quantitative measures we use to
express our risk appetite limits and exposures are:
Risk appetite metric definitions
Metric
Definition
>> Economic capital at risk (ECaR)
>> Earnings at risk (EaR)
>> Cash flow at risk (CFaR)
>> Operational risk (OpRisk)
>> Financial Group Directive (FGD) surplus capital at
risk (FCaR).
(See panel below for definitions)
The embedding of our risk appetite methodology is
a cornerstone of our risk analysis capability. Using
one of the metrics as an example, our economic
capital calculations provide a long-term view of the
risks in the business and oversight of the key threats
facing the Group if an extreme event occurs. ECaR
indicates the reduction in post-tax economic value
(broadly defined as market-consistent embedded
value for life companies or IFRS equity for other
Group companies) over a one-year forward-looking
time horizon that should only be exceeded seven
times in 10,000 years (a 99.93% confidence level
consistent with our target ‘A’ rating).
ECaR helps us to optimise risk-based decisions.
The stress test allows us to monitor overexposures
and deepens our understanding of where the
business could further improve its capital allocation.
We have set appetite limits for economic capital
based on the ratio of available financial resource
divided by economic capital.
FCaR was added as a new risk appetite metric
during the year, measuring the potential reduction
in FGD surplus capital in various adverse economic
scenarios. We recognise that FGD is a key regulatory
measure which it is particularly important to
monitor in volatile economic conditions where our
policyholder and shareholder assets can significantly
impact our position − particularly since we hold these
assets in a variety of currencies. For further details on
our FGD position throughout the year see page 287.
ECaR
The value of assets required to ensure that the business concerned can meet in full its
obligations to policyholders and senior creditors at a 99.93% confidence level, which is the
probability placed on a target A-rated bond not defaulting in the next year
EaR
The reduction in pre-tax IFRS adjusted operating profit over a one-year forward-looking time
horizon following a 1 in 10 year loss event
CFaR
The reduction in the potential cash remittable to Old Mutual Group on a 1 in 10 year basis
OpRisk
FCaR
The reduction in economic value due to 1 in 10 year operational loss events and expected
day-to-day losses and reputational impacts
The reductions in FGD surplus at the reporting date. This is tested following both 1 in 10 years
and once in 200 years loss events
110 Old Mutual plc
Annual Report and Accounts 2009
Risk appetite in action
Setting risk appetite limits across the business has proved a valuable management tool. For example,
using the results produced by the risk appetite framework in 2008, Old Mutual Life Assurance Company
South Africa (OMLAC(SA)) concluded that there was excessive market risk in its business. An action
plan to reduce this exposure led to a transfer of shareholder assets from equities into cash and hedging
of the remaining shareholder equity investments. As a result, when equity markets in South Africa fell
during late 2008 and 2009, OMLAC(SA) avoided any significant losses. As the market started to recover
OMLAC(SA) management considered unwinding the hedges to strive for greater possible upside.
However, calculating that this would breach its risk appetite, it elected to keep the hedges until they
expired to ensure the downside was mitigated.
Stress and scenario testing
We perform regular stress tests and sensitivity
analysis to monitor the robustness of our regulatory
and capital position. As an example of the stress
testing undertaken, the following table shows
the assumptions of testing performed to stress
the reduction in FGD surplus from the 30 June
2009 balance sheet position in three different test
scenarios.
These assessments give management a view on the
capital that would be required if any of the scenarios
became reality. They help management to prepare
for significant changes in the environment and
protect shareholders and investors from unexpected
loss. Information on stress testing is reported to the
GERC, and to management so that decision making
is based on an understanding of potential impacts.
Policy setting
Group policies set out our mandatory minimum
requirements that business units must follow. At the
end of 2009 there were 27 Group policies in place
covering a range of topics, including Liquidity Risk,
Market Risk, New Product and Business Approval,
Capital and Treasury Risk and Business Continuity.
Business units ensure that their local policies
and procedures are aligned to the Group policy
suite. In many cases business unit policies include
requirements beyond the Group’s mandatory
minimum requirements and incorporate applicable
local regulations. The Group policies are mapped to
our risk categorisation model and form a key part
of our governance framework. Their implementation
allows the Group to establish a common framework
of control across the business units.
Collectively known as the Group Policy Suite, these
policies are agreed by the GERC and approved by
the Group Audit & Risk Committee. Once approved,
policies are communicated to each business unit for
compliance. Every six months, business units must
provide an attestation to the Group on compliance
with these policies.
For further information on Group policies, see the
Governance section of this report.
Risk module
Adverse scenario
Recession scenario
Inflation scenario
Interest rate
0- ≤ 2Y
2- ≤ 5Y
5- ≤ 10Y
10Y+
Equities (EEA, OECD)
Equities (other)
Real estate
-50%
-50%
-30%
-15%
-10%
-20%
-15%
-60%
-60%
-50%
-40%
-40%
-55%
-25%
+500%
+100%
+50%
+40%
0%
0%
0%
Credit spread risk
25% of function1
100% of function1
0% of function1
Lapse risk
15% of surrender strain
15% of surrender strain
30% of surrender strain
1 Function is a formula that depends on rating and maturity of credit instruments.
Old Mutual plc
Annual Report and Accounts 2009
111
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RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
■■ Consistent business unit risk
methodology
Supporting the planning cycle, risk appetite setting and
stress testing, we use a number of risk management
tools to manage the identification, management and
escalation of risk within the businesses. All business
units adopt a consistent methodology ensuring that
information can be reviewed and analysed on a like-for-
like basis. The methodology employed by the business
units includes:
>> Product development process
>> Risk categorisation
>> Risk and control self-assessment (RCSA)
>> Monitoring
>> Operational risk event data
>> Key risk indicators
>> Market-consistent embedded value (MCEV).
Product development process
Risk assumption frequently starts in the product
development process, where new products are
designed, priced, implemented on administration
systems and sold to customers. The Board
implemented a centralised approval process for
all products which may have implicit or explicit
guarantees, in order for product design to be
better understood and for aspects such as pricing,
administration arrangements, marketing material and
investment requirements to be rigorously challenged
by an independent party. The Group Risk & Actuarial
Director is responsible for approving products which
contain guarantees.
Risk categorisation
Since 2008, risk categorisation has promoted and
established the consistent use of a common risk
language across the Group allowing meaningful
aggregation and comparison of risks and issues
and enhanced risk reporting to the Audit and Risk
Committees and data sharing between business
units. We will review our categorisation model in the
coming months to ensure it is still appropriate in the
current environment.
Risk and control self‑assessment (RCSA)
This industry standard approach to identifying,
assessing and controlling risk is used by our
business units to consider all risks consistently.
Each business unit completes an RCSA regularly
and escalates any significant new risks or issues to
senior management immediately. This gives Group
management an up-to-date view of risks and ensures
that decision-makers are aware of areas of concern
promptly so that appropriate action can be taken.
The RCSA process incorporates:
>> Ongoing identification of risks that threaten the
achievement of objectives
>> Assessing these risks in terms of financial
and qualitative impacts such as reputational,
regulatory or customer
>> Determining whether the level of risk being taken
is acceptable
>> Determining and implementing management
action plans to bring risk exposures to an
acceptable level if required
>> Ongoing monitoring and reporting of risks,
control effectiveness and actions.
RCSA has strengthened our Group oversight and
enhanced the flow of information − resulting in
increased transparency, timely identification of risk
trends across the Group and control improvements.
The improved consistency of risk assessment in
business units has enabled aggregation at a Group
level to gain a much better informed picture of the
overall Group profile.
Monitoring
Operational risk event data
We have successfully improved transparency
and data sharing by rolling out the formal loss
data collection standards developed in 2008 for
the operational and strategic risk categories and
embedding them across the Group. Standardisation
of loss information across the Group has facilitated
early identification of trends leading to control
improvements, enhanced risk mitigation and
improved aggregation of losses.
Our aim is to mitigate further operational risk events
that lead to losses, within reasonable expectations,
and to learn from all losses to improve processes
and prevent recurrence.
The Group subscribes to a database outlining
significant operational losses experienced by other
companies. Data from this source helps us to take
mitigating actions proactively, to avoid incurring
similar losses.
Loss data collection has provided us with excellent
ways to improve our customer experience.
For example, during 2009, we observed a
number of operational losses resulting from simple
process errors. By collecting data systematically
and consistently we have been able to pinpoint
repetitive process failures and actively improve
controls in these areas. This is an area that we are
now focusing on, to make rapid changes that will
provide a better customer experience and reduce
unexpected losses.
112 Old Mutual plc
Annual Report and Accounts 2009
Key risk indicators (KRIs)
KRIs provide data on whether a risk is trending up
or down, or is stable, both now and in the future.
This acts as an early warning system, enabling
management to take preventative action against the
risk materialising.
During 2009 we identified KRIs against each
of the Group’s top risks. We see KRIs as a vital
step forward in making risk information more
transparent, and have begun data collection from
the business units. In 2010 we will continue to
enhance these processes through trend analysis
and threshold setting.
Market‑consistent embedded value (MCEV)
In addition to the other tools described here, we
use MCEV extensively as a tool for forward-looking
assessment and monitoring of risk in the Group’s
life insurance companies. By analysing the source
of MCEV operating earnings we can assess where
emerging experience is significantly different from
expectations. This allows senior management to
identify emerging risks and trends and take remedial
action where necessary. The MCEV sensitivities
allow us to understand the impact of changes in
economic, demographic and operating conditions
on the Group’s embedded value. Finally, the
market-consistent value of new business (MCVNB)
provides information on the extent of investment
risk that is embedded in new products. For further
information, see the MCVNB supplementary
information on page 340 of this report.
■■ Significant risks to Old Mutual
Old Mutual’s weakness in certain business units in
the past was caused by a combination of a small
number of poor investment decisions, insufficient
consideration of the volatility of certain guaranteed
products and executive short-term reward for sales
growth in certain businesses resulting in incorrect
long-term business decisions. Although these
instances were limited to a small part of the Group,
Old Mutual was not alone in this regard. All financial
service organisations were required to act quickly
in the recent tough environment. Although these
conditions brought many of these shortcomings
to light, they have made it even more critical for
organisations to ensure they fully understand the
risks they are taking on − and the interdependencies
between them − in order to hold sufficient capital
and liquidity to cover a combination of risks
occurring at once.
We do not only look at risk as presenting threats.
They also present opportunities and are impacted
by uncertainties. When considering risk, we need
to consider not only the downside risk, but also the
potential upside in order to make the right decisions.
The table alongside lists some of the most significant
risks Old Mutual faced during 2009:
KRI Examples:
KRI
Expense levels –
actual v forecast
Related
risk type
Business risk
Level (%) of voluntary
turnover in key jobs
Operational risk
Assets in excess
of local regulatory
capital requirements
Liquidity risk
What it tells us
If trending up, the Group’s costs will be higher than planned,
which if not compensated by a rise in income will mean profits
will be lower than forecast. This trend will also show in increased
exposure to business risk. The indicator allows proactive
analysis to identify the reasons for the increase in expenses and
to put appropriate management actions in place.
If trending up, this indicator can highlight a failure to retain
key talent, which could mean recruitment costs are higher
than planned and an increased exposure to this risk as key
jobs are left vacant for a time. The indicator allows analysis of
the reasons for the leavers and facilitates actions to be put in
place to prevent repetition.
If trending down, this indicator provides Group with knowledge
that the solvency position is worsening and the risk of
regulatory intervention is increasing. The reasons for the
reduction in surplus assets can be identified and management
actions taken to ensure the trend does not continue.
Old Mutual plc
Annual Report and Accounts 2009
113
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RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
SIgnIFIcant RISKS to the old mUtUal gRoUp
Risk type
Credit risk
Business risk
Market risk
– Interest
– Equity
– Hedge
– Real estate
– Credit spread
– Foreign exchange
Risk as a threat and uncertainty
Mitigating actions and opportunities
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 may be unable to
repay amounts owed.
Credit risk also arises from financial guarantees that
the banking businesses have to act upon where clients
default on their obligations with respect to the financial
guarantees.
Although in some instances it does not pay to take
credit risk, there are situations when expected returns
mean that there are significant rewards for assuming
this risk.
We monitor credit exposures and set limits in each
business unit, reducing our risk exposure by requiring
counterparties to have a specified credit rating.
We also check to ensure that we do not have a
concentration of exposure to single issuers, sectors or
investment types.
We operate in a highly competitive environment. If we
are not able to compete successfully there is a risk of
reduced market share, revenues or profitability.
The profitability of our businesses could be adversely
affected by a worsening of economic conditions.
Changes to the distribution environment (for example
through regulation or a failure of distribution providers)
could have an impact on our business.
This risk also covers the risk of terminations and
expenses being higher than expected, which would
prejudice product profitability and sustainability.
The risk of loss as a result of adverse changes in the
market value of assets and liabilities. This includes the
risk of falling equity values or losses due to volatility in
asset values as well as the impact of changing interest
rates, credit spreads and currency fluctuations.
Some of our life assurance businesses contain
investment guarantees and options. A reduction in
interest rates and equity markets can cause more of
these to be in-the-money, with a potentially adverse
impact on profit.
We offer innovative products to suit different clients
and different client needs, enabling us to find
opportunities even in challenging market conditions.
We closely monitor lapse rates and persistency
information, adapting our business approach
as necessary. Old Mutual is diversified across
geographies and product lines, minimising the impact
of sector or territory-specific economic downturns.
We monitor developments in the distribution sectors
across all geographies and our strategic planning and
research teams help position us to reduce this risk.
The upside presented by market risk is evident when
equity values rise, or interest rates move favourably.
Then the Group is well positioned to gain over and
above the benchmark, particularly in retail and
institutional asset management products and activities,
since fee income will rise faster than associated
expenses.
Business units exposed to downside market risk as a
consequence of the liabilities they have underwritten
are required to take account of the structure of
their asset and liability portfolios as well as the local
regulatory environment and Group policy requirements.
Actions used by individual business units to manage
market risk include asset liability matching, interest rate
swaps and hedges to manage interest rate risk, equity
hedges to manage equity risk and currency swaps,
currency borrowings and forward foreign exchange
contracts to mitigate currency risk.
114 Old Mutual plc
Annual Report and Accounts 2009
SIgnIFIcant RISKS to the old mUtUal gRoUp (contInUed)
Risk type
Risk as a threat and uncertainty
Mitigating actions and opportunities
Liquidity risk
The risk that available liquid assets will be insufficient
to meet changing market conditions, liabilities, funding
of asset purchases or an increase in client demands
for cash.
We aim to maintain a prudent level of liquidity
consistent with regulatory expectations.
Our Group-wide liquidity policy 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 Executive Committee providing additional
oversight and challenge.
By monitoring our liquidity position prudently,
we are well positioned to identify surplus liquid
assets available.
Operational risk
The risk arising from operational activities, for example
a failure of a major application, or losses incurred as a
consequence of negligence or fraud.
Taking greater operational risk rarely gives the Group
greater reward and therefore we aim to minimize our
operational risk exposure across the Group.
The Group is currently developing a strategic
risk management system which will increase our
understanding of the operational risks in the business
and facilitate the improvement in the controls to reduce
losses. The Group has purchased a database of
operational risk losses in other organisations, which
ensures we are proactive in mitigating risks that have
crystallised in other companies before they affect
Old Mutual. Operational risk is one of the metrics in our
risk appetite framework and is monitored with actions
taken if it approaches the limit.
Underwriting risk
We are exposed to underwriting risk by issuing
insurance contracts. The business units which incur
significant underwriting risk are Old Mutual Bermuda,
Old Mutual Specialised Finance, Old Mutual Life
Assurance Company of South Africa Limited, Nedgroup
Life Assurance Company Limited and Old Mutual
Financial Life Insurance Company (OMFLIC) which
provide long-term insurance and Nedgroup Insurance
Company Limited and Mutual & Federal, which provide
short-term insurance.
Our Group-level liability risk policy sets out the
internal controls and processes that we must follow
in long-term and short-term insurance. Business units
have more detailed underwriting policies. Actuarial
modelling is used to calculate premiums and monitor
claims patterns. The internal controls designed to
mitigate operational risks help ensure that we feed
robust data into our models. Analysis of MCEV plays
a key role in ensuring we are managing these risks
pro-actively.
In respect of long-term insurance, the risk of loss is
caused by insurance claim frequencies and sizes being
larger than expected. This includes the risk of mortality/
morbidity being higher than expected.
In banking, our risk management standards require
strict limits to be set in relation to underwriting limits,
and mandates the review of gross as well as net
exposures, to understand the impact of hedge failure.
With short-term insurance the risk relates to an
increased number of claims due to accidents or adverse
weather conditions.
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Old Mutual plc
Annual Report and Accounts 2009
115
RISK and ReSponSIbIlIty
RISK and capItal management
contInUed
■■ Group risk profile
The table below shows the significant risks to the Group, based on Group diversified economic capital.
Diversification accounts for risks within business units and between business units across the Group.
Old Mutual significant risks as a percentage of overall Group exposure
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Long‑term
savings
Banking
Mutual &
Federal
(short‑term
insurance)
US Asset
Management
Old Mutual
Bermuda
1. Credit risk
l■l
2. Market risk
l■l■
(Interest
and equity)
3. Business risk
l■l
4. Operational
risk
5. Underwriting
risk
l
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Negligible
Negligible
Negligible
l■
Hedge and
equity
Negligible
Negligible
Negligible
Negligible
Negligible
Negligible
N/A
N/A
Exposure to risk type but economic capital exposure less than 5% of Group’s diversified total
• Significant or principal risk to Group, with economic capital exposure between 5% and 10% of Group’s diversified total
• • Significant or principal risk to Group, with economic capital exposure more than 10% of Group’s diversified total
Credit risk
Business units are responsible for establishing
appropriate systems and governance structures
to ensure that they actively monitor credit risk in a
manner consistent with the level of credit risk they
face and in line with Group policies and principles.
Business units are responsible for ensuring their
credit risk exposures stay within the risk appetite
limits set by the Group.
Our in-house Risk Exposure Aggregation
System (REAS) allows us to monitor Group-wide
counterparty risk. It aggregates nominal exposures
reported by the business units but does not
collect any VaR-related data (such as probability
of default). In 2010, we will further enhance our
oversight of Group credit risk by implementing a
new counterparty exposure system through the
iCRaFT project.
The new counterparty exposure system will facilitate
a VaR approach to setting Group-level counterparty
exposure limits as well as providing the concentration
risk capital requirement for the Group’s internal
capital model. It will also allow more timely and
proactive monitoring of the additional risk arising from
the aggregation of counterparty exposures across
different business units and geographies.
The Group Executive Risk Committee monitors and
challenges accumulations of credit exposures across
the Group, arising due to same-name exposure held
in different business units. As at 31 December 2009,
the Group’s top exposures by sector are:
116 Old Mutual plc
Annual Report and Accounts 2009
Counterparty Exposures by Sector
31 December
2009
• Banks & Financial Services
30%
• National & Local Government 17%
• Real Estate
7%
• Telecommunications Services 6%
• Mining
4%
• Commercial Mortgage
Backed Securities
• Electricity
• Diversified Industrials
• Other
4%
3%
3%
26%
The two main sectoral exposures are both driven by
the inclusion of Nedbank’s banking book exposures:
>> As a bank, Nedbank inevitably has large
exposures to the other South African banks; this
sector also includes the Skandia Money Market
Fund and the financial sector corporate bond
portfolio of the US Life business
>> The exposure to government debt includes a
substantial amount of South African government
debt which Nedbank holds in respect of its
reserve requirements.
The main change in the sectoral exposures during
2009 has been a reduction in banking and financial
exposure, offset by an increase in government
exposure. This is a consequence of, inter alia, the
proactive de-risking of the US Life bond portfolio
through a shift out of corporate bonds into
US Treasuries.
Market risk
Market risk is the risk of changes in the value of our
financial assets or financial liabilities arising from
changes in equity, bond and real estate prices, credit
spreads, interest rates and foreign exchange rates.
Market risk arises differently across the Group’s
businesses depending on the types of financial
assets and liabilities held.
Market equity risk is the most significant market
risk type across the Group. We monitor our market
exposures for early identification and management
of these risks (see the ‘Risk appetite in action’
box on page 125 for further details). We conduct
separate analyses to understand the impacts on
both shareholder and policyholder assets.
In respect of the investment of shareholder funds,
equity price risks are addressed in the Group’s
various investment policies, which tightly limit the
opportunity for business units to invest their own
capital in equities or equity funds. As a result, the
shareholder assets invested to back the statutory
capital requirements across the Group are typically
invested in sovereign bonds and cash. There is
some remaining shareholder exposure to equity
markets within OMLAC(SA). To mitigate the risk
of falling equity markets adversely impacting the
shareholder capital position, we use extensive equity
hedging. We regularly evaluate the protection offered
by the hedges that we operate in order to decide
the appropriate level and extent of hedging that
we need.
Sensitivities to adverse impacts of changes in
market prices arising in our insurance operations
are set out in the Old Mutual market consistent
embedded value supplementary-basis information
section of this report (see page 340). For our
insurance operations, equity, property price,
credit spread and interest rate risk are modelled
in accordance with the Group’s risk-based capital
practices, which require sufficient capital to be held
in excess of the statutory minimum to allow us to
manage significant exposures in line with the Group
risk appetite.
Each of the Group’s business units has its own
policies, principles and governance to manage
its market risk in accordance with local regulatory
requirements. These are supplemented by
Group-level monitoring as part of the risk appetite
framework. The impacts of changes in market
risk are monitored and managed using sensitivity
analyses, through the business units’ own regulatory
processes, with reference to the Group’s risk
appetite framework, and by other means. This work
is complemented by the Group’s market consistent
embedded value reporting processes, which include
assessments of the sensitivity of our capital position
and embedded value to various market changes.
Business risk
A significant component of the regular management
information communicated at Group level relates to
ongoing measurement of the level of sales of each
business, the level of expenses in that business
against planned expenses and the expenses in
previous years, as well as the level of lapse and
surrender activity.
All new life assurance products with financial
guarantees within the Group are subject to
a rigorous approval process, culminating in
the Group Risk and Actuarial Director either
approving or rejecting the product prior to it
going to launch. In all cases there are a series of
product development committees and stringent
requirements which must be passed before the
new product can proceed to launch. Many of these
additional requirements have been introduced
following experience relating to the Old Mutual
Bermuda Variable Annuity product. All potential
risks to the Group as a result of writing the new
product are considered prior to the product being
escalated to the Group Risk and Actuarial Director
for approval. These risks include, but are not limited
to: investment, expense, surrender, mortality and
operational risk (including reputational effects)
impacts. An assessment of the cost of offering
the financial guarantee is also included. Extensive
scenario and stress testing is undertaken for all new
product developments, so that the new business
margin and market consistent value of new business
can be assessed under a range of different adverse
scenarios, including a worst-case scenario as well
as the base case. We also evaluate all new product
developments in light of our commitment to treat
customers fairly.
Quarterly Business Reviews chaired by Group with
each of the businesses, ensures regular dialogue
and oversight of business performance. At each
meeting business risk is monitored and, where
appropriate, actions are agreed to mitigate negative
trends. MCEV is a particularly useful tool that is
used to monitor ongoing experience as it emerges.
For further details on MCEV, see page 340 of this
report.
Insurance risk
The Group assumes insurance risk by issuing
insurance contracts under which it agrees to
compensate the policyholder or other beneficiary
if a specified uncertain future event affecting the
policyholder occurs. This risk includes mortality
Old Mutual plc
Annual Report and Accounts 2009
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RISK and capItal management
contInUed
and morbidity risk in the LTS business and a risk
of loss from fire, accident and other sources in our
short-term insurance business.
The table below shows our key insurance risks along
with risk management actions within the LTS and
short-term insurance businesses:
Key InSURance RISKS
Risk
Definition
Risk management
Underwriting risk
Misalignment of policyholders to the appropriate pricing
basis or impact of anti-selection, resulting in a loss.
HIV/AIDS risk
Impact of HIV/AIDS on mortality rates and critical illness
cover.
Medical
developments risk
Possible increase in annuity costs due to policyholders
living longer.
Changing financial
market conditions
risk
Lower swap curves and higher volatilities cause
investment guarantee reserves to increase.
Policyholder
behaviour risk
Selection of more expensive options, or lapse and
re-entry when premium rates are falling, or termination
of policy, which may force the sale of assets at
inopportune times.
Catastrophe risk
Natural and non-natural disasters, including war and
terrorism, could result in increased mortality risk and
payouts on policies.
Policy lapse risk
Where policyholders have an option to terminate the
policy, this could force the sale of assets at inopportune
times. This creates the risk of capital losses and/or
reinvestment risk if market yields have decreased.
Experience is closely monitored. For universal life
business, we can reset mortality rates. Underwriting
limits, health requirements, spread of risks and training
of underwriters all mitigate the risk.
Wherever possible we write products that allow for
regular repricing or are priced to allow for the expected
effects of HIV/AIDS. We require tests for HIV/AIDS and
other tests for lives insured above certain values: a
negative test result is a prerequisite for acceptance at
standard rates.
For non-profit annuities, improvements to mortality are
allowed for in pricing and valuation. Experience is closely
monitored. For with-profit annuity business, the mortality
risk is carried by policyholders and any mortality profit or
loss is reflected 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).
Experience is closely monitored, and policyholder
behaviour is allowed for in pricing and valuation.
We have a catastrophe stop loss and excess of
loss reinsurance treaty in place which covers claims
from one incident occurring within a specified period
between a range of specified limits.
Experience is closely monitored, and policyholder
behaviour is allowed for in pricing and valuation.
118 Old Mutual plc
Annual Report and Accounts 2009
Our insurance risk exposure is relatively low as we
effectively manage this through:
For more information on insurance risk, see p193 in
the notes to the accounts.
>> Diversification of the business over several insurance
classes and a number of geographical segments
>> The relatively weak correlation of insurance risk
with our other risk types, which reduces our
exposure after diversification
>> Maintenance and use of management
information systems which provide current data
on the risks to which we are exposed
>> Use of actuarial models to calculate premiums
and monitor claims patterns using past
experience and statistical methods
>> Guidelines for concluding insurance contracts
and assuming insurance risks, eg underwriting
principles and product pricing procedures
>> Reinsurance to limit our exposure to large single
claims and catastrophes
>> An effective mix of assets that back insurance
liabilities based on those liabilities’ nature and term.
Reinsurance plays an extremely important role in the
management of risk and exposure in our short-term
insurance business, 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 £6.3 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 (this is
based on a limit of R75 million for one event at an
estimated exchange rate of R11.90 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
>> Development risk – the possibility that the
amount of an insurer’s obligation may change at
the end of a contract period.
The majority of the Group’s general insurance
contracts are classified as ‘short-tailed’, meaning
that any claim is settled within a year after the
loss date. This contrasts with ‘long-tailed’ classes
where claims costs take longer to materialise and
settle. Our long-tailed business is generally limited
to personal accident, third-party motor liability and
some engineering classes; in total it comprises less
than 5% of an average year’s claim costs.
Operational risk
Operational risk represents approximately 10% of our
aggregate Group risk profile. This risk could result in
losses from internal failures relating to processing,
systems and people as well as losses relating to
external triggers such as flooding or retrospective
changes in legislation. By its nature, operational risk
is difficult to eliminate entirely. But we aim to keep it
to a minimum and certainly within our risk appetite as
we are unlikely to gain significant reward from taking
operational risk. That is why operational risk is one of
the metrics in our risk appetite framework.
Our highest operational risk exposures arise within
LTS because of its size relative to the other divisions
and business units, which are all currently within
their operational risk appetite.
The Group RCSA process places responsibility
directly onto line management for identifying,
monitoring and managing operational risk within
each business unit. This is supplemented by the
operational risk event identification and recording
process which was embedded across the Group
in 2009. The improvement in data will facilitate
identification of areas where controls need to be
more robust. Identifying the level of losses in relation
to a particular risk will start to help us assess
more accurately the potential impact of any further
occurrences and improve the accuracy of the RCSA
assessment. Our management of risk will only be
effective if the RCSA and loss event recording drives
management action, often in the area of process
re-engineering, to minimise the scope for recurrence.
The RCSA process has helped us identify a
significant number of operational risks ranging from
failures in our underwriting processes to the effects
of a pandemic on business operations. These have
been assessed and prioritised, and the principal
operational risks we face are listed in the table on the
next page. These are reassessed and monitored by
the GERC and Group Executive Committee at least
quarterly.
One key factor in our future success will be our
ability to analyse the increased level of risk data
collected. This is dependent on IT capability.
We recognise that now is the right time to review
our risk management system to gain the greatest
benefit and after much due diligence on a number
of systems we have chosen Open Pages as our
long-term strategic system. The new system is now
in the development phase: roll-out starts in Q2 2010
and is scheduled to complete in 2011. We expect
operational risk management to become increasingly
robust throughout H2 2010 as the system embeds.
Old Mutual plc
Annual Report and Accounts 2009
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RISK and capItal management
contInUed
Key
mitigations
To manage these change initiatives, we
appointed a Head of Strategic Implementation
in February 2009 as part of the Group
Executive Committee and set up a Strategic
Implementation Department to monitor and
guide the strategic programmes. As part of this
process regular progress reports are made to
the Group Executive Committee.
We set new strategy in 2009, which
identified a number of change initiatives to
position the Group for sustainability and
growth in the future.
This risk is increasing due to the number
of change initiatives that the Group is
undertaking. These were agreed and
prioritised at the beginning of the year by
the Group Executive Committee. Examples
include iCRaFT and other projects to enable
the consolidation of our LTS business into a
single operating structure to unlock value.
To deliver these changes some 20 individual
strategic implementation programmes have
been set up to implement them in stages,
spanning organisational, functional and
geographic boundaries.
This risk is increasing for the Group for a
number of reasons.
Old Mutual is well positioned to meet increased
regulatory expectations.
2009 market events have increased
regulatory expectations across the industry,
with particular emphasis on capital and
liquidity issues.
Dedicated Group and business unit compliance
teams closely monitor new and changing
regulatory developments and liaise regularly
with their local regulators.
An increase in consumer activism in many
of the jurisdictions where we operate is
resulting in challenges from consumers
about whether business is conducted fairly.
The Group provides a co-ordination role in
relation to the FSA, which is the lead regulator
for Old Mutual plc under the Financial Groups
Directive.
The iCRaFT project is designed to deliver, as a
minimum, all Solvency II requirements, as part
of an integrated business change programme.
As regulators have sought to understand
how businesses in their territory have
responded to market falls and liquidity
pressure − and as regulators respond to
consumer pressure − we have seen an
increase in regulatory visits and interaction
across the Group.
In Europe, Solvency II will challenge the
industry to further enhance and integrate
risk and capital models.
The main operational risks facing the group are:
Key opeRatIonal RISKS
Risk
description
2009
trend
2009
commentary
Strategy/change risk
This was identified as a
principal risk by the Board and
Group Executive Committee.
It arises if the Group is unable
to effect the necessary
culture shift to implement its
change initiatives effectively,
in response to the changing
market environment.
Regulatory risk
Regulatory requirements
and changes are increasing,
and are likely to continue to
do so over the time ahead:
compliance with the new
Solvency II requirements is due
in 2012. If we do not correctly
assess the impact of these
changes or implement them in
a timely manner a fine, penalty
or regulatory censure could
result.
120 Old Mutual plc
Annual Report and Accounts 2009
Key opeRatIonal RISKS (contInUed)
Risk
description
2009
trend
2009
commentary
Key
mitigations
Processing risk
Our businesses rely on
their systems, operational
processes and infrastructure
to help process numerous
transactions daily across
various different markets.
With a large number of such
processes comes significant
operational risk arising from
breakdowns in the processes,
human error or IT systems
issues.
IT infrastructure
During 2009 a Group-wide
IT benchmarking exercise
identified some areas for
improvement across our IT
infrastructure and control
environment. There is a risk
that if these are not completed
within an appropriate timescale
we could experience problems
with the current IT systems.
HR risk
This was identified as a
principal risk in 2008. The
demand for staff in a number
of key disciplines in the
industry has increased,
particularly driven by increasing
regulatory change, which could
lead to Old Mutual employees
resigning and joining
competitors.
Implementation of the operational risk
event reporting process during 2009 has
highlighted that this risk is crystallising
regularly. This has led to a number of actions
and improvements to the framework which
should embed and start to reduce losses
in 2010.
We have established a number of Group
strategic implementation programmes
to review, evaluate and document key
business processes, facilitating a thorough
understanding of the relationships between
these processes and highlighting areas where
process or control improvements are required.
The consolidation of our long-term savings
business presents opportunities to further
enhance our IT infrastructure and exploit IT
synergies. This work started in 2009.
The development of a number of Group-
wide IT solutions has helped us carry out
further work on the current infrastructure
and future IT strategy. This is helping to
reduce risk in this area.
During 2009 our turnover of key
management reduced. Market conditions
and the reorganisation of the business
promoted stability and contributed towards
this reduction.
The new risk management system that we are
implementing in 2010 will categorise risks by
business process, enabling us to assess more
readily the level of risk in each process.
We have established a Group strategic
implementation programme to address
these issues and identify and implement IT
synergies across the Group. This will be further
supported by the iCRaFT initiative, and will be
tested on the risk management system as one
of the initial Group-wide IT roll outs.
Group-wide management development
programmes and formal succession planning
are in place.
We have established a Group strategic
implementation programme to review
remuneration across the Group. This
will introduce more consistent practices
and address the new FSA remuneration
requirements.
■■ Other risks impacting the group risk
profile
Liquidity risk
Our liquidity position remains sound at both Group
holding company and business unit level. The Group
holding company is funded through a combination
of internal cash resources and undrawn bank credit
facilities. Business units’ liquidity needs are met from
their own internal resources, and where appropriate,
either locally arranged external lines or funding lines
from the holding company.
In aggregate the Group has £1.2 billion liquidity
headroom, comprising £447m of cash and £773m
of undrawn committed facilities; this includes the
proceeds of a £500 million senior bond issued last
October.
Financial Groups Directive surplus
As part of the Group’s regular and ongoing risk
appetite submissions, business units are asked to
assess the impact of various adverse scenarios on
their statutory surplus and ultimately their FGD surplus.
This allows the Group to quickly identify those drivers
key to maintaining the target level of FGD surplus.
Management has access to a heat map which allows
continuous monitoring of the surplus position in our
changing economic environment.
Old Mutual plc
Annual Report and Accounts 2009
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RISK pRoFIle by Segment
■■ Long-Term Savings (LTS)
long‑teRm SaVIngS (ltS) RISK pRoFIle
Credit
Market
(equity & interest)
Business
Operational
Our LTS businesses represent a significant part of
the Group’s earnings and capital (see the segmental
disclosures in this report) and the aggregation of
the primary risks to Old Mutual is naturally greatest
within this segment. The most significant risks in LTS
overall are business, market (equity and interest) and
credit risk.
LTS has an inherent resilience against specific
risks because its product and geographic diversity
spread risk across its various businesses. The Group
exposures within LTS break down as follows:
LTS exposures as a percentage of overall group exposure
R
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Business risk
Market equity
risk
Credit risk
Operational risk
South
Africa and
Emerging
Markets
l
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Wealth
Management
Nordic
Retail
Europe
US Life
l
Negligible
l
Negligible
l■l
Negligible
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.
Exposure to risk type but economic capital exposure less than 5% of Group’s diversified total
• Significant or principal risk to Group, with economic capital exposure between 5% and 10% of Group’s diversified total
• • Significant or principal risk to Group, with economic capital exposure more than 10% of Group’s diversified total
LTS business risk
Business risk is the risk that the LTS business
performance will be below plan and therefore
negatively impact on earnings and capital.
The drivers that could result in this include negative
variances in new business volumes, new business
margins, lapse experience and expenses.
Lapse risk includes the risk that policyholders
surrender their policies earlier than expected,
resulting in capital strains. If large numbers of
policies lapse, the business is exposed to losses
on up-front commissions, and also to per-policy
maintenance costs increasing above pricing
assumptions, resulting in losses as policyholder
charges fail to cover the ongoing costs of
maintenance. Early surrender of policies can also
crystallise unrealised losses for portfolios where
market values are trading below book values or
up-front commissions not fully earned by distributors
cannot be recouped. Within the Group, we examine
the impact on earnings and capital by stress testing
both increased and decreased lapse rates in order
to understand these impacts.
122 Old Mutual plc
Annual Report and Accounts 2009
RISK and ReSponSIbIlIty
RISK pRoFIle by Segment
Lower than anticipated new business volumes
can lead to acquisition expense overruns, resulting
in reduced earnings and shareholder capital.
By contrast, significantly higher than expected new
business volumes can consume large amounts of
capital and may risk capital strain. Within the Group,
we examine the impact on earnings and capital
by stress testing both increased and decreased
new business volumes in order to understand
these impacts.
varies according to the type of contract. Where
contracts are related purely to longevity, mortality
and morbidity risk, there is typically no sharing of
better-than-expected or required investment returns.
Under unit-linked and/or market-linked contracts,
policyholders receive the full investment return on
the underlying assets, less any applicable fees, and
the only residual market risk relates to the fluctuation
in asset-based fees as a result of fluctuations in the
underlying assets.
Business risk is particularly significant as a
proportion of total risk, in respect of the Group’s
unit-linked and asset management businesses,
where there are few other significant risks relating to
market, credit or insurance risk. Hence these risks
comprise a large proportion of total risk in Wealth
Management, Nordic and Retail Europe. While these
risks are also important in US Life and South Africa &
Emerging Markets, they represent a lower proportion
of overall risk, given the market and credit-related
risks in US Life, and the market-related risks in
South Africa & Emerging Markets.
We have a number of mitigating actions in place to
monitor and contain business risk.
During 2009 we took significant actions to reduce
the cost base of all Group companies, particularly
the Skandia UK and US Life businesses. This
was also a major driver behind the recent Group
restructuring as we aim to give scale to our Retail
Europe businesses by combining them into a
single unit. In addition, our ongoing platform
strategy should ultimately result in cost savings.
The changes in the US Life business were made in
the first four months of 2009, and the risk reduction
was quickly evident in the half-year economic
capital calculations.
Within the US Life business we took significant
steps to control the impact of lapses on the
crystallisation of unrealised losses by building up
significant cash holdings. These enabled us to
withstand a temporary increase in terminations in
the first half of the year without having to crystallise
losses in the investment portfolio. A combination
of a normalisation in terminations over the second
half of the year and a reduction in corporate bond
spreads reduced the risk and quantum of potential
investment losses, which in turn allowed US Life to
reduce its cash holdings. This is part of the ongoing
monthly activity of the US Life Oversight Committee.
We also run a number of incentive programmes to
encourage lower surrender levels in the business.
LTS market risk
The extent of the Group’s discretion as to the
allocation of investment return to policyholders
In most other classes of investment-related
contracts, investment returns are attributed to,
or shared with, policyholders, in the form of vesting
and/or non-vesting bonuses. Non-vesting bonuses
offer an option for management action, as they can
be withheld in adverse circumstances.
Smooth bonus products constitute a significant
proportion of South African business. We pay
particular attention to declaring bonuses in a
responsible manner, retaining sufficient reserves to
meet our promise to clients that returns will be less
volatile over time than purely market-linked returns.
Investment returns not distributed after deducting
charges are credited to bonus-smoothing reserves,
which are used to support subsequent bonus
declarations.
For discretionary participating business underwritten
in South Africa, there are well-established
management actions. Principles and Practices of
Financial Management clearly set out how risks and
surpluses are shared, how bonuses are declared,
and how these classes of businesses are managed
− including the management actions that will be
taken in adverse conditions. These actions are
sanctioned and signed-off by the OMLAC(SA) Board
and are disclosed to the Financial Services Board of
South Africa, OMLAC(SA)’s regulator.
In South Africa the stock selection and investment
analysis process is supported by a well-developed
research function. For fixed annuities, we manage
market risks where possible by investing in
fixed-interest securities with a duration closely
corresponding to those liabilities. Market risk on
policies that include specific guarantees and where
shareholders carry the investment risk resides
principally in the OMLAC(SA) guaranteed non-profit
annuity book, which is closely matched with gilts,
semi-gilts and high quality corporate bonds. Other
non-profit policies are also suitably matched, based
on comprehensive investment guidelines. Market
risk on with-profit policies, where investment risk is
shared with investors, is mitigated by appropriate
bonus declaration practices.
Old Mutual plc
Annual Report and Accounts 2009
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RISK pRoFIle by Segment
contInUed
In US Life’s fixed annuities, policyholder option risk is
managed by investing in fixed securities with durations
within a half-year of the duration of the liabilities. Cash
flows in any period are closely aligned to ensure any
mismatch is not material. In addition, we carry out
extensive interest rate scenario testing, as required
by US regulatory authorities, to ensure that the
amounts reserved are sufficient to meet the guarantee
obligations. The guaranteed returns provided under
equity-indexed annuities are hedged to ensure a close
matching of option or futures pay-offs to the liability
growth. Hedging is largely static with minimal trading.
Variable annuities are no longer written and for those
policies in force the guaranteed returns provided
are dynamically hedged. Hedging positions are
reviewed daily and readjusted as necessary. In our US
businesses we include an assessment of our ability
to hedge market movements and the effectiveness of
these hedging programmes. Hedge ineffectiveness
risk is the risk of underperformance of the hedge
assets in comparison with the associated liabilities, in
respect of the components that we hedge. This can
arise from less than complete hedging, such as failure
to hedge higher-order derivative measures and from
non-hedgeable items such as basis risk.
Within OMLAC(SA) and US Life, reductions in
interest rates can lead to an increase in the value
of investment guarantees and options given to
policyholders, causing a reduction in earnings and
shareholder capital. We undertake regular and
ongoing activity related to interest rate and equity
hedging to mitigate this risk.
Real estate risk for the Group is low compared
with other risk categories. It is noteworthy only
in the OMLAC(SA) business − where a portion
of policyholder funds is invested in real estate to
generate outperformance and diversify the asset
portfolio − and in Nedbank, where real estate assets
are held as collateral backing mortgage loans on
residential and commercial real estate.
LTS credit risk
The US Life business is exposed to credit risk by
the substantial corporate bond holdings and asset
backed securities within its investment portfolio.
The risk relates not only to defaults or impairments
but also to the possibility of widening credit spreads
adversely impacting the market value of the
investment portfolio. All these risks may create a
liquidity need to bridge the gap between benefits
payable on termination and realisable asset values.
We actively monitor and manage the US Life portfolio
to mitigate credit risk. We appointed a new Chief
Investment Officer in US Life, who has significant
credit management experience. During 2009 we took
action to rebalance the composition of the US Life
investment portfolio. At the year end, the investment
grade of the portfolio has improved although we
continue to have an over-exposure to corporate
bonds. There has been substantial improvement
in unrealised losses on the portfolio, which as of
31 December stands at $497 million, down from
$2,844 million in March 2009. We expect to see
continued improvement in this area during 2010.
US Life: Composition of the investment portfolio
$m
Treasury/Agency
CMBS/RMBS/ABS
Corporate bonds
Cash/short-term
Total investments & securities
31 December 2009
31 December 2008
505
2,900
11,947
839
16,191
351
3,739
9,682
1,218
14,990
124 Old Mutual plc
Annual Report and Accounts 2009
In other business units, shareholder credit-related
exposure is predominantly relevant sovereign debts.
We are currently enhancing the process and
systems infrastructure that support aggregation of
credit exposures as part of the iCRaFT programme
to ensure they are fully Solvency II compliant, with a
target completion date of Q1 2010.
In line with Scandinavian market practice,
SkandiaBanken (Skandia Nordic’s banking arm)
provides a full-range online retail banking service
to customers in Sweden and Norway. Its lending
portfolio has been built on sound lending practices
and mostly (95%) comprises mortgages with
excellent creditworthiness and low loan-to-value
ratios (38% at December 2009); the residual
exposure (5%) is comprised of unsecured loans.
The bank has strong liquidity and was consequently
only marginally affected by the market turbulence
in 2009. Its credit loss ratio (credit losses as
a percentage of the opening lending balance)
remained low at only 0.14%.
Businesses outside Group risk appetite: US Life and Old Mutual Bermuda
Measured against the risk appetite limits set by the
Group Executive Risk Committee and ratified by
the Group Executive Committee, all the Group’s
businesses are within the Group’s appetite except
for US Life and Old Mutual Bermuda. It is worth
noting that:
>> Both these business units are managing
their positions to reduce the risk in their
business gradually, within their capabilities and
minimising loss of value
>> An Oversight Committee has been established
for each business to monitor risk exposures,
help to optimise risk-taking within the business
and track progress monthly. The Committee
members include the Group Risk and Actuarial
Director, the Group Finance Director and
relevant executives from the companies
concerned
>> Credit risk is actively managed in US Life,
to improve the quality of the investment
portfolio holdings while trying to avoid realising
large losses by trading out of securities with
significant unrealised losses at inopportune
times; we have made significant progress in
achieving this
>> Asset/liability management has also been
improved, with significant effort being spent
on identifying the assets appropriate to
different product lines and ensuring investment
strategies match the profile of those liabilities
>> The Oversight Committees have also been
directly involved in making decisions relating
to the closure of unprofitable product lines and
those deemed to be excessively risky relative
to the Group’s risk appetite
>> We monitor Old Mutual Bermuda’s hedging
and related risks daily, and the company has
been closed to new business to prevent any
increase in guarantee exposures brought on by
growing the Variable Annuity book. Over time
we expect exposures to reduce significantly
as policies mature and roll off the book.
We continue to monitor hedging activity closely
on both an actual and notional basis
>> In September 2009 the decision was taken
to progressively and selectively remove
the majority of the hedge positions on this
business. This decision was taken in light
of rising markets globally, which increased
the liquidity risk inherent in our short futures
strategy and reduced market risk and our
improved capital position which allowed us to
better absorb fluctuations in guarantee costs.
It also helped us save on substantial hedging
costs at a time of rising markets. We continue
to monitor our “notional hedge” as rigorously
as we would monitor any hedge which was
actually in place, and therefore should markets
begin to fall again we are in a position to
replace protection rapidly. It is likely that we will
maintain a dynamic approach towards hedging
in this business, by varying the extent of
hedges over time based on market conditions.
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Annual Report and Accounts 2009
125
RISK and ReSponSIbIlIty
RISK pRoFIle by Segment
contInUed
■■ Banking
banKIng RISK pRoFIle
Credit
Market
(equity)
Business
Operational
■■ NEDBANK
Banking credit risk
As our primary banking business, Nedbank carries
a substantial proportion of our credit risk through
its lending and other financing activities (it should
be noted that, due to the nature of its investment
portfolio, US Life also retains a significant proportion
of our credit risk).
Nedbank manages credit risk exposures through
its credit risk management framework, which
encompasses comprehensive credit policies, limits,
governance structures and internal risk models that
are fully Basel II compliant and in line with Group
policies and practices. To address the changing
conditions impacting on credit risk this year,
Nedbank has:
Nedbank’s financing activities contribute to
its significant credit risk exposure. We expect
impairment levels to remain stable or even start
to reduce during 2010. This is due to a number
of factors, including a slowdown in lending, the
introduction of tighter lending criteria and the
stabilisation of economic conditions.
Nedbank maintains a well diversified funding deposit
base supporting a strong loan to deposit ratio.
Nedbank has remained focused on attracting its
share of the deposit base. The bank continues to
pursue opportunities to lengthen and diversify its
funding base, maintaining a strong regional presence
with little reliance on foreign funding. The bank
also has an immaterial reliance on securitised and
interbank funding – facilitated by a strong retail and
commercial deposit base.
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 a number of factors including
conservative credit underwriting practices which
have culminated in a high-quality, well collateralised
wholesale book as well as further tightening of
credit criteria in our retail book in anticipation of the
economic downturn. This has resulted in Nedbank’s
reasonable credit concentration risk levels in relation
to the South African market, with counterparty credit
risk being restricted to non-complex, vanilla banking
transaction.
>> Closely monitored credit risk loss ratios and
other key indicators through its credit risk
monitoring committees
>> Tightened credit granting criteria: for example
on home loans it has tightened loan-to-value
criteria, increased acceptance standards and
where appropriate restructured credit risk
agreements
>> Tightened controls over large payments to and
from global banks
>> Increased staff to administer collections.
Banking market risk
The principal market risks in the Group’s banking
operations arise from:
>> Trading risk in Nedbank Capital
>> Banking book interest rate risk from repricing
and/or maturity mismatches between on and
off-balance sheet components in all banking
businesses.
We use a comprehensive market risk framework
to ensure that market risks are understood and
managed. Governance structures are in place
to achieve effective independent monitoring and
management of market risk.
Nedbank has a low level of assets and liabilities
exposed to the volatility of IFRS fair value
accounting; a small market trading risk in relation
to total bank operations; relatively low banking
book interest rate risk by international standards
126 Old Mutual plc
Annual Report and Accounts 2009
and low equity (investment) risk exposure, having
successfully completed the non-core asset
disposal strategy in 2007. Nedbank has low
currency translation risk due to its strong regional
focus and its relatively small offshore structure is
deemed appropriate and optimal, given its current
international strategy.
The Group’s capital adequacy ratios increased
significantly in 2009 and continued to be maintained
above the group’s target ratios. Ongoing focus will
be given to increasing Core Tier 1 capital and the
Tier 2 regulatory capital remains well diversified with
no maturing subordinated debt until 2011.
Trading risk
We measure market risk exposures from trading
activities at Nedbank Capital using value-at-risk
(VaR), supplemented by sensitivity analysis and
stress-scenario analysis, and set limit structures
accordingly.
The VaR measure estimates the potential loss
in pre-tax profit over a given holding period for a
specified confidence level. The methodology is a
statistically-defined, probability-based approach that
takes into account market volatilities as well as risk
diversification 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% VaR
number used by Nedbank represents the overnight
loss that has less than 1% chance of occurring under
normal market conditions. By its nature, VaR is only
a single measure and cannot be relied upon as a
means of measuring and managing risk on its own.
Banking book interest rate risk
This arises at Nedbank 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 fixed-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
>> 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 point-in-time interest income stress
testing for parallel interest rate moves over a
forward-looking 12-month period.
Banking Business risk
Business risk is the risk of adverse outcomes
resulting from a weak competitive position or from a
poor choice of strategy, markets, products, activities
or structures. Major potential sources of business
risk include revenue volatility, owing to factors such
as macro-economic conditions, inflexible cost
structures, uncompetitive products or pricing, and
structural inefficiencies.
The South African economy has emerged from
recession in the third quarter of 2009, posting only
modest growth over the quarter, but the recovery
gained some traction in the final quarter of 2009 as
real GDP grew by 3.2%. The improved performance
was mainly due to a rebound in manufacturing
exports on the back of strong demand for
commodities from China and a modest recovery in
most major industrialised countries. However, some
segments of the domestic economy are still under
significant strain.
In the short term, the recovery is expected to
continue to be hampered by high unemployment
and high household debt levels resulting in a
protracted recovery in retail banking. While
wholesale banking, which has been resilient, even
at the peak of the interest rate cycle, is showing
increased signs of credit stress, the Group’s own
experience is still within expected and acceptable
levels.
The fluctuations in earnings captured in business
risk are those not attributable to the influence of
other risk types. The major driver or input used in
the earnings-at-risk methodology is a time series of
historical profit and loss, cleansed of the effects of
other risk types. The volatility of this time series of
historical profits and losses becomes the basis for
the measurement of business risk.
Nedbank’s operational risk strategy and objectives
are in line with the Basel II framework. Nedbank will
apply for regulatory approval to transition its current
operational risk management framework capabilities
from the Standardised Approach to the Advanced
Measurement Approach in 2010.
Nedbank Group actively manages business risk
through the various management structures, as set
out in the Enterprise Risk Management Framework,
and an earnings-at-risk methodology similar to the
Group’s risk appetite metrics.
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Annual Report and Accounts 2009
127
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RISK and ReSponSIbIlIty
RISK pRoFIle by Segment
contInUed
■■ Mutual & Federal
For Mutual & Federal, the second-largest short-term
insurer in South Africa, underwriting risk is the
primary concern. Adverse weather patterns and
large numbers of commercial fires impacted our
underwriting profitability in the first half of the
year, but the recovery in the second half reflected
the fundamental soundness of our portfolios,
our diligence in rate setting and our continuing
adherence to responsible underwriting standards.
The potential sale of Mutual & Federal by the
Old Mutual Group caused uncertainty in the business
during 2009. This was coupled with the environmental
challenges facing the industry and challenging internal
projects, such as introduction of a single insurance
administration system. The decision to make Mutual
& Federal a wholly owned subsidiary of Old Mutual
provided confidence to the local team. In 2010
management focus is on stabilising the operating
platform and responding to changes within the market
to continue to offer growth, profitability and value to
clients.
■■ US Asset Management
Since this is an asset management business, market
volatility presents the greatest risk. We conduct our
asset management activities in an agency capacity,
hence clients take both the upside and downside
risk in their portfolios. Our asset management
affiliates are exposed to a second-order risk in
respect of their asset-based management fees
and performance-related fees. Over the year, we
felt the impact of the financial crisis in a lower
level of asset-based fees and substantially lower
performance fees.
■■ Old Mutual Bermuda
(Legacy business)
In Old Mutual Bermuda, reductions in interest rates
can cause more of the investment guarantees and
options within its deferred annuity business to be
in-the-money, reducing earnings and shareholder
capital. We maintain regular interest rate hedging
activity to mitigate this risk.
The guaranteed returns provided under
equity-indexed annuities are hedged to ensure a
close matching of option or futures pay-offs to any
liability growth. Hedging is largely static with minimal
trading.
Variable annuities are no longer sold, and for in
force policies, the guaranteed returns provided are
dynamically hedged. We review hedging positions
daily to readjust them as necessary. We include
an assessment of our ability to hedge market
movements and the effectiveness of these hedging
programmes. Hedge ineffectiveness risk is the risk
of hedge assets underperforming in comparison
with the associated liabilities. This can arise from
less than complete hedging, such as failure to
hedge higher-order derivative measures and from
non-hedgeable items such as basis risk. The
ongoing monitoring of hedge activity in Old Mutual
Bermuda ensured that the effectiveness in respect of
components hedged averaged 96% over 2009.
Old Mutual Bermuda remains outside our Group risk
appetite and is being actively managed to mitigate
losses. For further details of the action we are taking
to mitigate risk in Old Mutual Bermuda, please see
page 125.
■■ Summary
Old Mutual has made considerable progress in
2009 in effectively managing risk and capital in order
to create value. This is a particular achievement
given the past year’s volatility in financial markets.
Our progress is due to the continued focus
on group wide risk management through our
Strategic priorities and iCRaFT programme.
The risk environment will continue to evolve, and
we embrace this journey. We are developing and
implementing further tools to allow us to optimise
business decisions and take a forward-looking view
of integrated risk and capital management.
The Board believes that current capital and
liquidity levels are adequate for a Group of our
size and nature. It also confirms that the Group’s
internal systems of control, risk management and
governance have operated as intended during 2009
and are therefore effective.
128 Old Mutual plc
Annual Report and Accounts 2009
RISK and RESPOnSIBILITY
RESPOnSIBLE BUSInESS
InTROdUcTIOn
Sustainable growth through responsible business
The management of our social and environmental impacts is a
central part of what it means for us to be a responsible business
and deliver long‑term sustainable success.
Don Schneider
Group Human Resources Director
Group Executive Responsible for Corporate Responsibility
n The year in brief
> Completed our second public submission for the
Carbon Disclosure Project
> Won five customer service awards
> Invested £10.1 million in local community programmes
> Set up the Group Responsible Business Committee
> Formalised our Responsible Business Policy
> Retained our membership of FTSE4Good Index
and JSE’s Socially Responsible Investment Index
1 Helen Wilson
Head of Corporate
Responsibility
2 Helen Casey
Head of Marketing
3 Patrick Bowes
5 Martin Murray
7 Steve Lock
Head of Investor Relations
Group Company Secretary
Head of Financial Crime
Prevention and Security
4 Sam Brown
6 Don Schneider
Head of Risk, USA, Nordic
and Retail Europe
Group Human Resources
Director
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Annual Report and Accounts 2009
Annual Report and Accounts 2009
129
129
RISK and RESPOnSIBILITY
RESPOnSIBLE BUSInESS
InTROdUcTIOn
cOnTInUEd
■n Broader commitment to
responsible business
In parallel with the changes to our governance and
risk structures we have continued to look at the
bigger picture and deliver on the commitments
we have made as a Group. This has included our
ongoing public commitment to addressing climate
change through our support for the work of the UN
as a signatory to the Copenhagen Communiqué.
By better understanding our own impacts through
our second public submission to the Carbon
Disclosure Project we have been able to implement
carbon reduction strategies across the Group.
We have also continued to pursue the principles
outlined by the UN Global Compact on human
rights, labour, environment and anti‑corruption.
During 2009, despite the global recession, we also
maintained our investment in the communities and
societies in which we operate − particularly in South
Africa, where we continue to play a vital role in the
nation’s economic transformation.
■n Stronger stakeholder engagement
Talking to our stakeholders, and understanding
what matters to them, is always important; and it
has never been more important to maintain ongoing
dialogue and effective engagement than it was in
2009. We spent a lot of time and effort making sure
that all our stakeholders, particularly customers
and employees, had the information they needed.
In 2010 we will be expanding the number and
range of stakeholder dialogues, and formalising
this process to ensure we focus on the issues and
impact areas that drive sustainable growth.
■n The future
Getting the right governance and risk management
structures in place has been an important step
forward for us in 2009. But we know there is still
much for us to do. This year promises to be an
exciting one, and we believe we are well positioned
to continue achieving our aim of sustainable growth
through responsible business.
Don Schneider
Group Human Resources Director
■n Ensuring sustainable growth
Without doubt, 2008 and 2009 have been two
of the most challenging years that many of us in
the financial services industry have experienced.
But a sharp shock can provide necessary focus.
We have used this experience to re‑evaluate the
drivers behind our vision of delivering long‑term
sustainable success.
In the past year we have taken time to re‑examine
in particular what it means to be a responsible
business and how we go about operating as one.
We have not only developed new governance and
management structures to deliver consistency
across the Group; we have also considered
how to build greater trust with our stakeholders.
Our progress so far is evidenced by the fact
that in 2009 Old Mutual South Africa was voted
number one for ‘Corporate Reputation’ by Global
Reputation Pulse and Nedbank was voted ‘Socially
Responsible Bank of the Year’ at the African Banker
Awards. As we move forward, I firmly believe
that it is not enough to manage the risks we face
related to our social and environmental impacts:
our future success depends on how we can create
opportunities by taking a more proactive approach.
■n Strengthening governance
and risk management
During 2009, strengthening our governance and risk
processes across the Group has been one of our
strategic priorities. The details of this are explained
in the risk section of the report but integrating
the management of our social and environmental
impacts into our approach was a central part of this
process and will continue to be a focus for 2010.
In 2008 we made a commitment to set up a new
forum to focus on these issues; in 2009 we set up
our Responsible Business Committee, which I chair.
Through me, this new governance structure reports
directly into the Group Executive Committee and
gives the Group leadership and direction on being a
truly responsible business.
In addition to our new governance structure for
responsible business, we have also developed
our Responsible Business Principles into a
Group‑wide policy: further details can be found in
the sections that follow. This policy is now effective
for all business units, driving greater consistency
across the Group. For the first time, it includes a
procurement policy defining what we expect of our
suppliers and what our suppliers can expect from
us, now and in the future. As we move forward we
plan to revisit the policy regularly to ensure it meets
both our, and our stakeholders’, rising expectations.
130 Old Mutual plc
130 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
RISK and RESPOnSIBILITY
OUR aPPROacH TO RESPOnSIBLE
BUSInESS
Being a responsible business means pursing commercial success in ways
that honour ethical values and respect people, communities and the natural
environment. It includes making decisions that fairly balance the claims of relevant
stakeholders. Our Responsible Business Policy sets out our top level commitment
to operating responsibly and is structured around five key areas which we have
determined are most material to our business, namely the customers, employees,
environment, society and suppliers. Details of the policy and our activities in these
key impact areas in 2009 can be found in the sections that follow.
OUR STaKEHOLdERS and aPPROacH
TO RESPOnSIBLE BUSInESS
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> provide high level
of service
> provide appropriate
advice
> prevent financial
crime
Our
Stakeholders*
Suppliers
> develop strong
relationships
> factor in environmental
and social impacts
> act fairly and honestly
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> develop employee
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> safeguard employee
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> provide safe and
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> support development
in local communities
> promote financial
education and inclusion
> manage impact
of investments
Environment
> minimise environmental
impact
> engage employees
> manage impact
of investments
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*Customers, shareholders, employees, local communities, regulators, suppliers, NGOs.
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Annual Report and Accounts 2009
Annual Report and Accounts 2009
131
131
RISK and RESPOnSIBILITY
CuSTOmERS
Providing excellent service is critical to retaining
our customers through tough and uncertain
economic times.
RESPOnSIBLE BuSInESS POLICY:
CuSTOmERS
The Group’s ability to manage and grow its customers’ investments is
a source of its value as a business, business units must:
>> Endeavour to deal with customers in a way that is open, honest
and fair;
>> Give the appropriate advice where permitted, to grow customers’
assets in a way that meets their needs;
>> Sell and promote the Group’s financial products in a way that is
clear and transparent;
>> Ensure that they provide clear information to customers about
how their funds are invested;
>> Facilitate and listen to customer feedback and act on it;
>> Rectify any errors that affect customers as quickly as possible
(that are identified by the Group and are within its control).
We provide over 12 million customers internationally
with long‑term saving products, asset management,
banking and short‑term insurance products and
services.
If we are to manage their financial requirements well,
we must understand their needs and provide them
with accurate advice, the most suitable products
and good service. This means working with all our
customers – personal and business − in a way that
is open, honest and respectful. At a time when the
wider financial sector is under close scrutiny, this is
more important than ever.
We continue striving to deliver high levels of
customer service. All our businesses have clearly
communicated processes enabling customers to
give feedback on the services we provide, so that
we can respond to any problems promptly and
effectively.
In 2009, key elements of good customer service
included:
>> Making sure our customers were up‑to‑date
with developments within our business and
across the sector;
>> Providing financial advice at a time when
customers were most likely to need it;
132 Old Mutual plc
Annual Report and Accounts 2009
>> Consolidating our products to offer our
customers a clearer and more efficient service.
In 2010 we will continue refining our products and
businesses as we try to give our customers value for
money and transparency, while offering the financial
protection, advice and support that they need.
So how did we address these core customer issues
in 2009?
■■ Providing regular communication
We need to make sure our customers understand
how we have responded to the challenges that
the market situation has posed and how they are
affected by what has happened. In 2009 we held
about 25% more meetings with the companies that
invest in us, compared with 2008. We expect a
similar level of interaction in 2010. Across the Group,
we made sure our customers were kept up‑to‑date
with emerging issues and latest developments.
In most of our business units we have reviewed
our customer communication strategies and
expanded our activities to include additional emails,
e‑newsletters, seminars, blogs, meetings, videos,
Q&A sessions and letters from CEOs. These tools
have enabled us to explain to our customers how
our businesses have been affected by the financial
crisis, specific portfolio developments, market
changes and performance across the year.
■■ Providing financial advice and
assistance to our customers
Old Mutual has a long history of providing financial
tools, training and advice to corporate and individual
customers to help increase financial literacy levels,
improve financial management and help our
customers to understand our products and see
how to benefit from using them. Providing this
support across the Group was more important
than ever in 2009.
Our customer service centres provide appropriate
advice across all our business units. When relevant,
we provide free seminars to help advisers prepare
for changes in the regulatory environment. In many
of our businesses we provide additional support
and free management seminars for our small
business customers. In 2009, for example, Skandia
UK launched a new online financial planning tool
enabling advisers to demonstrate how to maximise
tax‑efficient withdrawals from collective investments
and investment bonds.
■■ Improving product offering
and service
In 2009 we reviewed the products and services we
offer across many of our business units to ensure
that what we offer our customers is simple and
efficient, and creates wealth over the long‑term.
This process is never complete, but we made
progress during the year and it will continue
across the Group in 2010.
Skandia Investment Group has undertaken a project
which involves reviewing Skandia Investment
Management Limited’s (SIML) fund range in the UK.
The bulk of the project has been completed, with
the merging of seven funds and closing of 15 funds
and share classes, to produce a clear and cohesive
fund range. Within this project, Skandia UK and
Skandia International have also taken measures
to simplify and reduce the number of in‑house life
and pension funds. As a result, the number of UK
funds has been reduced by one third of its original
size. This means that the business is focused on
delivering performance by managing more money
through fewer funds creating a more streamlined
approach. By bringing together existing funds, we
are in a greater position to deliver more value for
customers; managing fewer funds with larger assets
enables economies of scale that can be passed on
to clients. We have cut some annual management
charges by about 25% which, together with the
adoption of a more flexible investment approach,
has been very positive for our clients.
■■ Preventing financial crime
Reducing the Group’s vulnerability to financial crime
is a central component of our risk programme. It is
an area on which we continue to focus our attention,
having set up a dedicated team at Group level in
2007. The team focuses on important risk and
regulatory areas such as money laundering, bribery
and corruption, whistle‑blowing and sanctions
compliance across the Group.
During 2009 we worked closely with all our
businesses to maintain vigilance in this area.
We emphasised the importance of engaging senior
management across the Group with our financial
crime specialists to fully understand the risks and
responsibilities associated with financial crime.
The Group’s Audit and Risk Committee also
received annual updates on the state of our financial
crime controls.
Our Group Information Security Working Group,
consisting of representatives from across the
business units, met four times in 2009 to share
security best practice and identify common areas
in need of specific focus. Additional networks
are also in place between Group businesses that
share particular crime issues, such as Nedbank
and Skandiabanken. At Nedbank we are exploring
various biometric solutions for preventing identity
theft and deterring bank robberies. Learnings from
this will be shared where relevant across the Group.
CuSTOmERS
EmPLOYEES dEVISE CuSTOmER
FOCuSEd ImPROVEmEnTS
Skandia has turned to its
employees in Sweden for
ideas on how to improve
its products and services.
This has encouraged the
whole business to focus on
efficiency and quality service,
with hundreds of practical
ideas being put into practice.
For example, customer service teams have agreed on new
roles where individuals take responsibility for gaining a deeper
knowledge of a specific product; they then share their knowledge
with the rest of the team, particularly when that product changes.
The scheme has also led to the development of an intranet site
where all employees can share their ideas, track what every team is
doing and see how actions are making a difference to customers.
Our employees can really see what a difference and contribution
they make to the business.
“ It really encourages employees to get directly involved in making
positive changes.”
Lena Hök, Information Manager of Skandiabanken and
Skandia Private
■■ Recognition for our service to our
customers
Across the Group we work hard to provide
choice and flexibility to our customers, whose
needs change over time. We continue to develop
innovative, value for money and transparent savings
and investment products. In 2009, our reputation for
good customer service and the strong relationships
we have with our customers earned us a number of
awards, including:
>> Old Mutual South Africa won the ‘Best South
African Customer Service Centre’ award at
the African Stars Awards and the ‘Long‑term
Insurance Industry Service Excellence’ award
from the Ask Afrika Orange Index;
>> In Norway, Skandiabanken was ranked by EPSI
Rating (Extended Performance Satisfaction
Index) as the best customer service provider
across all industries;
>> Skandia International won ‘Best Commitment
to Service’ at the International Investment Fund
and Product Awards;
>> Skandia:BSAM won the ‘Best Customer Service’
award from the China Information Associate and
China Service Trade Associate.
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RISK and RESPOnSIBILITY
EmPLOYEES
Through 2009 we worked hard to continue to
attract, engage and develop the best people in
a very challenging year for the financial services
sector. Continuing to invest in our people will
position us well for future growth.
RESPOnSIBLE BuSInESS POLICY:
EmPLOYEES
Our Responsible Business Policy provides an overview of the
approach we take to our relationship with our employees, while our
Group HR Policy sets out in more detail the standards we expect from
business units.
To attract and retain the best people, the Group works hard to create
an environment where employees can flourish and where people are
proud to work. Wherever the Group’s employees are based, business
units must:
>> Recruit and reward employees fairly and according to merit.
This is balanced with the need to ensure that the Group assists
with advancing transformation in the unique context of African
operations;
>> Promote the health and wellbeing of employees in the work
environment;
>> Provide opportunities for employee dialogue; listen actively and
encourage participation in the resolution of issues;
>> Invest in employee development and provide opportunities for
career and personal advancement, including involvement in
community activities;
>> Safeguard employee rights, including but not limited to, rights to
freedom of association and collective bargaining;
>> Embrace and encourage the diversity that exists amongst
employees, whilst treating individuals with respect.
We employ over 53,500 people in 34 countries.
Our employees are the foundation of our
relationships with our stakeholders; by creating an
environment where they feel supported, rewarded
and encouraged to develop, we are able to help
them reach their potential.
During 2009 we continued to maintain and develop
our positive relationship with our employees. It was
a challenging year for our business, and we are
proud of the way they have responded. We have
devoted considerable efforts to recognising their
READ MORE ABOUT RISK p102
contribution, through a focus on fostering talent,
listening to what they want to tell us, promoting
health and wellbeing, and rewarding their ideas and
contributions. Our success in achieving this in many
parts of our business is reflected in the external
awards we won in 2009, including:
>> Skandia:BSAM was named ‘Best Employer’ by
Fortune Magazine in China;
>> Fairbairn Private Bank ranked 15th out of 1,000
companies in the Sunday Times 100 Best Small
Companies to Work for 2009;
>> Skandia UK has been recognised as ‘One
to Watch’ for two years running in the Best
Companies to Work for survey.
So what did we do to deliver our commitments to
employees in 2009?
■■ Recognising and developing talent
We continued to provide high‑quality training for
our employees across the Group and our Career
Choices Model increased the access to, and quality
of, career advice available to all our employees.
For example, the Skandia UK business completed
its Employer of Choice programme, which has
successfully implemented a wide variety of new
development and employee engagement initiatives.
Employees now have dedicated resources to
support, motivate and work with them to develop
their careers − and specialist support to provide
professional development and technical mentoring.
At a time when leaders must be able to deal
with ambiguity and uncertainty, while confidently
managing risk and leading change across their
business, we have increased the scope of our
development programmes for senior management.
The Global Business Manager’s Programme and our
new Global Strategic Management Development
Programme have both been developed to facilitate
strategic and leadership learning, networking and
sharing best practice.
We take a proactive approach to succession
planning, to mitigate risks and focus our
development programmes where they are most
needed. Our objective is to improve our ability to
fill key roles internally − thereby enabling continuity
and providing career opportunities for the talent that
we have throughout the Group. One initiative driven
by our understanding of current succession plans
was the creation of a Global Leadership Potential
Programme. This provides individual action plans
for people who show particular promise, to prepare
them for appropriate future roles at more senior
levels within the Group.
134 Old Mutual plc
Annual Report and Accounts 2009
■■ Listening to, and engaging with,
our people
Maintaining high levels of commitment is important
to both short‑ and long‑term business performance.
We gauge employees’ commitment, involvement
and enthusiasm for their work and Old Mutual in
terms of ‘employee engagement’.
Every year we survey our employees confidentially,
to ask them about their experiences of working
at Old Mutual; and we use the results to inform
changes within the business. Surveys of this type
in 2009 indicate that, due to the recession, across
all industries, levels of employee engagement
have fallen. Our 2009 survey showed we were no
exception. However, despite the slight decrease
in scores we continued to rank in the top quartile
of companies surveyed and engagement levels
remain high across the Group relative to other
organisations1.
Our employees recognised our ability to adapt
to change and rate our managers highly in their
levels of honesty and integrity. This organisational
resilience and trust in managers place us in a good
position to remain competitive, continue building our
performance score and retain valuable employees as
the market begins to recover.
We place a premium on a strong internal
communications process, both across the Group
and within our business units, and we believe that
this has been an important contributor to motivating
our employees. For the first time in the Group’s
history we launched a Group‑wide ezine, In Touch.
This has been supported by our intranet and other
internal magazines to share information between
business units and keep employees up to date.
In particular, it was important in 2009 to increase
our communications about the financial crisis to
inform our employees of the latest developments in
the business and the sector. Employees responded
positively, and this prompted many suggestions
that have led directly to numerous improvements
benefiting our customers and the efficiency of the
business.
■■ Wellness at Work
We want Old Mutual to be a safe, positive and
rewarding place for our employees to work, so we
take their health and wellbeing at work seriously.
Across the Group individual business units have
a variety of approaches for promoting wellness at
work. These are just a few examples:
1 Benchmarked against members of the Corporate
Leadership Council.
>> During 2009, over 11% of Old Mutual South
Africa employees accessed the health and
wellbeing services and support offered to
them by our Employee Wellbeing Programme,
including over 800 who received face‑to‑face
advice;
>> Nedbank established a network of 80 Wellness
Champions in the latter part of 2009 who have
volunteered to communicate health and wellness
initiatives to colleagues.
■■ Transformation
Transformation remains a key priority in our African
operations and in 2009 we continued to focus
effort on making the profile of our employees more
representative of the demographics of the people we
serve across South Africa.
For example, at Nedbank, our retail division has
made good progress in advancing black and black
female employees at senior, middle and junior
management levels. This helped earn us third
place out of 200 in the 2009 Financial Mail Top
Empowered Companies Survey. The challenge
remains to achieve our targets at all levels, and in
2010 we will continue to place a strong emphasis on
achieving our goals.
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HELPInG EmPLOYEES WITH
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In Skandia UK we ran a
two‑day Money Matters
programme. This involved
a range of activities to help
employees from across the
business learn more about
the products and services
offered by Skandia, as well
as about their own personal
finances. As part of the initiative we launched a Money Matters
intranet site to give employees easy access to finance‑related tips,
tools and information.
At Skandia we are always looking to provide training that helps our
employees not only in their day‑to‑day job but also in their personal
life. This helps us ensure we deliver both for our customers and for
our people.
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RISK and RESPOnSIBILITY
EnVIROnmEnT
We aim to achieve long‑term sustainable growth.
Understanding the impact we have on the
environment, and the risks and opportunities that
this presents, is central to achieving this goal.
RESPOnSIBLE BuSInESS POLICY:
EnVIROnmEnT
During 2009 we revisited our commitment to minimising our impact
on the environment through our new Responsible Business Policy.
As a financial services provider, the Group recognise that it has two
types of environmental impact: direct impacts that arise from the
running of our offices and branches, and indirect impacts through the
procurement of services and products and the investment decisions
that we make and products we sell.
To minimise environmental impacts where practical, business
units must:
>> Set targets and monitor measures to reduce their energy and
water use and the waste they generate in each of their locations.
This is to aid the Group with reducing its carbon footprint;
>> Create awareness to aid employees in understanding their
impacts and their role in minimising these;
>> Consider environmental impacts as part of their investment decision
process.
We work hard to improve the way we manage
our environmental risks. This is important, not
only because it reduces our reputational and
regulatory risk and allows us to use resources more
efficiently, but also because it is part of our broader
responsibility to future generations. We manage
both the direct impacts we have as a business
through our operations (for example, running our
offices, employees’ travel and the production of
materials related to our work) and also the indirect
impact we have through our investment decisions,
communications and products. We also recognise
that there are opportunities across the Group to
take proactive action on the environment, such
as reducing costs through efficiencies, using
environmental positioning to win new customers,
or developing new products to meet customer
demand. Across the Group in 2009 we shared
environmental best practice in terms of both risks
and opportunities.
As part of our broader role in helping to tackle
the challenges that climate change presents, we
continued to support the UN’s work in this area and
signed the Copenhagen Communiqué as part of the
UN Climate Change Conference in December 2009.
We also committed funding for a research project at
Imperial College London, looking into the effect of
climate change on biodiversity.
During 2009 we made progress towards our
environmental policy commitments. However,
we recognise that there is still much to be done.
Our goals for 2010 are based on reducing the
direct impact of our operations, managing the
impact of our investment decisions, and engaging
our employees in our environmental effort.
ELECTRICITY, WaTER and WaSTE uSEaGE
Electricity (KWh)
Water (m³)
Waste (Kg)
Business Unit
2009
2008
2009
Group Head Office
8,465,964
9,038,851
27,788
2008
30,656
2009
2008
142,360
173,960
Long Term Savings
572,871,465
631,012,556
4,183,119
4,400,941
5,041,253*
503,196
Banking
94,552,210
98,710,927
310,630
373,935
552,000
674,000
Short‑term Insurance
84,890
88,330
17,545
18,177
Not available
Not available
US Asset Management
1,155,909
1,158,145
2
2
3,175
3,300
TOTAL+
677,209,494
740,008,809
4,539,084
4,823,711
5,738,788*
1,354,456
+ Includes Legacy
* Waste figures decreased across all business units in 2009. The increase in total is due to the inclusion of Old Mutual South Africa data for the first time.
136 Old Mutual plc
Annual Report and Accounts 2009
So what did we do to meet our environmental
commitments in 2009?
■■ Minimising the direct impact of
our operations
Our biggest direct sources of carbon emissions
are our offices and travel. As part of our continued
commitment to developing a better understanding of
our own environmental impact, and in particular our
carbon footprint, we completed our second public
submission to the Carbon Disclosure Project (CDP)
in 2009. This saw us included in the CDP’s Carbon
Disclosure Leadership Index for the first time,
ranking in the top 10% of the FTSE350 companies
that responded. In our submission we made a
commitment to reduce our overall carbon emissions
by 2% during 2009, and we have met this target.
As part of this commitment each business unit has
developed, or started to develop, carbon reduction
initiatives.
In addition to our Group submission, Nedbank also
made its own CDP submission. It was recognised
as the overall winner in the South African Carbon
Disclosure Project Report 2009 Leadership Index.
Nedbank followed this achievement by making a
commitment to carbon neutrality, making it the first
South African bank and the first listed company in
South Africa to do so.
In 2010 we plan to finalise carbon reduction
strategies across the Group, monitor our reduction
targets and submit our third public Group CDP
submission.
■■ Managing our indirect impact
through our investment decisions,
communications, and products
In 2008 we developed our first Group Investment
Statement. Following on from this, in 2009 we
worked with different parts of the business, including
the Group Executive Committee, to establish how
we can refine the statement to reflect the structure
and priorities of the Group for 2009 and beyond.
In 2010 we will continue to review the Group
Investment Statement and investment statements
from the business units across the Group.
As part of Nedbank Group’s commitment to managing
the indirect impact of its investment decisions it
continued to apply the Equator Principles to project
finance initiatives. These provide an enhanced risk
management framework to assess projects’ possible
environmental and social impacts. Using the Equator
Principles has significantly increased our awareness,
knowledge and experience in managing environmental
and social risk for all transactions.
We also help manage our indirect environmental
impacts through the products we offer to our
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GREEn BanKInG PROVES a WInnER
In South Africa, Nedbank has gained an unexpected benefit from
initiatives aimed at lowering its carbon footprint. Its growing reputation
as the ‘green bank’ is attracting not only customers but also skills to the
company. In September 2009, Nedbank announced its commitment to go
carbon neutral.
“ Nedbank is the first South African bank, in fact the first large corporation
in the country, to take this step.”
Tom Boardman, Former Chief Executive, Nedbank
customers and by developing communication
methods that are specifically designed to minimise
impact on the environment. For example, during
2009 Nedbank ran a series of outdoor, radio and
print advertisements designed to increase take‑up
of our range of Green Affinity banking, investment
and insurance products, encouraging customers
to choose products designed to benefit the
environment.
Percentage of business units reporting
environmental data
Electricity
89%
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Waste
59%
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Water
74%
09
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%
89
73
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59
57
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74
67
■■ Engaging our employees
Engaging our employees in our environmental efforts
has been an important part of delivering change
across the Group in 2009. Throughout the year and
across the Group we have continued to promote the
‘three Rs’ – Reduce, Reuse and Recycle. Much of
this work has been conducted at individual business
unit level. However, we also worked to share best
practice across the Group through meetings,
workshops, and our Group ezine, In Touch. As well
as promoting behaviour change at work, we have
also run programmes throughout the Group to help
employees take action at home.
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Useful links:
For more information
on how we engage
our employees please
see www.oldmutual.com
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Old Mutual plc
Annual Report and Accounts 2009
137
RISK and RESPOnSIBILITY
SOCIETY
Our impacts reach beyond our customers,
suppliers and employees to the wider
communities in which we operate. Managing all
of our impacts, including those that affect society
at large, is important in creating a sustainable
business that delivers long‑term success for all
those it affects.
RESPOnSIBLE BuSInESS POLICY:
SOCIETY
Good relations and long‑term partnerships with local communities
are synonymous with success. Wherever they operate, business
units must:
>> Promote in the communities they serve:
>> Financial education and other appropriate education
programmes;
>> Financial inclusion;
>> Economic development; and
>> Health (where appropriate).
>> Consider social impacts as part of our investment decision
process where practical.
We work hard to maintain good relationships with
all our stakeholders and the communities in which
we operate, protecting our corporate reputation and
helping us achieve long‑term success.
As financial institutions have come under greater
scrutiny than ever before, it has been more
important than ever to maintain our support for the
communities in which we operate. Our broader role
in society is of particular importance to us because,
as one of the leading financial services providers in
Southern Africa, we are a significant participant in
these countries’ economies and societies. In South
Africa we are committed to playing a leading role
in the country’s economic transformation and at
Old Mutual South Africa (OMSA) the initiatives we
run are underpinned by four main themes which
form our strategy for helping to transform the
national economy:
>> Poverty eradication through job creation;
>> Capacity building and addressing skills
shortages in national, provincial and local
government departments;
>> Property and infrastructure development;
138 Old Mutual plc
Annual Report and Accounts 2009
>> Increasing the national knowledge base,
focusing specifically on equipping learners with
more sophisticated mathematical and scientific
skills.
Our investment decisions have an impact on society
through the projects we finance and the companies
in which we invest. These activities generate wealth
for our customers and shareholders and we work to
minimise, as far as possible, any potential negative
impacts they may have on society.
So what did we do in 2009 to manage and build on
our positive impact on society?
■■ Promoting financial education
and inclusion
As a financial service provider we believe we have
a commitment not only to our customers but
also to society as a whole, helping people better
understand the financial marketplace and the
choices they make in spending and saving. This
ensures that they understand, and can benefit from,
the products and services we provide. We use our
financial knowledge and skills to support financial
education in the countries where we operate.
Across the Group we run many financial inclusion
projects. Where possible, we encourage our
employees to pass on their own skills and
knowledge: for example, Old Mutual plc has entered
into partnership with Young Enterprise London to
deliver a Personal Economics Programme targeting
young people in London, making us the key private
sector supporter for financial literacy education in
Southwark schools and providing opportunities for
Old Mutual employees to deliver financial literacy
classes to students.
In South Africa we see financial education as a core
part of our responsibility to help the nation break the
cycle of generational poverty and the debt trap that
so many find themselves in. We continue to deliver
our On The Money programme through OMSA,
a financial education initiative that has benefited
over 50,000 South Africans since it was launched.
In addition, in 2009 we introduced our Financial
Wellbeing Programme to help retirement fund
members plan for retirement.
■■ Supporting development in
our communities
We provide a wide range of opportunities for our
employees to donate their time and effort to help
support their local communities through activities
including mentoring, participation in environmental
projects, fund‑raising for good causes, and health
and welfare projects.
These activities are usually tailored to the needs of
the communities in which we operate. We recognise
the importance of continuing our support at a time
when communities are most likely to need our help.
This is evident in the fact that Skandia UK broke
its annual fund‑raising record in 2009. Skandia UK
employees have joined over 20 different types of
volunteering activities and have given nearly 600
hours to the local community through team‑building
events.
The Old Mutual (South Africa) Foundation
enhanced its working relationship with the Nedbank
Foundation by jointly hosting the Old Mutual
Nedbank Community Builder of the Year for the
second year running, to honour and recognise our
Staff Community Builders. We also joined forces
in support of Do It Day, the national volunteer
campaign spearheaded by Greater Good South
Africa, further entrenching our position as leaders in
volunteering in South Africa.
Across the Group we also support our local
communities through financial assistance for charity
and philanthropic donations: we donated a total
of £10.1 million in 2009 to support community
development projects. These included education,
community development and socio‑economic
development projects which are most relevant to the
local communities in which we operate.
■■ Making responsible investment
decisions
Our Group Investment Statement outlines our
approach to social and environmental issues in
investment decisions for both our own capital
investments and those we make on behalf of our
customers.
An important element of our investment approach
is to give our customers ethical investment choices
where possible. For example, in the UK over
30 funds we offer our customers are ethical and
environmental funds. In Sweden, customers are
able to invest in the Ideas for Life Mutual Fund which
donates 2% of its profits to charity; this amounted to
£300,000 in 2009 and funded 216 different projects
supporting young people in the Nordic region.
In South Africa, the Infrastructural, Developmental &
Environmental Assets (IDEAS) Managed Fund is a
socially responsible investment vehicle marketed and
managed jointly by Unity Incorporation (representing
a group of seven trade unions) and Old Mutual
Investment Group South Africa; it invests in assets
that contribute to the sustainable economic and
social development of disadvantaged communities.
SOCIETY
BIG BEaSTS GET SOuTH aFRICa
On THE mOnEY
At Old Mutual South Africa we
are working with the government
and other stakeholders on a well
co‑ordinated and coherent financial
education programme to help
consumers manage their finances
better. These efforts include the
On The Money programme, a
financial education initiative we
created to teach South Africans how best to manage their finances.
The programme is based on the behaviours of South Africa’s
Big Five wild animals. It uses the unique characteristics of the
lion, leopard, elephant, rhino and buffalo to help build a positive
and productive attitude towards money and the management of
personal and family finances.
“ Old Mutual South Africa is at the forefront of efforts to grow the
nation’s savings. Playing our role through financial education is key
to that growth.”
Crispin Sonn, Director of Corporate Affairs, Old Mutual South Africa
SOCIETY
EnCOuRaGInG SuSTaInaBLE
VaLuE CREaTIOn
We want to improve
the transparency of the
companies we invest in.
So Skandia joined 12 of
Sweden’s largest institutional
investors in 2009 to launch
a Sustainable Value Creation Initiative. As part of this we published
surveys of governance and policies for sustainable value creation in
the 100 largest corporations on NASDAQ OMX Stockholm and the
74 companies in the Oslo Børs Benchmark Index.
“ This index encourages companies to develop sustainably while
at the same time creating long‑term economic value for their
shareholders.”
Hans Svensson, Head of Public Affairs and CR, Skandia Nordic
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Annual Report and Accounts 2009
139
RISK and RESPOnSIBILITY
SuPPLIERS
We work with many different suppliers across the
Group and are committed to acting fairly and
honestly in all our dealings with them.
So what were the main developments in our supplier
relationships and activities during 2009?
■■ Developing stronger relationships
with suppliers
RESPOnSIBLE BuSInESS POLICY:
SuPPLIERS
It is important for us to be consistent in the way we manage our
relationships with all our suppliers to raise standards across the
Group. So we have included in our Responsible Business Policy a set
of commitments related to the suppliers we work with.
Business units must:
>> Where appropriate treat suppliers as partners to create long‑term
relationships;
>> Act fairly and honestly with suppliers (see additional detail in
society section);
>> Factor the environmental and social impact of their suppliers into
their procurement decisions, where practical;
>> Work with their suppliers to create awareness and progress
understanding of the social and environmental impacts on them;
>> Have adequate procurement controls including but not limited
to, segregation of authorisation of expenditure and selection of
vendors/suppliers.
We work with thousands of suppliers. Our choice
of suppliers, and the way we deal with them, not
only reflects the values we have as a company but
also determines how strong and mutually beneficial
our supplier relationships are, both now and in the
future. The relationships we develop secure us
high‑quality, reliable and cost‑effective products and
services; and the business we bring to our suppliers
assists their growth and development.
To further improve our procurement, in 2009
we integrated it into our new Responsible
Business Policy. As part of this, we made a
commitment to strengthen our relationships
with suppliers. A number of our business units
have been developing ways to consider social
and environmental impacts in their procurement
decisions, and are working with suppliers to help
them understand these issues. In South Africa,
where we are the largest financial services business,
the country’s Black Economic Empowerment (BEE)
strategy has a material impact on our business:
in 2009 we continued working to ensure that the
economic benefits and opportunities we generate
are spread equitably across South African society.
Our reputation is one of our most important assets
and the relationships we build with our suppliers
contribute directly to that reputation. Our Code
of Business Conduct, in combination with the
commitments to suppliers outlined in the new
Responsible Business Policy, sets clear standards.
The implementation of procurement policy is
managed by procurement teams at local level and
we work with all our suppliers to help them meet
our requirements. In 2010 we will be reviewing how
procurement is monitored within each business unit.
As part of our work to strengthen relationships
throughout our supply chain, our business units run
regular supplier forums to share best practice and
seek feedback. During 2009 we started to look at
ways in which we can stimulate greater feedback
from our supply chain. Old Mutual South Africa
(OMSA), for example, has a Procurement Council to
provide a feedback channel, tracking progress over
time through monitoring and auditing.
■■ Greening the supply chain
Where practical, we consider the environmental
impacts of our suppliers’ activities in our
procurement decisions; and we work with suppliers
to raise their awareness and understanding of these
impacts and improve their performance.
Nedbank and Skandia Nordic are showing
leadership in this area, and plans are in place
to share their best practice with the rest of the
Group in 2010. At Nedbank, for example, we have
focused particularly on suppliers with the largest
environmental impact and have moved to electronic
invoicing where possible.
■■ Improving black economic
empowerment in South Africa
In all our business relationships in South Africa,
across Old Mutual South Africa, Nedbank, and
Mutual & Federal we aim to ensure that we act
within the spirit of the BEE strategy, as well as in
line with the letter of the law. This includes our
relationships with our suppliers.
Where possible we practise affirmative procurement
by sourcing goods and services from:
– All suppliers based on their BEE Procurement
Recognition Level;
– Black‑owned small and medium enterprises
(including micro‑enterprises);
– Black women owned suppliers.
140 Old Mutual plc
Annual Report and Accounts 2009
Nedbank, for example, has a dedicated BEE
Procurement Management Unit. This sets the
framework rules for BEE procurement, in line with
the Nedbank Procurement Policy, and engages
with all parts of the business in achieving BEE goals
and targets.
At OMSA, the Transformation Committee and
Procurement Council receive quarterly reports on all
aspects of procurement. Through the Procurement
Council we are working closely with Masisizane
(a non‑profit organisation set up by Old Mutual to
support national economic transformation) and
with the business units to establish BEE supplier
accreditation and supplier development frameworks.
SuPPLIERS
COunTInG THE CaRBOn COST
OF TRaVEL
At Nedbank, environmental
issues affecting procurement
are discussed at bi‑monthly
Group Procurement
Committee meetings and
actions to reduce the bank’s
environmental footprint
are implemented via the
committee.
Having investigated buying behaviours and updated policies, in 2009
the team stepped‑up its focus on meeting our intensity reduction
targets for travel and paper use. A sustainable travel task team has
been established and all business travel must now be pre‑authorised
and the carbon cost of the travel indicated on the order form.
The footprinting information for flights includes the carbon cost of
travel to and from the airport, based on distance, car and fuel type.
“ During 2009, we initiated several projects to ensure that the bank
and its suppliers remain focused on environmental sustainability
issues”
Howard Stephens, Chief Procurement Officer, Nedbank
SuPPLIERS
STICKInG TO THE ECO‑LaBEL
In 2009, Skandia Nordic joined Sweden’s
Svanen eco‑label network. This means
that when we buy office furniture, head
office catering, and travel (including hotels,
trains and air travel), we use only those
goods and services that display the Svanen
eco‑label. The label is awarded only to the
most environmentally sound products and
services, and also takes into account factors such as fair trade.
“ Concern for the environment is an important part of our corporate
responsibility work, and joining the network was a very practical
way to take action.”
Per Lindell, Environment Controller, Skandia Nordic
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Old Mutual plc
Annual Report and Accounts 2009
141
GOVERNANCE
BOARD OF DIRECTORS
Key:
1 Member of the Group Audit
and Risk Committee
2 Member of the
Nomination Committee
3 Member of the
Remuneration Committee
1. Patrick O’Sullivan (60)2, B.A.,
F.C.A. (Ireland), M.Sc. Chairman
Patrick joined the Board and succeeded Chris Collins as Chairman
on 1 January 2010. He also chairs the Nomination Committee.
From 2007 until 2009, he was Vice Chairman of Zurich Financial
Services, where he had specific responsibility for its international
businesses including those in South Africa. He had previously
held roles at Zurich as CEO, General Insurance and Banking of
its UKISA business division and Group Finance Director. Qualified
as a chartered accountant, his prior experience includes positions
at Bank of America, Goldman Sachs, Fidelity Guaranty Insurance
Company (a subsidiary of GE Capital), Barclays/BZW and Eagle
Star Insurance Company. He is COO Retail, Asia and Latin America,
of COFRA Group in Switzerland and also serves as a non-executive
director of Man Group plc and Bank of Ireland.
2. Julian Roberts (52)2, B.A., F.C.A., M.C.T.
Group Chief Executive
Julian has been Group Chief Executive of Old Mutual plc since
September 2008. Julian joined Old Mutual in August 2000 as
Group Finance Director, moving on to become CEO of Skandia
following its purchase by Old Mutual in February 2006. Prior to
joining Old Mutual he was Group Finance Director of Sun Life &
Provincial Holdings plc and previously Chief Financial Officer of
Aon UK Holdings Limited.
3. Philip Broadley (49), M.A., F.C.A.
Group Finance Director
Philip has been Group Finance Director since November 2008.
He was previously Group Finance Director of Prudential plc
from May 2000 until March 2008. Prior to joining Prudential, he
was a partner in 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.
4. Nigel Andrews (62)1, 2, 3, B.Sc., M.B.A.
Independent non-executive director
Nigel 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 office of the CEO of GE Capital,
having spent 13 years with The General Electric Company, Inc.
5. Mike Arnold (62)1, B.Sc., F.I.A.
Independent non-executive director
Mike joined the Board as an independent non-executive director
in September 2009. He is a qualified actuary and was formerly
Principal Consulting Actuary and Head of Life practice at the
consulting actuarial firm, Milliman, from 2002 to 2009. Prior to
that, he had been the senior partner at the practice from 1995,
having joined one of its predecessor organisations as a recently
qualified actuary in 1971. He is a past Member of Council and
Vice Chairman of the Institute of Actuaries, past Chairman of
the International Association of Consulting Actuaries and past
member of the Board of Actuarial Standards. He is also a non-
executive director of MGM Assurance and the Scottish Equitable
Policyholder Trust.
6. Rudi Bogni (62)1, 2, 3, D.Econ. (Bocconi)
Senior independent non-executive director
Rudi has been senior independent non-executive director
since May 2008, having served on the Board since February
2002. He also chairs the Remuneration Committee. Rudi 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,
1
2
3
4
5
142 Old Mutual plc
Annual Report and Accounts 2009
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.
7. Russell Edey (66)1, 2, 3, F.C.A.
Independent non-executive director
Russell 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.
8. Reuel Khoza (59), Eng.D., M.A.
Non-executive director
Reuel has been a non-executive director of the Company since
January 2006 and Chairman of Nedbank Group since May
2006. Reuel is Chairman of Aka Capital, which is 25% 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 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.
9. Bongani Nqwababa (44)1, B.Acc., C.A., M.B.A.
Independent non-executive director
Bongani has been an independent non-executive director since
April 2007. He became Chief Financial Officer 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.
10. Lars Otterbeck (66), Dr. Econ.
Independent non-executive director
Lars 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.
11. Richard Pym (60)1, 2, 3, B.Sc., F.C.A.
Independent non-executive director
Richard has been an independent non-executive director
since September 2007. He chairs the Group Audit and Risk
Committee. Richard is Chairman of Bradford & Bingley plc,
Northern Rock (Asset Management) plc and BrightHouse Group
Limited and is a non-executive director of British Land Group plc.
He was Group Chief Executive of Alliance & Leicester plc from
2002 until his retirement in 2007 and is a former Vice President of
the British Bankers Association and former Chairman of Halfords
Group plc.
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Old Mutual plc
Annual Report and Accounts 2009
143
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GOVERNANCE
ChAiRmAN’s iNtROduCtiON
Corporate governance – a key foundation for our business success
It is essential that our governance continues to adapt
to the ever more demanding business landscape.
Patrick O’Sullivan
Chairman
■■ Achievements during 2009
> Actuarial expertise on the Board strengthened
■■ Priorities for 2010
> Full roll‑out and embedding of our new
> New Chairman appointed
> Group representation on subsidiary boards
strengthened
> Risk appetite refined and further embedded into
our operational decision‑making processes
Group Operating Model
> Separation of the functions of the Group
Audit and Risk Committee into two separate
Board‑level committees
> Addressing other recommendations in the
Walker Review
> Planning for Board succession and renewal
> Active participation in the continuing debate
about improving governance
We have made progress in streamlining the
Old Mutual Group during 2009, including by
strengthening our governance framework and
procedures. This was one of our Group Chief
Executive, Julian Roberts’, five key priorities for
2009 and has been an area of focus throughout the
year. We have followed through on his pledge to
ensure that appropriate assurance is implemented
and maintained over the Group’s activities and
businesses. As part of this, we have clarified
reporting lines at Group Executive Committee level,
strengthened the representation of the Group on
major subsidiary boards and developed a new
Group Operating Model based on strategic control
rather than the highly decentralised structure that
previously prevailed. As it is implemented during
2010, this model will replace our current Scheme of
Delegated Authority.
The recent financial crisis has emphasised the need
to be vigilant and proactive in the management
of risk. The proposed introduction of Solvency
II in Europe, currently scheduled for 2013, will
increase further the focus on risk‑adjusted metrics
and have important implications for regulatory
capital. Risk management is therefore a key part
of our governance process. The Risk and Capital
Management Report earlier in this document
provides an overview of the progress we have made
in this area and describes some of the challenges
that lie ahead.
The governance of UK‑listed banks and other
large financial institutions (BOFIs) was the subject
of the Walker Review, which published various
recommendations in November 2009. Old Mutual
is categorised as a BOFI and will be determining
its response to these recommendations over the
coming months. In addition, we will be addressing
certain recommendations that emerged from our
own Board effectiveness review conducted during
2009 in conjunction with external facilitators.
We have already made a number of changes as
a result of these developments, as described in
the Report on Governance that follows. As the
new Chairman, I will be personally responsible for
ensuring that we take the necessary steps to ensure
that our governance continues to adapt to the ever
more demanding business landscape. I also aim
to ensure that the Board retains the right level of
expertise and experience to lead the Group as our
new strategy is implemented.
144 Old Mutual plc
Annual Report and Accounts 2009
GOVERNANCE
diRECtORs’ REPORt ON CORPORAtE
GOVERNANCE ANd OthER mAttERs
In this section, we describe how the Company’s governance operated during 2009
Old Mutual views good governance as a vital ingredient
of operating a successful business.
Martin Murray
Group Company Secretary
■
Index to this section of the Report
153 Auditors
146 Approach to governance
146 Combined Code compliance
146 Walker Review
146 Board of Directors
> Membership
> 2009 operations
> Responsibilities of the Board
> Delegation of certain responsibilities
> Scheme of Delegated Authority
> Rotation and re‑election of directors
> Skills, experience and review
> Board performance review
> Executive and non‑executive roles
> Independence of non‑executive directors
> Senior independent director
> Directors’ interests
> Directors’ conflicts of interest
150 Board Committees
> Group Audit and Risk Committee
> Remuneration Committee
> Nomination Committee
> Other committees
153 Attendance record
154
Internal control environment
> Responsibility for internal control
> Assessment of the system of
internal control
> Group Internal Audit
155 Other Directors’ Report matters
> Relations with shareholders and analysts
> General Meetings
> 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
> Shares held in employee benefit trusts
> Significant agreements
> Substantial interests in voting rights
> Going concern
> Disclosure of information to the auditors
160 Governing law
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Old Mutual plc
Annual Report and Accounts 2009
145
GOVERNANCE
diRECtORs’ REPORt ON CORPORAtE
GOVERNANCE ANd OthER mAttERs
CONtiNuEd
■■ Approach to governance
Old Mutual views good governance as a vital
ingredient of operating a successful business, so
that we can provide assurance to shareholders,
customers and regulators that the Group’s
businesses are being properly managed and
controlled.
The approach that the Group adopts to governance
is underpinned by the Group’s four values of
integrity, respect, accountability and pushing
beyond boundaries. We require integrity of the
Group’s businesses in all their dealings, including
the way in which their boards of directors operate
and report upwards. Respect is reflected in the
dynamics between the centre and the operating
units and the manner in which problems, when they
do arise, are dealt with. Accountability lies at the
heart of all good governance systems and is vital
for the prompt escalation of issues and how they
are then addressed. Finally, we aim to empower our
operating units to push beyond boundaries and
to be responsive and inventive to serve customers’
needs without entangling them with unnecessary
red tape.
During 2009, the Group reviewed its board
structures and risk governance arrangements in
major subsidiaries, seeking to apply lessons learned
during the severe downturn in 2008 and the first
part of 2009. We believe that in the current climate
we should move from a highly decentralised federal
model of group governance to a more centralised
“strategic controller” model steered from our head
office. Our new Group Operating Model will be rolled
out during 2010.
■■ Combined Code compliance
As the Company’s primary listing (which will be
renamed from 1 April 2010 as a premium listing) is
on the London Stock Exchange, this report mainly
addresses the matters covered by the Combined
Code on Corporate Governance issued by the
Financial Reporting Council in June 2008 (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). The Company’s
major South African subsidiaries are also subject
to applicable local governance expectations,
including those contained in King 3 and, in the case
of Nedbank Group Limited and Mutual & Federal
Insurance Company Limited (until it was delisted on
8 February 2010), the Listings Requirements of the
JSE Limited.
Throughout the year ended 31 December 2009
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
financial statements set out at the end of this section
of this report, have been reviewed by the Company’s
auditors, KPMG Audit Plc, in accordance with
guidance published by the Auditing Practices Board.
■■ Walker Review
During 2009, in response to the view that
the events of the financial crisis had exposed
material shortcomings in the governance and
risk management of some regulated firms, the
UK Treasury commissioned Sir David Walker to
carry out a review of the corporate governance of
major banks and other financial institutions, which
led to the publication, in November 2009, of a
report containing 39 recommendations. These
covered board size, composition and qualification;
functioning of the board and evaluation of
performance; the role of institutional shareholders
in exercising good stewardship over the firms in
which they invest; governance of risk; and directors’
remuneration.
Old Mutual has already begun to address the
implications of the Walker Review and will be taking
further steps during 2010 in order to be compliant
by the time the new regime is fully in force. This is
currently expected to be for accounting periods
beginning on or after 29 June 2010. Further details
of how the Walker Review’s recommendations
on remuneration matters are being factored
into the Company’s approach are set out in the
Remuneration Report.
■■ Board of Directors
Membership
The Old Mutual Board currently has 11 members,
two of whom are executive and nine of whom are
non‑executive directors. All of the current directors,
except for Mr M Arnold (who was appointed to the
Board from 1 September 2009) and Mr P O’ Sullivan
(who was appointed as successor to Mr C Collins
as Chairman of the Board with effect from
1 January 2010), served throughout the year ended
31 December 2009.
146 Old Mutual plc
146 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
2009 operations
Board meetings were held regularly during 2009.
Scheduled meetings were co‑ordinated with the
Company’s reporting calendar to allow for detailed
consideration of interim, preliminary and final results
and quarterly interim management statements.
Sessions were also devoted to strategy and
business planning and the Board met ad hoc,
as required, to deal with specific matters requiring its
consideration. In all, 11 Board meetings were held
during 2009.
Monthly management accounts were circulated
to each member of the Board within three weeks
of the month‑end, containing detailed analysis of
the businesses’ financial 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 the Group’s major
businesses.
Responsibilities of the Board
The Board’s role is to exercise stewardship of
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, reviews whether the necessary
financial and human resources are in place for it
to meet its objectives and monitors management
performance. It is kept informed about major
developments affecting the Group through the
Group Chief Executive’s monthly reports and also
holds one or more strategy sessions each year at
which high‑level strategic matters are debated.
The Board has overall authority for the conduct of
the business of the Group and there are a number of
matters that have been specifically reserved for the
Board to decide, including:
> approval of financial reporting and controls, such
as interim and annual results, the Annual Report
and Accounts of the Group, payment of dividends
and accounting policies;
> monitoring of the cash and capital resources,
and overall liquidity, of the Group and authorising
any significant acquisitions, disposals of core
businesses, investments, capital expenditure or
other material projects or transactions;
> monitoring and managing of the relationships
between the Group and its regulators;
> reviewing and implementing of effective
systems of delegation and internal control, and
the carrying out of an annual review of their
effectiveness (which, in 2009, led to the decision
to pursue the new Group Operating Model);
> overall review and approval of Group strategy
and the setting of long‑term objectives and/or
changes in strategic direction; and
> monitoring of the overall performance of the
Group in relation to its objectives, plans, targets
and the implementation of projects and decisions.
Delegation of certain responsibilities
The Board has delegated its executive powers
to the Group Chief Executive, with power to
sub‑delegate, and to the Approvals Committee.
In his co‑ordination and stewardship of the Group,
the Group Chief Executive is advised by the Group
Executive Committee, a consultative management
committee. 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: Mr A Birrell (Group Risk and Actuarial Director),
Mr M Brown (Chief Executive of Nedbank Group,
who succeeded Mr T Boardman in March 2010),
Mr P Hanratty (Chief Executive Officer of the
Long‑Term Savings division), Mr D Hope (Head of
Strategy Development), Mr P Maddox (Head of
Strategic Implementation), Mr D Schneider (Group
Human Resources Director) and Mr T Turpin (Chief
Executive Officer of US Asset Management).
Additional details accompany the photographs of
the Committee on pages 28 and 29 of this Annual
Report.
The Board has also delegated specific responsibilities
for certain matters to Board committees. The
principal Board committees have responsibility for
Nomination, Remuneration, and Group Audit and
Risk, subject to their respective terms of reference.
The Board receives reports from these committees
on the matters that they have covered. The matters
addressed by the principal Board committees in
2009 are outlined in the part of this section of the
Annual Report headed “Board Committees”.
The Chairman and Group Company Secretary are
both involved in ensuring good information flows
within the Board and its committees, as well as in
facilitating induction and training for the directors.
All directors have access to the Group Company
Secretary, who is responsible to the Board for
ensuring that Board procedures are complied with.
On appointment, new directors receive induction,
including information about matters of immediate
importance to the Group, such as the current
strategy and operating performance. They also hold
a series of meetings with other directors, senior
management and external advisers (such as the
auditors) as part of this induction.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
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147
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GOVERNANCE
diRECtORs’ REPORt ON CORPORAtE
GOVERNANCE ANd OthER mAttERs
CONtiNuEd
Facilities are available for the directors to 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.
The Company maintains directors’ and officers’
liability insurance in respect of legal action against its
directors and senior managers.
Scheme of Delegated Authority
Under the Scheme of Delegated Authority, the Board
delegates decision‑making relating to wholly‑owned
subsidiary businesses to the boards of the Group’s
principal subsidiaries, subject to specified escalation
criteria that require higher‑level authorisation based
on the materiality of the matter concerned.
The governance relationship with the Group’s
majority‑owned subsidiary, Nedbank Group Limited,
is somewhat different from those that apply to
wholly‑owned subsidiaries, in recognition of its own
governance expectations as a separately‑listed
entity on the JSE Limited and the fact that it has
minority shareholders. The Company entered
into a relationship agreement with Nedbank
Group Limited 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.
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 AGM 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.
Accordingly, at the Annual General Meeting (“AGM”)
to be held on 13 May 2010, shareholders will be
asked to approve the election of Mr M Arnold
and Mr P O’Sullivan, and the re‑election of
Mr N Andrews, Mr B Nqwababa and Mr L Otterbeck.
The Board, having reviewed the performance of
these directors and the contributions that they each
respectively make, recommends that they be elected
or re‑elected as directors at the AGM. Biographical
details of each of the directors who is standing for
election or re‑election 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 considers, in making recommendations, the
independence of candidates and their suitability
and willingness to serve on other Committees of the
Board. All of these aspects are currently believed
by the Nomination Committee to be suitable for the
requirements of the Group’s business. However,
such matters will be kept actively under review,
having regard to recommendations in the Board
effectiveness review, scheduled retirements of
non‑executive directors in 2011 and the Group’s
developing strategy.
Board performance review
The Board conducts a review of its performance on
an annual basis. The review is designed to ensure,
among other things, that each director continues
to contribute effectively and to demonstrate
commitment to the role (including commitment of
time for Board and Committee meetings and any
other duties). In 2009, the Board was assisted by
external facilitators in its review. The results of the
review are considered by the Board and appropriate
actions taken, if necessary. An action plan setting
out the recommendations arising from the review
and tracking progress in addressing them has
been agreed by the Board and will be updated and
considered at Board meetings during 2010.
Executive and non‑executive roles
While there are currently only two executive
directors, all 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 their periodic
participation in Board meetings, other briefing
sessions by the senior executives and Board visits
to the locations where the Group’s main businesses
are based.
The executive element of the Board is balanced
by an independent group of non‑executive
directors. The Board as a whole approves the
strategic direction of the Group, scrutinises the
performance of management in meeting agreed
goals and objectives, and monitors the reporting
of performance. Procedures are in place to enable
148 Old Mutual plc
148 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Board members to satisfy themselves about the
integrity of the Group’s financial information and
to ensure that financial 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.
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
procedures will be refreshed during 2010 in line
with recommendations contained in the Board
effectiveness review conducted during 2009.
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 from the executive
directors. As Mr Collins, the former Chairman, was
due to retire at the end of 2009, this did not take
place this year.
The assignment of responsibilities between the
Chairman, Mr P O’Sullivan, and the Group Chief
Executive, Mr J Roberts, 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. The responsibilities
of Mr P O’Sullivan 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 continued suitability of each non‑executive
director is assessed by the Nomination Committee
before renewal of his appointment takes place.
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 the duration
of their office and how the extension process has
been applied to them.
Independence of non‑executive directors
Seven of the eight current non‑executive directors
other than the Chairman (Messrs N Andrews,
M Arnold, 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 judgment and with
no relationships or circumstances which are likely
to affect, or could appear to affect, their judgment.
The other non‑executive director, Mr R Khoza,
is not considered independent because of
his chairmanship of the Group’s partly‑owned
subsidiary, Nedbank Group Limited, and the
business relationships between Aka Capital, in which
he owns a stake, and Nedbank.
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
significant 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.
Senior independent director
Mr R Bogni is the senior independent director.
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 Group
Company Secretary (martin.murray@omg.co.uk).
The Board has determined that, in the absence of
exceptional circumstances, non‑executive directors
should serve a maximum of nine years in office.
The renewal of non‑executive directors’ terms for
successive three‑year cycles is not automatic and
Directors’ interests
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
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
149
149
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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 2009 and
11 March 2010.
Old Mutual plc
Number of shares
Nedbank
Group Limited
Number of shares
At 31 December 2009
Mr N Andrews
Mr M Arnold
Mr R Bogni
Mr P Broadley
Mr R Edey
Mr R Khoza
Mr B Nqwababa
Mr L Otterbeck
Mr R Pym
Mr J Roberts
7,000
12,725
19,000
50,6251
25,000
–
–
–
40,000
1,500,8321
–
–
–
–
2,604
2,0622
–
–
–
–
Old Mutual plc
Number of shares
Nedbank
Group Limited
Number of shares
At 1 January 2009 (or date of appointment as a director, if later)
Mr N Andrews
Mr M Arnold
Mr R Bogni
Mr P Broadley
Mr R Edey
Mr R Khoza
Mr B Nqwababa
Mr L Otterbeck
Mr R Pym
Mr J Roberts
7,000
12,725
19,000
–1
25,000
–
–
–
20,000
1,089,6042
Former director (at 1 January and 31 December 2009)
Mr C Collins
100,000
–
–
–
–
2,604
2,0622
–
–
–
–
–
1 These figures do not include rights to restricted shares that have not yet vested, which are described in the Remuneration Report.
2 This figure does not include shares in the Aka‑Nedbank Eyethu Trust, one of Nedbank’s Eyethu BEE trusts.
Directors’ conflicts of interest
Processes are in place for any potential conflicts
of interest to be disclosed and for directors to
avoid participation in any decisions where they
may have any such conflict or potential conflict.
The Company’s procedures for dealing with
directors’ conflicts of interest have operated
effectively during 2009.
No director had a material interest in any significant
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 G3 to the Accounts.
The executive directors are permitted to hold and
retain for their own benefit fees from 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 conflict or potential conflict
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.
■■ Board Committees
The Board has a number of 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 specifies a
remit, quorum and appropriate mix of executive and
non‑executive participation. Further information on
the principal committees of the Board is set
out below.
150 Old Mutual plc
150 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Group Audit and Risk Committee
Members and years of appointment: Mr R Pym
(Chairman) (2007), Mr N Andrews (2003),
Mr M Arnold (2009), Mr R Bogni (2002), Mr R Edey
(2004), Mr B Nqwababa (2007). Secretary and year
of appointment: Mr M Murray (1999)
All members of the Group Audit and Risk Committee
(the “Committee”) are independent non‑executive
directors. The Chairman, Mr Pym, is a chartered
accountant with a wide range of recent and
relevant financial experience, being Chairman of
Bradford & Bingley plc and of Northern Rock (Asset
Management) plc. He was Chief Executive of the
major UK banking group, Alliance & Leicester plc,
until July 2007. All members of the Committee
are expected to be financially literate and to have
relevant corporate finance experience. The terms
of reference of the Committee, which specify its
responsibilities, are available on our website at
www.oldmutual.com.
At its meetings during 2009, the Committee
considered, among other things:
> The accounting principles, policies and practices
adopted in the Group’s accounts. These included
the use and quantum of the liquidity premium used
in valuing the bond portfolio of the Group’s US life
business for the purposes of MCEV reporting, the
carrying value of goodwill and various proposed
changes to actuarial assumptions;
> The internal audit function, including internal
audit’s terms of reference, reporting lines and
access to the Committee and members of the
Board, its plans and resources and achievement
of the activities planned as part of its agreed
programme for the year, the results of key audits
and other significant findings, and the adequacy
of management’s responses and the timeliness of
resolution;
> External audit, including: audit plans for the year,
changes in key external audit staff in the external
auditors’ plan for the year, arrangements for
day‑to‑day management of the audit relationship,
the auditors’ arrangements to identify, report and
manage any conflicts of interest, the overall extent
of non‑audit services provided by the external
auditors, the external auditors’ engagement letter
for the year and fee proposal, and any major
issues that arose during the course of the audit
and their resolution;
> Significant accounting and actuarial issues;
> Tax, litigation and contingent liabilities affecting
the Group;
> Any significant findings or control issues arising
from internal audits carried out around the Group;
and
> Significant risks and related risk management
practices across the Group,
and received and considered specific reports or
presentations on:
> The Group’s US life business, to satisfy itself that
the right actions were being taken to manage risk
within this operation, following the problems that
emerged there during 2008;
> The Group’s proposed response to an
independent actuarial report on provisioning
for guaranteed variable annuity products at Old
Mutual Bermuda;
> The activities of subsidiary audit committees on a
regular basis (a number of audit or audit and risk
committees operated during 2009 at subsidiary
level, including at Old Mutual Life Assurance
Company (South Africa) Limited, Old Mutual (US)
Holdings, Inc., Old Mutual US Life Holdings Inc.,
Skandia UK, Skandia Nordic, Skandia Europe
& Latin America, Nedbank Group Limited and
Mutual & Federal Insurance Company Limited,
with terms of reference broadly equivalent to
those of the Committee); and
> The findings of Internal Review Committees
through which Group Finance reviews in detail
the results of the major businesses half‑yearly
with their Finance Directors, including, where
applicable, the actuarial aspects of the results of
the life businesses around the Group.
A Group Governance and Control Planning meeting
was held between the Chairman of the Committee
and the Chairmen of the main subsidiary audit
committees, the Group Internal Audit Director,
the heads of internal audit of major subsidiaries,
the Group Risk Director and representatives of
the Group’s auditors during December 2009,
to co‑ordinate the audit committees’ activities
and to review and approve the scope of internal
audit plans for 2010. This included a presentation
by the Company’s auditors, KPMG, on the
likely implications for the Group of Solvency II.
Such planning meetings take place annually.
Please refer to the section later in this Report
headed “Auditors” for information on our policy on
auditor independence and non‑audit fees and the
recommendation of the Committee that the auditors
be re‑appointed for 2010. The Committee’s role in
relation to monitoring of risk is explained in more
detail in the ‘Internal control environment’ section
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
151
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of this report and the separate report on Risk and
Capital Management earlier in this document.
The Group’s whistle‑blowing 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 confidence, using a
dedicated hotline operated by an independent
firm 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 whistle‑blowing
facility and to help them detect the signs of possible
fraudulent or improper activity.
The Committee holds private meetings with the
external auditors once a year (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.
From April 2010, the activities of the Group Audit
and Risk Committee will be split and reassigned, in
line with recommendations contained in the Walker
Review, into two successor committees, the Group
Audit Committee and the Board Risk Committee.
Mr R Pym will continue to be Chairman of the
Group Audit Committee, while Mr M Arnold will be
Chairman of the Board Risk Committee. Each will be
a member of the other committee so as to ensure
continued close liaison about audit and risk matters.
Remuneration Committee
Members and years of appointment: Mr R Bogni
(Chairman) (2005), Mr N Andrews (2002), Mr R Edey
(2007), Mr R Pym (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.
The terms of reference of the Remuneration
Committee, which specify its responsibilities, are
available on our website at www.oldmutual.com.
Nomination Committee
Members and years of appointment: Mr C Collins
(1999, became Chairman in May 2005,) replaced
by Mr P O’Sullivan with effect from January
2010, Mr N Andrews (2005), Mr R Bogni (2003),
Mr R Edey (2005), Mr R Pym (2008), Mr J Roberts
(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 was chaired during 2009 by the Chairman
of the Board, Mr C Collins, (now replaced by
Mr P O’Sullivan) and a majority of its members (four
out of six) are independent non‑executive directors.
The terms of reference of the Nomination
Committee, which specify its responsibilities, are
available on our website at www.oldmutual.com.
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.
In identifying candidates, appropriate regard is
paid to ensuring that they will have sufficient time
available in the light of their other commitments to
discharge their duties as directors of the Company.
During 2009, the Committee identified the need
to increase specialist actuarial expertise within the
non‑executive cadre, leading to the appointment of
Mr M Arnold to the Board. A separate Chairman’s
Selection Committee was established, under the
chairmanship of Mr R Bogni, the senior independent
director, for the purpose of identifying and
recommending a suitable candidate for the position
of Chairman. Mr C Collins, the incumbent Chairman,
was not involved in the selection or appointment of
his successor. Mr P O’Sullivan was appointed to the
Board as Chairman from 1 January 2010.
Other committees
There are a number of executive committees which
assist the Group Chief Executive with the day‑to‑day
management of the Group. These include the Group
Executive Committee mentioned earlier in this
report, the Group Executive Risk Committee, whose
responsibilities are described in the Risk and Capital
Management report earlier in this document; and the
152 Old Mutual plc
152 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Group Capital Management Committee, whose role
is, inter alia, to agree capital allocations within certain
limits (or make recommendations to the Board
regarding any allocations beyond such limits) and to
approve the capital plan of the Group as part of the
annual business‑planning process.
■■ Attendance record
The table below sets out the number of meetings
held and individual directors’ attendance at meetings
of the Board and its principal committees (based
on membership of those committees, rather than
attendance as an invitee) during 2009.
The Group Chief Executive and Group Finance
Director attended all, and the Chairman attended
all but one, of 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). The Group Chief Executive also attended
all and the Chairman attended all but one of the
Remuneration Committee meetings at the invitation
of the Chairman of that Committee, 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 2009, fees
paid by the Group to KPMG Audit Plc, the Group’s
auditors, and its associates totalled £11.9 million
for statutory audit services (2008: £11.0 million),
£0.5 million for other audit and assurance services
relating to Old Mutual Market Consistent Embedded
Value reporting (2008: £0.5 million), and £2.8 million
for tax and other services (2008: £4.3 million).
In addition to the above, Nedbank Group paid a
further £2.9 million (2008: £2.6 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 engagement to
provide a non‑audit service to the Group, 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 significantly. Before
accepting a proposed engagement to provide
a non‑audit service to the Group, 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 financial statements
> Identify and assess the significance of any
related threats to the firm’s objectivity, including
any perceived loss of independence; and
Number of meetings held
Mr N Andrews
Mr M Arnold
Mr R Bogni
Mr P Broadley
Mr R Edey
Mr R Khoza
Mr B Nqwababa
Mr L Otterbeck
Mr R Pym
Mr J Roberts
Former director
Mr C Collins
Board
(scheduled
and ad hoc)
Group Audit
and Risk
Committee
Remuneration
Committee
Nomination
Committee
11
10/11
4/4
10/11
11/11
11/11
11/11
11/11
10/11
10/11
11/11
9/11*
5
5/5
1/1
5/5
–
5/5
–
5/5
–
5/5
–
–
5
5/5
–
5/5
–
5/5
–
–
–
5/5
–
–
7
7/7
–
7/7
–
7/7
–
–
–
7/7
7/7
6/7
* Mr Collins was unable to attend the last two Board Meetings of 2009 as he was indisposed following an operation.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
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> Identify and assess the effectiveness of the
available safeguards to eliminate or reduce
threats to an acceptable level.
> Where it is felt probable that an informed party
would regard the proposed service as being
inconsistent with the objectives of the firm
as auditors, the firm will not be permitted to
undertake the non‑audit service.
> 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 firm 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 or director concerned
ceased to be associated with the audit.
In addition, the following process governs the
provision of non‑audit services by the auditors:
> There is a schedule of non‑audit services which
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 Officer;
> 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
financial quarter should not exceed £500,000
without approval of the Group Audit and Risk
Committee or its Chairman; and
> 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 office 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 AGM. In reaching
its decision to recommend the reappointment
of KPMG Audit Plc as auditors, the Board took
into account the fact that the firm had been the
Company’s auditors since the Group demutualised
in 1999 and that appropriate arrangements are
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 or
director rotation in accordance with the requirements
of the UK Auditing Practices Board. The current
audit engagement director in the UK, Mr Alastair
Barbour, joined the audit team as a key audit
director in 2005 and succeeded to his current role
in 2008.
■■ 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 efficient operation of the Group
and its business units by enabling management
to respond appropriately to significant 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 identified and managed;
> The quality of internal and external reporting; and
> 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.
154 Old Mutual plc
154 Old Mutual plc
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Annual Report and Accounts 2009
Assessment of the system of internal control
An ongoing process for identifying, evaluating and
managing the significant risks faced by the Group
has been in place for the year ended 31 December
2009 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 level and within each
business unit. This review covers all material
controls, including financial, operational and
compliance controls and the risk management
systems;
> A certification process, under which all business
units are required to confirm 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 significant 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
significant internal control matters that they have
identified 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 and Capital Management report elsewhere in
this document).
The certification 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. Our annual internal control assessment has
not highlighted any material failings. We remain
committed to having a robust internal control
environment across the Group.
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
businesses. 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 Finance 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
meetings of the Business Unit Audit Committee and
of the Group Executive Risk Committee.
GIA teams across Old Mutual use a single audit
methodology which meets the standards set by the
Institute of Internal Auditors. Issues raised by GIA
during the course of their work are communicated to
management, who are responsible for taking action
to address the issues identified 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 significant matters.
■■ Other Directors’ Report matters
Relations with shareholders and analysts
The Company places great 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. These investors include
both debt and equity owners.
Old Mutual increased the number of investor
meetings by approximately 25% to 194 in 2009
Old Mutual plc
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Annual Report and Accounts 2009
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compared to 2008. These took place in the UK,
South Africa, North America and continental Europe
and generally involved one or more of the Group
Chief Executive, Group Finance Director or another
member of the senior management team. In 2009,
the Company targeted smaller institutional investors
and these who manage funds for high net worth
retail clients and charities with a view to diversifying
its shareholder base.
In addition, the Company presented at a number
of major investor conferences around the world.
It also hosted three events for institutional investors
and analysts: a presentation on the Company’s UK
platform business, which was given by members
of UK management, a presentation on Nedbank by
its senior management team and a presentation by
an independent analyst and economic adviser, who
discussed 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.
Currently 14 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.
The Board is updated regularly by the Investor
Relations team on issues arising from any
shareholder communications and from analyst
research.
General Meetings
The Board uses the AGM to comment on the
Group’s trading performance during the first 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.
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.
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% of
annual base salary within five years of appointment;
the equivalent figure for other executive directors
is 100% of annual base salary. Further details of
the executive directors’ shareholdings are set out
under ‘Directors’ Interests’ earlier in this report and
of their interests in awards under the Company’s
employee share plans are contained 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.
Directors’ indemnities
The Company has entered into formal deeds
of indemnity in favour of each of the directors.
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,
specific terms are agreed to beforehand. It is the
Group’s policy to ensure that terms of payment are
notified in advance and adhered to. The Company
has signed the Better Payment Practice Code, an
initiative promoted by the Department for Business,
Innovation and Skills 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 2009 amounted to £3,867,555,
corresponding to 40 days’ payments when
averaged over 2009.
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 office at
the date of the meeting attended the AGM in 2009.
Charitable contributions
The Group made a wide range of significant
donations to charitable causes and social
development projects during 2009, 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 £195,000
during the year (2008: £672,000).
156 Old Mutual plc
156 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Environmental matters
A description of the Group’s environmental impact
and management during 2009 is contained 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 is recommending the payment of a final
dividend for the year ended 31 December 2009 of
1.5p per share (or its equivalent in other relevant
currencies). Subject to approval at the 2010 AGM,
a scrip dividend alternative will also be available for
eligible shareholders in relation to this dividend.
The Board intends to pursue a dividend policy
consistent with the Group’s new strategy and having
regard to overall capital requirements, liquidity and
profitability, and targeting dividend cover of a least
2.5 times IFRS AOP earnings over time.
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 2009 was £551,825,295 divided into
5,518,252,950 Ordinary Shares of 10 pence each
(2008: £551,614,136 divided into 5,516,141,360
Ordinary Shares of 10 pence each). During the year
ended 31 December 2009, 2,111,590 shares were
issued under the Company’s employee share option
schemes at an average price of 91.18 pence each.
At 31 December 2009, shareholder authorities were
in force enabling 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 527,670,000 shares. No shares were bought
back by the Company during 2009.
Out of the 5,518,252,950 shares in issue at
31 December 2009:
> 239,434,888 were held by the Company in
treasury
> A total of 204,777,492 shares were held by
African life subsidiaries of the Company, with
190,284,758 of these shares held on books
for the benefit 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.
The total number of voting rights in the Company’s
issued ordinary share capital at 31 December 2009
(which excludes the 239,434,888 shares held in
treasury, but includes the shares held by the African
life subsidiaries) was 5,278,818,062.
In the period 1 January to 10 March 2010, 1,200,752
further shares were issued by the Company under
its employee share schemes at an average price
of 93.46p each and 147,313,449 shares were
issued on 8 February 2010 as consideration for the
acquisition by the Company of the minority interests
not already owned by the Group in Mutual & Federal
Insurance Company Limited. No further shares were
bought back during that period. As a result, the
Company’s issued share capital at 10 March 2010
had increased to £566,676,715.10 divided into
5,666,767,151 Ordinary Shares of 10 pence each
and the total number of voting rights at that date,
after deducting the 239,434,888 treasury shares,
was 5,427,332,263.
Rights and obligations attaching to shares
The following description summarises certain
provisions of the Company’s current Articles of
Association (the “Articles”) and applicable English
law concerning companies (now mainly enshrined
in the Companies Act 2006 (the “Act”)). This is a
summary only: for further information please see the
relevant provisions of the Act or the Articles.
Issue of shares
Subject to the Act and the Articles, shares may
be issued with such rights and restrictions as the
Company may by ordinary resolution approve or
as the directors may decide. At each AGM the
Company seeks authority from shareholders for the
directors to allot up to a certain amount of shares.
Whenever shares are issued for cash, the Company
must offer shares to all shareholders pro rata to
their holdings, unless it has been given authority by
shareholders to issue shares without applying such
pre‑emption rights. The Company seeks authority
from its shareholders on an annual basis to issue up
to 5% of its issued share capital without observing
pre‑emption rights, in line with relevant regulations
and best practice. No shares were issued for cash
in 2009 disapplying pre‑emption rights, and the total
number of shares issued disapplying pre‑emption
rights by the Company over the last three years
amounted to less than 7.5% of the Company’s
issued share capital over that period.
The Company’s existing authorities to issue shares
and to do so without observing pre‑emption rights
are due to expire at the end of this year’s AGM, but
an ordinary resolution and a special resolution to
approve the renewal of these authorities respectively
will be put to shareholders at the 2010 AGM.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
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Voting
Every member attending a general 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 Act, 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.
A member may appoint more than one proxy in
relation to a general 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 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.
There are currently no restrictions on the voting
rights of any member of the Company.
The Articles provide a deadline for submission of
proxy forms by members of not less than 48 hours
before the relevant general meeting (not excluding
non‑working days).
Dividends and distributions
Subject to the provisions of the Act, 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 fixed‑rate dividend, whenever the financial
position of the Company justifies 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 fixed dividends on other shares.
Transfer of shares
Any shares in the Company may be held in
uncertificated form and title to uncertificated shares
may be transferred by means of a relevant system.
Registration of a transfer of an uncertificated share
may be refused in the circumstances set out in the
Uncertificated Securities Regulations (as defined in
the Articles) and where, in case of a transfer to joint
holders, the number of joint holders to whom the
uncertificated share is to be transferred exceeds four.
Any member may transfer all or any of their
certificated 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.
The Board may decline to register a transfer of a
certificated share unless the instrument of transfer:
> Is duly stamped or certified or otherwise shown
to the satisfaction of the Board to be exempt from
stamp duty and accompanied by the relevant
share certificate 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.
Repurchase of shares
Subject to authorisation by shareholder resolution,
the Company may purchase its own shares in
accordance with the Act. 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. No shares have
been repurchased by the Company since the AGM
in 2009.
Amendment to the Articles of Association
Any amendments to the Articles of the Company
may be made in accordance with the provisions of
the Act by way of a special resolution. New Articles
of Association, reflecting changes arising from the
full implementation of the Act and other recent
company law changes are being proposed for
adoption at the AGM in 2010.
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 office only until the next following AGM and is
then eligible for election by the shareholders.
The Company may by special resolution remove
any director before the expiration of his or her term
of office. Directors shall also vacate their office in
certain customary circumstances specified in the
Articles, including voluntary resignation in writing,
mental ill health or that director becoming bankrupt.
Powers of the directors
Subject to 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
158 Old Mutual plc
158 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
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 benefit trusts
The shareholdings in the Company of the Group’s
employee benefit 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’.
Significant agreements
The following significant 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 notification 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)
> Old Mutual Capital Funding L.P. (the “Issuer”)
$750 million 8% 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 “Acquirer”) 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 Acquirer
following the change of control.
Substantial interests in voting rights
At 10 March 2010, 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
Alliance Bernstein
442,093,506
8.15
Public Investment
Corporation of the
Republic of South Africa
Cevian Capital
307,212,664
302,103,832
Sanlam Investment
Management (Pty) Limited 208,685,625
5.66
5.57
3.85
Legal & General
Group Plc
Old Mutual Life
Assurance Company
(South Africa) Limited
203,844,712
3.76
192,049,630
3.54
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 financial position of the Group, its cash
flows, liquidity position and borrowing facilities are
described in the Group Finance Director’s Statement.
In addition, section E of the notes to the financial
statements includes the Group’s objectives, policies
and processes for managing its capital and set out
details of the risks related to financial instruments and
insurance risks taken on by the Group.
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Annual Report and Accounts 2009
Annual Report and Accounts 2009
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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.
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.
Disclosure of information to the auditors
The directors who held office at the date of approval
of this Directors’ Report on Corporate Governance
and Other Matters confirm 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
and Capital Management report, 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 Murray
Group Company Secretary
11 March 2010
160 Old Mutual plc
160 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
GOVERNANCE
REMUNERATION REPORT
In this section, we describe the Company’s remuneration practice during 2009.
The Remuneration Committee aims to ensure that the
Company’s remuneration practices are aligned with good
corporate governance and risk management.
Rudi Bogni
Chairman of the Remuneration Committee
I am pleased to present the annual report of the Remuneration
Committee, referred to in this report as the Committee, and
would like to comment briefly on what is covered.
The change in strategy prompted the Committee to review the
current executive incentive arrangements with a view to ensuring
that executive remuneration is well aligned with the new strategy.
This report has been designed to provide stakeholders with a
good understanding of the Group’s remuneration philosophy
and practices, with particular emphasis on the remuneration
arrangements for the executive directors.
The Group has shared the challenges faced by the financial
services sector since the economic downturn began.
The Committee continues to review incentive programmes to
ensure an appropriate balance is maintained between the need for
remuneration that is competitive, while ensuring that remuneration
practices are aligned with good corporate governance and
risk management.
Some fundamental changes in governance of the financial services
sector are now in contemplation as a result of the publication in
the UK of the Walker Review in November 2009. The Committee
is taking steps to align with this latest review where practicable,
primarily by:
> Ensuring the composition of the Committee has adequate
bench strength in terms of capability to provide a deeper level
of scrutiny
> Extending the Committee’s responsibility for ensuring
remuneration practices are aligned with shareholder interests
organisation‑wide
> A greater focus on high‑paid executives across the broader
Group who are not on the Board.
In 2009, we announced a plan to change the strategic direction
of Old Mutual and accomplish a turnaround of the Group.
A number of critical steps were taken during 2009 to stabilise the
Group and prepare for more fundamental changes. Our Group
strategy, communicated to investors in March 2010, sets out
the next phase of the strategy for the Group with a number of
transformational changes which will be executed over the next
few years.
The key themes emerging from the executive remuneration
review were:
1. Short‑term incentive focus. The current arrangements
require a bonus to be paid in order for there to be any long‑term
incentive funding. This introduces a focus on short‑term
performance that the Committee believes is now not consistent
with current trends in the financial services sector, and is also
not appropriate in the context of a transformation strategy
operating over a number of years.
2. Alignment of performance conditions with strategy.
The current performance conditions, while appropriate to a
stable‑state business, are not directly aligned with the Group
strategy.
3. Incentivising management appropriately. The particular
focus required over the coming strategic period for the business
warrants a single focused arrangement operating over the next
few years, to incentivise management to achieve the required
changes.
The rationalising of the business over the next few years, as set
out in our Group strategy, is fundamental to the Group’s future
success. This will present significant challenges to our most senior
executives and accordingly the Committee has, over the last
few months, overseen the revision of the Group’s remuneration
structure to support this new strategy. A new plan for executive
directors and other key group executives is therefore proposed,
which takes into account the need to retain and appropriately
incentivise these individuals during this crucial period in the
Company’s evolution.
The background principles and details of this plan have been
discussed with our largest shareholders and are also set out in
the accompanying circular relating to this year’s Annual General
Meeting. The key elements of executive remuneration following
introduction of the new plan are set out below.
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
161
161
GOVERNANCE
REMUNERATION REPORT
CONTINUEd
■■ Proposed structure of the remuneration of executive directors
Element
Key features
Rationale
Base salary
> Base salaries will be frozen in 2010
> Reflects market practice and agreed policy for 2010
in light of low inflation and shareholder expectations
Short‑Term Incentive
(cash and deferred
element)
> Total Short‑Term Incentive (STI) remains capped
> Higher deferral reflects developing practice in
at 150% of base salary
> MCEV will no longer be used as a metric
> Deferral into shares increased from 33% to 50%
of STI
the financial services sector
> Places more emphasis on Old Mutual’s
long‑term sustainable performance and
increases alignment with shareholders
New Old Mutual
Strategic Incentive
Plan (OMSIP)
> No matching awards will be offered in 2010 in
> This new plan is subject to shareholder approval
respect of 2009 bonus
at the AGM on 13 May 2010
> OMSIP will replace the normal long‑term
> A one‑off rationalising award provides the
incentivisation for management to achieve the
strategic transformation of the Group
> The rationalising measures provide
management with clear line of sight to value
drivers that are within their control, and provide
the most effective way of assessing overall
delivery of the strategy
> The financial measures relating to the long‑term
savings business provide alignment and focus
on ensuring that the future business is optimised
during the business transformation to deliver an
enhanced and profitable earnings stream
> The TSR measure aligns executives with the
ultimate delivery of value for shareholders
> The release (50% after 3 years and 50%
after 4 years) for these LTIP awards provides
long‑term alignment with shareholders
incentive awards for 2010 and 2011 and will be
made up of three parts (each of up to 250% of
base salary) as described below
> Part 1 awards will be made in 2010 to
incentivise the rationalising component of
strategic change (as described in Part V of the
Shareholder Circular relating to the 2010 AGM)
over the three‑year measurement period
> Part 2 awards will be made in 2010 and linked
to financial performance for the period 2009 to
2012 as follows:
> One half on financial performance of long‑
term savings business
> One half on absolute total shareholder return
(TSR)
> Part 3 awards will be made in 2011 and linked
to financial performance for the period 2010 to
2013, as follows:
> One half on financial performance of long‑
term savings business
> One half on absolute total shareholder return
(TSR)
> All OMSIP awards will vest subject to attainment
of agreed targets after 3 years and be released
50% after 3 years and 50% after 4 years
> From 2012 onwards, annual long‑term awards will
be aligned with appropriate targets as determined
at that time after the transformation period
> Clawback provisions will apply to all future share
grants including deferred shares and long‑term
incentive awards
Pension and benefits
> Benefit allowance unchanged from 2009 (35%
> Reflects the Group’s emphasis on minimising
of base salary)
pension liabilities and focusing the package for
executive directors on performance‑related pay
In addition to this, a Group‑wide project is underway to realign executive incentive structures at a business unit level from 2010 onwards,
to ensure that local incentive structures across the Group:
> Support the Group’s longer‑term value‑creation goals
> Conform with new regulatory requirements as well as shareholder governance and guidance on variable pay structures and design
> Provide more consistency in the level of reward for performance and in variable pay design
> Enable the Group to continue to attract and retain highly talented executives at the business unit level.
The Committee recommends this report to shareholders and asks for your support for the related resolutions at the forthcoming AGM.
Rudi Bogni
Chairman of the Remuneration Committee
11 March 2010
162 Old Mutual plc
162 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
This report has been prepared by the Committee and approved by the Board. The figures included in the sections of this report headed
‘Directors’ Emoluments for 2008 and 2009’ on page 168 and ‘Directors’ interests under employee share plans’ on page 175 have been
audited by KPMG Audit Plc as required by the Large & Medium‑sized Companies and Groups (Accounts & Reports) Regulations 2008.
Their audit report is set out on page 179. 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, benefits and any compensation payments of the executive directors
> Determining the remuneration of the Chairman of the Board
> Monitoring and approving the level and structure of remuneration of the executive directors of the Company and its principal
operating subsidiaries, the Group Company Secretary, senior executive employees (as identified by the Board), those who perform
a significant influence function or whose activities have, or could have, a material impact on the risk profile of the Company or as
defined for compliance with regulations (collectively “Senior Employees”) in accordance with the policy
> 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 2009 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 FTSE100 Index provide
the benchmark for UK based executive directors, with particular reference to subsets of that data within the financial 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 significant percentage of total maximum potential rewards in the form of share‑based incentives, to align the executive
directors’ interests closely with those of shareholders
> To provide an opportunity for 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
> To focus attention on the main drivers of shareholder value by linking performance‑related remuneration to clearly defined
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 influenced by the need to be competitive with other international financial services groups, while avoiding any
excess. This includes its approach to setting the fixed 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 cognisance of the FSA
Remuneration Code and the Walker Review recommendations (insofar as applicable to insurance groups).
Wherever it considers appropriate, the Committee seeks the views of institutional investors on any significant changes to remuneration
structures applicable to the executive directors or affecting the Company’s share incentive arrangements.
Membership of the Committee
The following independent non‑executive directors served on the Committee during the year:
Name of non‑executive director
Rudi Bogni
Nigel Andrews
Russell Edey
Richard Pym
Position
Chairman
Member
Member
Member
Period on the Committee
May 2005 to date
November 2002 to date
June 2007 to date
May 2008 to date
The Committee renewed the appointment of Alan Judes as its independent adviser for 2009, through his consultancy Strategic
Remuneration. A copy of his letter of engagement is on the Company’s website. Any work that the Company wishes Alan Judes
to do on its behalf, rather than for the Committee, is pre‑cleared with the Committee Chairman with a view to avoiding conflicts of
interest. Work undertaken for the Committee includes attending meetings of the Committee and advising the Committee in connection
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
163
163
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GOVERNANCE
REMUNERATION REPORT
CONTINUEd
with benchmarking of the total reward package for executive directors and other senior members of staff, the design of short‑term
incentive and long‑term incentive arrangements, valuation of share options, updating the Committee on trends in compensation and
governance matters and accompanying the Chairman of the Committee at meetings with shareholder representatives to discuss
proposed remuneration structures. In addition, Alan Judes provided services to the Company in connection with share incentive plans
and prepared communication materials for participants in the LTIP. Fees for 2009 amounted to £72,000 excluding VAT of which £20,000
excluding VAT, was in respect of the services provided to the Company.
Don Schneider and 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 justifications for proposed salary, benefit, 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 2009, the Committee met five times. 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), Kevin Stacey and Chris Collins, the then Chairman of the Board. Don Schneider also attended all meetings following
his appointment as HR Director. The Group Company Secretary, Martin Murray, acted as Secretary to the Committee.
The Management Remuneration Committee (MRC)
The MRC oversees executive remuneration governance at the tiers immediately below director and Group Executive Committee level
provided such executives fall outside the designated group of employees reviewed individually under the Committee’s terms of reference.
The MRC approves remuneration arrangements and pay review decisions recommended 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 MRC meetings are noted at the Committee and the MRC can escalate matters for decision by the Committee
as appropriate. The MRC 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:
Principles adopted by the MRC are that remuneration must be:
> Viewed in conjunction with wider people management practices to support a consistent approach to achieving desired culture
and behaviour
> Performance‑related and linked to delivery against value‑creating objectives
> Benchmarked to reliable and relevant market data specific to each region and sector.
In addition:
> 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 profits
> Incentives must be based on objectives that reward the creation of a sustainable business and long‑term value creation and should
not be prejudiced by short‑term objectives
> Deferrals should be linked to the realised profitability 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 awards is an acceptable percentage of the profit; and
> Bonus pools have not been struck above the level at which cost and risk can be allocated
> 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 graph at the top of the next page shows the total shareholder return to 1 January 2010 on £100 invested in shares in Old Mutual plc
on 1 January 2005 compared with £100 invested in the FTSE100 Index. The other points are the comparative returns at the intervening
financial year ends.
In the opinion of the directors, the FTSE100 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‑specific comparators.
164 Old Mutual plc
164 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Total shareholder return for the five years to 1 January 2010
Old Mutual plc
FTSE100
250
200
150
100
50
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Terms of engagement of the executive directors
Directors holding executive office 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 fix notice periods for executive
directors at a maximum of 12 months. Compensation for loss of office is tailored to reflect 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, Julian Roberts and Philip 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 directors attain the age of 65 (7 June 2022 for Julian Roberts and 31 January 2026 for Philip Broadley).
Neither Julian Roberts’ nor Philip Broadley’s contracts contain any provisions quantifying compensation payable on early termination.
Executive directors’ remuneration during 2009
The Committee reviews the structure of the executive directors’ remuneration packages annually to satisfy itself that the balance
between fixed 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 2009 was as follows:
Julian Roberts, Group Chief Executive
Element
Quantum
Additional information
Basic salary
£830,000
Paid monthly in cash. Reviewed with effect from 1 January each year, taking into
account market benchmarks.
Benefit allowance
£270,781
Paid monthly in cash – 35% of basic salary (less pension contributions).
£19,719
Paid in lieu of a monthly cash payment under the benefit allowance.
Pension
contribution
Short‑term
incentive
£952,425
Long‑term
incentive
£576,000
114.75% of a maximum of 150% of basic salary, to be paid half in cash and half
in restricted shares under the Old Mutual plc Share Reward Plan. The short‑term
incentive for 2009 was based on achievement of Group financial targets, as well
as delivery of individually agreed objectives.
The value shown represents the expected value of the bonus‑matching
award granted under the Performance Share Plan on a two‑for‑one basis.
Julian Roberts pledged a combination of 231,576 existing shares and
276,124 shares purchased with some of his net cash incentive paid in March
2009 under the plan.*
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Other benefits
£1,933
Life cover of £1,000,000 and disability cover capped at £140,000 a year.
Restricted share
release
£34,577 based on the
market value of the shares
at date of release
On 30 March 2009, Julian Roberts received a release of 75,578 shares held
under the deferred short‑term incentive restricted share award originally granted
in 2006. He retained all of these shares, paying the associated income tax and
employee National Insurance costs.
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exercise
£119,518
On 14 October 2009, Julian Roberts exercised options over 661,418 shares,
originally granted on 3 March 2004 with an exercise price of £0.9525 per share.
Julian Roberts sold 601,892 of these shares at a price of £1.1332 per share to
pay the exercise price and income tax and National Insurance Contributions.
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Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
165
165
GOVERNANCE
REMUNERATION REPORT
CONTINUEd
Philip Broadley, Group Finance Director
Element
Quantum
Additional information
Basic salary
£550,000
Paid monthly in cash. Reviewed with effect from 1 January each year, taking into
account market benchmarks.
Benefit allowance
£192,500
Paid monthly in cash – 35% of basic salary.
Short‑term
incentive
£660,000
Long‑term
incentive
£57,435
120% of a maximum of 150% of basic salary to be paid half in cash and half in
restricted shares under the Old Mutual plc Share Reward Plan. The short‑term
incentive for 2009 was based on achievement of Group financial targets, as well
as delivery of individually agreed objectives.
The value shown represents the expected value of the bonus‑matching
award granted under the Performance Share Plan on a two‑for‑one basis.
Philip Broadley pledged 50,625 shares purchased using his net cash incentive
paid in March 2009 under the plan.*
Other benefits
£1,933
Life cover of £1,000,000 and disability cover capped at £140,000 a year.
Restricted share
grant (Joining
Award)
£400,000
On 8 April 2009, Philip Broadley received a restricted share award under the
Old Mutual plc Performance Share Plan over 739,372 shares. Vesting of the award
is subject to the achievement of performance targets as set out on page 167.
* This amount was also disclosed in the 2008 narrative because of the link to the 2008 short‑term incentive plan, although the amount granted in 2008 was accounted for
correctly in the Directors’ interests under employee share plans table.
The following diagrams show the breakdown of the executive directors’ total remuneration arrangements during 2009 (excluding
restricted share award releases, option exercises and the Joining Award).
Julian Roberts
Philip Broadley
• Basic Salary
• Benefit Allowance
• Cash Short-term Incentive
• Deferred Short-term Incentive
• Long-term Incentive
• Basic Salary
• Benefit Allowance
• Cash Short-term Incentive
• Deferred Short-term Incentive
• Long-term Incentive
Short‑term incentive targets for performance year 2009
The payment of short‑term incentives is subject to the achievement of pre‑determined financial 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 Julian Roberts and Philip Broadley for 2009 are set out in the following table.
Targets applicable to Julian Roberts’ and Philip Broadley’s short‑term incentives for performance year 2009
Group Targets as % of salary
Personal targets as % of salary
Total (as % of salary)
£000 incentive for period
Achieved incentive as % of maximum
Julian Roberts
Philip Broadley
Potential
Achieved
Potential
Achieved
112.5
37.5
150
1,245
81
33.75
114.75
952
76.5
75
75
150
825
54
66
120
660
80
The Remuneration Committee determined that a fourth metric (Capital Restructuring and Liquidity) would be added to the three set out
in last year’s Remuneration Report (EPS, RoAE and MCEV) for the calculation of Group targets in 2009.
166 Old Mutual plc
166 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Performance targets applicable to share incentives
Prior to 2009, the vesting of executive share options and, in certain cases, restricted share awards, was subject to the successful
achievement of EPS‑based targets as set out below.
Year
of grant
Plans covered
by targets
Target 1
Target 2
Target 3
For bonus‑matching
restricted share awards and
tier 1 of share option awards
(up to 100% of base salary)
For tier 2 of share option
awards (between 100% and
200% of base salary)
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 UK RPI
by at least 9% over the
three‑year vesting period
Growth in IFRS EPS must
exceed growth in UK RPI
by at least 12% 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
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
specific award. In respect of the share options and bonus‑matching restricted share awards granted in 2007, the IFRS EPS‑based
targets were not met and the share options and bonus‑matching restricted share awards lapsed on 11 March 2010.
For bonus‑matching awards and the restricted share Joining Award granted to Philip Broadley in 2009, a target of Return on Average
Equity (RoAE) was added to the IFRS EPS measure so that targets for long‑term incentive awards reflect the two major measures of
profitability 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 specified below. One‑third of each award vests on attainment of 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.
The targets are set out in the table below:
Return on Average Equity
RoAE required
Real growth in adjusted operating profit IFRS earnings per share
Stock Market growth*
50% +
0%
*Growth will be calculated by the value of £100 invested as follows:
> £33.33 in the FTSE100 index – average price over Q4 2008
> £66.67 in the JSE ALSI index – average price over Q4 2008
Tier 1 %
Tier 2 %
Tier 3 %
10
11
12
Tier 1 %
9.0
0.0
Growth factor above UK RPI
Tier 3 %
Tier 2 %
12.0
3.0
15.0
6.0
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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.
The Old Mutual Staff Pension Fund
The Old Mutual Staff Pension Fund (OMSPF), established in 1979, is a hybrid scheme which has a defined benefit section that was
closed to new members in 1998 and a defined 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 2008 was 1,370.
Julian Roberts is a member of the defined contribution section of the OMSPF and during 2009 the Company contributed a total of
£19,719 in lieu of an equivalent cash payment under his agreed 35% benefit allowance. The accumulated value of Julian Roberts’
funds in the OMSPF was £247,403 at 31 December 2009 (£182,390 at 31 December 2008). Philip Broadley does not participate in any
employer‑provided pension scheme of the Group.
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Annual Report and Accounts 2009
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GOVERNANCE
REMUNERATION REPORT
CONTINUEd
Directors’ emoluments for 2008 and 2009
Remuneration for the year ended 31 December 2009 and the preceding financial year, including in each case remuneration from offices
held with the Company’s subsidiaries, Old Mutual (US) Holdings, Inc. (OMUSH), Old Mutual US Life Holdings Inc. (USLIFE) and Nedbank
Group Limited (Nedbank), where relevant – was as follows:
Salary and Fees
Bonus
Benefits and benefit
allowance1
Pension
£000
2009
2972
550
830
22
1116
80
69
3057
65
1768
89
£000
2008
300
78
617
–
1046
79
69
2517
65
1748
83
£000
2009
£000
2008
–
–
6603
9523
723,4
4893,4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£000
2009
–
193
303
–
–
–
–
–
–
–
–
£000
2008
24
27
196
–
7
12
–
–
–
11
16
£000
2009
–
–
205
–
–
–
–
–
–
–
–
Total
£000
2009
£000
2008
£000
2008
–
297
324
–
205
1,403
2,105
177
1,322
–
–
–
–
–
–
–
–
22
111
80
69
305
65
176
89
–
111
91
69
251
65
185
99
Chairman
Chris Collins
Executive directors
Philip Broadley
Julian Roberts
Non‑executive directors
Mike Arnold
Nigel Andrews
Rudi Bogni
Russell Edey
Reuel Khoza
Bongani Nqwababa
Lars Otterbeck
Richard Pym
Total emoluments
2,594
1,820
1,612
561
496
293
20
20
4,7229
2,694
1 Benefits 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 satisfied that such expenditure is reasonable and in the interests of the Company.
2 Chris Collins sacrificed £3,000 to pay for chauffeur services.
3 The total short‑term incentive for the 2008 performance year was payable two‑thirds in cash and one‑third in the form of a restricted share award. For 2009, the short‑term
incentive is payable 50% in cash and 50% in the form of a restricted share award.
4 Julian Roberts pledged existing shares to the value of £129,175 and used £154,025 from his net cash short‑term 2008 incentive to purchase Old Mutual plc shares in order
to secure a bonus‑matching award for the 2008 performance year. Philip Broadley used his entire net cash 2008 short‑term incentive to purchase Old Mutual plc shares to
secure a bonus‑matching award for the 2008 performance year.
5 The Company made pension contributions in lieu of an equivalent cash payment under Julian Roberts’ benefit allowance.
6
7
8
9 The prior‑year comparative number as published in the Remuneration Report for 2008 was £4,546,000 which included £1,852,000 paid to former executive and
Includes fees of £41,520 (2009) and £35,000 (2008) from OMUSH and USLIFE.
Includes fees of £250,482 (2009) and £196,000 (2008) from Nedbank.
Includes fees of £121,093 (2009) and £119,000 (2008) from Skandia.
non‑executive directors.
The executive directors who held office during 2009 were required to waive fees for non‑executive directorships held in subsidiary
companies totalling £2,000 during the year ended 31 December 2009 (2008: £15,000) in favour of the Company or its subsidiaries.
These waivers are expected to remain in force in the future.
168 Old Mutual plc
168 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Executive directors’ remuneration in 2010
There has been no change to the executive directors’ basic salaries or benefit allowances from those that applied in 2009.
The short‑term incentive is now payable 50% in cash and 50% in the form of a restricted share award and, subject to shareholder
approval at the 2010 AGM, it is proposed that the long‑term incentive award will be replaced with the Old Mutual Strategic Incentive Plan
as described below.
Julian Roberts, Group Chief Executive
Element
Quantum
Additional information
Basic salary
£830,000 p.a.
Paid monthly in cash. Not increased since January 2009.
Paid either as contributions to agreed benefits or monthly in cash – 35% of
basic salary.
Maximum of 150% of basic salary payable half in cash and half deferred for
three years in restricted shares under the Old Mutual plc Share Reward Plan.
The short‑term incentive for 2010 will be based on achievement of Group
financial targets as well as delivery of individually agreed objectives.
The Old Mutual Strategic Incentive Plan – see below.
Benefit allowance
£290,500 p.a.
Short‑term incentive
£1,245,000 (maximum)
Long‑term incentive
£1,660,000 (based on the
annualised expected value
of the maximum award after
discounting by 40% for the
impact of performance targets)
Maximum for 2010
£4,025,500
Philip Broadley, Group Finance Director
Element
Quantum
Additional information
Basic salary
£550,000 p.a.
Paid monthly in cash. Not increased since November 2008.
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Benefit allowance
£192,500 p.a.
Short‑term incentive
£825,000 (maximum)
Long‑term incentive
£1,100,000 (based on the
annualised expected value
of the maximum award after
discounting by 40% for the
impact of performance targets)
Maximum for 2010
£2,667,500
Paid either as contributions to agreed benefits or monthly in cash – 35% of
basic salary.
Maximum of 150% of basic salary payable half in cash and half deferred for
three years in restricted shares under the Old Mutual plc Share Reward Plan.
The short‑term incentive for 2010 will be based on achievement of Group
financial targets as well as delivery of individually agreed objectives.
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The Old Mutual Strategic Incentive Plan – see below.
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The Old Mutual Strategic Incentive Plan
The Old Mutual Strategic Incentive Plan (OMSIP) will replace the long‑term incentive awards for the executive directors and certain
other senior members of management for 2010 and 2011 (the matching plan is discontinued and in particular 2010 Matching Awards
in respect of the 2009 bonus will not be made). The normal maximum award level under the plan will be 250% of salary per annum.
To align management strongly with shareholders during the transformation phase and to further incentivise strategic change, an
additional one‑off award of 250% of salary will be made in 2010. The 2010 and the 2011 annual awards will be linked to the financial
targets agreed for the transformation period. Normal awards will recommence in 2012. Subject to attainment of the agreed targets, all
the awards under the OMSIP will vest in two equal parts, three and four years from the dates of grant.
If the plan is approved at the Annual General Meeting on 13 May 2010, it is envisaged that awards under the OMSIP will be made as
soon as practicable thereafter.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
169
169
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GOVERNANCE
REMUNERATION REPORT
CONTINUEd
The one‑off award relating to the strategic change will be released 50% in 2013 and 50% in 2014 subject to performance as measured
against rationalising objectives, described below.
The annual awards for 2010 and 2011 will be released 50% after year three and 50% after year four subject to the following performance
targets:
> one half of the award will be subject to the financial performance of the Long‑Term Savings business post‑restructuring
> one half of the award will be subject to absolute Total Shareholder Return (TSR) targets.
The Committee believes that these measures provide a balanced approach to assessing the success of implementing the strategic plan,
underlying financial performance of the future business, and delivery of shareholder value.
The targets for the OMSIP award are set out below.
Rationalising Objective
The Committee will require the executive directors to rationalise the Group by achieving initiatives in accordance with and supportive of the
Group strategy statement. These performance conditions were chosen to focus the attention of management on achieving the strategy that
has been adopted by the entire Board for rationalising the business.
The Board has identified a set of initiatives which relate to the restructuring of the business and has set expectations for what is required
under each of these initiatives. At an appropriate time in the planning stage for each initiative, the Committee, in consultation with the Board,
will set more detailed targets for what satisfactory performance through to exceptional performance means in relation to each initiative.
The Committee will measure the outcome based on the agreed performance levels at the point the initiative is achieved (this could be at
any time during the measurement period). Comprehensive retrospective disclosure and explanation of vesting decisions will be provided
annually in the following Remuneration Report. The assessment made by the Committee will be by reference to the pre‑determined
targets, and will take into account the quality of execution, in particular in relation to risk and sustainability.
Component
Objective
Measurements
Significant
Rationalising
Initiatives
Rationalise the Group by
achieving strategic initiatives
in accordance with the
Group strategy statement to
streamline the Group, unlock
value and reduce debt
Based on Committee evaluation of the following three factors:
1. Total value released relative to available benchmark transactions
2. Quality of execution including risk, reputation and other non‑financial impacts
3. Amount available to reduce debt from the proceeds of rationalising
At the end of the three‑year measurement period, the Committee will assess the sum of the evaluations of the individual initiatives when
determining total achievement of this component and may exercise discretion to reduce the vesting level of the award when factoring
in total achievement toward debt reduction and any new information arising which suggests a different performance assessment.
Outcomes will be disclosed in the Remuneration Report in the year following the achievement of objectives. The Committee has chosen
these methods because of the commercial sensitivity of disclosing more than summary information in advance and because it gives
the Committee the time and discretion to judge performance with the benefit of additional information emerging during the whole of the
performance period.
Financial Objectives
1. Financial performance of the Long‑Term Savings Business
The financial metrics within the OMSIP are intended to provide an incentive based on a selection of key financial measures that best
reflect the financial performance and success of the business over the performance period. The chosen measures balance profitability,
returns and scale growth:
Vesting %
Cumulative Growth in IFRS AOP1
Return on Equity2
Annual compound growth in NCCF/
AUM3
20%
Weighting
Below 2% pa
Below Threshold
Threshold
2% pa
Threshold to Maximum |––––––––––––––––––––––––––––––––––––––Interpolated––––––––––––––––––––––––––––––––––––––|
6% pa
Maximum
40%
Below 30%
30%
40%
Below 15%
15%
Nil
20%
100%
70%
18%
1 Growth in Adjusted Operating Profit (AOP) excluding Long‑Term Investment Return on a constant currency basis over the three year performance period
2
3 The ratio of the Net Client Cash Flow (NCCF) over Assets under Management (AUM) will be calculated on a simple average basis over the full three years
IFRS AOP over aggregate equity allocated to the Long‑Term Savings business for 2012
170 Old Mutual plc
170 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
2. Absolute TSR
TSR will be measured on an absolute basis, 50% in ZAR and 50% in GBP and will be averaged at the start (Q4) and end (Q4) of the
three‑year performance periods. Old Mutual’s TSR growth will then be compared with the vesting schedule set out below to determine
the vesting outcome:
Vesting percentage
Absolute TSR growth p.a.
Below threshold
Threshold
Threshold to Maximum
Maximum
0%
20%
Interpolated
100%
Less than 10%
10%
10% to 20%
20%
The Committee must be satisfied that the Company’s TSR performance reasonably reflects its underlying financial performance over the
period. Threshold performance is aligned with Old Mutual’s cost of equity and the maximum is aligned with performance in excess of the
historic upper quartile performance within the insurance sector.
The Committee considered the use of a relative TSR measure, but believes that absolute TSR reflects a fairer measure of shareholder
value, given the current circumstances of the Group. Relative TSR is undermined by the difficulties of finding a relevant peer group for
Old Mutual given:
> The South African weighting of the business and the shortage of comparably sized South African peers
> Currency issues arising from Old Mutual’s particular geographic spread
> The current business mix of insurance, asset management, and banking
> The envisaged strategic transformation of the Group during the measurement period.
Short‑term incentive targets for performance year 2010
The respective weightings attached to the Group metrics shown as a percentage of base salary for the executive directors’ short‑term
incentive for 2010 are as follows:
Metric
IFRS earnings (Adjusted Operating Profit) per share
Return on Equity
Subtotal
Personal objectives
Mr J Roberts
Group %
Mr P Broadley
Group %
56.25
56.25
112.5
37.5
37.5
37.5
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75
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In his role as Group Finance Director, Philip Broadley is responsible to the Board for all financial matters including management control
over the internal audit and risk functions. The financial elements of his bonus therefore have a lower weighting than line management
executives and more emphasis is placed on personal objectives.
The following chart depicts the overall make‑up of the executive directors’ respective remuneration packages for 2010, assuming
on‑target (rather than maximum) delivery on short‑term incentives and an expected value for long‑term incentives.
2010 Executive director’s remuneration split
(%)
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Julian Roberts
Philip Broadley
• Base
0
• Benefit
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20
• Bonus
• Deferred bonus
30
• LTI
40
50
60
70
80
90
100
Maximum face value of pay and incentives for
Julian Roberts
(£000) as compared against CEOs of the FTSE26-75 (full year incumbents)
Maximum face value of pay and incentives for
Philip Broadley
(£000) as compared against CFOs of the FTSE26-75 (full year incumbents)
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12,000
10,000
8,000
6,000
4,000
2,000
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5,000
4,000
3,000
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1,000
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Total direct remuneration is made up of basic salary, short‑term incentives and long‑term incentives (excluding the value of benefits).
FTSE 26‑75 by Market Capitalisation as supplied by PWC.
*The one‑time Rationalising Award is annualised over the 3‑year rationalising period.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
• Matching Awards
• Rationalising Awards*
• Normal LTI Awards
• Annual – Deferred
shares/co-investment
• Annual cash bonus
• Base salary
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171
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GOVERNANCE
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 and
restricted shares
(PSP)
In 2009, the purpose of the PSP was to grant share options and/or restricted shares
as long‑term incentive awards under a bonus‑matching arrangement to qualifying
senior employees. 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. From 2010 onwards, the PSP will be used to grant awards in respect of the
Old Mutual Strategic Incentive Plan. 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.
Share Reward Plan
– share options and
restricted shares
(SRP)
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 are 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.
2008 Sharesave
Plan (SAYE)
Share Option and
Deferred Delivery
Plan (SOP)
Restricted Share
Plan (RSP)
UK Sharesave Plan
(Sharesave)
The purpose of the SAYE is to provide a savings and investment opportunity for
employees of the Group’s participating businesses in the UK, Guernsey, Jersey and
the Isle of Man, which encourages share ownership at all levels. Options will be
granted for three‑ or five‑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 five‑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 or charged prior to exercise, except on death, and the
option would lapse on any attempt to do so.
Shares under award
or option at
31 December 2009
16,947,482
17,738,440
34,504,812
24,028,728
7,987,654
797,898
172 Old Mutual plc
172 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Name of Plan
Description
The OMSA
Broad‑Based
Employee Share
Plan
The OMSA Senior
Black Management
Share Plan (SBP)
The OMSA
Management
Incentive Share
Plan (MISP)
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 by means of an opportunity of ownership of Old Mutual shares for 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.
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 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.
Shares under award
or option at
31 December 2009
5,250,344
20,346,564
95,136,175
Total shares held under award or option at 31 December 2009
222,738,097
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 reflect 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 reflect 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.
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
173
173
GOVERNANCE
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 2009, 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
Zimbabwe
Guernsey
Namibia
Namibia
South Africa
South Africa
South Africa
Old Mutual plc
Shares held in trust
1,552,369
18,959,521
904,224
2,234,800
28,705,690
82,505,037
23,048,439
157,910,080
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 sufficient 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 beneficiaries 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 beneficiaries 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, SRP, PSP and SAYE are currently
intended to be settled by the issue of new shares rather than using shares held in an ESOT.
Dilution limits
For the purposes of calculating dilution limits, any awards that are satisfied 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 2009, the Company had 2.14% of share capital available under the 5% in five years limit applicable to discretionary
share incentive schemes and 5.55% of share capital available under the 10% in 10 years limit applicable to all share incentive
schemes. The issued share capital figure used for this calculation has not been reduced to reflect 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 (whose listing
came to an end in February 2010 when it became wholly owned by the Old Mutual Group), 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.
174 Old Mutual plc
174 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Directors’ interests under employee share plans
The following options and rights over shares in the Company were outstanding at 1 January and 31 December 2009 in favour of the
executive directors under the employee share schemes described in the ‘Employee share plans’ section above. Those granted during
2009 are highlighted in bold and those vested, released, exercised or lapsed during 2009 are shown in italics:
Grant
Date
At
1 Jan
09
Granted
Exercised,
Released,
Lapsed
At
31 Dec
09
Exercise
price per
share (p)
Share
price at
date of
exercise/
release
(p)
Gain
made on
exercise/
release
Exercised or
released or
from which
exercisable
or releasable
Expiry or
vesting
date
Award
type
and plan
Reason
for
award
Performance
targets
to be
met
Philip Broadley
Option
(SRP)
Joining No
10‑Nov‑08
1,315,789
1,315,789
Total
Shares
(SRP)
Total
Option
(PSP)
Total
Shares
(PSP)
Total
DSTI
No
8‑Apr‑09
Match Yes
8‑Apr‑09
Match Yes
8‑Apr‑09
Joining Yes
8‑Apr‑09
Julian Roberts
Shares
(SRP)
DSTI
No
8‑Apr‑09
Total
Option
(PSP)
Total
Shares
(PSP)
Total
Option
(SOP)
Total
Shares
(RSP)
Total
Option
SAYE
Total
Match Yes
8‑Apr‑09
Match Yes
8‑Apr‑09
LTI
LTI
LTI
LTI
LTI
LTI
DSTI
Match
DSTI
Match
DSTI
Match
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
Yes
No
Yes
No
26-Feb-03
3-Mar-04
26‑Apr‑05
29-Mar-06
30‑Mar‑07
3‑Apr‑08
29-Mar-06
29-Mar-06
30‑Mar‑07
30‑Mar‑07
3‑Apr‑08
3‑Apr‑08
9‑Apr‑09
–
–
–
–
–
–
–
–
–
–
645,406
661,418
304,348
239,295
307,504
426,137 8
2,584,108
75,578
118,976
90,812
143,766
93,104
186,661 8
708,897
–
–
44,235 1
44,235
442,357 1, 2, 3
442,357
85,805 2, 3
739,372 1, 2
825,177
301,594 1
301,594
4,436,229 1, 2, 3
4,436,229
860,508 2, 3
860,508
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,315,789
57.00
–
–
–
–
–
–
–
–
–
–
–
–
–
–
645,406 4
661,418 5
–
239,295 6
–
–
1,315,789
44,235
44,235
–
442,357
54.10
442,357
85,805
739,372
825,177
301,594
301,594
–
–
–
4,436,229
54.10
4,436,229
860,508
–
860,508
–
–
304,348
–
307,504 7
426,137
86.25
95.25
126.50
198.50
162.60
123.20
1,546,119
1,037,989
75,578 9
118,976 6
–
–
–
–
–
–
90,812
143,766 7
93,104
186,661
194,554
514,343
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
113.32
–
–
–
–
45.80
–
–
–
–
–
–
119,518
–
–
–
–
119,518
34,577
–
–
–
–
–
34,577
10‑Nov‑11
10‑Nov‑14
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑15
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑12
8‑Apr‑15
8‑Apr‑12
8‑Apr‑12
–
14‑Oct‑09
26‑Apr‑08
–
30‑Mar‑10
3‑Apr‑11
30-Mar-09
–
30‑Mar‑10
30‑Mar‑10
3‑Apr‑11
3‑Apr‑11
–
–
26‑Apr‑11
–
30‑Mar‑13
3‑Apr‑14
–
–
30‑Mar‑10
30‑Mar‑10
3‑Apr‑11
3‑Apr‑11
–
–
48,906
48,906
–
–
48,906
32.00 10
–
–
1‑Jun‑14
30‑Nov‑14
48,906
1 Options and awards under the PSP and the SRP granted on 8 April 2009 were based on the closing middle‑market price of the Company’s shares on the London Stock
Exchange on 7 April 2009, namely 54.1p.
2 Subject to the fulfilment of performance targets prescribed by the Committee under which bonus‑matching options and restricted share awards granted in 2009 are subject
to targets relating to the Company’s IFRS EPS and RoAE.
3 The number of shares awarded under the RSP bonus match on 8 April 2009 was calculated by reference to a price of 0.55781p per share, being the price at which the
matching shares were acquired by the Old Mutual plc Employee Share Trust.
4 Unexercised options granted on 26 February 2003 expired on 26 February 2009, six years after the date of grant.
5 On 14 October 2009 Julian Roberts exercised share options originally granted on 3 March 2004 over 661,418 shares. Julian Roberts sold 601,892 of these shares to cover
the costs of exercise and the income tax and employee’s National Insurance contribution liabilities and retained 59,526 shares.
6 As a result of the MCEV EPS‑based performance targets not being met, the options and bonus‑matching restricted share awards granted on 29 March 2006 lapsed on
4 March 2009.
7 As a result of the IFRS EPS‑based performance targets not being met, the options and bonus‑matching restricted share awards granted on 30 March 2007 lapsed on
11 March 2010.
8 Subject to the fulfilment of performance targets prescribed by the Committee, under which options and bonus‑matching restricted shares granted in 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% over the three‑year vesting period.
9 On 30 March 2009, 75,578 shares were released to Julian Roberts in respect of the 2006 deferred short‑term incentive restricted share award. Julian Roberts retained
all shares.
10 The SAYE option price was determined as 20% below the average of the Company’s share price between 16 and 18 March 2009. The Company’s share price at the date of
grant (9 April 2009) was 63.3p.
Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
175
175
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GOVERNANCE
REMUNERATION REPORT
CONTINUEd
Company share price performance
The market price of the Company’s shares was 109.2p at 31 December 2009 and ranged from a low of 30.8p to a high of 121.3p
during 2009.
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% of annual base salary within
five years of appointment; the equivalent figure for the other executive director is 100% 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 the executive directors at 31 December 2009 (including holdings by connected
persons) compared to the shareholding requirements prescribed by these guidelines.
Julian Roberts
Philip Broadley
Minimum number
of shares required
to be held1
Personal shares
held at 31
December 2009
Date by which holding
must be achieved
1,140,110
503,664
1,500,832 September 2013
50,625 November 2013
1 The minimum number of shares required to be held has been calculated using the market price of Old Mutual plc shares on 31 December 2009, namely 109.2p.
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.
It excludes unvested share options and vested share options that were underwater at 31 December 2009 as well as restricted share
awards that are subject to performance targets.
Personal
shares
held
Total value
of personal
shares £
Total restricted
shares held
(not subject to
performance
targets)
Total value
of restricted
shares £
Total share
options held
(above water
and not subject
to performance
targets)
Total value of
share options
held (above
water and
not subject to
performance
targets) £
Total
exposure £
Total exposure
as a percentage
of base salary
Julian Roberts
Philip Broadley
1,500,832
50,625
1,638,909
55,283
485,510
44,235
530,177
48,305
–
1,315,789
–
686,842
2,169,086
790,430
261%
144%
The Board has considered whether to adopt a shareholding requirement for non‑executive directors, but does not consider this to be appropriate.
Terms of engagement – Chairman and non‑executive directors
Chris Collins retired as Chairman on 31 December 2009. His replacement, Patrick O’Sullivan, entered into an engagement letter with the
Company in August 2009 setting out the terms applicable to his role as Chairman from January 2010. Under these terms, subject to: (a)
12 months’ notice given at any time by either the Company or Patrick O’Sullivan, (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, Patrick O’Sullivan’s
appointment may continue until his 70th birthday, namely 15 April 2019.
The other eight 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 not be extended
beyond 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:
Date of original
appointment
Date of current
appointment
Current term
as director
Date current
appointment
terminates
Nigel Andrews
Mike Arnold
Rudi Bogni
Russell Edey
Reuel Khoza
Bongani Nqwababa
Lars Otterbeck
Richard Pym
176 Old Mutual plc
176 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
1 June 2002
1 Sep 2009
1 Feb 2002
1 June 2008
1 Sep 2009
1 Feb 2008
24 June 2004 24 June 2007
27 Jan 2009
27 Jan 2006
1 April 2007
1 April 2007
14 Nov 2006 14 Nov 2009
1 Sep 2007
1 Sep 2007
1 June 2011
3rd
1 Sep 2012
1st
1 Feb 2011
3rd
2nd 24 June 2010
27 Jan 2012
2nd
1st
1 April 2010
2nd 14 Nov 2012
1 Sep 2010
1st
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 FTSE100
Index)
> Not linked to share price or Company performance.
The annual fees for the Chairman and for other non‑executive roles for 2009 and 2010 are set out below:
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Chairman
Non‑executive directors
> Base Fee
> Senior independent director additional fee
Additional fees payable for Committees
Group Audit & Risk Committee
> Chairman
> Member
Remuneration Committee
> Chairman
> Member
Non‑executive directors
> Base Fee
> Senior independent director additional fee
Additional fees payable for Committees
Group Risk Committee
> Chairman
> Member
Group Audit Committee
> Chairman
> Member
Remuneration Committee
> Chairman
> Member
Nomination Committee
> Member
2009
£
2010
£
300,000
350,000
2009 and
Q1 2010
£
55,000
3,000
30,000
10,000
12,000
4,000
2010
(effective from
1 April 2010)
£
55,000
10,000
25,000
8,000
30,000
10,000
20,000
6,000
3,000
None of the non‑executive directors of the Company (including the Chairman) contributed to any Group pension fund during 2009 or
had any accrued pension fund benefits in any Group pension fund at 31 December 2009.
Shareholder approval of the Remuneration Report
An advisory vote on the Remuneration Report will be put to shareholders at the AGM on 13 May 2010.
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Chairman of the Remuneration Committee,
On behalf of the Board
11 March 2010
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
177
177
STaTemenT of direcTorS’ reSponSibiliTieS
in reSpecT of The annual reporT and The
financial STaTemenTS
For the year ended 31 December 2009
The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are
required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to
prepare the parent company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the
state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company
financial 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 financial 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 adequate accounting records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that
its financial statements comply with the Companies Act 2006. 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 complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The directors confirm that to the best of their knowledge:
> The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit 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
11 March 2010
Philip Broadley
Group Finance Director
178 Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
independenT audiTorS’ reporT To The
memberS of old muTual plc
For the year ended 31 December 2009
We have audited the financial statements of Old Mutual plc for the year ended 31 December 2009 which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the
Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity and the
related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of
the Companies Act 2006. We have audited the Reconciliation of adjusted operating profit to Profit after tax which has been prepared on the basis
as set out on page 182.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 auditors’ 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
As explained more fully in the Statement of Directors’ Responsibilities set out on page 178, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s web-site at www.frc.org.uk/apb/scope/UKP.
Opinion on financial statements
In our opinion:
> the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2009
and of the Group’s profit for the year then ended;
> the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
> the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
> the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006.
In our opinion:
> the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
> the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception.
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
> adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
> the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
> certain disclosures of directors’ remuneration specified by law are not made; or
> we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
> the directors’ statement, set out on page 178, in relation to going concern; and
> the part of the Corporate Governance Statement on page 146 relating to the Company’s compliance with the nine provisions of the
June 2008 Combined Code specified for our review.
Alastair W S Barbour (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
8 Salisbury Square London EC4Y 8BB
11 March 2010
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Old Mutual plc
Annual Report and Accounts 2009
179
conSolidaTed income STaTemenT
For the year ended 31 December 2009
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
B3
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
C1(b)
G5(b)
C1(c)
D1(a)
F11(a)
F11(a)
C3(a)
C3(a)
3,820
(369)
3,451
11,616
3,989
168
2,422
202
21,848
(5,069)
328
(4,741)
(8,345)
(511)
(322)
(2,627)
(806)
(3,139)
(266)
(470)
(326)
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)
(21,553)
496
2
(50)
247
(365)
(118)
(340)
158
64
(118)
(7.8)
(7.8)
(1)
53
595
88
683
441
188
54
683
8.6
8.1
4,758
4,755
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 benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits 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’ profit/(loss) after tax
(Loss)/profit on disposal of subsidiaries, associated undertakings and strategic investments
Profit before tax
Income tax (expense)/credit
(Loss)/profit after tax for the financial year
Attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
(Loss)/profit after tax for the financial year
Earnings per share
Basic earnings per ordinary share (pence)
Diluted earnings per ordinary share (pence)
Weighted average number of shares – millions
180 Old Mutual plc
Annual Report and Accounts 2009
conSolidaTed STaTemenT of
comprehenSive income
For the year ended 31 December 2009
(Loss)/profit after tax for the financial year
Other comprehensive income for the financial year
Fair value (losses)/gains
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains/(losses)
Recycled to the income statement
Shadow accounting
Currency translation differences/exchange differences on translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
Total other comprehensive income for the financial year
Total comprehensive income for the financial year
Attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total comprehensive income for the financial year
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
(118)
683
D1(c)
(10)
(41)
1,087
239
27
302
21
(397)
1,228
1,110
709
334
67
1,110
16
281
(1,635)
414
26
429
68
366
(35)
648
305
299
44
648
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Old Mutual plc
Annual Report and Accounts 2009
181
reconciliaTion of adjuSTed operaTing
profiT To profiT afTer Tax
For the year ended 31 December 2009
Core operations
Long Term Savings
Nedbank
M&F
USAM
Finance costs
Long term investment return on excess assets
Interest payable to non-core operations – Bermuda
Other shareholders’ expenses
Adjusted operating profit
Adjusting items
Non core operations – Bermuda
Profit before tax (net of policyholder tax)
Income tax attributable to policyholder returns
Profit before tax
Total income tax (expense)/credit
(Loss)/profit after tax for the financial year
Adjusted operating profit after tax attributable to ordinary equity holders
Adjusted operating profit
Tax on adjusted operating profit
Adjusted operating profit
Non-controlling interests – ordinary shares
Non-controlling interests – preferred securities
Adjusted operating profit after tax attributable to ordinary equity holders
Adjusted weighted average number of shares – (millions)
Adjusted operating earnings per share – (pence)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
B2
B2
B2
B2
685
470
70
83
452
575
76
97
1,308
1,200
(104)
91
(40)
(85)
1,170
(1,137)
22
55
192
247
(365)
(118)
(140)
108
–
(32)
1,136
60
(365)
831
(236)
595
88
683
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,170
(292)
1,136
(86)
878
1,050
(181)
(64)
633
(218)
(54)
778
5,229
5,230
12.1
14.9
C1(a)
B2
D1(a)
Notes
D1(d)
F11(a)
F11(a)
C3(a)
C3(b)
Basis of preparation
The reconciliation of adjusted operating profit has been prepared so as to reflect the Directors’ view of the underlying long-term performance of
the Group. The statement reconciles adjusted operating profit to profit after tax as reported under IFRS as adopted by the EU.
For core life assurance and general insurance businesses, adjusted operating profit is based on a long-term investment return, including
investment returns on life funds’ investments in Group equity and debt instruments, and is stated net of income tax attributable to policyholder
returns. For the US Asset Management business it includes compensation costs in respect of certain long-term incentive schemes defined as
non-controlling interests in accordance with IFRS. For all core businesses, adjusted operating profit excludes goodwill impairment, the impact
of acquisition accounting, revaluations of put options related to long-term incentive schemes, the impact of closure of unclaimed shares trusts,
profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred
callable securities, and fair value profits/(losses) on certain Group debt movements. Bermuda, which is non-core, is not included in adjusted
operating profit.
Adjusted operating earnings per ordinary share is calculated on the same basis as adjusted operating profit. It is stated after tax attributable
to adjusted operating profit and non-controlling interests. It excludes income attributable to Black Economic Empowerment trusts of listed
subsidiaries. The calculation of the adjusted weighted average number of shares includes own shares held in policyholders’ funds and Black
Economic Empowerment trusts.
182 Old Mutual plc
Annual Report and Accounts 2009
conSolidaTed STaTemenT
of financial poSiTion
At 31 December 2009
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 life assurance 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
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Total assets
Liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Liabilities under acceptances
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held-for-sale
Total liabilities
Net assets
Shareholders’ equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total non-controlling interests
Total equity
At
31 December
£m
2009
At
31 December
£m
2008
Notes
A1
F1
F2
F3
F8
G5
F4
E8
E8
E8
E3
E4
F5
E6
E8
E8
E9
F6
F7
F8
F9
E10
E6
Restated
5,882
734
682
1,478
1,590
111
3,199
1,148
115
164
35,745
83,522
118
220
3,137
3,228
3,203
7
5,159
882
828
1,759
570
135
3,138
1,296
120
146
42,393
98,461
169
170
3,051
2,546
2,982
1
163,806
144,283
93,876
372
2,906
3,309
263
654
905
210
4,305
170
44,135
1,990
–
81,269
344
2,591
2,295
477
598
1,452
219
4,074
220
38,171
2,990
6
153,095
134,706
10,711
9,577
F10
8,464
7,737
F11(b)
F11(b)
1,537
710
2,247
10,711
1,147
693
1,840
9,577
The consolidated financial statements on pages 180 to 320 were approved by the Board of Directors on 11 March 2010.
Julian Roberts
Group Chief Executive
Philip Broadley
Group Finance Director
Old Mutual plc
Annual Report and Accounts 2009
183
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S
conSolidaTed STaTemenT of caSh flowS
For the year ended 31 December 2009
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Restated
247
595
(9,762)
1
86
648
770
21
(2)
50
(465)
14,183
3
74
504
320
21
1
(53)
(294)
(8,653)
14,759
(148)
(5)
62
(6,589)
(652)
13,163
5,964
(1,798)
9,997
(373)
486
(49)
(370)
(5,206)
282
(10,260)
6,110
(3,901)
(12,908)
(458)
1,218
1,988
(2,674)
(82)
57
(138)
29
(43)
(5)
40
(1,170)
(145)
13
(99)
11
(18)
(93)
1,138
(2,816)
(363)
–
(190)
(57)
100
38
–
1,049
(441)
499
(352)
(208)
(87)
31
5
(175)
374
(225)
(637)
Cash flows from operating activities
Profit before tax
Capital (gains)/losses 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’ (profit)/loss after tax
Loss/(profit) arising on disposal of subsidiaries, associated undertakings and strategic investments
Other non-cash amounts in profit
Non-cash movements in profit before tax
Reinsurers’ share of life assurance 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
Net cash inflow from operating activities
Cash flows from investing activities
Net acquisitions of financial investments
Acquisition of investment properties
Proceeds from disposal of investment properties
Acquisition of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of intangible assets
Acquisition of interests in subsidiaries
Disposal of interests in subsidiaries, associated undertakings and strategic investments
Net cash outflow from investing activities
Cash flows from financing activities
Dividends paid to
Equity holders of the Company
Non-controlling interests and preferred security interests
Interest paid (excluding banking interest paid)
Proceeds from issue of ordinary shares (including by subsidiaries to non-controlling interests)
Net sale of treasury shares
Shares repurchased in buyback programme
Issue of subordinated and other debt
Subordinated and other debt repaid
Net cash inflow/(outflow) from financing activities
184 Old Mutual plc
Annual Report and Accounts 2009
conSolidaTed STaTemenT of caSh flowS
For the year ended 31 December 2009 continued
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 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 in the statement of financial position
Mandatory reserve deposits with central banks
Short term cash balances held in policy holder funds
Cash and cash equivalents subject to consolidation of funds
Total
Other supplementary cash flow disclosures
Interest income received (including banking interest)
Dividend income received
Interest paid (including banking interest)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
(1,099)
160
4,983
4,044
263
2,412
307
2,982
882
897
(717)
Restated
988
399
3,596
4,983
221
2,794
188
3,203
734
2,043
(997)
4,044
4,983
5,394
335
2,544
5,384
493
3,078
The 31 December 2008 cash flows have been restated as detailed in note A1.
Cash flows presented in this statement include all cash flows relating to policyholders’ funds for life assurance.
Except for mandatory reserve deposits with central banks and cash and cash equivalents subject to consolidation of funds, management
do not consider that there are any material amounts of cash and cash equivalents which are not available for use in the Group’s day to day
operations. Mandatory reserve deposits are, however, included in cash and cash equivalents for the purposes of the cash flow statement in line
with market practice in South Africa.
d
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Old Mutual plc
Annual Report and Accounts 2009
185
conSolidaTed STaTemenT of
changeS in equiTy
For the year ended 31 December 2009
Year ended 31 December 2009
Millions
Number of
shares issued
and fully paid
Attributable to
equity holders
of the parent
Total
non-controlling
interests
Notes
Shareholders’ equity at beginning of the year
5,516
(Loss)/profit after tax for the financial year
Other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to the income statement
Shadow accounting
Currency translation differences/exchange differences on
translating foreign operations
Other movements
Income tax relating to components of other comprehensive
income
Total comprehensive income for the financial year
Dividends for the year
Net sale of treasury shares
Issue of ordinary share capital by the Company
Change in participation in subsidiaries
Exercise of share options
Change in share-based payments reserve
Transactions with shareholders
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
2
D1(c)
C4
7,737
(340)
(12)
(41)
1,087
239
27
124
22
(397)
709
(45)
39
2
–
3
19
18
1,840
222
2
–
–
–
–
178
(1)
–
401
(145)
–
–
150
–
1
6
£m
Total
equity
9,577
(118)
(10)
(41)
1,087
239
27
302
21
(397)
1,110
(190)
39
2
150
3
20
24
Shareholders’ equity at end of the year
5,518
8,464
2,247
10,711
186 Old Mutual plc
Annual Report and Accounts 2009
conSolidaTed STaTemenT of
changeS in equiTy
For the year ended 31 December 2009 continued
Year ended 31 December 2009
Notes
Share
capital
Share
premium
Other
reserves
Translation
reserve
Retained
earnings
Perpetual
preferred
callable
securities
£m
Total
Attributable to equity holders of the
parent at beginning of the year
(Loss)/profit for the financial year
attributable to equity holders of
the parent
Other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to income statement
Shadow accounting
Currency translation differences/exchange
differences on translating foreign
operations
Other movements
Income tax relating to components of other
comprehensive income
Total comprehensive income for the
financial year
Dividends for the year
Net sale of treasury shares
Issue of ordinary share capital by the
Company
Exercise of share options
Change in share-based payments reserve
Transactions with shareholders
Attributable to equity holders of the
parent at end of the year
552
766
2,130
386
3,215
688
7,737
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
3
–
5
–
–
(372)
32
(340)
(12)
–
1,087
239
27
–
7
(410)
938
–
–
–
–
19
19
–
(41)
–
–
–
124
–
–
83
–
–
–
–
–
–
–
–
–
–
–
–
15
–
(357)
–
39
–
–
–
39
–
–
–
–
–
–
–
(12)
(41)
1,087
239
27
124
22
13
(397)
45
(45)
–
–
–
–
(45)
709
(45)
39
2
3
19
18
C4
F10
552
771
3,087
469
2,897
688
8,464
Other reserves attributable to equity holders of the parent
At beginning of the year
Fair value gains/(losses)
Property revaluation
Available-for-sale investments
Fair value gains
Recycled to income statement
Shadow accounting
Other movements
Income tax relating to components of other comprehensive
income
Change in share-based payments reserve
Property
revaluation
reserve
Share-based
payments
reserve
Other
reserves
Merger
reserve
Available-for-
sale reserve
2,716
(844)
–
–
–
–
–
–
–
–
1,087
239
9
1
(410)
–
82
85
(12)
–
–
18
(4)
–
–
87
171
–
–
–
–
1
–
19
191
£m
Total
2,130
(12)
1,087
239
27
7
(410)
19
2
–
–
–
–
9
–
–
At end of the year
2,716
11
3,087
Retained earnings were reduced by £379 million at 31 December 2009 in respect of own shares held in policyholders’ funds, ESOP trusts,
Black Economic Empowerment trusts and other related undertakings.
Old Mutual plc
Annual Report and Accounts 2009
187
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S
conSolidaTed STaTemenT of
changeS in equiTy
For the year ended 31 December 2009 continued
Year ended 31 December 2008
Millions
Number of
shares issued
and fully paid
Attributable to
equity holders
of the parent
Total
non-controlling
interests
Notes
Shareholders’ equity at beginning of the year
5,510
Profit after tax for the financial year
Other comprehensive income
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
Income tax relating to components of other comprehensive income
Total comprehensive income for the financial 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
Change in share-based payments reserve
Transactions with shareholders
D1(c)
C4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
–
6
7,961
441
16
281
(1,635)
414
26
419
(23)
366
305
(395)
5
(175)
5
–
5
26
(529)
1,636
242
–
–
–
–
–
10
91
–
343
(165)
–
–
–
26
–
–
(139)
£m
Total
equity
9,597
683
16
281
(1,635)
414
26
429
68
366
648
(560)
5
(175)
5
26
5
26
(668)
Shareholders’ equity at end of the year
5,516
7,737
1,840
9,577
188 Old Mutual plc
Annual Report and Accounts 2009
conSolidaTed STaTemenT of
changeS in equiTy
For the year ended 31 December 2009 continued
Year ended 31 December 2008
Notes
Share
capital
Share
premium
Other
reserves
Translation
reserve
Retained
earnings
Perpetual
preferred
callable
securities
£m
Total
Attributable to equity holders of the
parent at beginning of the year
Profit for the financial year attributable
to equity holders of the parent
Other comprehensive income
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
Income tax relating to components of other
comprehensive income
Total comprehensive income for the
financial 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
Change in share-based payments reserve
Transactions with shareholders
Attributable to equity holders of the
parent at end of the year
C4
Other reserves attributable to equity holders of the parent
At beginning of the year
Fair value gains/(losses)
Property revaluation
Available-for-sale investments
Fair value losses
Recycled to income statement
Shadow accounting
Other movements
Income tax relating to components of other comprehensive
income
Change in share-based payments reserve
551
757
2,908
(304)
3,361
688
7,961
–
410
31
441
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
5
4
–
9
–
16
–
(1,635)
414
26
–
8
367
–
281
–
–
–
419
3
(13)
(804)
690
–
–
–
–
–
26
26
–
–
–
–
–
–
–
–
–
–
–
–
–
(34)
–
376
(352)
5
(175)
–
–
–
–
–
–
–
–
–
–
12
43
(43)
–
–
–
–
–
16
281
(1,635)
414
26
419
(23)
366
305
(395)
5
(175)
5
5
26
(522)
(43)
(529)
552
766
2,130
386
3,215
688
7,737
Merger
reserve
Available-for-
sale reserve
Property
revaluation
reserve
Share-based
payments
reserve
Other
reserves
2,716
–
–
–
–
–
–
–
(30)
–
(1,635)
414
41
(1)
367
–
(844)
75
16
–
–
(15)
9
–
–
85
147
–
–
–
–
(2)
–
26
171
–
–
–
–
–
2
–
–
2
£m
Total
2,908
16
(1,635)
414
26
8
367
26
2,130
At end of the year
2,716
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.
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Annual Report and Accounts 2009
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009
A: Accounting policies
A1: Basis of preparation
Statement of compliance
Old Mutual plc (the Company) is a company incorporated in England and Wales.
The Group financial 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 life assurance funds). The Parent Company financial
statements present information about the Company as a separate entity and not about the Group.
Both the Parent Company financial statements and the Group financial 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 financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in
section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved
financial statements.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated
financial statements. Details of standards, amendments to standards, and interpretations adopted in the 2009 annual financial statements are
described in section A24 and in the individual sub‑sections.
The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value:
derivative financial assets and liabilities, financial instruments designated 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 financial 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 A5(n), in accordance with IAS 27.
The Company and Group financial 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 significant effect on the financial statements and
estimates with a significant risk of material adjustment in the next year are discussed in note A17.
The 31 December 2008 financial position has been restated to reduce both derivative financial assets and liabilities by an amount of
£1,405 million and to increase both cash and cash equivalents and other liabilities by £305 million on a consistent basis to 31 December 2009,
with a corresponding restatement made to the cash flows where applicable. In addition certain comparative information including segmentation
has been revised in accordance with changes to presentation made in the current year. There was no impact on the consolidated net assets at
31 December 2008 as a result of the restatement. The 31 December 2007 statement of financial position has not been presented on the basis
that there were no changes required to that statement as a consequence of the 2008 restatements.
A2: Foreign currency translation
(a) 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 reporting 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 other comprehensive income in the consolidated statement
of other comprehensive income when the changes in the fair value of the non‑monetary item are recognised in the consolidated statement of
other comprehensive income, and in the income statement if the changes in fair value of the non‑monetary item are recognised in the income
statement.
(b) 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, cumulative unrealised gains or losses resulting from translation of functional currencies to the
190 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
presentation currency are included as a separate component of shareholders’ equity. To the extent that these gains and losses are effectively
hedged, the cumulative effect of such 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.
A3: Group accounting
(a) Subsidiary undertakings (including special purpose entities)
Subsidiary undertakings are those entities controlled by the Group. Subsidiary undertakings include special purpose entities created to
accomplish a narrow, well‑defined 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 financial and operating policies of an entity so as to obtain
benefits from its activities. The Company considers the existence and effect of potential voting rights currently exercisable or convertible when
assessing whether it has control. Special purpose entities that the Company controls by virtue of the Company retaining the majority of risks
or benefits, for example interests in open ended investment companies, unit trusts, mutual funds and similar entities, are also included in the
consolidated financial statements.
The group consolidates certain of its interests in open ended investment companies, unit trusts, mutual funds and similar investment vehicles
(collectively ‘funds’) in the event that the group has power to govern the operations of a fund so as to obtain benefits from that fund, or for
special purpose entities where the majority of benefits arising in a particular fund accrue to the group. The latter condition is typically regarded
as the case when the group owns (through a group subsidiary’s direct investment in a fund) more than 50% of the shares or units in that fund.
The assets of consolidated funds are accounted for in accordance with the appropriate accounting policies for the assets in question.
The amounts due to the balance of the investors in these funds are reported as a liability under the balance sheet caption ‘Third party interests
in consolidated funds’. Such interests are not recorded as non‑controlling interests as they meet the liability classification requirement set out
in paragraph 18 of IAS 32, ‘Financial Instruments: Presentation’. As stated in note A22, these liabilities are regarded as current, as they are
repayable on demand, although it is not expected that they will be settled in a short time period.
The Group financial statements include the assets, liabilities and results of the Company and subsidiary undertakings. 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 financial 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 benefits usually associated with share ownership due to the legal and regulatory restrictions.
Those benefits 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 financial instruments.
Intra‑group balances and transactions, income and expenses and all profits and losses arising from intra‑group transactions, are eliminated in
preparing the Group financial statements. Unrealised losses are not eliminated to the extent that they provide evidence of impairment.
(b) Business combinations
Business combinations are accounted for using the purchase method. Business combinations are accounted for at the date that control is
achieved (the acquisition date). The cost of a business combination is measured as the aggregate of the fair values (at the date of exchange)
of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. For all
transactions subsequent to 31 December 2008 acquisition‑related costs are recognised in the income statement as incurred. Prior to this date
all acquisition‑related costs were included in the cost of the acquisition.
Where appropriate, the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured
at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as
measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as an asset
or liability are accounted for in accordance with the relevant IFRS. Changes in the fair value of contingent consideration that have been classified
as equity are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 ‘Business
Combinations’ are recognised at their fair value at the date of acquisition date, with the following exceptions:
> Deferred tax assets or liabilities are recognised and measured in accordance with IAS 12 ‘Income Taxes’;
> Assets and liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 19 ‘Employee
Benefits’;
> Liabilities or equity instruments that relate to the replacement, by the Group, of an acquiree’s share‑based payment awards are measured in
accordance with IFRS 2 ‘Share‑based Payment’; and
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
> Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non‑current Assets Held for Sale and Discontinued
Operations’ are measured in accordance with that standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts for the items for which the accounting is incomplete. Where provisional amounts were reported these are adjusted
during the measurement period (see below). Additional assets or liabilities are recognised, to reflect any new information obtained about the
facts and circumstances that existed as of the date of acquisition date that, if known, would have affected the amounts recognised as on
that date.
The measurement period for initial accounting for a business combination is the period from the date of acquisition to the date the Group
receives complete information about the facts and circumstances that existed as at the acquisition date, subject to a maximum period of
one year.
Where a business combination is achieved in stages, the Group’s previously‑held interests in the acquired entity are remeasured to fair value
at the date that control is achieved (the acquisition date) and the resulting gain or loss, if any, is recognised in the income statement. Amounts
arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are
reclassified to the income statement, where such treatment would be appropriate if the interest were disposed of.
Non‑controlling interests in the net assets of consolidated subsidiary undertakings are identified and recorded separately from the Group’s
equity. The interest of non‑controlling shareholders is initially measured either at fair value or at the non‑controlling interest’s proportionate share
of the acquiree’s identifiable net assets. The choice of measurement basis for the initial measurement of the non controlling interest is made on
an acquisition‑by‑acquisition basis. Subsequent to acquisition, non‑controlling interests comprise the amount attributed to such interests at
initial recognition together with the non‑controlling interest’s share of changes in equity since the date of acquisition. For acquisitions prior to
31 December 2008, non‑controlling interests were recorded at the proportionate share of the acquiree’s identifiable net assets.
The difference between the proceeds from the disposal of a subsidiary undertaking and its carrying amount as at the date of disposal, including
the cumulative amount of any related exchange differences that are recognised in equity, is recognised in the Group income statement as the
gain or loss on the disposal of the subsidiary undertaking.
Changes in the Group’s interest in a subsidiary undertaking that do not result in a loss of control are accounted for as transactions with
equity holders (as owners). Any difference between the amount by which the non‑controlling interests are adjusted and the fair value of the
consideration paid or received is recognised in equity and attributed to the Group. Prior to 31 December 2008, such a difference would have
been accounted for as an addition to goodwill.
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 for either the provisions of the original (2003) or revised (2008)
versions of IFRS 3 ‘Business Combinations’. In accordance with the transitional provisions of IFRS 3 ‘Business Combinations’ (revised 2008)
and corresponding provisions of IAS 27 ‘Separate and Consolidated Financial Statements’ (revised 2008) business combinations that took
place prior to 1 January 2009 have not been restated.
(c) Associates and jointly controlled operations
An associate is an entity, including an unincorporated entity such as a partnership, over which the Group has significant influence but not
control, through participation in the financial and operating policy decisions of the investee (and that is neither a subsidiary nor an investment in
a joint venture). This is generally demonstrated by the Group holding in excess of 20%, but less than 50% of the voting rights.
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 financial 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 financial 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 profits 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 that are held with a view to subsequent resale are accounted for as non‑current
assets held‑for‑sale, and those held by policyholder life assurance funds are accounted for as financial assets fair valued through the income
statement.
192 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
A4: Insurance and investment contracts
Life assurance
(a) Classification of contracts
Contracts sold as life assurance (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 classification 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.
Unit‑linked assurance contracts are savings contracts with a small or insignificant component of insurance risk.
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.
Such contracts include savings and/or investment contracts sold without life assurance protection.
Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as
insurance contracts. Insurance risk is risk other than financial risk. Contracts accounted for as insurance contracts include life assurance
contracts and savings contracts providing more than an insignificant amount of life assurance protection.
Financial risk is the risk of a possible future change in one or more of a specified 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‑financial variable
that the variable is not specific 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 significant portion of the total contractual payments and are contractually based on (1) the performance of a specified
pool of contracts or a specified type of contract, (2) realised and/or unrealised investment returns on a specified pool of assets held by the
Group or (3) the profit or loss of the Group. Investment contracts with discretionary participating features, which have no life assurance
protection in the policy terms, are accounted for in the same manner as insurance contracts.
(b) Premiums on life assurance
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 and unit‑linked assurance contracts are
recorded as deposits and credited directly to investment contract liabilities.
(c) 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.
(d) Claims paid on life assurance
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
notified.
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 and unit‑linked assurance contracts are
recorded as deductions from investment contract liabilities.
(e) 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 profit emergence.
Old Mutual plc
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 related to these contracts is
included as part of life assurance policyholder liabilities.
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 benefit 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 qualifies 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 sufficient in view of estimated future cash flows. When performing the liability adequacy test, the
Group discounts all contractual cash flows and compares this amount to the carrying value of the liability at discount rates appropriate to the
business in question. Where a shortfall is identified, an additional provision is made.
The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected 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
significant adjustments to the amount provided.
The Group applies shadow accounting in relation to certain insurance contract provisions in the South Africa life assurance, and DAC and PVIF
assets in the United States life assurance, in respect of owner occupied properties or available‑for‑sale financial 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 life assurance, 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 other comprehensive income. The shadow accounting adjustment to insurance contract provisions is recognised
in other comprehensive income to the extent that the unrealised gains or losses on owner‑occupied property backing insurance contract
provisions are also recognised directly in other comprehensive income.
In respect of the United States life assurance, shadow accounting adjustments are made to the amortisation of DAC and PVIF assets in
respect of unrealised gains and losses on available‑for‑sale financial 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
other comprehensive income in line with the unrealised gains and losses on the relevant financial assets until such time as those assets are sold
or otherwise disposed of, at which point the accumulated amortisation recognised in other comprehensive income is recycled to the income
statement in the same way as the unrealised gains or losses on those financial assets.
Financial guarantee contracts are recognised as insurance contracts. Liability adequacy testing is performed to ensure that the carrying amount
of the liability for financial guarantee contracts is sufficient.
(f) Investment contract liabilities
Investment contract liabilities in respect of the Group’s non‑linked business are recorded at amortised cost unless they are designated at fair
value through the income statement in order to eliminate or significantly reduce a measurement or recognition inconsistency, for example where
the corresponding assets are recorded at fair value through the income statement.
Investment contract liabilities in respect of the Group’s linked business are recorded at fair value. For such 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 floor’ such that the liability established cannot be less than the
amount repayable on demand.
(g) Acquisition costs
Acquisition costs for insurance contracts comprise all direct and indirect costs arising from the sale of insurance contracts.
194 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 statement of financial position for the contracts
issued in these areas.
For the US life insurance business, an explicit deferred acquisition cost asset is established in the statement of financial position. Deferred
acquisition costs are amortised over the period that profits on the related insurance policies are expected to emerge. Acquisition costs are
deferred to the extent that they are deemed recoverable from available future profit margins.
Deferral of costs on insurance business in other territories is limited to the extent that they are deemed recoverable from available future
margins.
(h) 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 identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs represent the contractual
right to benefit 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
All classes of general insurance business are accounted for on an annual basis.
(i) 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 reporting 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.
(j) 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
reporting 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 sufficient in view of estimated future cash flows.
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
significant adjustments to the amount provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the
financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used and estimates
made are reviewed regularly.
(k) 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.
(l) Reinsurance
The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the diversification 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 significant transfer of insurance risk are accounted for as reinsurance assets. Rights under
contracts that do not transfer significant insurance risk are accounted for as financial 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.
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Notes to the coNsolidated
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For the year ended 31 December 2009 continued
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 reporting 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.
A5: Financial instruments
(a) Recognition and de‑recognition
A financial asset or liability is recognised when, and only when, the Group becomes a party to the contractual provisions of the financial
instrument.
The Group de‑recognises a financial asset when, and only when:
> The contractual rights to the cash flows arising from the financial assets have expired or been forfeited by the Group; or
> It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or
> It no longer controls the financial asset nor retains substantially all the risks and rewards of ownership, regardless of whether it has
transferred the asset.
A financial liability is de‑recognised when and only when the liability is extinguished, that is, when the obligation specified in the contract is
discharged, assigned, cancelled or has expired.
The difference between the carrying amount of a financial 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 financial 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.
(b) Initial measurement
Financial instruments are initially recognised at fair value plus, in the case of a financial asset or financial liability not at fair value through the
income statement, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
(c) Derivative financial instruments
Derivative financial instruments are recognised in the statement of financial position at fair value. Fair values are obtained from quoted market
prices, discounted cash flow 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 finance
costs as appropriate.
(d) Hedge accounting
Qualifying hedging instruments must either be derivative financial instruments or non derivative financial instruments used to hedge the risk of
changes in foreign currency exchange rates, changes in fair value or changes in cash flows. Changes in the value of the financial instrument
should be expected to offset changes in the fair value or cash flows 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 firm commitment (fair value hedge); (2) a hedge of a future cash flow attributable to a recognised asset or liability,
or a forecasted transaction, and could affect profit or loss (cash flow 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 flows
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 flow hedges of a forecast transaction, an assessment that it is highly probable that the hedged transaction will occur and will carry
profit and loss risk.
196 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 specific hedged risk.
Changes in the fair value of derivatives that are designated and qualify as cash flow 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 other comprehensive income.
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 financial 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 financial instrument, based on the
effective interest method.
For hedges of a net investment in a foreign operation, any cumulative gains or losses in equity are recognised in the income statement on
disposal of the foreign operation.
(e) Embedded derivatives
Certain derivatives embedded in financial and non‑financial instruments, 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.
(f) Offsetting financial instruments and related income
Financial assets and liabilities are offset and the net amount reported in the statement of financial position 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 statement of financial position, with
the exception of those relating to hedges, which are disclosed in accordance with the income statement effect of the hedged item.
(g) Interest income and expense
Interest income and expense in relation to financial 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 flows. 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 income and expense on financial instruments carried at fair value through the income statement is presented as part of interest income
or expense.
(h) Non‑interest revenue
Non‑interest revenue in respect of financial 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 benefits of the transaction or service will flow
to the Group.
(i) Financial assets
Non‑derivative financial assets 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 statement of financial position, showing the categorisation of financial assets,
together with financial liabilities is set out in note E1(a).
Held‑for‑trading financial assets
Held‑for‑trading financial assets are those that were either acquired for generating a profit from short‑term fluctuations in price or dealer’s
margin, or are securities included in a portfolio in which a pattern of short‑term profit taking exists, or are derivatives that are not designated as
effective hedging instruments.
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Notes to the coNsolidated
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For the year ended 31 December 2009 continued
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 significantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement
basis (for instance with respect to financial assets supporting insurance contract provisions) or are managed, evaluated and reported using a
fair value basis (for instance financial assets supporting shareholder funds).
All financial 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 financial asset
is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash
flows are based on management’s best estimates and the discount rate used is a market‑related rate at the reporting date for an instrument
with similar terms and conditions. Where pricing models are used, inputs are based on observable market data where available at the reporting
date.
Realised and unrealised fair value gains and losses on all financial 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 financial 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.
Loans and receivables
Loans and receivables are non‑derivative financial assets with fixed or determinable payments that are not quoted in an active market, other
than those classified 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 financial assets
Financial assets with fixed 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 classified as held‑to‑maturity. These assets are carried at amortised cost less any impairment write‑downs.
Interest earned on held‑to‑maturity financial assets is reported within Investment return (non‑banking) or Banking interest and similar income,
as appropriate.
Available‑for‑sale financial assets
Financial assets intended to be held for an indefinite 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
classified as available‑for‑sale. Management determines the appropriate classification of its investments at the time of the purchase.
Available‑for‑sale financial 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 financial asset is estimated using pricing models or discounted cash flow techniques. Where discounted cash
flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market‑
related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on
observable market data where available at the reporting date.
Unrealised gains and losses arising from changes in the fair value of available‑for‑sale financial assets are recognised in other comprehensive
income. When available‑for‑sale financial assets are disposed the related accumulated fair value adjustments are included in the income
statement as gains and losses from available‑for‑sale financial 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 financial 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.
(j) Sale and repurchase agreements and lending of securities
Securities sold subject to linked repurchase agreements are retained in the financial statements as appropriate when considering the
de‑recognition criteria contained within IAS 39. The securities that are retained in the financial statements are reflected 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 retained in the financial statements and any interest earned recognised in the income statement using the
effective interest method.
Securities borrowed are not recognised in the financial 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.
198 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(k) Impairments of financial assets
Indicators of impairment
A provision for impairment is established if there is objective evidence that the Group will not be able to recover all amounts relating to the
financial asset. Observable data that could come to the attention of the Group that could lead to a provision for impairment to be made
includes:
> significant financial difficulty of the counter party;
> 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 counter party’s financial difficulty, grants to the counter party a concession that the
Group would not otherwise consider;
> it becoming probable that the counter party will enter bankruptcy or other financial reorganisation; or
> observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of assets since the initial
recognition of those assets, although the decrease cannot yet be identified with the individual financial assets, including:
> adverse changes in the payment status of counter parties in the group of financial assets; or
> national or local economic conditions that correlate with defaults on the assets in the group of financial assets.
In addition, for an available‑for‑sale financial asset, a significant or prolonged decline in the fair value below its cost is also objective evidence of
impairment.
Financial assets at amortised cost
The amount of the impairment of a financial asset held at amortised cost is the difference between the carrying amount and the recoverable
amount, being the value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the
effective interest rate at initial recognition.
The impairment provision also covers losses where there is objective evidence that losses are present in components of the loan portfolio at the
reporting date, but these components have not yet been specifically identified. When a loan is uncollectable, it is written‑off against the related
impairment provision.
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.
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Available‑for‑sale financial assets
The amount of the impairment loss of an available‑for‑sale financial asset is the cumulative loss that has been recognised in other
comprehensive income, being the difference between the acquisition cost and the asset’s current fair value, less any impairment loss on that
asset previously recognised in the income statement. For available‑for‑sale debt securities, fair value is determined as is the present value of
expected future cash flows discounted at the current market rate of interest.
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All such impairments are recognised in the income statement. 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.
(l) Financial liabilities (other than investment contracts and derivatives)
Non‑derivative 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 financial 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
significantly 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 financial 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 first 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 financial 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.
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Conversion options included within financial 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.
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Annual Report and Accounts 2009
199
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of a
liability and the consideration paid is included in other income.
(m) Reclassifications of financial assets
A non‑derivative financial asset that would have met the definition 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 reclassified out
of the fair value through income statement category if the Group intends and is able to hold the financial asset for the foreseeable future or until
maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification. Any gain or loss already recognised
in profit or loss is not reversed. The fair value at the date of reclassification becomes its new cost or amortised cost, as applicable.
Other non‑derivative financial assets that were required to be categorised as held‑for‑trading at initial recognition may be reclassified out of
the fair value through income statement category in rare circumstances. If a financial asset is so reclassified, it is reclassified at its fair value on
the date of reclassification. Any gain or loss already recognised in profit or loss is not reversed. Measurement of the asset after reclassification
depends on the subsequent categorisation.
A non‑derivative financial asset that would have met the definition of loans and receivables at initial recognition that was designated as
available‑for‑sale may be reclassified out of the available‑for‑sale category to the loans and receivables category if it meets the loans and
receivables definition at the date of reclassification and if the Group intends and is able to hold the financial asset for the foreseeable future
or until maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification. The fair value at the date of
reclassification becomes its new cost or amortised cost, as applicable. In the case of a financial asset with a fixed maturity, the gain or loss
already recognised in the available‑for‑sale reserve in equity is amortised to profit 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 financial asset that does
not have a fixed maturity, the gain or loss already recognised in the available‑for‑sale reserve in equity is recognised in profit or loss when the
financial asset is sold or otherwise disposed of.
In accordance with the transitional provisions of the amendments, issued in October 2008 to IAS 39 ‘Financial Instruments: Recognition and
Measurement’ relating to the reclassification of financial assets, certain qualifying financial assets held by the Group during the period up to and
including 1 July 2008 were reclassified as of that date and based on the fair value at that date.
Details of all reclassifications of financial assets in accordance with the above accounting policies are shown in note E1(a).
(n) 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‑financial assets (see section A(8)).
A6: Tax
Income tax on the profit 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 in other comprehensive income, in which case it is correspondingly recognised in other
comprehensive income.
(a) 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 reporting
date, and any adjustment to tax payable in respect of previous years.
(b) Deferred tax
Deferred taxation is provided using the temporary difference method. Temporary differences are differences between the carrying amounts of
assets and liabilities for financial 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
reporting date. Deferred taxation is charged to the income statement except to the extent that it relates to a transaction that is recognised
directly in other comprehensive income, 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 other
comprehensive income. 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 benefits 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 profit. Note F8 includes further detail of circumstances in which the Group does not recognise temporary differences.
A7: Intangible assets
(a) Goodwill and goodwill impairment
Goodwill arising on the acquisition of a subsidiary undertaking is recognised as an asset at the date that control is achieved (the acquisition
date). Goodwill is measured as the excess of the fair value of the consideration transferred, the amount of any non‑controlling interest in the
acquiree and the fair value of the acquirer’s previously‑held equity interest in the acquiree (if any) over the net of the acquisition date amounts
200 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
of the identifiable assets acquired and the liabilities assumed. If the Group’s interest in the net fair value of the acquiree’s identifiable net assets
exceeds the sum of the consideration transferred, the amount of any non‑controlling interest in the acquiree and the fair value of the acquirer’s
previously‑held equity interest (if any), this excess is recognised immediately in the income statement as a bargain purchase gain.
Goodwill is not amortised, but is reviewed for impairment at least once annually. Any impairment loss is recognised immediately in profit or loss
and is not subsequently reversed.
On loss of control of a subsidiary undertaking, any attributable goodwill is included in the determination of any profit or loss on disposal.
Goodwill is allocated to one or more cash‑generating units (CGUs), being the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or group of assets. The directors annually test for impairment of each CGU or
group of CGUs containing goodwill and intangible assets with indefinite useful lives, at a level that is no larger than that of the Group’s identified
operating segments for the purposes of segment reporting. An impairment loss is recognised whenever the carrying amount of an asset or its
CGU or group of CGUs exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Impairment
losses relating to goodwill are not reversed.
(b) 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 statement of financial
position as an intangible asset.
The capitalised value is the present value of cash flows anticipated in the future from the relevant book of insurance and investment contract
policies acquired. This is calculated by performing a cash flow projection of the associated life assurance fund and book of in‑force policies in
order to estimate future after tax profits 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 profits are discounted at a rate of return allowing for the risk of uncertainty of the future cash flows. 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 profit 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 reporting date and any impairment losses recognised accordingly.
(c) 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 flows 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
> Customer relationships
> Brand
10 years
10 years
15 – 20 years
The estimated life is re‑evaluated on a regular basis.
(d) 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 statement of financial position if, and only if, it is probable that the relevant future economic
benefits attributable to the software will flow 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
specific criteria, set out in the relevant accounting guidance. The main criteria being that future economic benefits can be identified 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 five years.
(e) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the
specific asset to which it relates. All other expenditure is expensed as incurred.
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For the year ended 31 December 2009 continued
A8: Impairment (all assets other than goodwill, deferred tax assets and financial assets)
The Group assesses all assets (other than goodwill, deferred tax assets and financial 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.
A9: Property, plant and equipment
(a) 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, fixtures 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.
(b) Subsequent expenditure
Subsequent expenditure is capitalised when it is measurable and will result in probable future economic benefits. 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.
(c) 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.
(d) 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.
(e) 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
(f) Leases
Operating leases
Leases where the lessor retains the risks and rewards of ownership of the underlying asset are classified as operating leases. Payments made
under operating leases are charged against income on a straight‑line basis over the period of the lease.
202 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Finance leases
Lease agreements where the Group substantially accepts the risks and rewards of the ownership of the leased asset are classified as finance
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 finance charges so as to achieve a constant interest rate on
the outstanding balance of the liability.
Finance lease obligations, net of finance charges, are included in liabilities. The interest element of the finance cost is charged to the income
statement over the lease period according to the effective interest method. Where applicable, assets acquired under finance leases are
depreciated over the shorter of the useful life of the asset and the lease term.
Where assets are leased out under a finance 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. Finance lease income is allocated to accounting periods to reflect a
constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.
Assets leased under operating leases
Assets leased out under operating leases are included under property, plant and equipment in the statement of financial position. 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 benefit, then that method is used.
A10: 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 reporting date an
internal valuation is performed and adjustments made to reflect 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
flows. Vacant land, land holdings and residential flats are valued according to sales of comparable properties. Near vacant properties are valued
at land value less the estimated cost of demolition.
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Surpluses and deficits arising from changes in fair value are reflected in the income statement.
For properties reclassified 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 deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual
deficit is accounted for in the income statement.
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Investment properties that are reclassified to owner‑occupied property are revalued at the date of transfer, with any difference being taken to the
income statement.
A11: 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.
A12: Non‑current assets held‑for‑sale and discontinued operations
Non‑current assets (and disposal groups) classified 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 reclassifications of assets as held‑for‑sale.
Non‑current assets and disposal groups are classified 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 classification.
A discontinued operation is defined as a component of an entity that either has been disposed of, or is classified 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.
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Annual Report and Accounts 2009
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Notes to the coNsolidated
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For the year ended 31 December 2009 continued
When a non‑current asset (or disposal group) ceases to be classified as held‑for‑sale, the individual assets and liabilities cease to be shown
separately in the statement of financial position at the end of the year in which the classification changes. Comparatives are not restated. If the
line of business was previously presented as a discontinued operation and subsequently ceases to be classified as held‑for‑sale the income
statement and cash flows of the comparative period are restated to show that line of business as a continuing operation.
A13: Pension plans and retirement benefits
Defined benefit and defined 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 defined benefit obligations based on actuarial assessments, which incorporate not
only the pension obligations known on the reporting 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 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 financial year exceed 10% of the greater of the fair value of the
plan assets or 10% of the present value of the gross defined benefit 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 benefit 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 benefits of a plan are improved, the portion of the increased benefit 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 benefits become vested. To the extent that the
benefits vest immediately, the expense is recognised immediately in the income statement.
Contributions in respect of defined 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 benefits for eligible employees. Non‑pension post
retirement benefits are accounted for according to their nature, either as defined contribution or defined benefit plans. The expected costs of
post retirement benefits that are defined benefit plans in nature are accounted for in the same manner as for defined benefit pension plans.
A14: Share‑based payments
(a) 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 specified 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 reflected directly in equity.
Where the equity instruments do not vest until the employee has completed a specified 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 recognised directly 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.
(b) 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.
(c) 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 financial 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.
204 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
A15: Cash and cash equivalents
For the purposes of the cash flow 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.
A16: 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 outflow of economic benefits 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 reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.
Specific policies:
> A provision for onerous contracts is recognised when the expected benefits 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.
A17: 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 financial 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 note A4, and further detail of the key assumptions made in determining insurance contract
provisions is included in note E8. Accounting for deferred acquisition cost assets is also discussed in note A4.
The fair values of financial assets and liabilities are determined in accordance with the policies set out in note A5. They are valued on the basis
of quoted prices in active markets 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 financial 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 A7.
Assets are subject to regular impairment reviews as required. 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 A7. The policy in respect of investment
securities and purchased loans and receivables is described in note A5.
The accounting policy for deferred tax is detailed in note A6.
The Group does not consolidate its wholly owned mutual life insurance undertaking, Skandia Liv. For more information refer to the Subsidiary
Undertakings (including Special Purpose Entities) accounting policy, note A3(a).
A18: Segment reporting
The Group’s results are analysed and reported consistent with the way that management and the Board of Directors considers information
when making operating decisions and the basis on which resources are allocated and performance assessed by management and the Board
of Directors. The operating segments are Emerging Markets, Nordic, Retail Europe, Wealth Management and US Life (collectively being the
newly formed Long Term Savings) plus Nedbank, Mutual & Federal (M&F), US Asset Management and Other operating segments (comprising
the Group head office functions). The Bermuda segment is treated as a non‑core operation. The above reported segments have been revised
during the year to reflect the change in the way that management and the Board of Directors consider information, with the comparative
information having been revised to report on a consistent basis to the amended structure.
There are four principal business activities from which the Group generates revenues. These are life assurance (premium income), asset
management business (fee and commission income), banking (banking interest receivable) and general insurance (premium income).
The revenues generated in each reported segment can be seen in the analysis of profits and losses in note B.
Old Mutual plc
Annual Report and Accounts 2009
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Notes to the coNsolidated
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For the year ended 31 December 2009 continued
The information reflected in note B reflects the measures of profit and loss, assets and liabilities for each operating segment as regularly
provided to management and the Board of Directors. There are no differences between the measurement of the assets and liabilities reflected
in the primary statements and that reported for the segments. A reconciliation between the segment revenues and expenses and the Group’s
revenues and expenses is shown in note B.
In line with internal reporting, assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated
between segments where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter‑segment revenues and
transfers as if the transactions were with third parties at current market prices. Given the nature of the operations, there are no major customers
within any of the segments.
Reclassifications of comparative segment information have been made to align segment information to the Group’s revised management
reporting structure described above. There was no impact on net profit or net assets.
A19: Treasury shares
Upon consolidation, the statement of financial position and income statement are adjusted for own shares held in policyholder funds, Employee
Share Ownership Trusts (ESOPs), and Black Economic Empowerment trusts consolidated within the Group’s financial statements.
Own shares are deducted from equity. On purchase, the cost of the shares acquired is deducted from equity. Subsequently, any proceeds from
the sale or cancellation of own equity instruments are recognised in equity.
Income in relation to own shares, both dividends received and unrealised gains and losses, are eliminated before stating the profit for the year.
In calculating basic earnings per share, the exclusion of income in respect of own shares from the income statement requires the corresponding
exclusion of own shares from the weighted average number of shares. When calculating diluted earnings per share, the number of shares
included in the weighted average reflects the potential issue in respect of the own shares held.
A20: Share capital
Ordinary and preference share capital (including perpetual preferred callable securities) are classified 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 classified as a liability if it is redeemable on a specific 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.
A21: 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 final dividend typically
requires shareholder approval.
A22: Liquidity analysis of the statement of financial position
The Group’s statement in financial position is 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 analysis is given to describe how statement of financial position lines are categorised between
current and non‑current balances, applying the principles laid out in IAS 1.
The following statement of financial position captions are generally classified as current – cash and cash equivalents, non‑current assets held‑
for‑sale, client indebtedness for acceptances, current tax receivable, third party interests in the consolidation of funds, current tax payable,
liabilities under acceptances and non‑current liabilities held‑for‑sale. The following balances are generally classified 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,
provisions, deferred revenue and deferred tax liabilities.
The following balances include both current and non‑current portions – reinsurers’ shares of life assurance and general insurance business
policyholder liabilities, loans and advances, investments and securities, other assets, derivative financial assets and liabilities, life assurance 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 financial liability captions).
A23: Funds under management
Funds under management represents a measure of the value of customer assets managed by the Group’s insurance and asset management
operating segments.
Accounting treatment of funds under management depends on the nature of the contractual relationship with the customer and generally
conforms to the following basic principles:
> Contracts with customers that involve a policy of insurance between the customer and the insurer are accounted for ‘on‑balance sheet’ and
follow the accounting policies set out in A4. For such contracts, there is a legal transfer of funds between the customer and the insurer, and
206 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
accounting recognition follows this contractual form, in accordance with insurance practice under IFRS 4, ‘Insurance Contracts’ (‘IFRS 4’).
The amount due to the policyholder is accounted for as a liability (generally in life assurance policyholder liabilities), the funds received are
invested by the insurer in financial and other assets, which are recorded on‑balance sheet.
> Customer funds related to asset/investment management contracts with the investor, where the investor only has a service relationship with
the Group and where the contractual terms do not result in a transfer of ownership of the investor’s assets to the insurer or asset manager,
are not recognised in the Group’s statement of financial position but are only included as part of the funds under management measure. The
Group has no legal entitlement to the investor’s assets, nor any requirement to recognise a liability to the investor.
Note B5 on page 216 provides an analysis of funds under management. The lines ‘life assurance policyholder funds’ and ‘shareholder funds’
represent on‑balance sheet funds under management, whereas the lines ‘unit trusts and mutual funds’ and ‘third party client funds’ are
off‑balance sheet.
A24: Standards, amendments to standards, and interpretations adopted in the 2009 annual financial statements
The following standards, amendments to standards and interpretations, which are relevant to the Group, have been adopted in these financial
statements:
> IFRS 2 ‘Share‑based payment’ (amendments effective 1 January 2010). The Group has early‑adopted the amendments to IFRS 2
‘Share‑based Payment’, ‘Group Cash‑settled Share‑based Payment Transactions’ issued in June 2009. These amendments introduce
guidance on the treatment of group cash‑settled share‑based payment arrangements and consolidate the previous requirements set out in
IFRIC 8, ‘Scope of IFRS 2’ and IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’. There were no material impacts arising from the
implementation of this amendment.
> IFRS 3 ‘Business Combinations’ (revised 2008) and IAS 27 ‘Consolidated and Separate Financial Statements’ (revised 2008) (effective
1 July 2009). The Group has early‑adopted the provisions of the revised version of IFRS 3 ‘Business Combinations’ together with the
corresponding amendments to IAS 27 ‘Consolidated and Separate Financial Statements’ in these financial statements. Mandatory adoption
would have been required for the first time in the financial year ended 31 December 2010. No retrospective application of the standards is
required. Details of the accounting policy for business combinations are given in A3.
> IFRS 5 ‘Non‑current Assets Held‑For‑Sale and Discontinued Operations’ (consequential amendment effective 1 July 2009). The Group has
early adopted the consequential amendment clarifying that assets and liabilities of a subsidiary should be classified as held for sale if the
Group is committed to a plan involving loss of control, regardless of whether the Group will retain a non‑controlling interest after the sale.
> IFRS 7 ‘Financial Instruments: Disclosures’ (effective 1 January 2009). The Group has adopted the amendments to IFRS 7 ‘Financial
Instruments: Disclosures’, ‘Improving Disclosures about Financial Instruments’ issued in March 2009. The amendments principally require
additional disclosures about the determination of fair values of financial assets and liabilities. See note E1 for the additional disclosures.
> IAS 1 ‘Presentation of Financial Statements’ (revised 2007) (effective 1 January 2009). The Group has adopted the provisions of the
revised version of IAS 1 ‘Presentation of Financial Statements’ issued in 2007, effective for accounting periods commencing on or after
1 January 2009. The principal change arising from the adoption of the standard is the inclusion of a new statement, a consolidated
statement of comprehensive income, separately from the consolidated statement of changes in equity. Comparative information has been
restated accordingly. There were no impacts on the Group’s results or net assets as a result of the introduction of the revised standard.
> IAS 27 ‘Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate’ (effective 1 January 2009). The amendment changes
the recognition principle in IAS 27 ‘Consolidated and Separate Financial Statements’ in respect of dividends received from subsidiaries,
joint ventures and associates in the entity’s own financial statements where those dividends are out of pre‑acquisition reserves. Under the
amendment, dividends out of pre‑acquisition reserves are accounted for in the income statement rather than against the cost of investment.
The amendment applies to accounting for investments by the Parent Company. There were no impacts in the Parent Company’s financial
statements.
> IAS 28 ‘Investments in Associates’ and IAS 31 ‘Interests in Joint Ventures’ (consequential amendments effective 1 July 2009 arising from the
changes to IFRS 3 and IAS 27). The Group has early‑adopted the consequential amendments to IAS 28 and IAS 31 arising as a result of the
early adoption of IFRS 3 and IAS 27 (revised 2008). There were no material impacts arising from the implementation of these amendments.
> IAS 32 ‘Financial Instruments: Presentation’ (amendments in respect of puttable financial instruments and obligations arising on liquidation,
effective 1 January 2009). The Group has adopted the amendments relating to the statement of financial position classification of puttable
instruments and obligations arising only on liquidation. The amendments had no impact on the Group’s financial statements.
> IAS 39 ‘Financial Instruments: Recognition and Measurement’ (effective 1 July 2009). The Group has early adopted amendments made to
clarify two hedge accounting issues: i) inflation in a financial hedged item and ii) a one sided risk in a hedged item. The amendments had no
impact on the Group’s financial statements.
> IFRIC 13 ‘Customer Loyalty Programmes’ (effective 1 January 2009). The Group has adopted the provisions of IFRIC 13, which addresses
accounting by entities that grant loyalty award credits to customers who buy other goods or services. Specifically, 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 had an insignificant impact in the financial statements of Nedbank.
> IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ (IASB effective date 1 October 2008; EU: 1 July 2009). The Group has
adopted the provisions of IFRIC 16 relating to the accounting for hedges of net investments in foreign operations. The interpretation had no
impact on the Group’s financial statements.
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Annual Report and Accounts 2009
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Notes to the coNsolidated
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For the year ended 31 December 2009 continued
> IFRIC 17 ‘Distributions of Non‑cash Assets to Owners’ (effective 1 July 2009). The interpretation deals with the recognition and
measurement principles for non‑cash distributions to owners. The interpretation had no impact on the Group’s financial statements.
A25: Standards and interpretations that have previously been early adopted in the Group’s annual financial statements
The following standards and interpretations have been previously early adopted in the Group’s financial statements.
> IFRS 8 ‘Operating Segments’ (effective 1 January 2009) was adopted in the Group’s 2007 financial statements. IFRS 8 replaced 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.
> IFRS 2 ‘Share‑based Payment’ (amendment relating to vesting conditions and cancellations, effective 1 January 2009) was adopted in
the Group’s 2008 financial statements. The amendments clarify that vesting conditions are performance conditions and service conditions
only. Other features of a share‑based transactions are not vesting conditions. There were no impacts arising from the adoption of this
amendment.
> IFRIC14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ (effective 1 January 2008).
The amendment had no impact on the financial statements.
A26: Future standards, amendments to standards, and interpretations not early adopted in the 2009 annual financial statements
At the date of authorisation of these financial 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 32 ‘Financial Instruments: Presentation’ (amendment in respect of accounting for rights issues, effective 1 February 2010).
The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the
Group. The amendment is not expected to have an impact on the Group’s financial statements.
> IFRS 9 ‘Financial Instruments’ (effective 1 January 2013) is a new standard on financial instruments that will eventually replace IAS 39.
The published standard introduces changes to the current IAS 39 rules for classification and measurement of financial assets. Under IFRS 9
there will be two measurement bases for financial assets, amortised cost and fair value. Financial assets at fair value will be recorded at fair
value through the income statement with a limited opportunity to record changes in fair value of certain equity instruments through other
comprehensive income. The main impact for the group will be the reclassification of the US Life business’ bond portfolios from ‘available‑
for‑sale’ (fair value changes through other comprehensive income) to amortised cost or fair value through the income statement. Financial
liabilities are excluded from the scope of the standard. The group is currently assessing the full impacts of the standard on its financial
statements. The standard has not yet to be endorsed by the EU.
> IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ (effective 1 January 2011). IFRIC 19 clarifies the treatment of
transactions whereby equity instruments are issued in order to extinguish all or part of a financial liability. IFRIC 19, which has not yet been
endorsed by the EU, is not expected to have any impact on the Group’s annual financial statements.
208 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information
B1: Basis of segmentation
The Group’s core operations are Emerging Markets, Nordic, Retail Europe, Wealth Management and US Life (collectively Long Term Savings),
Nedbank, Mutual & Federal, US Asset Management and Other operating segments (comprising the Group head office functions). The
Bermuda operating segment is regarded as non core. This represents a change in structure from that reported in the previous financial year
end is consistent with the revised way that management and the Board of Directors considers information when making operating decisions
and is the basis on which resources are allocated and performance assessed by management and the Board of Directors. Comparative
segment information has been changed accordingly. The Group generates revenue from four principal business activities: life assurance, asset
management, banking and general insurance. The types of products and services from which each operating segment derives its revenues are
as follows:
d
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M
Core operations
Emerging Markets – life assurance and asset management
Nordic – life assurance, asset management and banking
Retail Europe – life assurance and asset management
Wealth Management – life assurance and asset management
US Life – life assurance
Nedbank – banking and asset management
Mutual & Federal – general insurance
US Asset Management – asset management
Other operating segments
Non core operations
Bermuda – life assurance
i
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s
R
i
Adjusted operating profit is one of the key measures reported to the Group’s management and Board of Directors for their consideration in the
allocation of resources to and the review of performance of the segments. The Group utilises additional measures to assess the performance
of each of the segments, in particular the level of funds under management. Additional performance measures considered by management
and the Board of Directors in assessing the performance of the segments can be found in the Old Mutual Market Consistent Embedded Value
information presented on pages 340 to 389.
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.
e
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Old Mutual plc
Annual Report and Accounts 2009
209
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B2: Adjusted operating profit statement – segment information year ended 31 December 2009
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 benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits 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
Long Term Savings
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
1,946
(56)
1,890
2,636
–
–
305
65
55
4,951
(2,551)
76
(2,475)
(1,040)
–
–
–
(184)
(768)
–
–
–
(37)
(5)
109
(5)
104
2,035
157
–
190
6
32
2,524
(72)
2
(70)
(1,972)
(5)
–
(70)
(53)
(215)
–
–
–
(39)
(38)
31
(8)
23
564
–
–
189
–
10
786
(37)
5
(32)
(554)
(1)
–
–
(79)
(96)
–
–
–
–
(2)
315
(81)
800
(102)
234
4,997
–
–
746
24
27
6,028
(255)
46
(209)
(4,775)
–
–
–
(394)
(380)
–
–
–
(116)
(48)
698
654
–
–
–
6
–
1,358
(1,283)
128
(1,155)
–
–
–
–
(78)
(67)
–
–
–
–
(9)
Total expenses
(4,509)
(2,462)
(764)
(5,922)
(1,309)
Share of associated undertakings’ profit/(loss) after tax
Profit on disposal of subsidiaries, associated undertakings and
strategic investments
Adjusted operating profit/(loss) before tax and
non-controlling interests
Tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and
non-controlling interests
Adjusting items net of tax and non-controlling interests
Profit/(loss) after tax attributable to equity holders of the parent
4
–
446
(130)
(2)
314
(200)
114
–
–
62
9
–
71
(4)
67
–
–
22
(8)
–
14
(228)
(214)
–
–
106
(20)
–
86
(225)
(139)
–
–
49
(9)
–
40
(120)
(80)
Of the total revenues, excluding intercompany revenues, £5,544 million was generated in UK (2008: £5,826 million loss), £3,938 million
in rest of Europe (2008: £3,045 million loss), £10,084 million in South Africa (2008: £6,676 million), £2,201 million in the United States
(2008: £2,194 million) and £81 million relates to Other operating segments (2008: £48 million).
210 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long
Term Savings
Nedbank
M&F
USAM
Other
operating
segments
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(Note C1)
Non core
operations
– Bermuda
IFRS Income
statement
£m
3,201
(252)
2,949
10,886
157
–
1,430
101
124
15,647
(4,198)
257
(3,941)
(8,341)
(6)
–
(70)
(788)
(1,526)
–
–
–
(192)
(102)
–
–
–
–
3,832
168
663
70
31
4,764
–
–
–
–
(505)
–
(2,557)
(2)
(1,167)
–
–
–
–
(65)
(14,966)
(4,296)
4
–
685
(158)
(2)
525
(777)
(252)
2
–
470
(96)
(193)
181
15
196
612
(117)
495
58
–
–
22
1
29
605
(412)
72
(340)
–
–
–
–
(106)
(64)
–
–
–
–
(25)
(535)
–
–
70
(15)
(16)
39
–
39
–
–
–
13
–
–
429
7
6
455
–
–
–
–
–
–
–
(18)
(354)
–
–
–
–
–
(372)
–
–
83
(19)
–
64
(3)
61
–
–
–
91
–
–
–
–
21
–
–
–
509
–
–
(6)
1
(251)
3,813
(369)
3,444
11,557
3,989
168
2,538
180
(40)
112
253
21,836
–
–
–
–
–
(104)
–
–
(84)
–
–
–
–
(58)
(246)
(4)
–
(138)
(4)
(34)
(176)
(241)
(417)
–
–
–
–
–
–
–
(12)
(22)
–
(470)
–
–
251
(4,610)
329
(4,281)
(8,341)
(511)
(104)
(2,627)
(926)
(3,217)
–
(470)
–
(192)
1
(253)
(20,668)
–
–
–
–
–
–
–
–
2
–
1,170
(292)
(245)
633
(1,006)
(373)
–
–
–
(425)
–
–
(116)
–
–
(541)
–
–
–
–
–
(218)
–
167
97
(266)
–
(326)
192
–
(354)
–
(50)
(945)
(84)
23
(1,006)
1,006
–
7
–
7
484
–
–
–
22
40
553
(459)
(1)
(460)
(4)
–
–
–
(47)
(19)
–
–
–
–
(1)
3,820
(369)
3,451
11,616
3,989
168
2,422
202
–
21,848
(5,069)
328
(4,741)
(8,345)
(511)
(322)
(2,627)
(806)
(3,139)
(266)
(470)
(326)
–
–
(531)
(21,553)
–
–
22
11
–
33
–
33
2
(50)
247
(365)
(222)
(340)
–
(340)
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
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a
M
i
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v
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r
s
s
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s
u
B
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t
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l
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b
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o
p
s
e
R
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a
k
s
R
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a
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v
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G
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a
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a
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F
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Old Mutual plc
Annual Report and Accounts 2009
211
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B2: Adjusted operating profit statement – segment information year ended 31 December 2008
Long Term Savings
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
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
1,687
(48)
1,639
(420)
–
–
252
98
237
92
(4)
88
(2,317)
266
24
184
20
104
Total revenues
1,806
(1,631)
Expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits 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
(721)
42
(679)
204
–
–
–
(174)
(563)
–
–
–
6
(188)
(68)
4
(64)
2,390
(4)
–
(183)
(49)
(193)
–
–
–
(52)
(126)
22
(7)
15
(997)
–
–
178
1
18
(785)
(26)
2
(24)
1,011
–
–
–
(72)
(82)
–
–
–
(1)
(18)
186
(78)
108
(6,610)
–
–
775
14
108
1,269
(106)
1,163
211
–
–
–
3
–
(5,605)
1,377
(94)
34
(60)
6,442
–
–
–
(401)
(388)
–
–
–
283
(121)
(1,478)
106
(1,372)
–
–
–
–
(158)
(68)
–
–
–
–
(9)
Total expenses
(1,394)
1,719
814
5,755
(1,607)
Share of associated undertakings’ profit/(loss) after tax
Profit on disposal of subsidiaries, associated undertakings and
strategic investments
Adjusted operating profit/(loss) before tax and
non-controlling interests
Tax expense
Non-controlling interests
Adjusted operating profit/(loss) after tax and
non-controlling interests
Adjusting items net of tax and non-controlling interests
Profit/(loss) after tax attributable to equity holders of the parent
3
–
415
(138)
(5)
272
147
419
–
–
88
(11)
–
77
(122)
(45)
–
–
29
(10)
–
19
(28)
(9)
–
–
150
(57)
–
93
50
143
–
–
(230)
76
–
(154)
(341)
(495)
212 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long
Term Savings
Nedbank
M&F
USAM
Other
operating
segments
Consolidation
adjustments
Adjusted
operating profit
Adjusting
items
(Note C1)
Non core
operations
– Bermuda
IFRS Income
statement
£m
3,256
(243)
3,013
(10,133)
266
24
1,389
136
467
(4,838)
(2,387)
188
(2,199)
10,047
(4)
–
(183)
(854)
(1,294)
–
–
–
236
(462)
–
–
–
–
3,793
138
533
85
19
4,568
–
–
–
–
(315)
–
(2,684)
–
(928)
–
–
–
–
(71)
5,287
(3,998)
3
–
452
(140)
(5)
307
(294)
13
5
–
575
(123)
(227)
225
29
254
570
(91)
479
56
–
–
16
–
26
577
(401)
72
(329)
–
–
–
–
(101)
(59)
–
–
–
–
(12)
(501)
–
–
76
(17)
(19)
40
(49)
(9)
–
–
–
(3)
–
–
473
17
8
495
–
–
–
–
–
–
–
(10)
(388)
–
–
–
–
–
(398)
–
–
97
2
–
99
1
100
–
–
–
94
–
–
–
–
66
–
–
–
(713)
–
–
(1)
13
(586)
3,826
(334)
3,492
(10,699)
4,059
162
2,410
251
–
160
(1,287)
(325)
–
–
–
–
–
(140)
–
–
(38)
–
–
–
–
(37)
(215)
(9)
–
(64)
192
(21)
107
341
448
–
–
–
–
–
–
–
(44)
(34)
–
779
–
–
586
(2,788)
260
(2,528)
10,047
(319)
(140)
(2,867)
(1,009)
(2,741)
–
779
–
236
4
1,287
1,462
–
–
–
–
–
–
–
–
(1)
–
1,136
(86)
(272)
778
28
806
–
–
–
(108)
–
–
(97)
–
–
(205)
–
–
–
–
–
532
14
178
(77)
(74)
–
(361)
(236)
–
(24)
–
53
(176)
174
30
28
(28)
–
1,330
(1)
1,329
(771)
–
–
–
19
–
577
(822)
2
(820)
4
–
–
–
(106)
(16)
–
–
–
–
(4)
(942)
–
–
(365)
–
–
(365)
–
(365)
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
–
441
d
a
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r
t
s
a
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s
t
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m
e
t
a
t
s
t
n
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m
e
g
a
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a
M
i
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u
B
i
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t
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l
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i
b
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p
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e
R
d
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s
R
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a
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G
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a
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F
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Old Mutual plc
Annual Report and Accounts 2009
213
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B3: Gross earned premiums
Long Term Savings
£m
Year ended 31 December 2009
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary participation features
General insurance
Gross earned premiums
Life assurance – other investment contracts recognised as deposits
Year ended 31 December 2008
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary participation features
General insurance
Gross earned premiums
Life assurance – other investment contracts recognised as deposits
B4: Impairments of financial assets
1,287
659
–
1,946
2,726
109
–
–
109
31
–
–
31
315
–
–
315
1,199
733
4,906
Long Term Savings
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
1,163
524
–
1,687
1,409
92
–
–
92
22
–
–
22
186
–
–
186
976
690
5,236
800
–
–
800
171
US Life
1,269
–
–
1,269
115
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
5
248
253
504
13
770
5
384
389
315
30
734
Nordic
US Life
Total Long Term Savings
Nedbank
Bermuda
Total
214 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term
Savings
Nedbank
2,542
659
–
3,201
9,735
–
–
–
–
–
Total Long Term
Savings
Nedbank
2,732
524
–
3,256
8,426
–
–
–
–
–
M&F
–
–
612
612
–
M&F
–
–
570
570
–
USAM
Total core
operations
Non core
operations –
Bermuda
–
–
–
–
–
2,542
659
612
3,813
9,735
7
–
–
7
8
USAM
Total core
operations
Non core
operations –
Bermuda
–
–
–
–
–
2,732
524
570
3,826
8,426
1,330
–
–
1,330
115
£m
Total
2,549
659
612
3,820
9,743
Total
4,062
524
570
5,156
8,541
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
l
i
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
215
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B5: Funds under management
As at 31 December 2009
Life assurance 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 2008
Life assurance policyholder funds
Unit trusts and mutual funds
Third party client funds
Total client funds under management
Shareholder funds
Total funds under management
Long Term Savings
Emerging
Markets
25,454
7,686
8,229
41,369
2,130
Nordic
9,221
1,428
–
10,649
360
Retail
Europe
Wealth
Management
3,569
391
–
3,960
210
34,721
11,308
–
46,029
830
43,499
11,009
4,170
46,859
Long Term Savings
£m
US Life
6,689
–
–
6,689
–
6,689
Emerging
Markets
20,599
7,678
10,325
38,602
1,672
40,274
Nordic
6,605
1,000
–
7,605
418
8,023
Retail
Europe
Wealth
Management
US Life
2,881
416
–
3,297
213
29,200
8,777
–
37,977
943
3,510
38,920
241
–
–
241
–
241
216 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total
Long Term Savings
Nedbank
M&F
USAM
79,654
20,813
8,229
108,696
3,530
112,226
658
3,775
3,800
8,233
–
8,233
–
–
–
–
162
162
6,789
4,095
150,423
161,307
169
161,476
Total
Long Term Savings
Nedbank
M&F
USAM
59,526
17,871
10,325
87,722
3,246
90,968
425
2,617
3,375
6,417
–
6,417
–
–
–
–
145
145
13,623
3,127
147,956
164,706
177
164,883
Total core
operations
87,101
28,683
162,452
278,236
3,861
282,097
Total core
operations
73,574
23,615
161,656
258,845
3,568
262,413
Non core
operations –
Bermuda
2,913
–
–
2,913
–
2,913
Non core
operations –
Bermuda
2,401
–
–
2,401
–
2,401
£m
Total
90,014
28,683
162,452
281,149
3,861
285,010
Total
75,975
23,615
161,656
261,246
3,568
264,814
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
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v
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r
s
s
e
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s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
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c
n
a
n
r
e
v
o
G
l
i
s
a
c
n
a
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F
i
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t
a
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r
o
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f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
217
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B6: Statement of financial position – segment information year ended 31 December 2009
At 31 December 2009
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 life assurance 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
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Inter-segment assets
Long Term Savings
Notes
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
F1
106
1,035
91
–
6
9
–
336
1,518
54
20
123
–
107
16
11
11
–
–
–
–
340
58
282
219
624
1
191
–
7
–
108
2
49
2
47
–
10
7
–
3
–
108
4,209
2
4,207
F2
F3
F8
G5
F4
E8
E8
E8
E3
E4
27,603
10,836
3,586
1,825
2,989
8,854
1,223
457
6,123
2,543
3
4
–
630
327
189
–
1,352
150
1,453
–
1
15
547
8,670
–
–
4
–
155
9
344
–
59
F5
E6
563
204
265
3
91
–
4
–
17
–
275
–
271
4
6
4
–
2
–
–
2
2
–
3,693
60
53
2
10
–
–
3,568
–
–
16
–
58
–
81
–
23
1,602
656
671
35
240
–
19
2
23
–
778
50
654
74
772
45
717
10
–
–
148
148
–
94
–
89
5
–
–
1
–
183
–
1,671
1,671
–
–
475
450
–
25
–
35
54
53
1
35,120
10,045
251
–
104
–
–
437
34,327
1
–
86
–
232
–
278
–
277
302
6,766
2,439
–
–
3
16
519
–
–
–
213
187
4
–
74
Total assets
32,613
16,935
4,738
39,337
13,036
218 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term
Savings
Nedbank
M&F
USAM
Bermuda
Other operating
segments
Consolidation
adjustments
3,400
1,170
1,649
50
531
–
367
1,520
385
22
2,896
1,723
1,079
94
1,274
517
717
40
–
143
4,753
263
4,490
87,297
4,349
10,097
5,534
8,865
1,238
1,444
52,704
3,063
3
110
–
1,288
523
896
–
1,785
543
393
–
150
–
882
417
18
24
82
2
–
–
2
22
22
–
–
–
–
37,638
–
37,638
5,501
2,044
2,532
–
41
209
675
–
–
–
51
170
432
1,067
660
1
148
30
11
–
19
–
–
23
–
6
–
17
17
–
–
–
–
–
–
120
3
2
–
2
425
–
2
4
87
6
41
–
285
–
–
–
96
–
79
–
48
1,171
1,142
–
1
28
–
19
–
147
7
29
–
–
29
–
–
–
–
–
–
–
–
–
162
–
–
–
–
–
122
40
–
–
–
–
126
–
173
–
1
2
–
–
2
–
–
–
–
–
–
194
194
–
–
–
–
–
–
–
–
–
–
–
2,942
–
461
167
–
37
2,059
–
218
–
–
–
878
–
32
–
564
106,659
47,658
849
1,835
4,612
13
13
–
–
–
–
2
–
8
24
–
–
–
–
–
–
–
–
–
–
–
–
–
43
–
–
–
–
–
–
–
–
43
8
–
111
154
425
–
1,363
2,151
–
–
–
–
–
–
–
221
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,091
1,775
1,729
–
9,503
–
1,400
(12,678)
293
69
–
–
120
802
717
–
(3,909)
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
£m
Total
5,159
2,729
1,649
222
559
882
828
1,759
570
135
3,138
1,934
1,079
125
1,296
539
717
40
120
146
42,393
263
42,130
98,461
8,168
14,821
5,705
18,496
1,490
5,741
40,066
3,859
115
169
170
3,051
2,546
2,982
1
–
42
163,806
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
219
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B6: Statement of financial position – segment information year ended 31 December 2009 continued
At 31 December 2009
Liabilities
Life assurance 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
Life assurance
Asset management
General insurance
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Liabilities under acceptances
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held-for-sale
Inter-segment liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Non-controlling interests
Non-controlling interests – ordinary shares
Non-controlling interests – preference shares
Long Term Savings
Notes
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
E8
28,655
11,783
9,838
115
6,639
280
–
–
272
–
–
272
147
23
16
7
–
200
70
1,512
–
–
141
–
51
E8
E9
F6
F7
F8
F9
E10
E6
9,514
74
9,335
–
–
105
–
–
26
26
–
–
11
5
5
–
–
113
20
203
–
5,448
22
–
37
3,689
121
3,560
–
–
8
35,554
11,625
901
34,639
–
–
14
10,787
–
788
–
50
–
–
–
–
–
–
8
160
155
5
–
124
2
79
–
–
–
–
–
–
–
–
–
–
–
33
456
379
77
–
167
37
550
–
–
–
–
181
–
–
–
–
–
–
–
–
–
–
–
126
–
359
–
–
9
–
170
31,071
15,399
4,062
36,978
12,289
1,542
1,536
676
2,359
747
F10
F11(b)
F11(b)
1,540
2
2
–
1,536
–
–
–
676
–
–
–
2,359
–
–
–
747
–
–
–
Total equity
1,542
1,536
676
2,359
747
The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £340 million
(2008: £236 million) held in policyholder funds. These include investments in the Company’s ordinary shares and subordinated liabilities and
preferred securities issued by the Group’s banking subsidiary Nedbank Limited. All Emerging Markets debt relates to life assurance. All other
debt relates to other shareholders’ net assets.
220 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term
Savings
Nedbank
M&F
USAM
Bermuda
Other operating
segments
Consolidation
adjustments
89,037
23,666
57,372
903
6,639
457
–
–
298
26
–
272
199
644
555
89
–
730
129
2,703
–
5,448
172
–
439
99,799
6,860
6,858
2
2
–
6,860
661
95
–
566
–
–
–
–
1,614
484
118
1,012
1
1
1
–
–
148
21
897
170
38,687
969
–
697
43,866
3,792
2,084
1,708
1,444
264
3,792
–
–
–
–
–
–
372
–
–
–
–
–
21
9
–
–
9
2
–
118
–
–
–
–
–
522
327
265
62
62
–
327
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
10
221
–
–
–
–
1,202
1,435
400
371
29
29
–
400
4,178
3,788
–
390
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
(9)
–
–
–
–
–
4,174
438
438
–
–
–
438
–
–
–
–
–
–
–
–
1,397
636
–
761
40
–
–
–
–
25
45
120
–
–
59
–
1,571
3,257
(1,106)
(1,552)
446
–
446
(1,106)
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
l
i
s
a
c
n
a
n
F
i
£m
Total
93,876
27,549
57,372
1,859
6,639
457
372
2,906
3,309
1,146
118
2,045
263
654
556
89
9
905
210
4,305
170
44,135
1,990
–
–
–
–
–
–
–
–
–
2,906
–
–
–
–
–
–
–
–
–
–
–
255
–
–
790
–
(3,909)
42
153,095
–
–
–
–
–
–
10,711
8,464
2,247
1,537
710
10,711
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
221
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B6: Statement of financial position – segment information year ended 31 December 2008
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 life assurance 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
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Inter-segment assets
Long Term Savings
Notes
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
F1
111
1,183
95
(2)
4
14
–
277
1,282
68
33
116
–
96
20
6
6
–
–
–
–
59
59
–
F2
F3
F8
G5
F4
E8
E8
E8
E3
E4
22,447
3,769
1,805
2,113
6,932
885
411
4,263
2,264
5
6
–
455
209
467
7
1,326
F5
E6
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
865
420
326
5
114
–
6
–
45
–
253
–
248
5
5
3
–
2
–
–
2
2
–
2,958
–
26
45
–
5
–
2,882
–
–
6
–
67
–
134
–
10
1,814
742
764
23
285
–
25
2
172
–
698
49
585
64
607
42
551
14
–
–
139
138
1
132
–
120
12
–
–
1
–
1,036
–
1,896
1,896
–
–
505
477
–
28
–
40
62
61
1
29,477
10,284
699
2
22
1
26
649
28,078
–
–
81
–
228
–
236
–
238
97
7,021
2,488
–
–
8
18
652
–
–
–
252
36
(18)
–
46
Total assets
26,869
13,648
4,351
33,717
14,272
222 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term
Savings
Nedbank
M&F
USAM
Bermuda
Other operating
segments
Consolidation
adjustments
4,105
1,479
1,950
45
631
–
313
1,284
1,399
33
2,997
1,947
961
89
1,136
538
551
47
–
161
4,108
260
3,848
72,761
4,779
9,667
4,668
6,933
928
1,223
41,642
2,916
5
93
–
1,140
245
1,191
7
1,884
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
29
10
–
19
–
–
24
–
8
–
15
15
–
–
–
–
–
–
115
3
2
–
2
322
–
1
2
67
5
36
–
211
–
–
–
68
–
56
–
46
1,305
1,271
–
1
33
–
26
–
158
–
40
–
–
40
–
–
–
–
–
–
–
–
–
177
–
–
–
–
–
135
42
–
–
–
–
139
–
220
–
99
5
–
–
5
–
–
–
–
–
–
145
145
–
–
3
3
–
–
–
–
–
–
–
3,676
–
534
202
–
118
2,085
–
737
–
–
–
789
21
29
–
377
92,857
41,286
688
2,164
5,045
13
13
–
–
–
–
3
–
–
3
–
–
–
–
–
–
–
–
–
–
1
–
1
88
–
–
–
–
–
–
–
–
88
–
–
96
226
79
–
1,339
1,848
–
–
–
–
–
–
–
179
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,455
1,942
1,695
175
7,938
–
1,310
(11,853)
125
123
–
–
419
1,109
997
–
(3,764)
£m
Total
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
3,228
3,203
7
–
d
a
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r
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s
a
F
s
t
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t
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a
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p
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e
R
d
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a
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s
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v
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l
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f
i
395
144,283
l
r
e
d
o
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r
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h
S
Old Mutual plc
Annual Report and Accounts 2009
223
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
B: Segment information continued
B6: Statement of financial position – segment information year ended 31 December 2008 continued
At 31 December 2008
Liabilities
Life assurance 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
Life assurance
Asset management
General insurance
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Liabilities under acceptances
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held-for-sale
Inter-segment liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Non-controlling interests
Non-controlling interests – ordinary shares
Non-controlling interests – preference shares
Notes
Emerging
Markets
E8
23,261
10,619
6,690
105
5,646
201
–
–
237
–
–
237
132
31
17
14
–
176
98
1,197
–
–
31
6
66
E8
E9
F6
F7
F8
F9
E10
E6
Nordic
6,884
71
6,704
–
–
109
–
–
–
–
–
–
203
3
3
–
–
93
22
198
–
4,622
–
–
174
Long Term Savings
Retail
Europe
Wealth
Management
US Life
2,973
92
2,874
–
–
7
29,603
13,337
694
28,893
–
–
16
12,365
–
914
–
58
–
–
–
–
–
–
8
128
122
6
–
173
–
88
–
–
–
–
39
–
–
1
1
–
–
29
428
347
81
–
256
28
573
–
–
1
–
259
–
–
–
–
–
–
–
–
–
–
–
578
(15)
267
–
–
–
–
2
25,235
12,199
3,409
31,178
14,169
1,634
1,449
942
2,539
103
F10
F11(b)
F11(b)
1,626
8
8
–
1,449
–
–
–
942
–
–
–
2,539
–
–
–
103
–
–
–
Total equity
1,634
1,449
942
2,539
103
The 31 December 2008 financial position has been restated to reduce both derivative financial assets and liabilities by an amount of £1,405 million and to increase both cash
and cash equivalents and other liabilities by £305 million on a consistent basis to 31 December 2009. There was no impact on the consolidated net assets at 31 December 2008
as a result of the restatement.
224 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term
Savings
Nedbank
M&F
USAM
Bermuda
Other operating
segments
Consolidation
adjustments
76,058
23,841
45,161
1,019
5,646
391
–
–
238
1
–
237
372
590
489
101
–
1,276
133
2,323
–
4,622
32
6
540
86,190
6,667
6,659
8
8
–
6,667
426
–
–
426
–
–
–
–
960
–
104
856
1
–
–
–
–
162
18
747
220
33,549
1,731
–
427
38,241
3,045
1,717
1,328
1,081
247
3,045
–
–
–
–
–
–
344
–
–
–
–
–
21
8
–
–
8
2
2
71
–
–
–
–
(1)
447
241
193
48
48
–
241
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
8
299
–
–
–
–
1,452
1,762
402
365
37
37
–
402
4,785
4,265
–
520
–
–
–
–
–
–
–
–
–
–
–
–
–
–
19
9
–
–
–
–
2
4,815
230
230
–
–
–
–
–
–
–
–
–
–
–
1,097
556
–
541
80
–
–
–
–
12
39
160
–
–
124
–
1,344
2,856
(1,008)
(1,427)
419
(27)
446
230
(1,008)
£m
Total
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
4,074
220
38,171
2,990
6
–
–
–
–
–
–
–
–
2,591
–
–
–
–
–
–
–
–
–
–
–
465
–
–
1,103
–
(3,764)
395
134,706
–
–
–
–
–
–
9,577
7,737
1,840
1,147
693
9,577
d
a
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r
t
s
a
F
s
t
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m
e
t
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t
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S
Old Mutual plc
Annual Report and Accounts 2009
225
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
C: Other key performance information
C1: Operating profit adjusting items
(a) Summary of adjusting items
In determining the adjusted operating profit of the Group for core operations certain adjustments are made to profit before tax to reflect the
directors’ view of the underlying long-term performance of the Group. The following table shows an analysis of those adjustments from adjusted
operating profit to profit before and after tax.
Long Term Savings
£m
Year ended 31 December 2009
Notes
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Income/(expense)
Goodwill impairment and impact of acquisition accounting
(Loss)/profit on disposal of subsidiaries, associated
undertakings and strategic investments
Short-term fluctuations 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 non-controlling
interests
Credit-related fair value losses on Group debt instruments
Total adjusting items
Tax on adjusting items
Non-controlling interest in adjusting items
Total adjusting items after tax and non-controlling
interests
C1(b)
C1(c)
C1(d)
(1)
(51)
(38)
C1(e)
(109)
C1(f)
C1(g)
C1(h)
D1(d)
F11(a)(ii)
–
–
–
(199)
(1)
–
(12)
(243)
(167)
(14)
–
(1)
–
–
–
–
(13)
9
–
–
1
–
–
–
–
(7)
(88)
–
(150)
–
–
–
–
–
–
–
–
(242)
14
–
(262)
37
–
(164)
44
–
(200)
(4)
(228)
(225)
(120)
Long Term Savings
£m
Year ended 31 December 2008
Notes
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Income/(expense)
Goodwill impairment and impact of acquisition accounting
(Loss)/profit on disposal of subsidiaries, associated undertakings
and strategic investments
Short-term fluctuations 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 non-controlling
interests
Credit-related fair value gains on Group debt instruments
Total adjusting items
Tax on adjusting items
Non-controlling interest in adjusting items
C1(b)
C1(c)
C1(d)
C1(e)
C1(f)
C1(g)
C1(h)
D1(d)
F11(a)(ii)
(1)
(11)
(95)
234
–
–
–
127
20
–
55
4
–
–
–
–
(136)
14
–
Total adjusting items after tax and non-controlling
interests
147
(122)
226 Old Mutual plc
Annual Report and Accounts 2009
(195)
(46)
(100)
–
1
–
–
–
–
(45)
17
–
(28)
–
140
–
–
–
–
40
10
–
50
(96)
–
(248)
–
–
–
–
(344)
3
–
(341)
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Total Long Term Savings
Nedbank
M&F
USAM
Other
(437)
(58)
(276)
(109)
–
–
–
(880)
103
–
(777)
(4)
–
–
–
–
–
–
(4)
–
19
15
Total Long Term Savings
Nedbank
(438)
44
(198)
234
–
–
–
(358)
64
–
(294)
–
1
–
–
–
–
14
15
(4)
18
29
–
–
(10)
–
–
–
–
(10)
3
7
–
M&F
–
(10)
(72)
–
–
–
–
(82)
14
19
(49)
(2)
1
–
–
–
(1)
–
(2)
2
(3)
(3)
–
7
(30)
–
45
–
(263)
(241)
–
–
(241)
USAM
Other
–
1
–
–
–
7
–
8
–
(7)
1
–
17
(72)
–
43
–
489
477
(136)
–
341
£m
Total
(443)
(50)
(316)
(109)
45
(1)
(263)
(1,137)
108
23
(1,006)
£m
Total
(438)
53
(342)
234
43
7
503
60
(62)
30
28
d
a
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s
a
F
s
t
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e
m
e
t
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s
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Old Mutual plc
Annual Report and Accounts 2009
227
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Goodwill impairment and impact of acquisition accounting
Acquisition date deferred acquisition costs and deferred revenues are not recognised. These are reversed in the acquisition statement of
financial position and replaced by goodwill, other intangible assets and the value of the acquired present value of in-force business (‘acquired
PVIF’). In determining its adjusted operating profit the Group recognises deferred revenue and acquisition costs in relation to policies sold by
acquired businesses pre-acquisition, and excludes the impairment of goodwill and the amortisation of acquired other intangibles and acquired
PVIF and the movements in certain acquisition date provisions.
Goodwill impairment and acquisition accounting adjustments to adjusted operating profit are summarised below:
£m
Year ended 31 December 2009
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Nedbank
USAM
Total
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Change in acquisition date provisions
Goodwill impairment (note F1)
–
1
(2)
–
–
(1)
(106)
21
(25)
98
–
(37)
(5)
(14)
–
(187)
(86)
34
(36)
–
(79)
(12)
(243)
(167)
(14)
–
–
–
–
(14)
–
–
(4)
–
–
(4)
–
–
(2)
–
–
(2)
(243)
51
(83)
98
(266)
(443)
£m
Year ended 31 December 2008
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Nedbank
USAM
Total
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Change in acquisition date provisions
Goodwill impairment (note F1)
–
1
(1)
–
(1)
(1)
(105)
22
(24)
(76)
(12)
(195)
(49)
16
(13)
–
–
(46)
(97)
42
(37)
(8)
–
(100)
(35)
–
–
–
(61)
(96)
–
–
–
–
–
–
–
–
–
–
–
–
(286)
81
(75)
(84)
(74)
(438)
(c) (Loss)/profit on disposal of subsidiaries, associated undertakings and strategic investments
On 6 March 2009 the Group disposed of its interest in Old Mutual Australia at a loss of £8 million.
In August 2008, an agreement with ABN AMRO Asset Management Asia and their parent company, Fortis Bank was entered into to acquire
the 49% stake that Fortis holds in AATEDA, a major Chinese asset management joint venture for €165 million. On 27 May 2009 the termination
of this agreement with ABN AMRO Asset Management Asia and Fortis Bank was announced, with an exit fee of £41 million which has been
accounted for as a loss on disposal.
On 11 June 2008, the Group completed the disposal of its controlling shareholding in Palladyne, an asset management business, resulting in a
profit on disposal of £17 million.
Part of the Nordic segment’s banking business, Skandia’s Nordic vehicle finance operation, Skandiabanken Bilfinans, was sold in the previous
financial year, resulting in a profit on disposal of £55 million.
In the previous financial year, the Group has closed its project to develop a direct financial services capability in South Africa due to adverse
market conditions. Costs relating to the closure amounting to £25 million have been excluded from the adjusted operating profit. Emerging
Markets realised a profit of £4 million on the sale of its administration business and Nedbank recognised a £1 million profit on the disposal of
Bond Choice.
228 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(Loss)/profits on the disposal of subsidiaries, associated undertakings and strategic investments are analysed below:
Emerging Markets
Nordic
Wealth Management
Total Long Term Savings
Nedbank
M&F
USAM
Other
(Loss)/profit on disposal of subsidiaries, associated undertakings and strategic investments
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
(51)
–
(7)
(58)
–
–
1
7
(50)
(11)
55
–
44
1
(10)
1
17
53
(d) Long-term investment return
Profit before tax includes actual investment returns earned on the shareholder assets of the Group’s life assurance and general insurance
businesses. Adjusted operating profit is stated after recalculating shareholder asset investment returns based on a long-term investment return
rate. The difference between the actual and the long-term investment returns are short-term fluctuations in investment return.
Long-term rates of return are based on achieved real rates of return appropriate to the underlying asset base, adjusted for current inflation
expectations, default assumptions, costs of investment management and consensus economic investment forecasts, and are reviewed
frequently, usually annually, for appropriateness. These rates of return have been selected with a view to ensuring that returns credited to
adjusted operating profit are consistent with the actual returns expected to be earned over the long-term.
For Emerging Markets, the return is applied to an average value of investible shareholders’ assets, adjusted for net fund flows. For Nordic,
Retail Europe, Wealth Management and US Life, the return is applied to average investible assets. For M&F general insurance business, the
return is an average value of investible assets supporting shareholders’ funds and insurance liabilities, adjusted for net fund flows.
d
a
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r
t
s
a
F
s
t
n
e
m
e
t
a
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s
t
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e
g
a
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a
M
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p
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e
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d
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a
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s
R
i
Long-term investment rates
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
M&F
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
13.3%
1.8%
2.8%
5.0%
5.9%
13.3%
16.6%
3.5%
3.1%
5.0%
5.9%
16.6%
e
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o
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a
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F
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Old Mutual plc
Annual Report and Accounts 2009
229
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Analysis of short-term fluctuations in investment return
Year ended 31 December 2009
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
£m
Total
Long
Term
Savings
M&F
Other
Total
Long-term investment return
Less: Actual shareholder investment return
Short-term fluctuations in
investment return
126
88
38
1
–
1
1
2
(1)
109
21
539
389
776
500
88
150
276
60
50
10
91
61
927
611
30
316
£m
Year ended 31 December 2008
Emerging
Markets
Nordic
Retail
Europe
Wealth
Management
US Life
Total
Long
Term
Savings
M&F
Other
Total
Long-term investment return
Less: Actual shareholder investment return
133
38
1
5
–
1
65
205
440
192
639
441
60
(12)
108
36
807
465
Short-term fluctuations in
investment return
95
(4)
(1)
(140)
248
198
72
72
342
The actual investment return attributable to shareholders for US life assurance reflects total investment income, as a distinction is not drawn
between shareholder and policyholder funds.
(e) Investment return adjustment for Group equity and debt instrument held in life funds
Adjusted operating profit includes investment returns on policyholder investments in Group equity and debt instruments held by the Group’s life
funds. These include investments in the Company’s ordinary shares, and the subordinated liabilities and ordinary securities of Nedbank. These
investment returns are eliminated within the consolidated income statement in arriving at profit before tax, but are included in adjusted operating
profit. In 2009 the investment return adjustment increased adjusted operating profit by £109 million (2008: decrease of £234 million).
(f) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group’s perpetual preferred callable securities were £45 million in the year ended 31 December 2009
(2008: £43 million). These are recognised in finance costs on an accruals basis for the purpose of determining adjusted operating profit. In the
IFRS financial statements this cost is recognised in equity.
(g) US Asset Management equity plans and non-controlling interests
US Asset Management has a number of long-term incentive arrangements with senior employees in its asset management affiliates.
In accordance with IFRS requirements the cost of these schemes is disclosed as being attributable to non-controlling interests. However, this is
treated as a compensation expense in determining adjusted operating profit. The gain recognised in 2009 was £1 million (2008: loss £7 million).
The Group has issued put options to senior employees as part of some of its US affiliate incentive schemes. The impact of revaluing these
instruments is recognised in accordance with IFRS, but excluded from adjusted operating profit. As at 31 December 2009 these instruments
were revalued, the impact of which was nil (2008: nil).
(h) Credit-related fair value gains and losses on Group debt instruments
The narrowing of credit spread of the Group’s debt instruments in the market price has resulted in losses of £263 million (2008: gains due to
widening of £489 million) on Other operating segments and £nil (2008: £14 million gain) in Nedbank being recorded in the Group’s income
statement for those instruments that are recorded at fair value.
In the directors’ view, such movements are not reflective of the underlying performance of the Group and will reverse over time. They have
therefore been excluded from adjusted operating profit.
230 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
C2: 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 2009
Rand
US Dollars
Swedish Kronor
Euro
31 December 2008
Rand
US Dollars
Swedish Kronor
Euro
Income
statement
(average rate)
Statement
of financial
position
(closing rate)
13.1746
1.5655
11.9743
1.1227
15.2948
1.8524
12.2209
1.2594
11.9172
1.6148
11.5562
1.1268
13.7194
1.4575
11.4494
1.0446
C3: Earnings and earnings per share
(a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the financial year attributable to ordinary equity shareholders by the weighted
average number of ordinary shares in issue during the year excluding own shares held in policyholder funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings.
(Loss)/profit for the financial year attributable to equity holders of the parent
Dividends declared to holders of perpetual preferred callable securities
(Loss)/profit attributable to ordinary equity holders
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
(340)
(32)
(372)
441
(31)
410
Total dividends declared to holders of perpetual preferred callable securities of £45 million in 2009 (2008: £43 million) are stated net of tax
credits of £13 million (2008: £12 million).
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)
Year ended
31 December
Millions
2009
Year ended
31 December
Millions
2008
5,277
(7)
(41)
5,229
(236)
(235)
5,294
(19)
(45)
5,230
(240)
(235)
4,758
4,755
(7.8)
8.6
Diluted earnings per share recognises the dilutive impact of share options held in ESOP trusts and Black Economic Empowerment trusts which
are currently in the money in the calculation of the weighted average number of shares, as if the relevant shares were in issue for the full period.
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)
Year ended
31 December
Millions
2009
Year ended
31 December
Millions
2008
4,758
–
–
4,758
4,755
61
235
5,051
(7.8)
8.1
Old Mutual plc
Annual Report and Accounts 2009
231
d
a
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r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
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e
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a
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a
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F
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f
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r
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S
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
No adjustments to the weighted average number of ordinary shares have been effected for 2009 in order to calculate the diluted earnings per
ordinary share as any adjustments would be antidilutive.
(b) Adjusted operating earnings per ordinary share
Adjusted operating earnings per ordinary share is determined based on adjusted operating profit. Adjusted operating profit represents the
directors’ view of the underlying performance of the Group. For long-term and general insurance business adjusted operating profit is based
on a long-term investment return, includes investment returns on life funds’ investments in Group equity and debt instruments and is stated
net of income tax attributable to policyholder returns. For the US Asset Management business it includes compensation costs in respect of
certain long-term incentive schemes defined as non-controlling interests in accordance with IFRS. For all businesses, adjusted operating
profit excludes goodwill impairment, the impact of acquisition accounting, revaluations of put options related to long-term incentive schemes,
the impact of closure of unclaimed shares trusts, profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments,
dividends declared to holders of perpetual preferred callable securities, income/(expense) from closure of unclaimed shares trusts and fair value
gains/(losses) on Group debt instruments.
The reconciliation of (loss)/profit for the financial year to adjusted operating profit after tax attributable to ordinary equity holders is as follows:
(Loss)/profit for the financial year attributable to equity holders of the parent
Adjusting items
Non core operations – Bermuda
Tax on adjusting items
Non-controlling interest on adjusting items
Adjusted operating profit after tax attributable to ordinary equity holders
Adjusted weighted average number of ordinary shares – (millions)
Adjusted operating earnings per ordinary share – (pence)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
(340)
1,137
(33)
(108)
(23)
633
441
(60)
365
62
(30)
778
5,229
5,230
12.1
14.9
(c) Headline earnings per share
In accordance with the JSE Limited (JSE) listing requirements, the Group is required to calculate a ‘headline earnings per share’ (HEPS),
determined by reference to the South African Institute of Chartered Accountants’ circular 8/2007 ‘Headline Earnings’. The table below sets
out a reconciliation of basic earnings per ordinary share and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of
International Financial Reporting Standards.
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Gross
Net
Gross
(340)
(32)
(372)
266
50
239
183
4,758
5,109
3.8
3.6
(340)
(32)
(372)
266
53
239
186
4,758
5,109
3.9
3.6
441
(31)
410
100
(53)
414
871
4,755
5,051
18.3
17.2
Net
441
(31)
410
100
(67)
381
824
4,755
5,051
17.3
16.3
(Loss)/profit for the financial year attributable to equity holders of the parent
Dividends declared to holders of perpetual preferred callable securities
(Loss)/profit attributable to ordinary equity holders
Adjustments:
Impairments of goodwill and intangible assets
Loss/(profit) on disposal of subsidiaries, associated undertakings and strategic
investments
Realised gains/losses (including impairments) on available-for-sale financial assets
Headline earnings
Weighted average number of ordinary shares
Diluted weighted average number of ordinary shares
Headline earnings per share (pence)
Diluted headline earnings per share (pence)
232 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
C4: Dividends
Dividends paid were as follows:
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
2007 Final dividend paid – 4.55p per 10p share
2008 Interim dividend paid – 2.45p per 10p share
Dividends to ordinary equity holders
Dividends declared to holders of perpetual preferred callable securities
F10(b)
Dividend payments for the year
–
–
–
45
45
227
125
352
43
395
Dividends paid to ordinary equity holders, as above, are calculated using the number of shares in issue at the record date, less treasury shares
held in ESOP trusts, life funds of Group companies, Black Economic Empowerment trusts and related undertakings.
As a consequence of the exchange control arrangements in place in certain African territories, dividends to ordinary equity holders on the
branch registers of those countries (or, in the case of Namibia, the Namibian section of the principal register) are settled through Dividend
Access Trusts established for that purpose.
In March and November 2009, £22 million and 23 million respectively were declared and paid to holders of perpetual preferred callable
securities (March 2008: £23 million and November 2008: £20 million).
A final dividend of 1.5 pence per 10p share has been recommended by the directors. Subject to shareholders’ approval, the dividend will
be paid on 25 June 2010 to shareholders on the register at the close of business on 14 May 2010. The dividend will absorb an estimated
£81 million of shareholders’ funds. The Company is planning to offer, for the first time, a scrip dividend alternative for eligible shareholders
subject to finalising the associated logistics and timetable.
D: Other income statement notes
D1: Income tax expense/(credit)
(a) Analysis of total income tax expense/(credit)
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 and reversal of temporary differences
Changes in tax rates/bases
Write down/recognition of deferred tax assets
Total deferred tax
Total income tax expense/(credit)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
46
–
257
–
49
13
14
379
45
–
(59)
(14)
365
93
(145)
264
4
68
22
1
307
(548)
(1)
154
(395)
(88)
d
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r
t
s
a
F
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t
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m
e
t
a
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a
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e
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s
R
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a
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F
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r
a
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S
Old Mutual plc
Annual Report and Accounts 2009
233
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Reconciliation of total income tax expense/(credit)
Profit before tax
Tax at standard rate of 28% (2008: 28.5%)
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 expense/(credit)
(c) Income tax relating to components of other comprehensive income
Fair value gains/(losses)
Shadow accounting
Currency translation differences/exchange differences on translating foreign operations
Other
Income tax expense/(credit) relating to components of other comprehensive income
(d) Income tax on adjusted operating profit
Income tax expense/(credit)
Tax on adjusting items
Impact of acquisition accounting
(Loss)/profit on disposal of subsidiaries, associated undertakings and strategic investments
Short-term fluctuations in investment return
Income tax attributable to policyholders returns
Tax on dividends declared to holders of perpetual preferred callable securities recognised in equity
Fair value gains and losses on group debt instruments
Tax on non-core operations
Income tax on adjusted operating profit
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
247
69
(9)
(86)
180
83
(2)
19
142
(31)
365
595
169
(23)
(218)
8
123
(5)
53
(169)
(26)
(88)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
428
(18)
–
(13)
397
(383)
16
13
(12)
(366)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
365
40
(2)
83
(192)
(13)
–
11
292
(88)
46
12
35
236
(12)
(143)
–
86
234 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
D2: 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
Investments and securities
Derivatives
Other
Rental income from investment property
Investment property
Foreign currency gains/(losses)
Total investment return recognised in income
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 financial assets
Loans and receivables
d
a
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r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
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v
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r
s
s
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n
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u
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l
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i
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o
p
s
e
R
d
n
a
k
s
R
i
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
16
1,701
307
1,023
80
287
4
57
34
1,644
253
916
54
290
131
108
1,774
1,786
387
324
63
513
480
33
9,410
(13,790)
8,844
(343)
909
136
(99)
8
(12,921)
249
(1,118)
71
(143)
(15)
11,616
(11,578)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
681
851
(343)
9,992
(239)
–
249
(13,626)
(414)
1
9,410
(13,790)
e
c
n
a
n
r
e
v
o
G
Realised fair value gains and losses included in the above
(10)
(2)
The fair value gains and losses on available-for-sale financial assets shown above reflect 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 £261 million
(2008: £414 million) which all relate to debt securities held by the Group’s US Life and Bermuda businesses.
i
l
s
a
c
n
a
n
F
i
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n
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e
d
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h
S
Old Mutual plc
Annual Report and Accounts 2009
235
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
D3: 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 financial assets
D4: 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
31 December
£m
2009
Year ended
31 December
£m
2008
3,635
1,852
581
92
3
120
987
346
261
85
8
3,989
3,518
180
3,701
1,958
545
89
4
149
956
345
210
135
13
4,059
3,779
109
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
4
4
–
4
21
61
(1)
(42)
3
139
88
58
(8)
1
16
14
2
3
43
49
6
(22)
10
100
76
36
(12)
–
Total banking trading, investment and similar income
168
162
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 included in the above
236 Old Mutual plc
Annual Report and Accounts 2009
35
(32)
3
4
(61)
71
10
19
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
D5: Fee and commission income, and income from service activities
Year ended 31 December 2009
Fee and commission income
Transaction and performance fees
Change in deferred revenue
Year ended 31 December 2008
Fee and commission income
Transaction and performance fees
Change in deferred revenue
Life
assurance
Asset
management
Banking
General
insurance
947
–
(73)
874
855
27
11
893
632
–
1
633
23
–
(1)
22
Life
assurance
Asset
management
Banking
General
insurance
950
–
(109)
841
910
34
4
948
507
–
1
508
18
–
(2)
16
£m
Total
2,457
27
(62)
2,422
£m
Total
2,385
34
(106)
2,313
The amounts shown above for asset management relate to fees earned on trust and fiduciary activities where the Group holds or invests assets
on behalf of its customers.
d
a
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r
t
s
a
F
s
t
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m
e
t
a
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B
i
D6: 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 finance costs excluding banking activities
Finance costs from banking activities
D7
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
Year ended
31 December
£m
2009
Notes
Year ended
31 December
£m
2008
y
t
i
l
i
i
b
s
n
o
p
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e
R
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a
k
s
R
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a
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e
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l
s
a
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n
a
n
F
i
57
18
64
(25)
268
274
(6)
(3)
–
322
117
21
(6)
274
268
89
26
65
(2)
(474)
(434)
(40)
(6)
(1)
(392)
79
27
(40)
(434)
(474)
n
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i
t
a
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f
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S
Old Mutual plc
Annual Report and Accounts 2009
237
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
2,458
1,489
119
733
117
169
2,627
2,202
2,594
1,698
267
550
79
259
2,853
2,038
£m
Total
864
(114)
56
806
£m
Total
1,077
(193)
53
937
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
D7: Banking interest payable and similar expense
Amounts owed to bank depositors
Deposits and loan accounts
Current and savings accounts
Negotiable certificates of deposit
Long-term debt instruments
Other liabilities
Total interest payable and similar expenses
Total interest expense included above for liabilities not at fair value through income statement
D8: Fee and commission expenses, and other acquisition costs
Year ended 31 December 2009
Fees and commission expenses
Changes in deferred acquisition costs
Other acquisition costs
Year ended 31 December 2008
Fees and commission expenses
Changes in deferred acquisition costs
Other acquisition costs
Life
assurance
Asset
management
General
insurance
632
(111)
52
573
126
(3)
4
127
106
–
–
106
Life
assurance
Asset
management
General
insurance
804
(184)
46
666
170
(7)
7
170
103
(2)
–
101
The amounts shown above for asset management relate to fees earned on trust and fiduciary activities where the Group holds or invests assets
on behalf of its customers.
D9: Other operating and administrative expenses
(a) 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
Notes
D9(b)
F2
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,701
86
14
55
57
275
266
1,463
74
24
44
58
329
100
238 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Staff costs
Staff costs
Wages and salaries
Social security costs
Retirement obligations
Defined contribution plans
Defined benefit plans
Other retirement benefits
Bonus and incentive remuneration
Share-based payments
Cash settled
Equity settled
Termination benefits
Long-term employee benefits
Other
The average number of persons employed by the Group during the year was:
Life assurance
Banking
Asset management
General insurance
Other
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
1,196
58
1,011
60
G2(h)
G2(h)
50
2
4
264
7
35
2
3
80
37
(24)
3
200
3
21
2
4
146
1,701
1,463
Number
20,814
27,257
5,506
2,703
266
19,059
27,180
4,832
2,331
304
53,706
56,546
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a
F
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t
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s
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g
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a
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i
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s
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o
p
s
e
R
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n
a
k
s
R
i
(c) 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
31 December
£m
2009
Year ended
31 December
£m
2008
e
c
n
a
n
r
e
v
o
G
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
Any other services provided by auditors
Total non-audit services
Total Group auditors’ remuneration
1.4
10.7
0.3
12.4
1.1
0.1
0.1
0.1
1.4
2.8
1.5
9.7
0.3
11.5
0.9
0.1
0.4
0.2
2.7
4.3
15.2
15.8
In addition to the above, fees of £2.9million (2008: £2.6 million) were payable to other auditors in respect of joint audit arrangements of
Nedbank, the Group’s banking subsidiary in South Africa.
Old Mutual plc
Annual Report and Accounts 2009
239
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(d) Operating lease payments
Payments under operating leases recognised as an expense in the year
Banking
Non-banking
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
44
28
72
43
33
76
Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment.
240 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E: Financial assets and liabilities
E1: Group statement of financial position
The Group is exposed to financial risk through its financial assets (investments and loans), financial liabilities (investment contracts, customer
deposits and borrowings), reinsurance assets and insurance liabilities. The key focus of financial risk management for the Group is ensuring
that the proceeds from its financial assets are sufficient to fund the obligations arising from its insurance and banking operations. The most
important components of financial 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 specific market movements and/or conditions.
(a) Categories of financial instruments
The analysis of assets and liabilities into their categories as defined 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-financial nature, or financial assets and liabilities that are
specifically excluded from the scope of IAS 39, are reflected in the non-financial assets and liabilities category.
At 31 December 2009
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 life assurance
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 financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third party interest 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 financial instruments – liabilities
Non-current liabilities held-for-sale
Fair value through
income statement
Total
Held-for-
trading
Designated
Available-
for-sale
financial
assets
Held-to-
maturity
investments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
£m
5,159
882
828
1,759
570
135
3,138
1,296
120
146
42,393
98,461
169
170
3,051
2,546
2,982
1
–
–
–
–
–
–
–
–
–
–
1,163
936
–
–
70
2,546
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
717
–
110
3,157
82,862
–
–
909
–
–
–
–
–
–
–
11,677
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,210
–
–
–
–
–
–
–
882
–
–
–
–
–
88
–
36
38,073
1,758
–
–
1,807
–
2,982
–
163,806
4,715
87,755
11,677
1,210
45,626
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
93,876
372
2,906
3,309
263
654
905
210
4,305
170
44,135
1,990
–
1,372
–
–
–
–
–
–
–
411
–
2,520
1,990
–
58,582
–
2,906
1,344
–
–
–
–
643
–
6,235
–
–
153,095
6,293
69,710
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
121
–
–
–
–
–
–
–
–
–
–
–
–
1,178
–
–
1,965
–
–
–
–
2,545
–
35,380
–
–
5,159
–
828
1,759
570
135
3,138
491
120
–
–
18
169
170
265
–
–
1
12,823
32,623
372
–
–
263
654
905
210
706
170
–
–
–
121
41,068
35,903
Old Mutual plc
Annual Report and Accounts 2009
241
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i
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r
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S
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 life assurance 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 financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Liabilities
Life assurance 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 financial instruments – liabilities
Non-current liabilities held-for-sale
Fair value through
income statement
Total
Held-for-
trading
Designated
Available-
for-sale
financial
assets
Held-to-
maturity
investments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
£m
5,882
734
682
1,478
1,590
111
3,199
1,148
115
164
35,745
83,522
118
220
3,137
3,228
3,203
7
–
–
–
–
–
–
–
–
–
–
760
627
–
–
73
3,228
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
551
–
121
2,548
67,703
–
–
596
–
–
–
–
–
–
–
11,732
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,494
–
–
–
–
–
–
–
734
–
–
–
–
–
37
–
43
32,437
1,966
–
–
2,145
–
3,203
–
144,283
4,688
71,519
11,732
1,494
40,565
81,269
344
2,591
2,295
477
598
1,452
219
4,074
220
38,171
2,990
6
1,833
–
–
–
–
–
–
–
271
–
1,431
2,990
–
45,691
–
2,591
1,056
–
–
–
–
531
–
7,164
–
–
134,706
6,525
57,033
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,434
–
–
1,239
–
–
–
–
1,788
–
29,576
–
–
5,882
–
682
1,478
1,590
111
3,199
560
115
–
–
–
118
220
323
–
–
7
14,285
32,311
344
–
–
477
598
1,452
219
1,484
220
–
–
6
34,037
37,111
In accordance with the provisions of the October 2008 amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ in respect
of reclassifications of financial assets, the Company’s US subsidiary, US Life, in 2008 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 reclassifications were made as at 1 July 2008 in accordance with the transitional provisions in the amendment.
The book values and fair values of the reclassified 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 2009 of £1,001 million and £971 million respectively
(2008: £1,262 million and £972 million respectively). The amount of accumulated unrealised losses on the reclassified securities already
recognised in other comprehensive income as at the date of reclassification was £263 million. The amount of unrealised losses that would have
been recognised in other comprehensive income had the reclassification not taken place would have been £29 million at 31 December 2009
(2008: £284 million).
242 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The overall income statement impact of the reclassifications was nil, as the revised amortised effective interest on the reclassified securities was
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 reclassified securities ranged from 4.39% to 15.23% and at that point the Group expected
to recover £2.1 billion (based on exchange rate at 1 July 2008) in projected cash flows over the remaining lives of the reclassified securities.
(b) Fair values of financial assets and liabilities
Determination of fair value
All financial instruments, regardless of their IAS 39 categorisation, are initially recorded at fair value. The fair value of a financial 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 modification or
repackaging, or on a valuation technique whose variables include only observable data.
Subsequent to initial recognition, the fair values of financial 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 flow analysis, option pricing models and other valuation techniques commonly used by market participants. A number of
factors such as bid-offer spread, credit profile, 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.
In general, other than in respect of those securities that have been reclassified from available-for-sale to loans and receivables as described in
note E1(a) above, none of the carrying amounts of financial assets and liabilities carried at amortised cost have a fair value significantly different
to their carrying amounts. Such assets and liabilities are primarily comprised of variable-rate financial 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 financial 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 flows 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 first three years’ projected cash flows. Average PDs and LGDs are applied to the projected cash
flows for later years. These results are compared to both regulatory and accounting credit model values. There are no significant variances in
the fair value methodology results compared to the carrying values reported in these financial statements.
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 satisfied 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
Investments and securities include government and government-guaranteed securities, listed and unlisted debt securities, preference shares
and debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated
as investments and certain other securities.
Pooled investments represent the group’s holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar
investment vehicles. Pooled investments are stated at fair value. The fair values of pooled investments are based on widely published prices that
are regularly updated or models based on the market prices of investments held in the underlying pooled investment funds.
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 statement of financial position, which
generally reflects the amount payable on demand.
Borrowed funds
The fair values of amounts included in borrowed funds are based on quoted market prices at the reporting date where applicable, or by
reference to quoted prices of similar instruments.
Old Mutual plc
Annual Report and Accounts 2009
243
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Other financial assets and liabilities
The fair values of other financial assets and liabilities (which comprised cash and cash equivalents, cash with central banks, other assets and
liabilities) are reasonably approximated by the carrying amounts reflected in the statement of financial position as they are short term in nature or
re-price to current market rates frequently.
Fair value hierarchy
Fair values are determined according to the following hierarchy.
> Level 1 – quoted market prices: financial assets and liabilities with quoted prices for identical instruments in active markets. Instruments
classified as Level 1 generally comprise listed equity securities, government securities and other listed debt securities and similar
instruments, actively traded pooled investments, certain quoted derivative assets and liabilities, listed borrowed funds and investment
contract liabilities linked to Level 1 pooled investments and other assets.
> Level 2 – valuation techniques using observable inputs: financial assets and liabilities with quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in inactive markets and financial assets and liabilities valued using models
where all significant inputs are observable. Instruments classified as Level 2 generally comprise unlisted equity and debt securities where the
valuation is based on models involving no significant unobservable data. This includes certain loans and advances, certain privately placed
debt instruments, third party interests in consolidated funds and amounts owed to bank depositors.
> Level 3 – valuation techniques using significant unobservable inputs: financial assets and liabilities valued using valuation techniques
where one or more significant inputs are unobservable. Instruments classified as Level 3 generally comprise unlisted equity and securities
with significant unobservable inputs, securities where the market is not considered sufficiently active, including certain inactive pooled
investments, and derivatives embedded in certain portfolios of insurance contracts where the derivative is not closely related to the host
contract and the valuation contains significant unobservable inputs.
The best evidence of fair value is a quoted price in an active market. In the event that the market for a financial asset or liability is not active, or
quoted prices cannot be obtained without undue effort, a valuation technique is used.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of
trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price
provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or
liability requires additional work during the valuation process.
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However,
certain financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant market inputs that are
unobservable and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued
using significant unobservable inputs if a significant proportion of that asset or liability’s carrying amount is driven by unobservable inputs. In this
context, ‘unobservable’ means that there is little or no current market data available for which to determine the price at which an arm’s length
transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination
of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs
may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be restricted
to uncertainty about the overall fair value of the asset or liability being measured.
Additional information on the impact of unobservable inputs is provided in the section headed ‘Effect of changes in significant unobservable
assumptions to reasonably possible alternatives’.
244 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Fair value hierarchy
Year ended 31 December 2009
Financial assets measured at fair value
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Other assets
Derivative financial instruments – assets
Total
Level 1
Level 2
Level 3
£m
4,715
1,163
936
70
2,546
959
31
32
70
826
3,720
1,125
876
–
1,719
9,011
–
–
3,157
4,964
890
10,070
10,070
36
7
28
–
1
1,784
–
–
–
1,784
–
448
448
Designated (fair value through income statement)
87,755
76,960
Reinsurers’ share of life assurance policyholder liabilities
Deposits held with reinsurers
Loans and advances
Investments and securities
Other assets
Available-for-sale financial assets
Investments and securities
717
110
3,157
82,862
909
11,677
11,677
717
110
–
76,114
19
1,159
1,159
Total financial assets measured at fair value
104,147
79,078
22,801
2,268
Financial liabilities measured at fair value
Held-for-trading (fair value through income statement)
Life assurance policyholder liabilities
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities
Third party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
6,293
1,372
411
2,520
1,990
1,201
–
390
18
793
3,727
20
21
2,502
1,184
69,710
44,879
24,235
58,582
2,906
1,344
643
6,235
43,450
–
1,344
85
–
14,536
2,906
–
558
6,235
1,365
1,352
–
–
13
596
596
–
–
–
–
Total financial liabilities measured at fair value
76,003
46,080
27,962
1,961
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g
a
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a
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w
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u
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o
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s
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Old Mutual plc
Annual Report and Accounts 2009
245
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Fair value hierarchy
Year ended 31 December 2008
Financial assets measured at fair value
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Other assets
Derivative financial instruments – assets
Total
Level 1
Level 2
Level 3
£m
4,688
760
627
73
3,228
1,206
–
–
73
1,133
3,390
708
587
–
2,095
8,463
–
–
2,548
5,331
584
9,521
9,521
92
52
40
–
–
1,830
–
–
–
1,830
–
340
340
Designated (fair value through income statement)
71,519
61,226
Reinsurers’ share of life assurance policyholder liabilities
Deposits held with reinsurers
Loans and advances
Investments and securities
Other assets
Available-for-sale financial assets
Investments and securities
551
121
2,548
67,703
596
11,732
11,732
551
121
–
60,542
12
1,871
1,871
Total financial assets measured at fair value
87,939
64,303
21,374
2,262
Financial liabilities measured at fair value
Held-for-trading (fair value through income statement)
Life assurance policyholder liabilities
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
6,525
1,833
271
1,431
2,990
1,372
–
267
–
1,105
3,310
–
4
1,431
1,875
Designated (fair value through income statement)
57,033
37,020
19,188
Life assurance policyholder liabilities
Third party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
45,691
2,591
1,056
531
7,164
35,964
–
1,056
–
–
8,902
2,591
–
531
7,164
1,843
1,833
–
–
10
825
825
–
–
–
–
Total financial liabilities measured at fair value
63,558
38,392
22,498
2,668
246 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Gains/
losses
recognised
in income
statement
At
beginning
of the year
Gains/
losses
recognised
in other
compre-
hensive
income
Purchases
and issues
Sales and
settle-
ments
Transfers
in
Transfers
out
Foreign
exchange
and other
movement
At end of
the year
d
a
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a
F
s
t
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e
m
e
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a
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s
t
n
e
m
e
g
a
n
a
M
£m
For assets and liabilities
held at the year end
Gains/
losses
recognised
in other
compre-
hensive
income
Gains/
losses
recognised
in income
statement
Level 3 assets
Held-for-trading (fair value
through income statement)
Loans and advances
Investments and
securities
Derivative financial
instruments – assets
92
52
40
–
(7)
(7)
(1)
1
Designated (fair value
through income statement)
1,830
(13)
I nvestments and
securities
1,830
(13)
Available-for-sale financial
assets
340
(42)
Investments and
securities
340
(42)
Total Level 3 assets
2,262
(62)
Level 3 liabilities
Held-for-trading (fair value
through income statement)
Life assurance
policyholder liabilities
Derivative financial
instruments – liabilities
1,843
(225)
1,833
(227)
10
2
Designated (fair value
through income statement)
825
(79)
Life assurance
policyholder liabilities
(investment contracts)
825
(79)
Total Level 3 liabilities
2,668
(304)
(4)
(4)
–
–
12
12
20
20
28
–
–
–
–
–
–
–
–
–
–
(48)
(33)
(15)
–
–
–
–
–
(5)
(5)
–
–
8
4
4
–
36
7
28
1
(35)
–
(35)
–
163
(186)
107
(225)
96
1,784
(22)
163
(186)
107
(225)
96
1,784
(22)
118
(11)
118
(11)
95
95
(40)
(32)
448
(40)
(32)
448
–
–
13
–
13
–
–
–
–
–
281
(245)
202
(270)
72
2,268
(57)
13
29
29
–
12
(113)
(113)
–
–
–
–
–
–
–
(169)
1,365
(560)
(170)
1,352
(551)
1
13
(9)
(27)
107
(225)
(17)
596
12
(27)
107
(225)
(17)
596
41
(140)
107
(225)
(186)
1,961
(475)
–
–
–
–
–
–
85
85
i
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e
v
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r
s
s
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n
s
u
B
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y
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i
i
b
s
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o
p
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e
R
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a
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s
R
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a
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f
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S
Old Mutual plc
Annual Report and Accounts 2009
247
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The transfers into Level 3 largely relate to where inputs on certain financial assets and liabilities obtained from pricing service providers are
no longer observable. The transfers out of Level 3 relate to certain pooled investments no longer being considered inactive and for which
observable inputs are now available.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying
the levels of the unobservable parameter using statistical techniques. When parameters are not amenable to statistical analysis, quantification of
uncertainty is judgemental.
When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most
favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, the valuations are assessed on an asset-by-asset basis using a valuation methodology appropriate to
the specific investment, in line with industry guidelines. In many of the methodologies, the principal assumption is the valuation multiple to be
applied to the main financial indicators including, for example, multiples for comparable listed companies and discounts to marketability.
For asset-backed securities whose prices are unobservable, models are used to generate the expected value of the asset, incorporating
benchmark information on factors such as prepayment patterns, default rates, loss severities and the historical performance of the underlying
assets. The models used are calibrated by using securities for which external market information is available.
For structured notes and other derivatives, principle assumptions concern the future volatility of asset values and the future correlation between
asset values. These principle assumptions include credit volatilities and correlations used in the valuation of the structured credit derivatives.
For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a
volatility or correlation from comparable assets for which market data is more readily available, and examination of historical levels.
248 Old Mutual plc
Annual Report and Accounts 2009
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t
a
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s
t
n
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e
g
a
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a
M
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s
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u
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o
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e
R
d
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a
k
s
R
i
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Analysis of reasonably possible alternative assumptions
£m
Reflected in
income statement
Reflected in
comprehensive income
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
Year ended 31 December 2009
Level 3 financial assets
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Derivative financial instruments – assets
Designated (fair value through income statement)
Investments and securities
Available-for-sale financial assets
Investments and securities
1
–
–
1
404
404
–
–
1
–
–
1
481
481
–
–
–
–
–
–
–
–
27
27
27
–
–
–
–
–
–
–
–
–
–
–
–
24
24
24
–
–
–
–
–
–
Total level 3 financial assets
405
482
Level 3 financial liabilities
Held-for-trading (fair value through income statement)
Life assurance policyholder liabilities
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities (investment contracts)
29
26
3
85
85
13
10
3
92
92
Total level 3 financial liabilities
114
105
For the above analysis, the determination of the impacts of the favourable and unfavourable changes was based on a reasonable range of
favourable and unfavourable changes in the key observable inputs for the major types of Level 3 financial assets and liabilities, ranging from,
for example, a 10% change in the price earnings multiple for equity securities, to a 25% change in the discount rates applied to debt securities
and volatility assumptions in derivative contracts. Changes in other key observable inputs such as lapses and non-performance risk were also
considered.
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Old Mutual plc
Annual Report and Accounts 2009
249
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Financial instruments designated as fair value through income statement
Certain items in the Group’s statement of financial position 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:
At 31 December 2009
Loans and advances
Investments and securities
Other assets
At 31 December 2008
Loans and advances
Investments and securities
Other assets
£m
Change in fair value due to
change in credit risk
Maximum
exposure to
credit risk
Current
financial year
Cumulative
3,157
8,842
56
12,055
(1)
(7)
–
(8)
–
(8)
–
(8)
£m
Change in fair value due to
change in credit risk
Maximum
exposure to
credit risk
Current
financial year
Cumulative
2,548
6,622
36
9,206
–
(9)
–
(9)
1
(13)
–
(12)
Certain items in the Group’s statement of financial position that would otherwise be categorised as financial 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:
At 31 December 2009
Borrowed funds
Amounts owed to bank depositors
At 31 December 2008
Borrowed funds
Amounts owed to bank depositors
Change in fair value due to
change in credit risk
Fair value
Current
financial year
Cumulative
1,344
6,235
7,579
264
(6)
258
(276)
(18)
(294)
Change in fair value due to
change in credit risk
Fair value
Current financial
year
Cumulative
1,460
7,164
8,624
(503)
10
(493)
(565)
11
(554)
£m
Contractual
maturity
amount
1,679
6,290
7,969
£m
Contractual
maturity
amount
2,002
7,169
9,171
The fair values of other categories of financial liabilities designated as fair value through the income statement do not change significantly in
respect of credit risk.
250 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 financial 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 financial assets designated at fair value through the income statement. The change in fair value due to
credit risk of financial 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.
(c) Market risk
(i) Overview
Market risk is the risk of a financial impact arising from the changes in values of financial assets or financial 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 financial 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 sufficient capital to be held in excess of the statutory minimum to allow
the Group to manage significant equity exposures.
In South Africa the stock selection and investment analysis process is supported by a well-developed research function. For fixed annuities,
market risks are managed where possible by investing in fixed interest securities with a duration closely corresponding to those liabilities.
Market risk on policies that include specific guarantees and where shareholders carry the investment risk, principally reside in the South African
guaranteed non-profit annuity book, which is closely matched with gilts and semi-gilts. Other non-profit policies are also suitably matched
based upon comprehensive investment guidelines. Market risk on with-profit policies, where investment risk is shared, is minimised by
appropriate bonus declaration practices.
In the US, for fixed annuities, risk is managed by investing in fixed securities with durations within a half-year of the duration of the liabilities.
Cash flows 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 sufficient 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.
For the variable annuity business in Old Mutual Bermuda, the guaranteed returns are no longer dynamically hedged, instead the overall
exposures to changes in markets are monitored closely so that actions can be taken to re-establish hedging at short notice, however this does
create more short-term risk of volatility in earnings and capital for the Bermuda operation.
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 sufficient 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 382 to 389.
Old Mutual plc
Annual Report and Accounts 2009
251
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(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.
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 for Nedbank estimates the potential loss in pre-tax profit over a given holding period for a specified confidence
level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk
diversification 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% VaR number used by
Nedbank represents the overnight loss that has less than 1% 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.
£m
Historical VaR (one-day, 99%) by risk type
Average
Minimum
Maximum
Year-end
At 31 December 2009
Foreign exchange
Interest rate
Equity products
Other
Diversification
Total VaR exposure
At 31 December 2008
Foreign exchange
Interest rate
Equity products
Other
Diversification
Total VaR exposure
0.3
1.4
0.5
0.5
(1.0)
1.7
0.1
0.6
0.2
0.2
–
1.1
0.9
2.4
1.1
1.1
–
5.5
0.3
0.6
0.3
0.4
(0.5)
1.1
£m
Average
Minimum
Maximum
Year-end
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
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 fixed-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 2009 the sensitivity of the banking book to a 1% instantaneous reduction in interest rates would have led to a reduction in
Net interest income and equity of £44 million (2008: £31 million).
252 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The table below shows the repricing profile of Nedbank’s banking book, which highlights the fact that assets reprice quicker than liabilities
following derivative hedging activities.
Interest rate repricing gap
At 31 December 2009
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
Up to
3 months
3<6
months
6 months
<1 year
1<5 years Over 5 years
Trading and
non-rate
35,105
29,620
(2,631)
2,853
2,853
6.0%
283
2,601
2,232
(85)
2,768
5.8%
524
3,227
2,474
(229)
2,539
5.3%
2,624
1,013
(860)
751
3,290
6.9%
1,409
391
(1,215)
(197)
3,093
6.5%
7,944
11,037
–
(3,093)
–
–
At 31 December 2008
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
Up to
3 months
3<6
months
6 months
<1 year
1<5 years
Over 5 years
Trading and
non-rate
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)
–
–
£m
Total
47,889
47,889
–
–
–
–
£m
Total
41,330
41,330
–
–
–
–
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 reflect the situation in the money market. The interest rate risk that arises from
mismatching of fixed rates of interest is reduced through interest rate swap agreements.
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Old Mutual plc
Annual Report and Accounts 2009
253
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(d) Currency risk
The Group is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.
The principal foreign currency risk arises from the fact that the Group’s presentation currency is GBP, whereas (other than for the UK operations)
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 reflected
in the currency analyses that follow.
Old Mutual (Bermuda) Ltd (‘OMB’) shareholder funds and client assets are invested in US dollar denominated bonds, mutual funds, money
market securities and cash. Where selected, OMB provides minimum guarantees, also denominated in US dollars. However, a significant
portion of the underlying assets invested in by OMB’s clients are exposed to currencies other than the US dollar. OMB estimates and tracks this
exposure on a daily basis and, depending on the hedging strategy employed, seeks to mitigate the exposure to a greater or lesser extent.
The table below shows the Group’s statement of financial position by major currency at 31 December 2009.
£m
At 31 December 2009
ZAR
GBP
USD
Euro
SEK
Other
Total
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 life assurance 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 financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Liabilities
Life assurance 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 financial instruments – liabilities
608
843
738
1,518
83
102
129
32
107
3
35,077
29,483
51
141
1,137
1,381
790
1
1,523
35
21
223
19
26
696
772
–
–
533
30,685
93
–
223
100
844
–
1,267
–
22
–
329
7
1,894
475
–
143
1,586
18,690
–
10
1,302
1,020
483
–
661
–
5
–
30
–
347
7
–
–
92
5,983
17
19
155
34
319
–
1,013
–
6
–
104
–
43
4
–
–
1,979
10,530
2
–
188
9
422
–
87
4
36
18
5
–
29
6
13
–
3,126
3,090
6
–
46
2
124
–
5,159
882
828
1,759
570
135
3,138
1,296
120
146
42,393
98,461
169
170
3,051
2,546
2,982
1
72,224
35,793
27,228
7,669
14,300
6,592
163,806
28,509
344
531
1,941
156
28
337
81
2,507
140
35,471
1,092
30,204
–
1,507
750
63
421
162
85
100
–
778
–
18,920
–
206
31
17
–
126
16
742
10
1,572
815
7,171
–
–
583
20
190
154
2
382
20
179
7
6,318
–
662
4
–
–
109
15
229
–
2,803
76
2,754
28
–
–
7
15
17
11
345
–
3,332
–
93,876
372
2,906
3,309
263
654
905
210
4,305
170
44,135
1,990
71,137
34,070
22,445
8,708
10,216
6,509
153,095
254 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
At 31 December 2008
ZAR
GBP
USD
Euro
SEK
Other
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 life assurance 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 financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
Liabilities
Life assurance 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 financial instruments – liabilities
Non-current liabilities held-for-sale
£m
Total
5,882
734
682
1,478
1,590
111
3,199
1,148
115
164
35,745
83,522
118
220
3,137
3,228
3,203
7
479
686
594
1,296
97
78
117
15
100
3
29,263
23,251
29
208
983
1,779
1,057
7
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
–
60,042
32,852
27,881
6,526
11,404
5,578
144,283
23,604
316
374
1,184
142
26
329
115
1,996
208
30,298
1,730
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
4,074
220
38,171
2,990
6
60,328
24,269
27,845
7,218
10,434
4,612
134,706
The Group reduces the risk to foreign currency fluctuations through the use of currency swaps, currency borrowings and forward foreign
exchange contracts. There are no direct exposures to the unit linked investments and related policyholder liabilities. Taking these risk
mitigation techniques into account, a 10% appreciation in the GBP would result in a reduction to equity holders’ funds in relation to the USD
of £318million (2008: £292 million), EUR £42 million (2008: £113 million), SEK £352 million (2008: £215 million) and ZAR £99 million (2008: an
increase in consolidated equity holders’ funds of £26 million).
A 10% deterioration in the value of the major currencies shown above in relation to GBP (as set out in note C2) would have led to a reduction in
Profit after tax of £48 million (2008: £10 million gain).
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Old Mutual plc
Annual Report and Accounts 2009
255
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E2: Credit risk
Overall exposure to credit risk
Credit risk refers to the risk that counterparty will default on its contractual obligation resulting in financial loss to the Group. The Group has
adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating
the financial 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 significant credit exposure to any single counterparty or any group of counterparties having similar characteristics.
The credit risk on liquid funds and derivative financial 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
significant risk type facing Nedbank, accounting for over 70% of its economic capital requirements. Nedbank’s credit risk profile 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 life assurance operations cedes significant risk through reinsurance and any loans to policyholders are secured on the
surrender value of the relevant policies.
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 financial guarantees given by the Group and undrawn loan commitments,
which are not yet reflected in the Group’s statement of financial position.
Mandatory reserve deposits with central banks
Reinsurers’ share of life assurance policyholder liabilities
Reinsurers’ share of general insurance liabilities
Deposits held with reinsurers
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 financial instruments – assets
Cash and cash equivalents
Financial guarantees and other credit related contingent liabilities
Loan commitments and other credit related commitments
At
31 December
£m
2009
At
31 December
£m
2008
882
1,296
120
146
42,393
32,668
8,168
20,526
3,859
115
3,004
2,546
2,982
3,100
4,602
734
1,148
115
164
35,745
32,297
8,976
19,116
3,989
216
2,681
3,228
2,862
1,989
4,165
93,739
85,128
(i) Financial collateral
The Group takes financial collateral to support exposures in its banking and securities and lending activities. Collateral held includes cash and
debt securities. Cash collateral is included as part of cash equivalents.
These transactions are entered into under terms and conditions that are standard industry practice to securities borrowing and lending activities.
(ii) Non financial collateral
The Group takes other physical collateral to recover outstanding lending exposures in the event of the borrower being unable or unwilling to
fulfil its obligations. This includes mortgages over property (both residential and commercial), and liens over business assets (including, but not
limited to, plant, vehicles, aircraft, inventories and trade debtors) and guarantees from parties other than the borrower.
The Group has not disclosed the fair value of collateral held as it is not practicable to do so.
A further analysis of credit risk is provided in notes E3, E4, E6 and F5.
256 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E3 Loans and advances
(a) Summary
The following table shows an analysis of loans and advances:
Home loans
Commercial mortgages
Properties in possession
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and instalment debtors
Gross investment
Unearned finance 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
Specific provisions
Portfolio provision
Total net loans and advances
At
31 December
£m
2009
At
31 December
£m
2008
16,474
6,409
74
657
1,035
263
4,513
1,396
5,381
5,761
(380)
183
24
5,852
9
955
14,111
5,325
58
556
895
260
4,443
1,142
4,474
4,948
(474)
29
78
4,746
15
192
43,225
36,324
(660)
(172)
(407)
(172)
42,393
35,745
Non-performing loans included above had a book value less impairment provisions of £1,617 million (2008: £870 million).
Of the loans and advances shown above, £13,038 million (2008: £11,268 million) is receivable within one year of the reporting date and is
regarded as current. £29,355 million (2008: £24,477 million) is regarded as non-current based on the maturity profile of the assets.
The table below gives an age analysis of loans and advances representing primarily the exposures of the Group’s banking operations.
Neither past due nor impaired
Past due but not impaired
Past due but less than 1 month
Past due, greater than 1 month but less than 3 months
Past due, greater than 3 months but less than 6 months
Past due, greater than 6 months but less than 1 year
Past due more than 1 year
Impaired loans and advances individually impaired
Gross loans and advances
Provisions for impairment
Total net loans and advances
At
31 December
£m
2009
At
31 December
£m
2008
37,670
3,279
2,631
566
28
36
18
2,276
32,065
2,982
2,198
618
6
3
157
1,277
43,225
(832)
36,324
(579)
42,393
35,745
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Old Mutual plc
Annual Report and Accounts 2009
257
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The neither past due nor impaired loans and advances can be further analysed by credit rating as follows:
At 31 December 2009
At 31 December 2008
Investment
grade
Sub-
investment
grade
Not rated
Total
Investment
grade
Sub-
investment
grade
Not rated
Total
£m
Home loans
Commercial mortgages
Properties in possession
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and instalment
debtors
Factoring accounts
Trade, other bills and bankers’
acceptances
Term loans
Remittances in transit
Deposits placed under reverse
purchase agreements
220
493
–
91
58
–
2,926
422
649
–
13
3,988
5
732
9,358
5,572
–
434
500
–
1,317
3,762
735
181
11
1,075
–
–
3,980
15
–
44
204
484
134
183
–
–
–
80
4
–
13,558
6,080
–
569
762
484
4,377
4,367
1,384
181
24
5,143
9
92
580
–
2
46
–
2,115
167
449
1
37
3,179
9
7,638
4,637
–
429
568
–
1,895
3,780
685
21
42
1,185
–
732
192
–
3,627
–
–
30
160
153
211
46
4
–
–
79
6
–
11,357
5,217
–
461
774
153
4,221
3,993
1,138
22
79
4,443
15
192
Gross loans and advances
9,597
22,945
5,128
37,670
6,869
20,880
4,316
32,065
Collateral is held as security against certain loans and advances detailed above, with this principally consisting of cash, properties and letters of
credit.
Movements in provisions for impairment of loans and advances are analysed as follows:
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
Year ended 31 December 2009
Year ended 31 December 2008
Specific
impairment
Portfolio
impairment
Total
impairment
Specific
impairment
Portfolio
impairment
Total
impairment
£m
407
528
(378)
–
103
660
172
(19)
–
–
19
172
579
509
(378)
–
122
832
322
279
(215)
25
(4)
407
130
41
(2)
–
3
172
452
320
(217)
25
(1)
579
During the year under review, the Group recognised collateral in the amount of £74 million (2008: £58 million) in the statement of financial
position. These amounts are being included in the loans and advances above as properties in possession.
258 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Finance lease and instalment debtors
Amounts receivable under finance leases
Within one year
In the second to fifth years inclusive
After five years
Less: unearned finance income
£m
Minimum lease payments
receivable
Present value of minimum
lease payments receivable
At
31 December
2009
At
31 December
2008
At
31 December
2009
At
31 December
2008
974
4,771
16
5,761
(380)
882
3,283
783
4,948
(474)
843
4,525
13
5,381
–
5,381
741
2,954
779
4,474
–
4,474
Present value of minimum lease payments receivable
5,381
4,474
The accumulated allowance for uncollectable minimum lease payments receivable is £134 million (2008: £117 million).
E4: 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
At
31 December
£m
2009
At
31 December
£m
2008
8,168
20,526
14,821
5,705
19,986
18,496
1,490
45,807
5,741
40,066
3,859
115
8,976
19,116
14,069
5,047
16,179
14,976
1,203
35,046
5,215
29,831
3,989
216
Total investments and securities
98,461
83,522
Investments and securities are regarded as current and non-current assets based on the intention with which the financial assets are held
as well as their contractual maturity profile. Of the amounts shown above, £48,226 million (2008: £40,905 million) is regarded as current and
£50,235 million (2008: £42,617 million) are regarded as non-current.
(a) 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
Total debt instruments and similar securities
At
31 December
£m
2009
At
31 December
£m
2008
32,346
322
32,091
206
32,668
32,297
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Old Mutual plc
Annual Report and Accounts 2009
259
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 2009
Investment grade (AAA to BBB)
Sub-investment grade (BB and lower)
Not rated
At 31 December 2008
Investment grade (AAA to BBB)
Sub-investment grade (BB and lower)
Not rated
Government
and
government-
related
securities
Other debt
securities,
preference
shares and
debentures
Short-term
funds and
securities
£m
Other
Total
6,324
–
1,844
8,168
15,745
696
4,085
20,526
2,193
–
1,666
3,859
–
–
115
115
24,262
696
7,710
32,668
£m
Government
and
government-
related
securities
Other debt
securities,
preference
shares and
debentures
7,029
–
1,947
8,976
14,969
312
3,835
19,116
Short-term
funds and
securities
3,601
–
388
3,989
Other
Total
–
–
216
216
25,599
312
6,386
32,297
In general, no collateral is taken in respect of the Group’s holdings of debt instruments and similar securities.
United States
US Life incurred impairment losses of £248 million (2008: US Life & Bermuda £414 million) and cumulative net unrealised losses of £307 million
(2008: US Life & Bermuda £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.
US Life NAIC designation
For US statutory reporting, debt securities are classified into six categories specified 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.
£m
At 31 December 2009
At 31 December 2008
US Life
US Life & Bermuda
Carrying
value
% of total
Carrying
value
% of total
5,183
3,727
507
54
30
8
54.5%
39.2%
5.3%
0.6%
0.3%
0.1%
6,253
3,526
209
27
31
5
62.2%
35.1%
2.0%
0.3%
0.3%
0.1%
9,509
100.0%
10,051
100.0%
1
2
3
4
5
6
260 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
US Life Securities rating by sector
The following table analyses by carrying value the securities portfolio by sector and investment rating:
At 31 December 2009
AAA
AA
Finance
Banking
Utility
Communications
Insurance
Energy
Manufacturing
Other
Total
3
1
–
–
–
–
–
17
21
2
2
–
–
–
–
–
5
9
At 31 December 2008
AAA
AA
Finance
Banking
Utility
Communications
Insurance
Energy
Manufacturing
Other
Total
–
1
–
–
–
–
–
27
28
1
1
–
–
–
–
–
3
5
%
BBB
BB and
below
Total
US Life
A
2
8
3
3
3
1
–
5
A
7
7
2
3
3
2
1
4
2
5
7
5
4
4
4
8
5
5
6
4
3
3
1
8
29
35
25
39
US Life and Bermuda
BBB
BB and
below
1
1
–
–
1
–
–
3
6
1
–
–
–
–
–
–
2
3
10
17
10
8
8
5
4
38
100
%
Total
14
14
8
7
6
5
2
44
100
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Old Mutual plc
Annual Report and Accounts 2009
261
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
US Life Securities by industry
The following table analyses by carrying value the securities portfolio by industry:
Affiliated
Air transport
Asset backed
Automotive
Banking
Basic industries
Commercial Mortgage Backed Securities (CMBS)
Communications
Consumer cyclical
Consumer non-cyclical
Energy
Entertainment
Finance
Insurance
International
Manufacturing
Municipal
Residential Mortgage Backed Securities (RMBS)
Technology
Transportation
Treasury
Utility
Total
%
At
31 December
2009
At
31 December
2008
US Life
US Life and
Bermuda
1
–
4
–
17
4
8
9
2
4
5
–
11
7
–
3
1
7
2
2
2
11
4
1
6
1
14
2
10
6
2
2
5
1
14
6
1
2
1
10
1
1
1
9
100
100
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.
262 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
US Life fair value gains and losses
Assets fair valued at below book value
Book value
Unrealised loss
Fair value (as included in statement of financial position)
Assets fair valued at or above book value
Book value
Unrealised gain
Fair value (as included in statement of financial position)
Total
Book value
Unrealised loss
Fair value (as included in statement of financial position)
At
31 December
£m
2009
At
31 December
£m
2008
US Life
US Life and
Bermuda
5,634
(552)
9,525
(1,935)
5,082
7,590
4,182
245
4,427
2,326
135
2,461
9,816
(307)
11,851
(1,800)
9,509
10,051
The above analysis includes unrealised losses in relation to those securities that were reclassified in accordance with the provisions of the
October 2008 amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ which had an aggregate carrying value as at
31 December 2009 of £946 million (2008: US Life & Bermuda £1,262 million) and aggregate fair value as at 31 December 2009 of £918 million
(2008: US Life & Bermuda £972 million).
Included in the above are the amounts relating to sub-prime, Alt-A, CMBS and RMBS securities of:
Sub-prime
Alt-A
CMBS
RMBS
Total
US Life debt securities in an unrealised loss position
The following table excludes unrealised gains:
At 31 December 2009
Between 90% and 100%
Between 80% and 90%
Below 80%
Total
£m
At 31 December 2009
At 31 December 2008
US Life
US Life and Bermuda
Fair value
Unrealised
loss
Fair value
Unrealised
loss
214
27
806
390
(51)
(4)
(49)
(3)
312
33
973
1,036
1,437
(107)
2,354
(141)
(10)
(288)
(39)
(478)
£m
US Life
Fair value
Unrealised
loss
3,312
1,151
619
5,082
(109)
(204)
(239)
(552)
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Old Mutual plc
Annual Report and Accounts 2009
263
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
At 31 December 2008
Between 90% and 100%
Between 80% and 90%
Below 80%
Total
Included in the above are the amounts relating to sub-prime, Alt-A, CMBS and RMBS securities of:
At 31 December 2009
Between 90% and 100%
Between 80% and 90%
Below 80%
Total
At 31 December 2008
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 2009
Less than 6 months
6 months to 1 year
Over 1 year
At 31 December 2008
Less than 6 months
6 months to 1 year
Over 1 year
264 Old Mutual plc
Annual Report and Accounts 2009
£m
US Life and Bermuda
Fair value
Unrealised
loss
2,686
1,814
3,090
(135)
(308)
(1,492)
7,590
(1,935)
£m
US Life
Fair value
Unrealised
loss
289
250
163
702
(12)
(46)
(77)
(135)
£m
US Life and Bermuda
Fair value
Unrealised
loss
738
232
554
1,524
US Life
Investment
grade
Sub-
investment
grade
(16)
(16)
(425)
(457)
(1)
(11)
(83)
(95)
(34)
(38)
(428)
(500)
£m
Total
(17)
(27)
(508)
(552)
£m
US Life and Bermuda
Investment
grade
Sub-
investment
grade
(161)
(667)
(1,006)
(5)
(47)
(49)
Total
(166)
(714)
(1,055)
(1,834)
(101)
(1,935)
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E5: Securities lending
The Group participates in securities lending where securities holdings are lent to third parties. The loaned securities are not removed from the
Group’s consolidated balance sheet but are retained within the relevant investment classification. Collateral is held in respect of the loaned
securities, with the level of holding in relation to the underlying securities lent being dependant on the quality of collateral.
The table below represents the amounts lent and the related collateral received:
Amounts lent under securities lending
Equity securities
Debt securities
Amounts received as collateral for securities lending
Cash
Debt securities
At
31 December
£m
2009
At
31 December
£m
2008
626
230
856
782
74
856
430
522
952
903
49
952
The cash collateral above has been recognised in the statement of financial position with a corresponding liability to return the collateral
included in other liabilities. Of the collateral included in the table above, £856 million (2008: £952 million) can be sold or repledged and £nil
(2008: £nil) has been sold or repledged.
In addition the Group has provided £1 million in cash collateral and £92 million in debt securities collateral (2008: £322 million) under repurchase
arrangements.
E6: Derivative financial 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 to buy or sell foreign currency or a financial instrument on a
future date at a specified price established in an organised financial 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 flows for another. Swaps result in an economic exchange
of currencies or interest rates or a combination of both (ie 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 specific amount of a
foreign currency or a financial 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 financial instruments provide a basis for comparison with instruments recognised on the statement
of financial position, but do not necessarily indicate the amounts of future cash flows 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 fluctuations in market interest rates, foreign exchange rates or asset prices relative to their terms. The aggregate contractual
or notional amount of derivative financial 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 financial assets and liabilities can fluctuate significantly from time to time.
Old Mutual plc
Annual Report and Accounts 2009
265
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The following tables provide a detailed breakdown of the contractual or notional amounts and the fair values of the Group’s derivative financial
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 financial instruments with other financial 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.
£m
Notional principals
Fair values
Positive
values
Negative
values
Assets
Liabilities
–
976
599
1,575
6,420
1,619
368
7
–
8,414
16,820
3,644
1,663
–
864
195
758
39
106
903
6,255
712
–
5
368
7,340
15,310
5,363
1,163
391
1,552
580
23,186
24,359
65
–
65
8
127
–
127
–
6
217
3
226
1,237
177
13
–
–
1,427
555
5
167
–
81
11
819
73
–
73
1
166
12
1
179
1,013
88
–
–
12
1,113
570
8
1
9
74
9
671
5
–
5
22
33,248
32,729
2,546
1,990
At 31 December 2009
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
266 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 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
£m
Notional principals
Fair values
Positive
values
Negative
values
Assets
Liabilities
–
803
251
863
1
215
1,054
1,079
9,408
1,912
357
–
–
9,872
1,483
–
–
358
11,677
11,713
14,397
4,417
2,997
–
2,027
253
10,621
4,543
1,256
1,821
1,686
253
24,091
20,180
128
57
185
–
140
60
200
229
–
33
8
41
2,022
274
47
–
–
2,343
485
116
73
–
101
3
778
66
–
66
–
114
–
4
118
2,021
154
–
–
49
2,224
430
94
12
10
90
1
637
11
–
11
–
37,007
33,401
3,228
2,990
The contractual maturities of the derivatives held are as follows:
At 31 December 2009
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
No
contractual
maturity
date
£m
Total
Derivative financial liabilities
1,990
811
421
388
344
–
1,964
At 31 December 2008
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
No
contractual
maturity
date
£m
Total
Derivative financial liabilities
2,990
1,152
926
582
420
–
3,080
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Old Mutual plc
Annual Report and Accounts 2009
267
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
An analysis of the credit rating (Standard & Poor’s or equivalent) of the Group’s derivative financial assets is as follows:
Investment grade
Sub-investment grade
Not rated
Derivative financial instruments – assets
At
31 December
£m
2009
At
31 December
£m
2008
1,244
–
1,302
2,546
1,854
–
1,374
3,228
E7: Hedge accounting
Cash flow hedges
Cash flow hedge accounting is applied 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 flow hedge accounting is applied to the EUR/GBP swap. At 31 December
2009 the EUR/GBP swaps had a notional principal of £27 million (€30 million) (2008: £29 million (€30 million)) and a fair value of £5 million
(2008: £7 million). The GBP/USD swap qualifies as a net investment hedge, as discussed below.
The maturity date of the final EUR/USD swap of €30 million is 11 July 2010 and matches the repayment of the corresponding bond. The cash
flow 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 financial statements relating to derivatives designated as cash flow hedges is shown in the table below:
Fair value of derivatives designated as cash flow hedges at the reporting date
Cross currency interest rate swap – €30 million Euro loan borrowing
Analysis of movements in cash flow hedge reserve
Cash flow 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 flow hedge reserve at end of the year
The cash flow hedge reserve is included in ‘Other reserves’ in the statement of changes in equity.
In respect of the cross currency swap discussed above, cash flows will occur annually on 11 July until 11 July 2010.
There was no ineffectiveness in respect of either of the above cash flow hedges during the financial year (2008: nil).
At
31 December
£m
2009
At
31 December
£m
2008
5
5
2
–
–
–
2
7
7
–
2
–
–
2
268 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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
financial instruments utilised for net investment hedging purposes:
At 31 December 2009
Forward contracts
Currency swaps1
Debt2
At 31 December 2008
Forward contracts
Currency swaps1
Debt2
EUR
113
–
–
113
EUR
–
–
96
96
USD
–
321
31
352
USD
20
356
303
679
ZAR
95
–
55
150
ZAR
232
–
–
232
£m
SEK
–
353
–
353
£m
SEK
86
356
–
442
1 Excludes $35 million (2008: $35 million) of currency swaps that do not qualify for hedge accounting.
2 Excludes $750 million and €500 million (2008: $750 million and €500 million) of financial instruments accounted as non-controlling interests or as equity.
An analysis of amounts in the financial statements relating to derivatives designated as net investment hedges is shown in the table below:
At
31 December
£m
2009
At
31 December
£m
2008
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i
Fair value of financial instruments designated as net investment hedges at the reporting 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
–
–
(4)
(53)
(53)
(2)
(2)
(25)
(57)
(84)
(110)
(170)
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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.
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Old Mutual plc
Annual Report and Accounts 2009
269
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E8: Policyholder liabilities
Life assurance 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 Reinsurance
At
31 December
2009 Net
Gross
Reinsurance
£m
At
31 December
2008 Net
27,549
(539)
27,010
28,106
(550)
27,556
57,372
1,859
6,639
457
(717)
–
–
(40)
56,655
1,859
6,639
417
45,161
1,965
5,647
390
(551)
–
–
(47)
44,610
1,965
5,647
343
93,876
(1,296)
92,580
81,269
(1,148)
80,121
49
94
229
372
(10)
(38)
(72)
(120)
39
56
157
252
45
79
220
344
(8)
(26)
(81)
(115)
37
53
139
229
Life assurance policyholder and general insurance
liabilities
94,248
(1,416)
92,832
81,613
(1,263)
80,350
Of the £1,416 million (2008: £1,263 million) included in reinsurer’s share of life assurance policyholder and general insurance liabilities is an
amount of £919 million (2008: £705 million) which is classified as current, the remainder being non-current.
Of the £146 million (2008: £164 million) included in deposits held with reinsurers £110 million (2008: £124 million) is classified as current,
the remainder being non-current.
Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below.
(a) Insurance contracts
Balance at beginning of the year
Income
Premium income
Investment income
Other income
Expenses
Claims and policy benefits
Operating expenses
Currency translation loss/(gain)
Other charges and transfers
Taxation
Transfer to operating profit
Gross Reinsurance
Year ended
31 December
2009 Net
Gross
Reinsurance
£m
Year ended
31 December
2008 Net
28,106
(550)
27,556
23,637
(727)
22,910
2,549
1,623
5
(3,369)
(372)
(97)
(594)
(19)
(283)
(158)
–
–
165
–
44
(48)
–
8
2,391
1,623
5
(3,204)
(372)
(53)
(642)
(19)
(275)
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)
Balance at end of the year
27,549
(539)
27,010
28,106
(550)
27,556
270 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) 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
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Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
47,126
9,822
(656)
(5,703)
8,345
297
53,745
8,616
(762)
(5,470)
(10,085)
1,082
59,231
47,126
Of the liabilities shown in the above table, £1,178 million (2008: £1,434 million) are recorded at amortised cost with the remainder being
designated at fair value through the income statement.
(c) Discretionary participating investment contracts
Balance at beginning of the year
Income
Premium income
Investment income
Currency translation losses/(gains)
Expenses
Claims and policy benefits
Operating expenses
Other charges and transfers
Taxation
Transfer to operating profit
Balance at end of the year
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
5,647
6,404
659
774
867
2,300
(1,050)
(68)
(145)
(4)
(1,267)
(41)
524
(362)
(128)
34
(641)
(59)
(31)
3
(728)
(63)
6,639
5,647
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Old Mutual plc
Annual Report and Accounts 2009
271
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(d) Contractual maturity analysis
The table below is a maturity analysis of liability cash flows based on contractual maturity dates for investment contract liabilities and
discretionary participating financial instruments, and expected claim dates for insurance contracts.
The Group acknowledges that for general insurance the unearned premium provision, which will be recognised as earned premium in the
future, will most likely not lead to claim cash outflows equal to this provision. The Group has however adopted a conservative approach in
estimating future cash outflows associated with unearned premiums, by assuming a 100% combined ratio.
At 31 December 2009
Life assurance
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 flows
£m
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
Total
27,549
920
2,454
13,360
30,465
47,199
57,372
1,859
6,639
457
52,324
36
6,398
454
469
675
–
18
1,005
614
–
40
3,583
840
–
53
57,381
2,165
6,398
565
93,876
60,132
3,616
15,019
34,941
113,708
49
94
229
372
32
61
149
242
10
19
46
75
7
14
34
55
–
–
–
–
49
94
229
372
94,248
60,374
3,691
15,074
34,941
114,080
At 31 December 2008
Carrying
amount
Less than
3 months
£m
Undiscounted cash flows
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
Total
Life assurance
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
272 Old Mutual plc
Annual Report and Accounts 2009
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
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(e) Assumptions
Insurance contract provisions (together with provisions for investment contracts with discretionary participating features) are calculated
based upon assumptions determined in accordance with local accounting requirements. As described in the accounting policies, these vary
significantly 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;
> the compulsory margins as set out in the Actuarial Society professional guidance notes; plus
> discretionary margins reflecting mainly the excess of capital charges over the compulsory investment margin of 0.25% for policies that are
valued prospectively. These discretionary margins cause capital charges to be included in operating profits as they are charged and ensure
that profits are released appropriately over the term of each policy.
Other discretionary margins, mainly held to cover:
> mortality, lapse and investment return margins for Group Schemes funeral policies, due to the additional risk associated with this business,
and to ensure that profit is released appropriately over the term of the policies;
> mortality margins on Individual Business life policies, accidental death supplementary benefits, and disability supplementary benefits, due to
uncertainty about future experience;
> margins on certain Individual Business non-profit annuities, due to the inability to fully match assets to liabilities as a result of the limited
availability of long-dated bonds, expense margins in the pricing basis for Employee Benefits annuities;
> profit margins on Employee Benefits non-profit annuities to ensure that profit is released appropriately over the life of the policies;
> interest margins on Employee Benefits 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 financial options and guarantees on a market-consistent basis, and make due allowance for potential
lapses, paid-ups 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 AIDS, and for the expected improvement in annuitant mortality.
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 inflation (excluding margins) assumed for South Africa insurance
business are as follows:
Fixed interest securities
Cash
Equities
Properties
Future expense inflation
%
At
31 December
2009
At
31 December
2008
9.5
7.5
13.0
11.0
7.5
5.5
11.0
9.0
6.5*
4.5*
* 8.5 % (2008: 6.5%) for Individual Business administered on old platforms and 7.5% (2008: 5.5%) for Group Schemes business.
For non-profit annuities, liabilities are determined by calculating the present value of projected future benefits and expenses, valued using
current fixed-interest yields or swap curve yields.
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Old Mutual plc
Annual Report and Accounts 2009
273
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Assumptions are based upon experience as analysed in the following investigations:
Type of business
Type of investigation
Period of investigation
Individual Business
Group Schemes
Employee Benefits
All
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 mortality and disability
experience
Expenses
2003 to 2006
1999 to 2000
2005 to 2007
2001 to 2007
2000 to 2002
2000 to 2002
2008
2003 to 2008
2008
2008 to 2009
2000 to 2004
Ongoing for the purpose of setting scheme rates
For all business units the expense assumptions
are reviewed on an annual basis.
In addition to these detailed experience investigations, the 2009 analysis of profit provides a measure of the aggregate experience in 2009.
During this valuation period, actual decrement experience was in aggregate more favourable than the valuation assumptions, excluding special
project expenditure.
Various actuarial assumption changes have been made which have resulted in a net decrease in the value of liabilities of £61 million
(2008: £11 million increase) on the Published basis. Lower expense assumptions reduced liabilities by £15 million, lower assurance mortality
assumptions reduced liabilities by £45 million, and higher economic assumptions reduced liabilities by £11 million. Methodology changes and
error corrections further reduced liabilities by £25 million. These were partially offset by a strengthening of persistency assumptions which
increased liabilities by £35 million. A change in the rate of assumed future cover increased on certain risk products which reduced liabilities by
£24 million. The assumed changes exclude the impact on new business sold in 2009, as this is valued on the new basis.
United States
Insurance contract provisions and Deferred Acquisition Costs (DAC) balances for traditional insurance products with fixed premiums and
benefits (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, reflecting 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.
In 2008 the liability for guarantees on the fixed indexed annuity product was reduced by £184 million due to the effect of changes in credit risk.
Changes to lapse assumptions in the on-shore deferred annuity and fixed 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.
For insurance products with flexible premiums or benefits (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.
Europe
Insurance contract provisions for the Group’s Europe life assurance operations are limited, and principally comprise technical provisions for
pure disability and death benefit cover sold in the United Kingdom and Sweden, together with death benefit risk cover in respect of unit-linked
assurance products.
Insurance risk
Insurance risk arises through exposure to unfavourable claims experience on life assurance, critical illness and other protection business and
exposure to unfavourable operating experience in respect of factors such as persistency levels and management expenses.
Insurance risk arises due to uncertainty in persistency, expenses and mortality and morbidity claim rates, relative to the actuarial assumptions
made in the pricing process which may prevent the firm from achieving its profit objectives.
The Skandia UK group has developed an insurance risk policy which sets out the practices which are used to manage insurance risk and
the management information and stress testing requirements. As well as management of persistency, expense and claims experience, the
274 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
insurance risk policy sets requirements and standards on matters such as underwriting and claims management practices, use of reinsurance
to mitigate insurance risk, application of charges in respect of taxation and exercise of discretion.
The insurance risk profile and experience is closely monitored to ensure that the exposure remains acceptable.
The financial impact of insurance risk events is examined through stress tests carried out within the ICA and Economic Capital assessment.
Mortality and morbidity
Mortality and morbidity risk is the risk that death, critical illness and disability claims are higher than expected within the operations’ pricing
assumptions. Possible causes are unexpected epidemics of new diseases and widespread changes in lifestyle such as eating, smoking and
exercise habits. For contracts where survival is the insured risk, the most significant factor is continued improvement in medical science and
social conditions that increase longevity. Higher than expected levels of claims will cause emerging profit to be lower than expected.
For unit-linked contracts a risk charge is applied to meet the expected cost of the insured benefit. This risk charge can be altered in the event of
significant changes in the expectation for future claims experience, subject to ‘treating customers fairly’ principles.
The operations do not transact group protection business and there are no material concentrations of mortality and morbidity risk.
The operations manage mortality risks through their underwriting policy and external reinsurance arrangements where their policy is to
retain certain types of insurance risks within specified maximum single event loss limits. Exposures above accepted limits are transferred to
reinsurance counterparties.
The sensitivity of future earnings to changes in mortality, morbidity, persistency experience and management expense levels is regularly
monitored through sensitivity analyses performed for MCEV reporting and business planning.
Persistency
Persistency risk is the risk that a policyholder surrenders, transfers or ceases premium payments for their contracts with the operations in a
volume that has not been expected within the pricing assumptions thereby leading to a reduction in financial profit and an impact on liquidity.
Most insurance contracts can be surrendered before maturity for a cash surrender value. For insurance business, the surrender value is never
more than the current reported value of the contract liability.
In order to limit this risk to an acceptable level, charging and commission structures are designed to limit the risk of direct financial loss on
surrender.
Persistency statistics are monitored monthly. Actions may be triggered as a result of higher than expected lapse rates and significant emerging
trends. A detailed persistency analysis at a product level is carried out on an annual basis.
In the short term, profit is not materially impacted by changes in persistency experience that are reasonably foreseeable.
Expenses
Expense risk is the risk that actual expenses exceed expense levels assumed in product pricing. This may result in emerging profit falling below
the company’s profit objectives.
Expense levels are monitored quarterly against budgets and forecasts. An activity based costing process is used to allocate costs relating to
processes and activities to individual product lines.
Some products’ structures include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense
levels. This review may result in changes in charge levels, subject to ‘treating customers fairly’ principles.
Tax
Tax risk is the risk that insufficient tax is collected from the policyholders because the projected taxation basis for basic life assurance business
is incorrect resulting in contracts being incorrectly priced. The taxation position of the operations is projected annually and tax changes will
result in changes to new business pricing models as part of the annual control cycle. High risk issues and emerging trends are reported
internally on a quarterly basis.
(f) Insurance risk
The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other
beneficiary if a specified uncertain future event (the insured event) affecting the policyholder occurs. Insurance risk includes mortality and
morbidity risk in the case of life assurance or risk of loss (from fire, accident, or other source) in the case of general insurance.
For accounting purposes insurance risk is defined as risk other than financial risk. Contracts issued by the Group may include both insurance
and financial risk; contracts with significant insurance risk are classified as insurance contracts, while contracts with no or insignificant insurance
risk are classified as investment contracts.
Old Mutual plc
Annual Report and Accounts 2009
275
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(i) 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 significant insurance risk are:
> OMLAC (SA) – life assurance in South Africa
> Old Mutual US Life – life assurance in the United States
> Old Mutual Bermuda – life assurance in Bermuda
> 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 significant 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 insignificant in comparison to the rest of the Old Mutual Group.
The Group effectively manages its insurance risks through the following mechanisms:
> the diversification 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 sufficient 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.
276 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(ii) Terms and conditions of long-term insurance business – South Africa, United States and Bermuda
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
Individual Life Flexi
business with cover
Mortality/morbidity rates
may be repriced (regular
premium contracts)
Mortality, morbidity
Conventional with cover
Charges fixed at inception
and cannot be changed
Mortality, morbidity
Policyholder
guarantees
Policyholder participation
in investment return
Some investment
performance, cover and
annuity guarantees
Some investment
performance and annuity
guarantees
Varies*
Varies*
Greenlight
Group Schemes – funeral
cover
Charges fixed at inception
and cannot be changed
for a specified term
Charges fixed at inception
and cannot be changed
for a specified number of
years
Mortality, morbidity,
expense
Rates fixed for a specified
number of years
None
Mortality including HIV/
AIDS, expense
Rates fixed for a specified
number of years
None
Employee Benefits –
Group Assurance
Rates are annually
renewable
Mortality, morbidity
Non-profit annuity
With-profit annuity
Regular benefit payments
guaranteed in return for
consideration
Regular benefit payments
participating in profits in
return for consideration
Mortality, investment
Investment
None
No significant guarantees,
except for PHI claims in
payment for which benefit
payment schedule is
guaranteed
Benefit payment schedule
is guaranteed
None
Underlying pricing interest
rate is guaranteed.
Declared bonuses cannot
be reduced
Yes
* 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 significant proportion of the business. Particular attention is paid to ensuring that the declaration of bonuses is done in a responsible
manner, such that sufficient 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.
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Old Mutual plc
Annual Report and Accounts 2009
277
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
United States
Category
Life term
Universal life
Equity indexed annuities
Fixed deferred annuities
Equity indexed
universal life
Immediate (payout)
Variable annuities
Essential terms
Main risks
Policyholder
guarantees
Policyholder participation
in investment return
Renewable term products
offering coverage for level
periods ranging from 1 to
30 years
Flexible and fixed premium
interest sensitive life
insurance with cash value
build up
Single and flexible
premium accumulation
annuities with upside
potential of equity indexed
returns on their account
value
Single and flexible
premium accumulation
annuities
Flexible premium interest
sensitive whole life
products with upside
potential of equity indexed
returns on their account
value and a fixed account
option
Regular benefit payments
guaranteed in return for
consideration
Accumulation annuities
with policyholder
investments in separate
accounts and a fixed
account option
Mortality, expense
Premium guarantees from
1 to 30 years, return of
premium guarantees
None
Mortality, expense,
investment
Mortality, investment,
hedging
Yes, through the crediting
rate
Yes, through the index
Secondary non-lapse
guarantees (max of 15
years or to age 95); cost
of insurance (mortality
charge) guarantees
Minimum caps, maximum
spread guarantees,
maximum spread,
minimum interest
guarantees
Mortality, investment
Minimum guaranteed
accumulation rates and
annuitisation rates
Limited – crediting rates
are reset at specified
intervals
Mortality, investment,
hedging
Secondary non-lapse
guarantees; cost of
insurance (mortality
charge) guarantees;
minimum caps; maximum
spread guarantees
Yes, through the index and
crediting rates are reset at
specified intervals
Mortality, investment
Benefit payment schedule
is guaranteed Annuities
None
Mortality, investment,
hedging
Yes, through separate
Accounts and crediting
rates are reset at specified
intervals
Minimum guaranteed
death benefit and
minimum guaranteed
accumulation benefit
which may include a
minimum rate of return
or waiver of surrender
charges
278 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Bermuda
Category
Essential terms
Main risks
Policyholder
guarantees
Policyholder participation
in investment return
Variable Annuities
Fixed Deferred Annuities
Fixed Index Annuities
Accumulation annuities
with policyholder
investments in separate
accounts and a fixed
account option
Single and flexible
premium accumulation
annuities with credited rate
over specified duration;
flexible premiums
Single premium
accumulation annuities
with upside potential of
equity indexed returns on
their account value
Mortality, Persistency,
Market, Hedging, Volatility,
Basis Risk
Minimum guaranteed
death benefit and
maturity benefit; credited
rate guarantee on fixed
account option
Persistency, Investment
Credited rate over
specified period
Yes, through separate
account and credited rates
on fixed account
Via credited rates and
renewal rates on rate
expiration
Persistency, Investment,
hedging
Market participation with
no downside minimum
interest guarantees
Yes, through index credits
In addition to the specific risks identified above, the Group is subject to the risk that policyholders discontinue the insurance policy, through
lapse or surrender.
(iii) Management of insurance risks – life assurance
The table below summarises the variety of risks to which the Group’s life assurance operations are exposed, and the methods by which the
Group seeks to mitigate these risks.
Risk
Definition
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 financial
market conditions
Lower swap curves and higher volatilities cause investment
guarantee reserves to increase
Policyholder behaviour
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
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-profit annuities, improvements to
mortality are allowed for in pricing and valuation.
Experience is closely monitored. For with-profit
annuity business, the mortality risk is carried by
policyholders and any mortality profit or loss is
reflected 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
Old Mutual plc
Annual Report and Accounts 2009
279
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For the year ended 31 December 2009 continued
Risk
Catastrophe
Policy lapse
Definition
Risk management
Natural and non-natural disasters, including war/terrorism,
could result in increased mortality risk and payouts on
policies
A policyholder option to terminate the policy, which may
cause the sale of assets at inopportune times. This creates
the risk of capital losses and/or reinvestment risk if market
yields have decreased
Catastrophe stop loss/excess of loss reinsurance
treaty in place which covers claims from one
incident occurring within a specified period between
a range of specified limits
Experience is closely monitored, and policyholder
behaviour is allowed for in pricing and valuation
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 diversification 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.
(iv) Sensitivity analysis – life assurance
Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract provisions
recorded, with impact on profit/(loss) and/or shareholders’ equity. The effect of a change in assumption is mitigated by the following factors:
> offset (partial or full) to the bonus stabilisation reserve in the case of smoothed bonus products in South Africa;
> offset (partial or full) through DAC amortisation in the case of US business; and
> the effect of locked-in assumptions under USGAAP accounting, where assumptions underlying the insurance contract provisions are not
changed until liabilities are not adequate after reflecting current best estimates.
The net increase or decrease to insurance contract provisions recorded as of 31 December 2009 has been estimated as follows:
Assumption
Mortality and morbidity rates – assurance
Mortality rates – annuities
Discontinuance rates
Expenses (maintenance)
%
£m
£m
£m
Change
10
(10)
10
10
South
Africa
209
45
(1)
61
US
Bermuda
16
(4)
15
4
–
–
26
(1)
The insurance contract liabilities recorded for the South African business are also impacted by the valuation discount rate assumed. Lowering
this rate by 1% would result in a net increase to the insurance contract liabilities, and decrease to profit, of £58 million (2008: £66 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 specified increase or decrease to the rates, with no change in
charges paid by policyholders.
The valuation interest rate sensitivity reflects a change in the valuation interest rates without any corresponding change in investment returns
or in the expense inflation rate. It should be noted that where the assets and liabilities of a product are closely matched (eg non-profit 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 Profits
(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 specified do not approach the levels necessary to trigger a change in liabilities or DAC.
Bermuda
Assumption changes on Bermuda business have counterbalancing effects. Lapses and partial withdrawals have the largest impact where
increased activity hurts future fees and hence impact DAC negatively. However, such activity helps the guarantee portion of the business since
less death and living benefit exposure is expected in the future. Thus, anti-selective behaviour (eg business with little or no guarantees redeem
at a faster rate) presents the bigger challenge but it is accounted for in both the DAC and guarantee reserve calculations. Mortality plays a much
smaller part in the Bermudian business since all the business is accumulation/savings type business. Increased deaths do accelerate payment
of guaranteed minimum death benefits but there is a comparable release of reserve on the maturity guarantee providing an offset (about 85% of
the variable annuity business has both death/living benefits).
280 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(v) Guarantees and options – life assurance
Many of the insurance contracts issued by the Group contain guarantees and options to policyholders, the ultimate liability for which will
depend significantly 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 flows are described below.
Product category
Description of options and guarantees
Individual business
Death, disability, point and/or
maturity guarantees
A closed block of unit-linked type and smoothed bonus business with an underlying minimum
growth rate guarantee (4.28% per annum for life and endowment business and 4.78% 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% per annum investment return
Guaranteed annuity options
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
Group business
Vested bonuses in respect of
pre-retirement with-profits business
United States
There is a significant pre-retirement savings smoothed bonus portfolio. Vested bonuses affect the
calculation of benefit 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
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Product category
Description of options and guarantees
Death, disability, surrender
point and/or maturity
guarantees
Crediting rates declared for the fixed deferred annuity
block of business vest fully. They are subject to a
minimum crediting rate which is specified in the
contract. Minimum surrender values are determined
by this rate
Required shock to bring out-of-the-money policies
in-the-money
24% of policies are currently in-the-money and being
credited the minimum rate. A 300 basis points drop in
interest rates would bring 79% of policies in-the-money
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Equity indexed annuities offer minimum crediting
rates on the fixed 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 %. This equity
participation, which is subject to a minimum of 0%
therefore vests annually
The minimum surrender values of 17% of policies are
currently in-the-money. A year of flat equity markets with
no equity credits would bring an additional 24% in-the-
money. Two years of no equity credits would result in
26% of the portfolio being in-the-money. The equity
exposure is hedged using a hedging strategy
The universal life policies specify a minimum crediting
rate to accumulate account balances
The minimum rate is currently being credited on 77% 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
The extent to which the policies are currently in-the-
money is negligible
Old Mutual plc
Annual Report and Accounts 2009
281
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Required shock to bring out-of-the-money policies
in-the-money
17% of policies are currently in-the-money. This risk is
reinsured
Required shock to bring out-of-the-money policies
in-the-money
For the index annuities that are out-of-the-money,
it would require almost a 10% market increase to
bring them in-the-money (ie an index credit would then
be made)
Approximately 15% of the contracts are out-of-the-
money requiring over a 19% decrease in account values
to bring such policies in-the-money
Product category
Description of options and guarantees
No-lapse guarantees
Bermuda
Certain universal life contracts contain a feature that
guarantees that the contract will continue, even if
values would otherwise be insufficient, provided
the customer has paid at least a stated amount of
premium
Product category
Description of options and guarantees
Index and Credited Rate
Guarantees
Death and Maturity
Guarantees
Equity indexed annuities offer minimum crediting
rates on the fixed portion of the product, minimum
surrender values and credit equity participation as a
percentage of equity growth subject to a maximum
percent
Credited rates declared for the fixed deferred annuity
block are guaranteed for specific durations. Upon
expiration, renewal rates are set that reflect updated
expected earned yields
Both minimum guaranteed death and maturity
benefits are offered as optional riders for additional
fees. However, standard GMDBs are included in the
base policy. The company guarantees regardless
of market performance that the customer or its
beneficiaries (in case of death) will receive a minimum
value. Death benefits designs are either return of
investment or highest anniversary value. The maturity
benefits promise a minimum account value at maturity
(eg, 105% at year 5) with more elaborate versions
offering dual guarantees (eg UGO guarantee promises
at years 5/10 a 105%/120% minimum account value,
respectively) with a highest anniversary in year 10 if
elected
(vi) General insurance risks and sensitivities
Mutual & Federal writes the following types of business within its commercial, risk finance and personal divisions:
Fire
Accident
Personal accident
Motor
Engineering
Crop
Marine
Credit
Commercial
Risk finance
Personal
4
4
4
4
4
4
4
4
4
4
4
4
✘
✘
✘
✘
4
4
4
4
✘
✘
4
4
Underwriting guidelines are designed to ensure that underwritten risks are well diversified, and that terms and conditions, including premium
rates, appropriately reflect 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 £6.3 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.
282 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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% in the average cost of claims would require the recognition of an additional loss of £36.1 million. Similarly, an increase of
10% in the ultimate number of claims would result in an additional loss of £36.1 million. The majority of the Group’s general insurance contracts
are classified 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% of an average year’s claim costs.
(g) Reinsurance assets – credit risk
None of the Group’s reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position
all are considered investment grade with the exception of £87 million of unrated exposures (2008: £17 million). Collateral is not taken against
reinsurance assets or deposits held with reinsurers other than in limited circumstances.
E9: Borrowed funds
Senior debt securities and term loans
Mortgage backed securities
Subordinated debt securities
(net of Group holdings)
Borrowed funds
Other issues treated as equity for
accounting purposes
US$750 million cumulative preference securities
€500 million perpetual preferred
callable securities
£350 million perpetual preferred
callable securities
Gross debt (IFRS basis)
Nominal value of gross debt
Notes
E9(a)
E9(b)
E9(c)
F11(b)
F10(b)
F10(b)
Group
excluding
Nedbank
At
31 December
2009
Group
excluding
Nedbank
At
31 December
2008
Nedbank
Nedbank
£m
484
119
1,010
1,613
1,146
119
2,044
3,309
662
–
1,034
1,696
458
338
350
2,842
3,162
–
104
855
959
557
104
1,634
2,295
557
–
779
1,336
458
338
350
2,482
3,154
The table below is a maturity analysis of liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year end exchange rates.
Less than 1 year
Greater than 1 year and less than 5 years
Greater than 5 years
Total
£m
Group
excluding
Nedbank
At
31 December
2009
Group
excluding
Nedbank
At
31 December
2008
Nedbank
Nedbank
219
1,413
899
2,531
156
1,226
1,033
2,415
375
2,639
1,932
4,946
495
1,397
238
2,130
104
774
666
1,544
599
2,171
904
3,674
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Old Mutual plc
Annual Report and Accounts 2009
283
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(a) Senior debt securities and term loans
Floating rate notes1
Fixed rate notes2
Revolving credit facility3
Term loan and other loans
Total senior debt securities and term loan
Senior debt securities and term loans comprise:
1 Floating rate notes
£m
Group
excluding
Nedbank
At
31 December
2009
Group
excluding
Nedbank
At
31 December
2008
Nedbank
Nedbank
114
548
–
–
662
265
219
–
–
484
379
767
–
–
1,146
85
152
294
26
557
–
–
–
–
–
85
152
294
26
557
– £3 million note repayable in December 2010, with holders having the option to elect for early redemption every six months with coupon referenced against six month
LIBOR less 0.50%.
– US$50 million repayable September 2011 at 3 month LIBOR plus 0.50%.
– US$10 million repayable September 2009 at 3 month LIBOR plus 0.35% – repaid.
– SEK100 million repayable March 2009 at 3 month STIBOR plus 0.20% – repaid.
– €22 million repayable January 2010 at 3 month EURIBOR plus 0.35%.
– SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38%.
– R1,000 million unsecured senior debt repayable September 2012 at 3 month JIBAR + 1.5%.
– R250 million unsecured senior debt repayable September 2015 at JIBAR + 2.20%.
– R1,750 million unsecured senior debt repayable March 2013 inflation linked (3.9% real yield).
– R98 million unsecured senior debt repayable March 2013 inflation linked (3.8% real yield).
– R550 million repayable August 2010 at 3 month ZAR – JIBAR-SAFEX + 4.5%.
– R100 million repayable February 2011 at 3 month ZAR – JIBAR-SAFEX + 4.5%.
2 Fixed rate notes
– €30 million Euro bond repayable July 2010, capital and interest swapped into fixed rate US dollars at 5.28%.
– €10 million Euro bond repayable December 2010, capital and interest swapped into floating rate US dollars at 3 month LIBOR + 0.95%.
– €20 million Euro bond repayable August 2013, capital and interest swapped into floating rate US dollars at 3 month LIBOR + 1.30%.
– €100 million Euro bond repayable December 2009 at 3.46% – repaid.
– R130 million unsecured senior debt repayable October 2024 at zero coupon.
– R2,000 million unsecured senior debt repayable September 2015 at 10.55%.
– R400 million unsecured senior debt repayable September 2019 at 11.39%.
– £500 million Euro bond repayable October 2016 at 7.125%.
The total fair value of the swap derivatives associated with the Senior notes is £12 million (2008: £11 million). These are recognised as assets and are included within note E6.
3 Revolving credit facilities and irrevocable letters of credit
The Group has a £1,250 million five-year multi-currency revolving credit facility, which had an original maturity date of September 2010. On 18 August 2007 syndicate banks
agreed to extend the maturity date of £1,232 million of the facility until September 2012. At 31 December 2009 £480 million (2008: £826 million) of this facility was utilised,
£nil (2008: £294 million) in the form of drawn debt and £480 million (2008: £532 million) in the form of irrevocable letters of credit.
The Group has a SEK1,000 million revolving credit facility, which has a maturity date of 2 July 2010. At 31 December 2009 this facility was undrawn.
(b) Mortgage backed securities – Nedbank
R291 million notes (class A1) repayable 18 November 2039 (11.467%)
R1.4 billion notes (class A2A) repayable 18 November 2039 (11.817%)
R98 million notes (class B note) repayable 18 November 2039 (12.067%)
R76 million notes (class C note) repayable 18 November 2039 (13.317%)
At
31 December
£m
2009
At
31 December
£m
2008
25
84
6
4
22
73
5
4
119
104
284 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(c) Subordinated debt securities
Nedbank
US$18 million repayable 31 August 2009 (6 month LIBOR less 1.5%) – repaid1
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 4 December 2013 (JIBAR + 2.5%)15
US$100 million repayable 3 March 2022 (3 month USD LIBOR)16
Less: banking subordinated debt securities held by other Group companies
Banking subordinated debt securities (net of Group holdings)
Group excluding Nedbank
R3.0 billion repayable 27 October 2020 (8.9%)17
£300 million repayable 21 January 2016 (5.0%)18
R250 million preference shares repayable 9 June 201119
€750 million repayable 18 January 2017 (4.5%)20
Total subordinated liabilities
At
31 December
£m
2009
At
31 December
£m
2008
–
126
149
–
41
55
138
171
42
84
42
10
41
108
13
62
1,082
(72)
1,010
252
252
21
509
1,034
2,044
12
108
135
–
36
49
125
150
37
77
37
9
40
94
11
–
920
(65)
855
219
239
18
303
779
1,634
The subordinated notes rank behind the claims against the Group depositors and other unsecured, unsubordinated creditors. None of the
Group’s subordinated notes are secured.
1 This instrument is matched either by advances to clients or covered against exchange rate fluctuations – repaid.
2 Unsecured secondary callable note was issued 24 April 2005 with a call date of 24 April 2011.
3 Unsecured secondary callable note was issued 20 September 2006 at R1.5 billion with a call date of 20 September 2013. On 18 May 2007 an additional R0.3 billion
was issued.
4 Unsecured callable Bonds issued 10 June 2002.
5 Unsecured callable Bonds issued 30 March 2006.
6 Unsecured secondary callable note was issued 8 February 2007 with a call date of 8 February 2012.
7 Unsecured secondary callable note was issued 8 February 2007 at R1.0 billion. On 19 March 2007 an additional R0.7 billion was issued.
8 Unsecured secondary capital callable note issued 6 July 2007 and has a call date of 6 July 2017.
9 This bond issued on 15 August 2007 is an unsecured secondary capital callable floating rate note with a call date 15 August 2012.
10 This bond issued on 17 September 2007 is an unsecured fixed rate note with a term of 13 years (non-call 8 year).
11 This bond issued on 14 December 2007 is a 10 year (non-call 5 year) floating rate note. After its call date on 14 December 2012 its terms become JIBAR plus 1.70% until
maturity.
12 This bond issued on 14 December 2007 is a 10 year (non-call 5 year) fixed rate note. After its call date its terms become floating 3 month JIBAR plus initial margin over mid
swaps plus 1.0% until maturity.
13 This bond issued on 20 May 2008 is a perpetual (non-call 10 year) fixed rate note with a call date on 20 November 2018.
14 This bond issued on 20 May 2008 is a perpetual (non-call 10 year) floating rate note with a call date of 20 November 2018.
15 This bond issued on 4 December 2008 is a floating rate note with a call date of 4 December 2013.
16 Dated Tier 2 notes issued 3 March 2009 with call date 2 March 2017.
17 These bonds have a maturity date of 27 October 2020 and pay a coupon of 8.92% to 27 October 2015 and 3 month JIBAR plus 1.59% thereafter. The Group has the option
to repay the bonds at par on 27 October 2015 and at 3 monthly intervals thereafter.
18 These bonds, issued on 20 January 2006, have a maturity date of 21 January 2016 and pay a coupon of 5.0% to 21 January 2011 and 6 month LIBOR plus
1.13% thereafter. The coupon on the bonds was swapped into floating rate of 6 month STIBOR plus 0.50%. The Group has the option to repay the bonds at par on
21 January 2011 and at 6 monthly intervals thereafter.
19 These preference shares are redeemable on 9 June 2011 and pay a variable cumulative coupon of 61.0% of the Prime Rate as quoted by Nedbank Limited. The Group has
the option to redeem the shares at par at any time before the final redemption date but after giving an agreed period of notice.
20 This bond, issued on 16 January 2007, has a maturity date of 18 January 2017 and pays a coupon of 4.5% to 17 January 2012 and 6 month EURIBOR plus 0.96%
thereafter. The principal and coupon on the bond were swapped equally into Sterling and US dollars with coupons of 6 month LIBOR plus 0.34% and 6 month US LIBOR
plus 0.31% respectively. The Group has the option to repay the bonds at par on 17 January 2012 and at 6 monthly intervals thereafter.
Old Mutual plc
Annual Report and Accounts 2009
285
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
E10: 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 certificates of deposit
Deposits received under repurchase agreements
A contractual maturity analysis of the amounts owed to bank depositors is shown in the following table:
At
31 December
£m
2009
At
31 December
£m
2008
9,006
1,283
14,972
2,345
2,772
3,800
8,704
1,253
7,916
1,043
14,035
1,894
2,635
2,746
6,369
1,533
44,135
38,171
Amounts owed to bank depositors
44,135
33,935
Year ended 31 December 2009
Amounts owed to bank depositors
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
Year ended 31 December 2008
Amounts owed to bank depositors
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
9,006
1,283
23,889
8,704
1,253
8,879
1,283
20,099
2,421
1,253
107
–
3,422
6,233
–
9,762
20
–
1,298
613
–
1,931
–
–
261
3
–
264
£m
Total
9,006
1,283
25,080
9,270
1,253
45,892
£m
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
Total
7,916
1,043
21,310
6,369
1,533
7,756
1,043
17,452
2,287
1,533
35
–
3,105
4,392
–
7,532
–
–
1,104
373
–
1,477
–
–
83
–
–
83
7,791
1,043
21,744
7,052
1,533
39,163
Amounts owed to bank depositors
38,171
30,071
E11: Capital management (unaudited)
Overview
The Group actively manages its capital with a focus on capital efficiency 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 is expected capital and
financing 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 financial flexibility.
286 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The Group’s overall capital risk appetite is managed with reference to the requirements of the relevant stakeholders and seeks to maintain
sufficient, but not excessive, financial 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 financial flexibility 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 benefit of diversification.
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
2009 and throughout the year. As at the date of issue of these financial statements the unaudited pro-forma surplus was estimated to be
£1.5 billion. The FGD position will be submitted to the FSA by 30 April 2010.
Capital position statements
(a) Life assurance operations
Each of the Group’s life assurance businesses is capitalised at a sufficiently strong level for their individual circumstances. The regulatory capital
position of the Group’s life assurance operations, based on latest estimates that are not audited, is summarised as follows:
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
(unaudited) £m
At 31 December 2009
At 31 December 2008
South
Africa
4,447
(19)
(487)
3,941
(977)
2,964
United
States
1,064
(215)
(449)
400
(303)
Europe
5,132
(1,106)
(2,684)
1,342
(242)
South
Africa
3,455
(15)
(257)
3,183
(851)
United
States
339
(276)
232
295
(279)
Europe
3,745
(1,066)
(1,412)
1,267
(237)
97
1,100
2,332
16
1,030
Year ended 31 December 2009
Year ended 31 December 2008
(unaudited) £m
Capital position at beginning of the year
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
3,183
718
(182)
–
(281)
503
United
States
295
(184)
318
–
–
(29)
Europe
1,267
376
(229)
–
(55)
(17)
South
Africa
3,397
(233)
276
–
(209)
(48)
Capital position at end of the year
3,941
400
1,342
3,183
United
States
467
(751)
(239)
650
–
168
295
Europe
1,145
366
(327)
–
(55)
138
1,267
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Old Mutual plc
Annual Report and Accounts 2009
287
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 2009, OMLAC(SA)’s excess assets was 4.1 times (2008: 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 £2,634 million (2008: £1,690 million) and M&F £448 million (2008:
£219 million). In addition, £690 million (2008: £904 million) is invested in the Group’s loan notes and £561 million (2008: £335 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) (2008: N$4 million (£0.3 million). This has been determined in
accordance with local statutory rules.
United States
In the case of the United States, the amounts disclosed above represent the consolidated capital position of the Old Mutual US Life Holdings
Inc. group of companies, including Old Mutual Financial Life Insurance Company, Old Mutual Financial Life Insurance Company of New York
and Old Mutual Reassurance (Ireland) Limited, and Old Mutual (Bermuda) Limited. The calculations have been determined on the basis of the
local regulatory requirements for the United States (included at the relevant percentage used for FGD, which in 2009 has been strengthened to
200% of Risked Based Capital) and Ireland and on the basis of FSA rules for Bermuda.
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.
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.
(b) Banking operations
The regulatory capital position of the Group’s banking operations, based on latest estimates that are not audited, is summarised as follows:
Equity shareholder funds
Eligible subordinated debt
Inadmissible assets
Other adjustments
Total capital resources
Total capital requirement
Excess of capital resources over capital requirement
(unaudited) £m
At 31 December 2009
At 31 December 2008
Africa
Europe
Africa
Europe
1,720
598
–
(38)
2,280
(1,659)
621
224
104
(2)
(1)
325
(197)
128
1,434
482
–
(18)
1,898
(1,528)
370
218
105
(3)
1
321
(166)
155
288 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Capital position at beginning of the year
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 end of the year
(unaudited) £m
Year ended
31 December 2009
Year ended
31 December 2008
Africa
Europe
Africa
Europe
1,898
181
(28)
–
50
(108)
287
2,280
321
71
(56)
–
–
(9)
(2)
325
1,883
243
(49)
–
(60)
(104)
(15)
1,898
324
119
(13)
–
–
(149)
40
321
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 reflect the Group’s percentage ownership.
E12: Liquidity
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 flows and matching the maturity profiles of financial 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 Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group’s available
credit facilities. Given the nature of the Group’s investments and securities, generally speaking, liquid resources are readily available, as the
Group holds large portfolios of highly marketable securities, for example equities, listed bonds, actively traded pooled investments and cash and
cash equivalents. Whilst most of the Group’s policyholder and banking liabilities are generally repayable on demand, the Group’s expectation is
that policyholders and banking depositors will only require funds on an ongoing basis. Cash resources and other liquid assets are maintained in
the event of a ‘run on the bank’. Information on the nature of the investments and securities held is given in section E4. The Parent Company’s
existing revolving credit facility of £1.25 billion does not mature until September 2012. Details, together with information on the Group’s
borrowed funds, are given in section E9.
The key information reviewed by the Group’s executive directors and executive committee, together with the Group’s capital management
committee, is a detailed management report on the holding company’s current and planned capital and liquidity position together with summary
information on the current and planned liquidity positions of the Group’s operating segments. Forecasts are updated regularly based on new
information received, and as part of the Group’s annual business planning cycle. The holding company’s liquidity and capital position and
forecast is presented to the Old Mutual plc board of directors on a regular basis.
Group operating segments are required, both in terms of their local requirements and in accordance with direction from the holding company,
to establish their own processes for managing their liquidity and capital needs and these are subject to review by their local oversight functions,
with representation from the Group.
Further information on liquidity and holding company cash flow is contained in other sections of this annual report, for example the business
review and Group Finance Director’s statement.
The Group does not have material liquidity exposure to special purpose entities or investment funds.
The contractual maturities of the Group’s financial liabilities are set out in the appropriate notes to the financial statements.
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Old Mutual plc
Annual Report and Accounts 2009
289
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F: Other statement of financial position notes
F1: Goodwill and other intangible assets
Goodwill
Present value of
acquired in-force
business
Software
development costs
Other intangible
assets
Total
£m
At 31 December
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
Cost
Accumulated amortisation and impairment
losses at beginning of the year
Acquisitions through business combinations
Additions
Foreign exchange and other movements
Disposals or retirements
Transfer from/(to) Non-current assets
held-for-sale
3,316
12
–
(71)
(16)
2,762
40
–
496
–
3,129
–
–
(100)
–
2,736
–
–
393
–
548
51
20
52
(22)
–
18
–
–
–
Balance at end of the year
3,241
3,316
3,029
3,129
649
423
–
82
12
(3)
34
548
(261)
(43)
(25)
(17)
1
916
–
2
(35)
(3)
804
–
–
114
(2)
7,909
63
22
(154)
(41)
6,725
40
82
1,015
(5)
–
–
–
52
880
916
7,799
7,909
(252)
(82)
–
11
2
(144)
(75)
(1)
(32)
–
(2,027)
(382)
(266)
10
25
(1,266)
(404)
(100)
(233)
1
(235)
–
(266)
(12)
1
(133)
–
(74)
(19)
–
(1,179)
(244)
–
43
–
(728)
(286)
–
(165)
–
(361)
(56)
–
(32)
22
–
(9)
–
–
–
(16)
–
–
–
(25)
(512)
(235)
(1,380)
(1,179)
(427)
(361)
(321)
(252)
(2,640)
(2,027)
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
Accumulated amortisation and
impairment losses at end of the year
Carrying amount
Balance at beginning of the year
Balance at end of the year
2,729
3,081
1,649
1,950
3,081
2,629
1,950
2,008
187
222
162
187
664
559
660
5,882
5,459
664
5,159
5,882
Of the present value of acquired in-force business at the year end of £1,649 million (2008: £1,950 million), £1,561 million (2008: £1,832 million)
relates to the Skandia business acquired during 2006 which is due to be amortised over a further 11 to 16 years.
Of the other intangible assets £365 million (2008: £439 million) relates to distribution channels and £108 million (2008: £117 million) brands
associated with the Skandia business. The remaining periods over which these are being amortised are 6 years and 11 years respectively.
The acquisitions through business combinations comprises £5 million (2008: £3 million) in respect of various acquisitions by the Group’s
US Asset Management business, £nil (2008: £21 million) relating to the purchase of additional interests in Nedbank and £7 million (2008:
£16 million) relating to various other small acquisitions.
Allocation of goodwill to cash generating units (CGUs)
The carrying amount of goodwill accords with the operating segmentation shown in note B, and primarily relates to the Long Term Savings
CGUs of Nordic, Retail Europe and Wealth Management, together with Nedbank and US Asset Management.
An analysis of goodwill by CGU is set out below.
Nordic
Retail Europe
Wealth Management
Nedbank
US Asset Management
Other
Goodwill, net of impairment losses
290 Old Mutual plc
Annual Report and Accounts 2009
At
31 December
£m
2009
At
31 December
£m
2008
219
204
656
393
1,142
115
2,729
222
420
741
308
1,271
119
3,081
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Reorganisation of the former ELAM operating segment and recognition of impairment charges
As a result of the reorganisation of the Group’s operating segments during the current financial year the goodwill previously allocated to the
former ELAM operating segment (£574 million as at 31 December 2008) was reassigned to the Retail Europe (£420 million), Emerging Markets
(£56 million) and Wealth Management (£98 million) operating segments. The reallocation of goodwill was based on relative values at the point of
reallocation, in accordance with the requirements of IAS 36 ‘Impairment of Assets’.
Following a re-evaluation of the prospects for the former ELAM operating segment as part of the reorganisation, goodwill impairment tests were
carried out based on a comparison of the re-allocated carrying amounts and their corresponding value-in-use calculations at the point of re-
allocation. As a result, impairment charges were recognised in the income statement of £187 million in the Retail Europe CGU and £79 million
in Wealth Management CGU, largely as a result of a reassessment of the anticipated growth rates assumed in the value-in-use calculations
determined during the reorganisation. The discount rate applied in the corresponding value-in-use calculations was 15.7%.
Annual impairment testing of goodwill
In accordance with the requirements of IAS 36 ‘Impairment of Assets’, goodwill is tested annually for impairment for each CGU, by comparing
the carrying amount of each CGU to its recoverable amount, being the higher of that CGU’s value-in-use or net selling price. An impairment
charge is recognised when the recoverable amount is less than the carrying value. In all cases in 2009, each CGU’s recoverable amount has
been determined by reference to its value-in-use.
Nordic, Retail Europe, Wealth Management
These CGUs generate revenues through their life assurance and asset management businesses. Nordic also has a banking business as an
additional principal source of revenue.
The value-in-use calculations for the life assurance operations are determined using the reported embedded value methodology plus a
discounted cash flow calculation for the value of new business. The value of new business represents the present value of future profits from
expected new business. Embedded value represents the shareholders’ interest in the life assurance business and is calculated in accordance
with Market Consistent Embedded Value principles. The methodology and significant assumptions underlying the determination of embedded
value is disclosed in the supplementary information shown on pages 344 to 355. The differences between the key assumptions applied in the
current year and in the prior year are disclosed on pages 360 to 373.
The cash flows attributable to the value of new business are determined with reference to latest approved three-year business plans.
Projections beyond the plan period are extrapolated using an inflation based growth assumption.
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The value-in-use calculations for the asset management and banking operations are similarly determined based on discounted cash flow
models derived from the latest approved three-year business plans. Projections beyond the plan period are extrapolated using inflation based
growth rates. For Nordic, the banking and asset management cash flows are extrapolated for one year beyond the business plan period,
whereas for Retail Europe and Wealth Management an additional two years are projected.
The cash flows are discounted at a market participant cost of capital, which is derived from the 10-year government bond/gilt rates relevant to
the geographic region in question, adjusted to reflect the particular risks and uncertainties that would cause variations in the timing, amount or
liquidity of the cash flows derived from the assets.
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The key assumptions used in the value-in-use calculations for the Nordic, Retail Europe and Wealth Management CGUs are as follows:
> The growth rate – The rate used is an inflation based growth assumption, which varies by CGU and is based on external market factors
particular to that CGU. Nordic applied the Riksbanken inflation target of 2% to all principal business lines. Retail Europe, which incorporates
a number of European countries, applied a weighted average calculation to determine the growth rate of 3.1% applied to its life assurance
business and of 2.3% for its asset management business. Wealth Management applied 1.9% to both its life assurance business and asset
management business.
> The discount rate – The applied rate used the relevant 10-year government bond rate as a starting point, which was adjusted for an equity
market risk premium and other relevant risk adjustments, which were determined using market valuation models and other observable
references. For the life assurance businesses, rates applied were 12.4% for Nordic, 15.7% for Retail Europe and between 14.1% and 15.7%
for Wealth Management. A rate of 11.4% has been applied to the Nordic banking and asset management businesses. A rate of 11.2% was
used for Wealth Management’s asset management business and a rate between 10.4% and 11.2% was applied in Retail Europe’s asset
management businesses.
The directors are satisfied that any reasonable change in the assumptions would not cause the recoverable amounts of the Nordic and Wealth
Management CGUs to fall below their carrying amounts. Having made the impairment in Retail Europe the directors are satisfied that any
reasonable change in assumptions would not result in further impairment.
Nedbank
The impairment test in respect of the Nedbank CGU has been performed by comparing the CGU’s carrying amount to its value-in-use.
Value-in-use has been determined using a discounted cash flow methodology. The key assumptions used in the value-in-use calculation are
the discount rate and growth rate, which are based on market factors relevant to that CGU. The discount rate applied is approximately 12.9%
Old Mutual plc
Annual Report and Accounts 2009
291
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(2008: 11%). A 5% growth rate was applied to extrapolate cash flows for an additional two years beyond the three-year business plan period.
A terminal value, using the same growth rate, is added for the value of cash flows beyond five years.
There was no impairment charge recognised for the Nedbank CGU in the current financial year (2008: £nil). The directors are satisfied that a
reasonable change in assumptions would not cause the recoverable amount of the goodwill to fall below the carrying amount.
US Asset Management
The impairment test in respect of the US Asset Management CGU has been performed by comparing the CGU’s carrying amount to its
value-in-use. Value-in-use has been determined using a discounted cash flow methodology. The key assumptions used in the value-in-use
calculations for the US Asset Management CGU are as follows:
> An assumed growth rate of 6% (2008: 7%) was applied to the extrapolation of cash flows beyond the three-year business plan period.
Extrapolation was performed for two years beyond the business plan period. A terminal value, using the same growth rate, is added for the
value of cash flows beyond five years.
> The risk-adjusted discount rate applied was 13.3% (2008: 17%).
No impairment charge has been recognised for the US Asset Management CGU. The directors believe that a reasonable adverse change in the
assumptions used in the value-in-use calculation (for example, reducing the growth rate to 5% or increasing the risk adjusted discount rate by
1.5%) for that CGU would be absorbed before the recoverable amounts fall below the carrying amounts. The value-in-use exceeds the carrying
amount by £290 million.
Segmental analysis of goodwill and intangibles
The following table shows a segmental analysis of the carrying amounts of goodwill and other intangible assets, together with amortisation and
impairment charges, by operating segment:
Goodwill and other intangible assets by segment
At 31 December 2009
Long term savings
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Nedbank
US Asset Management
Other
Total
At 31 December 2008
Long term savings
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Nedbank
US Asset Management
Other
Total
* Goodwill and intangible assets discussed in the table above is net of amortisation and impairment losses.
292 Old Mutual plc
Annual Report and Accounts 2009
£m
Goodwill
and
intangible
assets*
Amortisation
Impairment
loss
3,400
106
1,035
563
1,602
94
543
1,171
45
5,159
337
3
133
54
127
20
37
2
6
382
Goodwill
and
intangible
assets*
Amortisation
4,105
111
1,183
865
1,814
132
425
1,305
47
5,882
374
3
130
62
137
42
27
2
1
404
266
–
–
187
79
–
–
–
–
266
£m
Impairment
loss
100
8
12
–
18
62
–
–
–
100
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
In 2008 £62 million of impairment losses were recognised in respect of the US Life CGU, representing the full carrying amount of goodwill
allocated to that CGU, and £8 million in respect of the Emerging Markets CGU. A further £12 million was recognised in the Nordic CGU as
a result of an adjustment for deferred tax assets previously unrecognised. An impairment charge of £18 million was recognised in Wealth
Management reflecting a write down in software development costs in relation to a platform that was not being used.
F2: Property, plant and equipment
Gross carrying amount
Balance at beginning of the year
Additions
Additions from business combinations
(Decrease)/Increase arising from
revaluation
Disposals
Foreign exchange and other
movements
Transfer from/(to) non-current asset
held-for-sale
Balance at end of the year
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
Land
Buildings
Plant and equipment
Total
2009
2008
2009
2008
2009
2008
2009
2008
£m
76
–
–
(8)
(1)
19
–
86
–
–
–
–
–
–
76
86
73
–
–
2
–
–
1
76
–
–
–
–
–
–
73
76
405
56
1
(5)
(21)
122
–
558
(13)
(12)
8
(20)
–
(37)
392
521
360
16
–
20
–
(1)
10
405
(10)
(8)
–
6
(1)
660
82
2
–
(76)
53
–
547
83
–
–
(36)
32
34
1,141
138
3
(13)
(98)
194
–
980
99
–
22
(36)
31
45
721
660
1,365
1,141
(446)
(74)
61
(41)
–
(362)
(66)
28
(24)
(22)
(459)
(86)
69
(61)
–
(372)
(74)
28
(18)
(23)
(13)
(500)
(446)
(537)
(459)
350
392
214
221
185
214
682
828
608
682
The carrying value of property, plant and equipment leased to third parties under operating leases, included in the above is £82 million
(2008: £33 million) and comprises land of £12 million (2008: £5 million) and buildings of £70 million (2008: £28 million).
There are no restrictions on property, plant and equipment title as a result of security pledges.
The revaluation of land and buildings relates to Emerging Markets and to Nedbank. In 2009 Emerging Markets suffered revaluation losses
of £10 million on land and £8 million on buildings (2008: revaluation gains of £1 million and £15 million respectively), while Nedbank made
revaluation gains of £2 million on land and £3 million on buildings (2008: gains of £1 million and £5 million respectively). For Emerging Markets,
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 flows 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 £64 million (2008: £19 million) and £99 million (2008: £91 million) respectively for Emerging Markets and
£21 million (2008: £12 million) and £97 million (2008: £92 million) for Nedbank respectively.
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a
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Old Mutual plc
Annual Report and Accounts 2009
293
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Capital expenditure and depreciation by segment
Year ended 31 December 2009
Capital expenditure, net of depreciation
Depreciation
Year ended 31 December 2008
Capital expenditure, net of depreciation
Depreciation
F3: Investment property
Balance at beginning of the year
Additions
Additions from business combinations
Disposals
Net loss from fair value adjustments
Foreign exchange and other movements
Balance at end of the year
£m
Long term
savings
Nedbank
US Asset
Management
M&F
Other
Total
367
25
417
48
Long term
savings
Nedbank
313
25
316
40
23
5
M&F
24
2
19
8
US Asset
Management
26
7
2
–
Other
3
–
828
86
£m
Total
682
74
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,478
82
155
(57)
(54)
155
1,479
145
–
(13)
(143)
10
1,759
1,478
In 2009 additions of £237 million (2008: £144 million) related to OMSA and £nil (2008: £1 million) related to Nedbank. Of the net (loss)/
gain arising from fair value adjustments on investment properties, a £105 million loss (2008: £31 million gain) related to OMSA, £nil gain
(2008: £1 million gain) related to Nedbank, £6 million gain (2008: £5 million gain) related to other African businesses and £45 million gain
(2008: £180 million gain) related to UK.
The fair value of investment property (freehold) leased to third parties under operating leases is as follows:
Freehold
Rental income from investment property
Direct operating expense arising from investment property that generated rental income
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,759
1,478
106
(19)
87
84
(16)
68
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 qualified staff, having an appropriate recognised professional qualification 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 £1,759 million (2008: £1,478 million), £1,535 million (2008: £1,296 million) is attributable to South Africa,
£223 million (2008: £182 million) to Europe and £1 million (2008: £nil) to other.
294 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F4: Deferred acquisition costs
Year ended 31 December 2009
Balance at beginning of the year
New business
Amortisation
Impairment losses charged for the year
Foreign exchange and other movements
Transfer from assets held-for-sale
Balance at end of the year
Year end 31 December 2008
Balance at beginning of the year
New business
Amortisation
Foreign exchange and other movements
Transfer to assets held-for-sale
Balance at end of the year
F5: Trade, other receivables and 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 trade, other receivables and other assets
Insurance
contracts
Investment
contracts
Asset
management
2,107
89
(102)
–
(160)
–
961
251
(130)
–
(3)
–
1,934
1,079
131
56
(46)
(5)
(11)
–
125
Insurance
contracts
Investment
contracts
Asset
management
1,422
234
(239)
677
13
2,107
717
286
(97)
55
–
961
114
47
(40)
10
–
131
£m
Total
3,199
396
(278)
(5)
(174)
–
3,138
£m
Total
2,253
567
(376)
742
13
3,199
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
89
86
23
198
94
252
1,598
433
63
134
279
3,051
63
93
49
205
90
459
1,531
508
62
151
131
3,137
Based on the maturity profile of the above assets, £2,849 million (2008: £2,693 million) is regarded as current and £202 million (2008:
£444 million) as non-current. Of the above assets, £3,003 million (2008: £2,681 million) was exposed to credit risk (Standard & Poor’s or
equivalent), with £1,195 million (2008: £1,218 million) rated investment grade, £93 million (2008: £46 million) rated sub-investment grade and
£1,716 million (2008: £1,417 million) not rated.
All amounts outstanding are short-term in nature. No significant balances are past due or impaired.
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Old Mutual plc
Annual Report and Accounts 2009
295
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F6: Provisions
Surplus property
Client compensation
Warranties on sale of business
Liability for long service leave
Provision for donations
Litigation claims
Other provisions
Post employment benefits
Total
Year ended 31 December 2009
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
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
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
20
30
17
49
84
–
95
295
(32)
263
23
27
111
38
80
36
165
480
(3)
477
£m
Surplus
property
Client
compen-
sation
Warranties
on sale of
business
Liability
for long
service
leave
Provision
for
donations
Litigation
claims
Other
Total
23
–
1
3
(7)
–
20
27
(2)
–
(3)
(2)
10
30
111
(54)
–
–
(26)
(14)
17
38
–
–
24
(20)
7
49
80
–
–
–
–
4
84
36
(11)
-
-
(6)
(19)
–
165
(41)
–
13
(59)
17
95
480
(108)
1
37
(120)
5
295
£m
Surplus
property
Client
compen-
sation
Warranties
on sale of
business
Liability
for long
service
leave
Provision
for
donations
Litigation
claims
Other
Total
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
183
(40)
–
20
(24)
26
165
498
(51)
1
91
(123)
64
480
2009 provisions in relation to surplus property amounted to £20 million (2008: £23 million). These relate to the onerous costs of vacant
properties leased by the Group of which £13 million (2008: £23 million) is estimated to be payable after more than 1 year.
Provisions in relation to client compensation were £30 million (2008: £27 million), primarily relating to possible mis-selling of guarantee contracts
in Wealth Management. £5 million (2008: £6 million) is estimated to be payable after more than one year.
Provisions in relation to warranties on the sale of businesses amounted to £17 million (2008: £111 million). £9 million (2008: £9 million) is
estimated to be payable after more than one year. During the year, settlement was reached in relation to certain outstanding litigations in
connection with the acquisition of Skandia. Corresponding provisions have been accordingly utilised or released.
The liability for long service leave of £49 million (2008: £38 million) relates to provision for staff payments for long serving employees, all of which
are estimated to be payable in less than one year.
296 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The provision for donations is held by Emerging Markets. It relates to the payment of charitable donations in future periods to which the
Group is committed, out of the funds made available on the closure of the Group’s unclaimed shares trusts, which were set up as part of the
demutualisation in 1999 and closed in 2006 of which £84 million (2008: £80 million) is estimated to be payable after more than one year.
Other provisions includes provisions for tax on long term staff benefits, restructuring and legal fees.
At 31 December 2009 provisions in relation to litigation claims amounted to £nil (2008: £36 million). During the year £36 million of the provision
was utilised, principally in respect of payments made in connection with the outcome of the Skandia Liv arbitration (note G3).
Where material, provisions are discounted at discount rates specific to the risks inherent in the liability. The timing and final amounts of
payments in respect of some of the provisions, particularly those in respect of litigation claims and similar actions against the Group,
are uncertain and could result in adjustments to the amounts recorded. Of the total provisions recorded above, £188 million (2008: £271 million)
is estimated to be payable after more than one year.
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e
g
a
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a
M
i
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s
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u
B
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R
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a
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R
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F
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Old Mutual plc
Annual Report and Accounts 2009
297
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F7: Deferred revenue
Year ended 31 December 2009
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 2008
Balance at beginning of the year
Fees and commission income deferred
Amortisation
Foreign exchange and other movements
Transfer to assets held-for-sale
Balance at end of the year
Life
assurance
Asset
management
General
insurance
489
91
(15)
(11)
2
556
101
34
(37)
(7)
(2)
89
8
–
–
1
–
9
Life
assurance
Asset
management
General
insurance
350
120
(11)
30
–
489
112
32
(37)
(6)
–
101
–
–
–
2
6
8
£m
Total
598
125
(52)
(17)
–
654
£m
Total
462
152
(48)
26
6
598
F8: 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.
(a) Deferred tax assets
The movement on the deferred tax assets account is as follows:
At beginning
of the year
Income
statement
(charge)/
credit
(Charged)/
credited to
equity
Acquisition/
disposals of
subsidiaries
Foreign
exchange
and other
movements
At end of the
year
£m
298
346
17
584
284
(63)
124
1,590
17
(53)
(10)
56
(53)
(10)
8
(45)
–
–
–
(404)
(24)
–
–
(428)
–
(4)
–
–
(1)
–
–
(5)
(29)
(20)
(1)
(51)
59
(551)
51
(542)
286
269
6
185
265
(624)
183
570
£m
At beginning
of the year
Income
statement
(charge)/
credit
(Charged)/
credited to
equity
Acquisition/
disposals of
subsidiaries
Foreign
exchange
and other
movements
At end of the
year
71
139
40
47
356
(123)
153
683
158
140
(29)
34
(165)
78
21
237
–
–
–
391
–
–
–
391
2
(2)
–
–
(5)
–
–
(5)
67
69
6
112
98
(18)
(50)
284
298
346
17
584
284
(63)
124
1,590
Year ended 31 December 2009
Insurance funds
Tax losses carried forward
Accelerated capital allowances
Available-for-sale securities
Other temporary differences
Netted against liabilities
Deferred fee income
Year ended 31 December 2008
Insurance funds
Tax losses carried forward
Accelerated capital allowances
Available-for-sale securities
Other temporary differences
Netted against liabilities
Deferred fee income
298 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being
where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the
reversal of the deferred tax asset can be deducted. The amounts for which no deferred tax asset has been recognised comprise:
31 December 2009
31 December 2008
£m
Unrelieved tax losses
Expiring within one year
Expiring in the second to fifth years inclusive
Expiring after five years
Accelerated capital allowances
Other timing differences
(b) Deferred tax liabilities
The movement on the deferred tax liabilities account is as follows:
Gross
amount
–
1,555
1,185
84
20
2,844
Tax
–
154
340
24
6
524
Gross
amount
54
1,222
1,826
19
28
3,149
Tax
2
109
541
5
8
665
£m
Year ended 31 December 2009
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Policyholder tax
Netted against assets
Year ended 31 December 2008
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Policyholder tax
Netted against assets
At beginning
of the year
Income
statement
charge/
(credit)
Charged/
(credited) to
equity
Acquisition/
disposals of
subsidiaries
Foreign
exchange
and other
movements
At end of the
year
24
715
54
258
107
2
256
99
(63)
1,452
–
24
(18)
(26)
(16)
–
(20)
7
(10)
(59)
–
(18)
–
–
–
–
–
–
–
(18)
–
–
–
–
–
–
–
–
–
–
–
(59)
8
(8)
(5)
–
130
15
(551)
(470)
24
662
44
224
86
2
366
121
(624)
905
£m
At beginning
of the year
Income
statement
charge/
(credit)
Charged/
(credited) to
equity
Acquisition/
disposals of
subsidiaries
Foreign
exchange
and other
movements
At end of the
year
25
534
80
256
103
–
429
109
(123)
1,413
(1)
47
(9)
(32)
(12)
–
(169)
(60)
78
(158)
–
16
–
–
–
–
9
–
–
25
–
–
–
–
–
–
–
–
–
–
–
118
(17)
34
16
2
(13)
50
(18)
172
24
715
54
258
107
2
256
99
(63)
1,452
As the Group is able to control the reversal of temporary differences in respect of investments in subsidiaries and branches 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 £3.4 billion (2008: £3.2 billion).
Old Mutual plc
Annual Report and Accounts 2009
299
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a
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a
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a
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n
a
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F
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F9: Trade, other payables and 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, spot positions and other
Trade creditors
Outstanding settlements
Total securities sold under agreements to repurchase
Obligations in relation to collateral holdings
Other liabilities
At
31 December
£m
2009
At
31 December
£m
2008
118
528
80
67
62
576
19
778
297
412
157
295
916
15
535
66
46
64
749
15
494
312
592
299
341
546
4,305
4,074
Included in the amounts shown above are £2,960 million (2008: £3,094 million) that are regarded as current, the remainder as non-current.
F10: Equity
(a) Share capital
Authorised and issued share capital
Authorised ordinary shares of 10p each
Issued ordinary shares of 10p each
At
31 December
£m
2009
At
31 December
£m
2008
750
552
750
552
(b) 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 (2008: £688 million) as at 31 December 2009. In accordance with IFRS accounting standards these
instruments are classified as equity and disclosed within equity shareholders’ funds as shown on page 187.
£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 fixed rate of 6.4% per annum annually in arrears.
From 24 March 2020 interest is reset semi-annually at 2.2% 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 fixed rate of 5.0% per annum annually in arrears. After this date the interest is reset
semi-annually at 2.63% 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.
(c) Share buy back programme
In 2008, there were 161,559,272 shares repurchased on the LSE at an average price paid of 149.3p and 77,875,616 shares repurchased on
the JSE at an average price paid of R20.23 in accordance with the share buy back programme announced on 3 October 2007. The shares
repurchased have not been cancelled and are held by the Company as treasury shares. The share buy back programme was completed
in 2008.
300 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
F11: Non-controlling interests
(a) Income statement
(i) Ordinary shares
The non-controlling interests charge to profit for the financial year has been calculated on the basis of the Group’s effective ownership of
the subsidiaries in which it does not own 100% of the ordinary equity. The principal subsidiaries where a non-controlling interest exists are
the Group’s banking and general insurance businesses in South Africa. For the year ended 31 December 2009 the non-controlling interests
attributable to ordinary shares was £158 million (2008: £188 million).
(ii) 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
Non-controlling interests – preferred securities
At
31 December
£m
2009
At
31 December
£m
2008
16
6
2
38
2
64
14
5
1
32
2
54
(iii) Adjusted operating profit
The following table reconciles non-controlling interests’ share of profit for the financial year to non-controlling interests’ share of adjusted
operating profit:
Reconciliation of non-controlling interests share of profit for the financial year
The non-controlling interests charge is analysed as follows:
Non-controlling interests – ordinary shares
Goodwill impairment and impact of acquisition accounting
Profit on disposal of subsidiaries, associated undertakings and strategic investments
Short-term fluctuations 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 non-controlling interests
Non-controlling interests share of adjusted operating profit
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
158
1
–
2
23
–
(3)
181
188
–
2
11
30
(6)
(7)
218
The Group uses revised weighted average effective ownership interests when calculating the non-controllable interest applicable to the adjusted
operating profit of its South Africa banking and general insurance businesses. This reflects the legal ownership of these businesses following
the implementation for Black Economic Empowerment (BEE) schemes in 2005. In accordance with IFRS accounting rules the shares issued for
BEE purposes are deemed to be, in substance, options. Therefore the effective ownership interest of the minorities reflected in arriving at profit
after tax in the consolidated income statement is lower than that applied in arriving at adjusted operating profit after tax. In 2009 the increase in
adjusted operating profit attributable to non-controlling interests as a result of this was £23 million (2008: £30 million).
(b) Statement of financial position
(i) Ordinary shares
Reconciliation of movements in non-controlling interests
Balance at beginning of the year
Non-controlling interests’ share of profit
Non-controlling interests’ share of dividends paid
Net acquisition of interests
Foreign exchange and other movements
Balance at end of the year
Year to
31 December
£m
2009
Year to
31 December
£m
2008
1,147
158
(80)
63
249
933
188
(111)
25
112
1,537
1,147
Old Mutual plc
Annual Report and Accounts 2009
301
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(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
R363 million non-cumulative preference shares6
Unamortised issue costs
Total in issue at 31 December
At
31 December
£m
2009
At
31 December
£m
2008
140
71
12
458
25
17
723
(13)
710
140
71
12
458
25
–
706
(13)
693
Preferred securities are held at historic value of consideration received less unamortised issue costs.
1 200 million R10 preference shares issued by Nedbank Limited (Nedbank), the Group’s banking subsidiary. These shares are non-redeemable and non-cumulative and pay
a cash dividend equivalent to 75% of the prime overdraft interest rate of Nedbank. Preference shareholders are only entitled to vote during periods when a dividend or any
part of it remains unpaid after the due date for payment or when resolutions are proposed that directly affect any rights attaching to the shares or the rights of the holders.
Preference shareholders will be entitled to receive their dividends in priority to any payment of dividends made in respect of any other class of Nedbank’s shares.
2 77.3 million R10 preference shares issued at R10.68 per share by Nedbank on the same terms as the securities described in (1) above.
3 30 million R10 preference shares issued on 22 June 2006 by Imperial Bank Limited, a subsidiary of Nedbank Limited, on the same terms as the securities described in
(1) above.
4 US$750 million Guaranteed Cumulative Perpetual Preference Securities issued on 19 May 2003 by Old Mutual Capital Funding L.P., a subsidiary of the Group. Subject to
certain limitations, holders of these securities are entitled to receive preferential cash distributions at a fixed rate of 8.0% per annum payable in arrears on a quarterly basis.
The Group may defer payment of distributions at its sole discretion, but such an act may restrict Old Mutual plc from paying dividends on its ordinary shares for a period of
12 months. Arrears of distributions are payable quarterly cumulatively only on redemption of the securities or at the Group’s option. The securities are perpetual, but may be
redeemed at the discretion of the Group from 22 December 2008. The costs of issue have been amortised over the period to 22 December 2008.
5 35 million R10 preference shares issued on 16 April 2007 at R10.27 per share by Nedbank on the same terms as the securities described in (1) above.
6 36.3 million R10 preference shares issued by Nedbank in seven instalments between September 2009 and December 2009 on the same terms as the securities described in
(1) above.
302 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
G: Other notes
G1: Post employment benefits
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 defined contribution and defined benefit schemes. The assets
of these schemes are held in separate trustee administered funds. Pension costs and contributions relating to defined benefit schemes are
assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the current level of contributions payable to each
pension scheme, together with existing assets, are adequate to secure members’ benefits 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
benefit obligations of the Group’s pension schemes vary according to the economic conditions of the countries in which they operate.
(a) Liability for defined benefit obligations
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M
Changes in projected benefit obligation
Projected benefit obligation at beginning of the year
Benefits earned during the year
Interest cost on benefit obligation
Actuarial (gain)/loss
Benefits paid
Foreign exchange and other movements
Projected benefit 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
Benefits paid
Foreign exchange and other movements
Plan assets at fair value at end of the year
Net (asset)/liability recognised in statement of financial position
Funded status of plan
Unrecognised assets
Other amounts recognised in statement of financial position
Unrecognised actuarial gains
Net amount recognised in statement of financial position
(b) Expense/(Credit) recognised in the income statement
Current service costs
Interest cost
Expected return on plan assets
Net actuarial losses/(gains) recognised in the year
Losses/(gains) on curtailment
Total (included in staff costs)
£m
Pension
plans
Other post-retirement
benefit schemes
Year to
31 December
2009
Year to
31 December
2008
Year to
31 December
2009
Year to
31 December
2008
778
8
41
25
(43)
6
815
828
99
14
1
(41)
52
953
(138)
8
1
61
(68)
675
6
41
3
(36)
89
778
855
(18)
13
1
(34)
11
828
(50)
18
–
10
(22)
158
5
12
15
(5)
26
211
160
9
–
–
(4)
10
175
36
(4)
–
4
36
128
4
10
–
(2)
18
158
134
8
–
–
(2)
20
160
(2)
2
2
16
18
£m
Pension
plans
Other post-retirement
benefit schemes
Year to
31 December
2009
Year to
31 December
2008
Year to
31 December
2009
Year to
31 December
2008
8
31
(42)
5
–
2
9
31
(51)
(15)
2
(24)
3
12
(11)
–
–
4
3
10
(10)
–
–
3
Old Mutual plc
Annual Report and Accounts 2009
303
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(c) Principal actuarial assumptions
UK pension schemes
Discount rate
Expected return on plan assets:
Equities
Debt
Cash
Annuities and other
Future salary increases
Pensions in payment and deferred pensions inflation
Price inflation
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 inflation
Price inflation
African pension schemes
Discount rate
Expected return on plan assets:
Equities
Debt
Cash
Future salary increases
Pensions in payment and deferred pensions inflation
Price inflation
African other post retirement schemes
Discount rate
Expected return on plan assets
Future salary increases
Price inflation
Health cost inflation
%
Year to
31 December
2009
Year to
31 December
2008
5.7-5.8
5.5-5.8
7.5-8.4
4.5-5.8
0.5-5.7
5.7-6.5
4.8
3.8-4.3
3.8
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
4.0
5.8
2.8
5.8
5.8
3.3
2.0
2.0
3.5
5.1
2.1
5.1
5.1
3.3
2.0
2.0
7.5-9.0
5.8-9.0
9.0-12.5
9.0-9.5
7.5-9.0
5.0-6.0
1.4-6.0
4.0-6.0
5.5-10.5
5.8-10.5
5.8-9.0
3.5-9.0
7.3-9.0
8.8-11.5
5.8-9.0
3.8-6.5
6.2
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
The calculations are based on actuarially calculated mortality estimates relevant to the economic countries in which they operate, with a specific
allowance made for future improvements in mortality which is broadly in line with that adopted for the 92 series of mortality tables prepared by
the Continuous Mortality Investigation Bureau of the Institute of Actuaries.
The expected returns on plan assets have been determined on the basis of long-term expectations, the carrying value of the assets and the
market conditions at the balance sheet date specific to the relevant locations.
The effect to the Group’s obligation of a 1% increase and a 1% decrease in the assumed health cost trend rates would be an increase of
£13 million and decrease of £11 million (2008: increase of £10 million and decrease of £8 million) respectively.
304 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(d) Plan asset allocation
Equity securities
Debt securities
Property
Cash
Annuities and other
%
Pension
plans
Other post-retirement
benefit schemes
At
31 December
2009
At
31 December
2008
At
31 December
2009
At
31 December
2008
37.4
40.9
6.8
3.6
11.3
38.4
37.4
7.0
1.0
16.2
36.6
20.8
5.6
26.1
10.9
45.1
24.5
5.5
23.5
1.4
100.0
100.0
100.0
100.0
Pension and other retirement benefit plan assets include ordinary shares issued by the Company with a fair value of £nil (2008: £0.1 million).
(e) Summary of Group pension plans
Present value of defined benefit obligations
Fair value of plan assets
Surplus
Experience losses arising on defined benefit plan liabilities:
Amount
As a percentage of plan liabilities
Experience gains arising on defined benefit plan assets:
Amount
As a percentage of plan assets
Year to
31 December
2009
Year to
31 December
2008
Year to
31 December
2007
Year to
31 December
2006
Year to
31 December
2005
£m
(815)
953
138
8
(1.0)%
(8)
(0.8)%
(778)
828
50
2
0.0%
(69)
(8.3)%
(675)
855
180
(5)
0.7%
39
4.3%
(758)
836
78
(12)
1.6%
50
6.0%
(497)
508
11
(16)
3.2%
40
7.7%
Total contributions expected to be paid to the Group pension plans for the year ending 31 December 2010 are £14 million (subject to any
reassessments to be completed in the year).
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Old Mutual plc
Annual Report and Accounts 2009
305
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
G2: Share-based payments
(a) Share-based payment arrangements
During the year ended 31 December 2009, the Group had the following share-based payment arrangements:
Description of award
Contractual life
Vesting conditions
Restricted
shares
Options
Dividend
entitlement
Other
Years
Service
(years)
Performance
(measure)
Other
–
–
3
–
3
–
3
–
–
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
–
3
–
3
–
3
3
–
–
–
3
–
–
–
3
–
–
–
–
–
–
3
3
3
–
3
–
3
–
–
3
3
3
3
3
3
3
3
3
3
3
3
3
3
32
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
32
31⁄2-51⁄2
3 & 5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
5
5
3
3
–
4-6
4, 5 & 64
3-6
10
10
10
3-6
3
–
–
–
3
4-6
4, 5 & 64
5
10
10
10
10
–
–
–
–
–
Target
growth in
EPS
–
–
–
Target
growth in
EPS5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
33
–
–
36
37
37
–
–
36
36
36
36
36
Scheme1
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
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
306 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Description of award
Contractual life
Vesting conditions
Scheme1
Restricted
shares
Options
Dividend
entitlement
Other
Years
Service
(years)
Performance
(measure)
Old Mutual Namibia Discretionary Scheme
Nedcor Group (1994)
Share Option Scheme
Nedbank Group (2005) Share Option 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 Omufima Black
Management Scheme
Nedbank Namibia Omufima Broad-based
Employee Scheme
Nedbank Namibia Omufima Black Business
Partner Scheme
Nedbank Namibia Omufima Affinity
Group Scheme
Nedbank Namibia Omufima 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
Mutual & Federal Broad-based Employee Scheme
Mutual & Federal Namibia Share Option Scheme
3
–
–
3
–
3
3
3
–
3
–
3
3
–
–
–
–
–
3
3
3
3
3
3
3
–
3
3
–
3
3
3
–
3
–
3
3
–
3
3
3
–
3
–
3
–
–
–
–
–
–
3
3
–
3
3
3
3
3
–
3
3
3
3
3
3
–
3
3
3
3
3
–
3
3
–
–
–
39
–
–
–
–
–
312
–
–
–
–
–
–
315
–
–
–
–
–
–
–
–
10
6
5
5
6
7
7
5
10
3
6
7
5
10
10
10
4
6
7
6
Indefinite
Indefinite
10
5
6
–
–
3 & 48
3
3
6
4, 5 & 64
4, 5 & 64
–
–
–
–
4, 5 & 64
–
–
–
–
3
3
4, 5 & 64
3
–
–
–
–
3
Target
growth in
headline
earnings
–
Various10
–
–
–
–
–
–
–
–
–
–
–
–
Target
growth in
average
ROE
–
–
–
–
–
–
–
–
Other
36
–
–
–
311
–
–
33
36,11
313
314
–
36
36,11
36,11
36,11
–
–
–
–
37
37
36
36
–
Old Mutual plc
Annual Report and Accounts 2009
307
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Scheme1
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
Description of award
Contractual life
Vesting conditions
Restricted
shares
Options
Dividend
entitlement
Other
Years
Service
(years)
Performance
(measure)
Other
3
3
3
3
3
3
–
–
–
3
–
–
3
3
–
3
3
–
–
–
–
–
–
–
7
4, 5 & 64
Indefinite
10
6
5
10
–
–
3
–
–
–
–
–
–
–
–
–
37
36
–
36
36
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 G2(e).
2 Scheme is linked to a savings plan.
3 Earlier of five years or participant being entitled to any other award under any other share incentive scheme of the Company.
4 One third of the instruments granted become unrestricted after each of these time periods.
5 Performance target applies to options only.
6 Expiry of the contractual life.
7 Minimum period of ten years.
8 One half of the instruments granted become unrestricted after each of these time periods.
9 Matching contributions made by the participant of an amount not more than 50% of their after-tax bonus.
10 Where performance targets are not met, 50% of the instruments granted will become unrestricted.
11 No dealing in these instruments during the notional funding period.
12 For every three shares acquired, participants qualify for an additional bonus share.
13 Participant holds a Nedbank Group Ltd account as their primary account for the contractual life of the instrument.
14 Participant uses Nedbank Group Ltd as their primary banker for contractual life of the instrument. Nedbank has first 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.
(b) Reconciliation of movements in options
The number and weighted average exercise prices of share options are as follows:
Year ended
31 December 2009
Year ended
31 December 2008
Options over shares in Old Mutual plc (London Stock Exchange)
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
Weighted
average
exercise
price
Number of
options
Weighted
average
exercise
price
Number of
options
33,222,022
58,992,582
(12,451,662)
(1,940,138)
(332,452)
£1.20 30,268,067
£0.45 17,480,275
£1.05 (7,440,893)
£0.94 (6,191,349)
(894,078)
£1.63
77,490,352
£0.66 33,222,022
6,234,171
£1.06
9,765,796
£1.24
£1.07
£1.33
£0.86
£1.22
£1.20
£1.07
The options outstanding at 31 December 2009 have an exercise price in the range of £0.35 to £1.99 (2008: £0.60 to £1.99) and a weighted
average remaining contractual life of 2.7 years (2008: 3.2 years). The weighted average share price at date of exercise for options exercised
during the year was £1.12 (2008: £1.08).
308 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Options over shares in Old Mutual plc (Johannesburg Stock Exchange)
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
Year ended
31 December 2009
Year ended
31 December 2008
Number of
options
42,623,552
34,996,407
(10,334,831)
(1,015,674)
(2,499,125)
Weighted
average
exercise
price
Number of
options
R18.30 33,704,154
R7.79 15,011,301
R19.85 (3,758,982)
R11.69 (2,282,921)
(50,000)
R13.68
Weighted
average
exercise
price
R18.15
R18.31
R20.07
R14.07
R15.15
63,770,329
R12.45 42,623,552
R18.30
10,457,729
R14.10 14,441,080
R14.28
The options outstanding at 31 December 2009 have an exercise price in the range of R7.45 to R23.40 (2008: R10.80 to R24.78) and a
weighted average remaining contractual life of 4.3 years (2008: 3.7 years). The weighted average share price at date of exercise for options
exercised during the year was R13.63 (2008: R18.14).
Options over shares in Nedbank Group Ltd
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
Year ended
31 December 2009
Year ended
31 December 2008
Number of
options
41,124,074
1,976,504
(1,577,822)
(4,207,864)
(364,503)
Weighted
average
exercise
price
Number of
options
R82.97
R121.61 44,497,984
2,152,253
R115.88 (2,051,134)
R78.78 (2,089,408)
R102.75 (1,385,621)
Weighted
average
exercise
price
R119.05
R110.84
R114.27
R68.49
R113.69
36,950,389
R124.86 41,124,074
R121.61
6,599,248
R96.86
5,240,727
R73.28
The options outstanding at 31 December 2009 have an exercise price in the range of R63.19 to R282.58 (2008: R78 to R282.58) and a
weighted average remaining contractual life of 3 years (2008: 3.6 years). The weighted average share price at date of exercise for options
exercised during the year was R113.21 (2008: R104.26).
Options over shares in Mutual & Federal Insurance Company Ltd
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
Year ended
31 December 2009
Year ended
31 December 2008
Number of
options
5,291,160
1,614,690
(359,940)
(489,570)
(787,970)
Weighted
average
exercise
price
Number of
options
R17.33
6,420,700
R14.00
1,595,020
(793,580)
R16.80
R10.60 (1,712,050)
(218,930)
R18.83
Weighted
average
exercise
price
R14.49
R22.23
R17.93
R9.03
R19.89
5,268,370
R16.40
5,291,160
R17.33
2,483,650
R13.99
2,248,450
R12.03
The options outstanding at 31 December 2009 have an exercise price in the range of R2.50 to R27.95 (2008: R1.50 to R27.98) and a weighted
average remaining contractual life of 3.3 years (2008: 3.5 years). The weighted average share price at date of exercise for options exercised
during the year was R16.15 (2008: R17.99).
Old Mutual plc
Annual Report and Accounts 2009
309
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(c) 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.
(d) Option pricing inputs
The following describes the option pricing inputs used for options granted by the Group during the year:
Number
of options
granted
Fair value at
measurement
date
Share
price
Exercise
price
Expected
volatility
Expected
life
Expected
dividends
UK Sharesave Scheme
UK Share Option and Deferred
Delivery Plan
2009 35,270,546
7,437,751
2008
2009
–
2008 10,042,524
Old Mutual plc Share Reward Plan –
Share Options
2009 12,367,231
1,315,789
2008
UK Performance Share Plan –
Share Option
OMSA Management
Scheme
Old Mutual Namibia Management
Scheme
Nedbank Eyethu Black Executive
Scheme
Nedbank Eyethu Black Management
Scheme
Nedbank UK Long-term Incentive
Plan
Mutual & Federal Management
Incentive Scheme
2009 11,354,805
–
2008
2009 34,254,956
2008 14,713,200
741,451
298,101
93,715
188,922
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
£0.16
£0.26
–
£0.21
£0.26
£0.08
£0.26
–
R7.11
R0.77
R7.21
R0.98
£0.44
£1.17
–
£1.20
£0.47
£0.57
£0.54
–
£0.35
£0.90
–
£1.20
£0.58
£0.57
£0.60
–
R7.80
R18.35
R7.52
R16.24
R7.80
R18.35
R7.52
R16.24
R23.88
R84.37 R116.19
R20.45 R108.63 R111.56
1,836,338
1,847,384
R22.80
R77.78 R100.50
R20.52 R108.79 R112.01
–
34,132
–
–
R19.01 R111.03 R120.62
–
1,569,260
1,550,240
R3.97
R6.62
R14.01
R22.22
R14.01
R22.22
54.7%
27.1%
–
29.5%
52.2%
43.9%
49.9%
–
43.8%
37.0%
44.0%
37.0%
45.5%
28.0%
48.7%
28.0%
–
27.0%
34.0%
34.2%
3.7yrs
3.5yrs
–
5.0yrs
5.0yrs
5.0 yrs
4.7yrs
–
5.3yrs
5.4yrs
5.3yrs
5.5yrs
5.6yrs
6.0yrs
6.0yrs
6.0yrs
–
4.0yrs
3.0yrs
3.0yrs
3.0yrs
3.0yrs
–
5.8%
–
5.8%
1.3%
12.3%
–
–
3.0%
4.5%
3.0%
4.5%
6.9%
7.9%
7.2%
7.9%
–
8.1%
4.5%
4.5%
4.5%
4.5%
Risk-free
interest
rate
2.1%
4.0%
–
4.1%
2.8%
3.7%
2.5%
–
8.6%
7.5%
8.6%
7.5%
8.5%
9.7%
8.6%
9.7%
–
11.9%
7.7%
8.9%
7.5%
8.8%
Mutual & Federal Namibia
Management Incentive Scheme
2009
2008
45,430
44,780
R4.05
R6.75
R13.50
R22.50
R13.50
R22.50
34.0%
34.1%
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.
(e) Share–based payment arrangements relating to US Asset Management
During the year ended 31 December 2009, US Asset Management had the following share-based payment arrangements:
Acadian Asset Management (AAM)
Class B equity interests in AAM acquired by employees during 2007 entitled the participating employees to 28.57% of the earnings of AAM
in excess of $120 million, and to a liquidation preference proportionate to their shareholding. In consideration for the equity acquired, the
participating employees agreed to forego a portion of existing long-term incentive payments owed. The difference between the carrying amount
of this consideration and the fair value of the interest acquired was treated as share-based compensation expense in 2007. Fair value was
determined based on the discounted projected future cash flows of AAM.
310 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
OMAM Affiliate Equity Plan
Equity granted during the year to employees of firms participating in the OMAM Affiliate Equity Plan vests 3-5 years from the date of grant,
conditional upon continued employment over this period. Equity purchased vested immediately. Fair value was determined based on a multiple
of prior year earnings. Under the terms of the arrangements, participating employees may sell their equity back to Old Mutual (which acts as
a buyer of last resort) at a fixed multiple of prior year earnings, subject to certain restrictions. Accordingly, the schemes are accounted for as
cash-settled share-based payments, despite the fact the initial purchase and/or grants of equity are settled in equity instruments.
The following summarises the fair value of instruments purchased from and granted by US Asset Management during the year:
Fair value of instruments granted and purchased during the year
AAM1
OMAM Affiliate Equity Plan
Total fair value of instruments ($USm)2
Affiliate share
purchases
Affiliate share
grants
Affiliate shares
forfeited/
bought back
Total
non-controlling
interest in
affiliate
2009
2008
2007
2009
2008
2007
2009
2008
2007
–
–
28.57%
0.48%
3.9%
2.4%
–
–
$17m
–
–
–
0.44%
2.5%
7.3%
$2.4m
$6m
$9m
–
–
–
–
–
28.57%
(0.22)%
(0.4)%
–
–
–
–
0.70%
6.0%
9.7%
$2.4m
$6m
$26m
1 Percentage of Class B equity.
2 Represents fair value in excess of consideration granted for affiliate share purchases.
US Asset Management annual bonus awards
The OMAM Affiliate Equity Plan is incorporated into annual bonus awards of employees at participating firms, which are to be settled partly in
cash, and partly in equity. The level of bonus is contingent upon current year financial and individual performance, therefore the vesting period
for bonus equity to be granted during 2010 in respect of the 2009 financial year has been determined to commence from 1 January 2009.
It is anticipated that instruments with a fair value of US$8.7 million (2008: US$3.5 million) will be granted during 2010 to firms participating in the
OMAM Affiliate Equity Plan based on 2009 financial performance.
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Old Mutual plc
Annual Report and Accounts 2009
311
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(f) Restricted share grants
The following summarises the fair value of restricted shares granted by the Group during the year:
Number
granted
Weighted
average fair
value
UK Restricted Share Plan
UK Share Reward Plan – Restricted Shares
UK Performance Reward Plan – Restricted Shares
OMSA Senior Black Management Scheme
OMSA Management Scheme
Old Mutual Namibia Management Scheme
Old Mutual Namibia Senior Black Management Scheme
Nedbank Group (2005) Matched Share Scheme
Nedbank Eyethu Black Executive Scheme
Nedbank Eyethu Black Management Scheme
Nedbank Group (2005) Share Option 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 Senior Business Management Scheme
2009
2008
2009
2008
2009
2008
2009
2008
–
7,013,741
8,713,091
–
3,091,695
–
7,737,889
3,546,385
2009 27,739,043
2008 10,924,260
643,089
112,596
85,457
456,879
194,248
295,983
–
£1.22
£0.54
–
£0.58
–
R8.56
R16.62
R7.47
R18.68
R7.45
R19.07
R8.18
R14.69
R67.77
R95.26
31,791
92,666
R84.12
R108.76
168,313
167,864
5,080,170
2,516,999
101,880
167,378
1,599,220
1,777,790
282,501
145,090
54,550
53,770
810
–
R77.28
R108.76
R75.36
R111.53
R16.17
R18.85
R13.79
R22.46
R13.63
R26.35
R13.50
R22.50
R17.50
–
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
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.
312 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(g) 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 financial 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
qualified 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 12,523,680 options (2008: 10,770,000 options) and 12,643,027 restricted
shares (2008: 8,420,000 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 R13.18 (2008: R7.60).
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.
Old Mutual plc performance share plans – restricted shares
Old Mutual plc performance share plans – options
(h) 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 benefits
Year ended
31 December 2009
Year ended
31 December 2008
Total fair
value, £m
Vesting
period
Total fair
value, £m
Vesting
period
9
7
4.2 years
4.2 years
3
1
4.2 years
4.2 years
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
35
7
42
19
–
21
3
24
15
–
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G3: Related parties
The Group provides certain pension fund, insurance, banking and financial services to related parties. These are conducted on an arm’s length
basis and are not material to the Group’s results.
(a) 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 compensation paid to the Board
of Directors as well as their shareholdings in the Company are disclosed in the Remuneration Report on page 168 and Corporate Governance
Statement on page 150 respectively.
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Old Mutual plc
Annual Report and Accounts 2009
313
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Key management personnel remuneration and other compensation
Year ended
31 December 2009
Year ended
31 December 2008
Number of
personnel
Value
£000s
Number of
personnel
Value
£000s
9
13
13
12
3
12
1,214
13,590
4,777
4,159
587
7
4,060
14,804
8
12
17
8
4
11
1,124
9,924
5,971
1,285
665
7
1,996
11,048
Year ended
31 December 2009
Year ended
31 December 2008
Number of
personnel
Number of
options/
shares ’000s
Number of
personnel
Number of
options/
shares ’000s
10
3
2
9
3
3
11
7,393
(848)
410
10,803
(1,171)
(974)
15,613
11
4
1
9
3
3
10
12,592
(7,706)
1,316
1,525
(191)
(143)
7,393
Year ended
31 December 2009
Year ended
31 December 2008
Number of
personnel
Number of
options/
shares ’000s
Number of
personnel
Number of
options/
shares ’000s
9
3
1
10
1
5
10
4,020
(724)
60
5,376
(119)
(781)
7,832
11
4
1
8
–
4
9
6,270
(4,325)
900
1,741
–
(566)
4,020
Directors’ fees
Remuneration
Cash remuneration
Short-term employee benefits
Post employment benefits
Other long-term benefits
Share-based payments
Share options
Outstanding at beginning of the year
Leavers
New appointments
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at end of the year
Restricted shares
Outstanding at beginning of the year
Leavers
New appointments
Granted during the year
Lapsed during the year
Released during the year
Outstanding at end of the year
314 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(c) 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.
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 benefits paid
Value of pension plan as at end of the year
Year ended
31 December 2009
Year ended
31 December 2008
Number of
personnel
Value
£000s
Number of
personnel
Value
£000s
6
7
4
4
4
5
5
2
(11)
276
265
12
10
22
1,896
1,509
190
(863)
296
3,028
33
3
6
6
5
4
5
4
5
1
40
(51)
(11)
16
(4)
12
2,014
421
194
(716)
(17)
1,896
25
18
12
11,550
12
8,397
11
5,648
10
9,500
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.
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Old Mutual plc
Annual Report and Accounts 2009
315
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(d) 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 financial statements.
Material transactions between the Group and the Skandia Liv group in the twelve months ended 31 December 2009 were as follows:
> 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 £73 million (2008: £52 million) for services rendered under this agreement.
> Premises – the Group rents office premises from Skandia Liv. The Group paid market rents of £15 million (2008: £15 million) for these
premises.
> Occupational pensions – Skandia Liv provides occupational pensions for the employees of the Group, for which the Group paid £19 million
(2008: £15 million).
> Agreement on IT services – the Group provides IT services to Skandia Liv. The amount charged to Skandia Liv was £7 million
(2008: £9 million).
> Settlement with Skandia Liv regarding the arbitration settlement – In a ruling issued on 2 October 2008, the arbitration board ruled that
the going rate level of compensation in the market pursuant to the 2002 Asset Management Agreement is a maximum of ten basis points
including value added tax, and that Skandia – for the time from 1 July 2008 and onward – is obligated to pay an amount to Skandia Liv
that corresponds to the share of asset management fees received that exceed ten basis points including value added tax. A reserve to
cover asset management fees for the time after 1 July 2008 was charged to the income statement. As per 21 July 2009, an agreement has
been reached between Skandia and Skandia Liv, under which Skandia will pay a fixed amount per quarter until the end of 2013. The total
remaining amount to be paid to Skandia Liv is thereby less than the reserve provision booked as per July 2009. The difference was solved
during the third quarter of 2009. The effect of this was a release of £10 million. The remaining provision of £17.8 million has been reclassified
and is shown as a liability to Skandia Liv in the statement of financial position.
The balance outstanding at 31 December 2009 due from Skandia Liv is £1.6 million (2008: £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 previous financial 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.
(e) Nedbank Ltd
During the year a Group subsidiary, Nedbank Limited, provided funding to the Group. The funding was made through two loans of
EUR 69.5 million and £58.9 million with interest charged at EURIBOR and 6.55% respectively. Both the loans have a maturity date of
6 August 2012.
316 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
G4: Principal subsidiaries and Group enterprises
The following table lists the principal Group undertakings whose results are included in the consolidated financial statements. All shares held are
ordinary shares and, except for OM Group (UK) Ltd, are held indirectly by the Company.
Name
Nature of business
Percentage holding
Country of incorporation
Old Mutual (South Africa) Ltd
OM Africa Holdings (Pty) Ltd
Old Mutual Life Assurance Company (South Africa) Ltd
Old Mutual Investment Group (South Africa) (Pty) Ltd
Nedbank Group Ltd
Nedbank Ltd
Mutual & Federal Insurance Company Ltd1
Old Mutual Life Assurance Company (Namibia) Ltd
Old Mutual (US) Holdings, Inc
Old Mutual U.S. Life Holdings, Inc
Dwight Asset Management Company
OM Financial Life Insurance Company
Old Mutual (Bermuda) Ltd
Acadian Asset Management2
Barrow, Hanley, Mewhinney & Strauss, Inc
OM Group (UK) Ltd
Skandia Europe and Latin America (Holdings) Ltd
Skandia Life Assurance Company Ltd
Skandia UK Holdings Limited
Försäkringsaktiebolaget Skandia
Skandiabanken AB
Old Mutual (Netherlands) B.V.
Holding company
Holding company
Life assurance
Asset management
Banking
Banking
General insurance
Life assurance
Holding company
Holding company
Asset management
Life assurance
Life assurance
Asset management
Asset management
Holding company
Holding company
Life assurance
Holding company
Life assurance
Banking
Holding company
100
100
100
100
59
59
84
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Namibia
Delaware, USA
Delaware, USA
Delaware, USA
Maryland, USA
Bermuda
Massachusetts, USA
Nevada, USA
England and Wales
England and Wales
England and Wales
England and Wales
Sweden
Sweden
Netherlands
1 Following regulatory approval on 19 January 2010 the Group acquired the outstanding equity share previously held by non-controlling interests and as a result now holds
100% of the share capital of Mutual & Federal.
2 The Group holds 100% Class A shares and 71.43% Class B shares in Acadian Asset Management. The remaining 28.57% Class B shares are held by the employees as
described in note G2(e).
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A complete list of subsidiaries is filed 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 financial statements. Skandia Liv’s unaudited capital and
reserves are summarised as follows:
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Capital & Reserves
Profit/(loss) after tax
£m (unaudited)
At
31 December
£m
2009
At
31 December
£m
2008
27
5
25
(7)
G5: Investments in associated undertakings and joint ventures
(a) 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:
At 31 December 2009
Country of operation
Clidet No. 638 (Pty) Ltd
Visigro Investments (Pty) Ltd
Odyssey Developments (Pty) Ltd
Kotak Mahindra Old Mutual Life Insurance Ltd
Skandia BSAM
All other associated undertakings
Republic of South Africa
Republic of South Africa
Republic of South Africa
India
China
£m
% interest
held
Carrying
value
Group share
of profit/(loss)
49%
30%
49%
26%
50%
23
9
10
16
8
69
135
–
–
–
3
(2)
1
2
Old Mutual plc
Annual Report and Accounts 2009
317
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Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
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 financial information as at 31 December 2008.
At 31 December 2008
Country of operation
Clidet No. 638 (Pty) Ltd
Visigro Investments (Pty) Ltd
Odyssey Developments (Pty) Ltd
Kotak Mahindra Old Mutual Life Insurance Ltd
Skandia BSAM
All other associated undertakings
Republic of South Africa
Republic of South Africa
Republic of South Africa
India
China
(b) Aggregate financial information of investments in associated undertakings
The aggregate financial information for all investments in associated undertakings is as follows:
Total assets
Total liabilities
Total revenues
Net profit/(loss) after tax
(c) 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 profit/(loss) after tax
Dividends paid
Foreign exchange and other movements
Balance at end of the year
£m
% interest
held
Carrying
value
Group share
of profit/(loss)
49%
30%
49%
26%
50%
19
8
8
13
11
52
111
–
–
–
(3)
(3)
5
(1)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,426
1,002
603
2
1,131
1,014
495
(1)
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
111
4
2
(6)
24
135
81
18
(1)
(8)
21
111
The Group has no significant investments in which it owns less than 20% of the ordinary share capital that it accounts for using the equity
method.
(d) Contingent liabilities
The Group is severally liable for the contingent liabilities relating to investments in associated undertakings of £1 million (2008: £1 million).
(e) Other Group holdings
The above does not include companies whereby the Group has a holding of more than 20%, but does not have significant influence over these
companies by virtue of the Group not having any direct involvement in decision making or the other owners possessing veto rights.
318 Old Mutual plc
Annual Report and Accounts 2009
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
G6: Contingent liabilities
Guarantees and assets pledged as collateral security
Irrevocable letters of credit
Secured lending
Other contingent liabilities
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At
31 December
£m
2009
At
31 December
£m
2008
2,375
605
555
49
1,839
760
383
393
The Group has pledged debt securities amounting to £1,253 million (2008: £1,533 million) as collateral for deposits received under re-purchase
agreements. These amounts represent assets that have been transferred but do not qualify for derecognition under IAS 39. These transactions
are entered into under terms and conditions that are standard industry practice to securities borrowing and lending activities.
Nedbank structured financing
Historically a number of the Group’s South Africa banking businesses entered into structured finance transactions with third parties using the
tax base of these companies. Pursuant to the terms of the majority of these transactions, the underlying third party has contractually agreed to
accept the risk of any tax being imposed by the South African Revenue Service (SARS), although the obligation to pay in the first instance rests
with the Group’s companies. It is only in limited cases where, for example, the credit quality of a client becomes doubtful, or where the client
has specifically contracted out of the re-pricing of additional taxes, that the recovery from a client could be less than the liability that could arise
on assessment, in which case provisions are made. SARS has examined the tax aspects of some of these types of structures and SARS could
assess these structures in a manner different to that initially envisaged by the contracting parties. As a result Group companies could be obliged
to pay additional amounts to SARS and recover these from clients under the applicable contractual arrangements.
Nedbank litigation
There are a number of legal or potential claims against Nedbank and its subsidiary companies, the outcome of which cannot at present be
foreseen. The largest of these potential actions is a claim in the High Court for R1.3 billion against Nedbank by certain shareholders in Pinnacle
Point Group Limited, alleging that Nedbank had a legal duty of care to them arising from a share swap transaction. Nedbank and its legal
advisers are of the opinion that the claim is without merit and will be defended vigorously.
G7: Commitments
Capital commitments
The Group’s capital commitments are detailed in the table below. The Group’s management is confident that future net revenues and funding
will be sufficient to cover these commitments.
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Investment property
Property, plant and equipment
At
31 December
£m
2009
At
31 December
£m
2008
–
104
–
37
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Commitments to extend credit to customers
The following table presents the contractual amounts of the Group’s financial instruments not included in the statement of financial position that
commit it to extend credit to customers.
Original term to maturity of one year or less
Original term to maturity of more than one year
Other commitments, note issuance facilities and revolving underwriting facilities
At
31 December
£m
2009
At
31 December
£m
2008
1,983
1,002
63
2,467
115
441
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 finance the Groups’ day-to-day operations.
Commitments under the Group’s operating lease arrangements are described in note G8.
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Old Mutual plc
Annual Report and Accounts 2009
319
Notes to the coNsolidated
fiNaNcial statemeNts
For the year ended 31 December 2009 continued
G8: Operating lease arrangements
(a) The Group as lessee
Year ended 31 December 2009
Year ended 31 December 2008
Outstanding commitments under non-cancellable
operating leases, fall due as follows:
Banking
Non-
banking
Total
Banking
117
212
240
569
35
115
72
222
152
327
312
791
38
117
170
325
Within one year
In the second to fifth years inclusive
After five years
(b) 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 fifth years inclusive
After five years
£m
Total
74
265
284
623
Non-
banking
36
148
114
298
At
31 December
£m
2009
At
31 December
£m
2008
12
70
1,759
1,841
5
28
1,478
1,511
At
31 December
£m
2009
At
31 December
£m
2008
62
149
21
232
57
132
27
216
G9: 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 financial instruments. Those assets that are held
in a fiduciary capacity are not included in these financial 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 B5.
G10: Events after the reporting date
On 8 February 2010, Nedbank announced that it had received regulatory approval of the acquisition of Imperial Holdings’ 49.9% indirect
interest in Imperial Bank Limited, thereby satisfying all conditions precedent for the acquisition. The purchase consideration, of approximately
£153 million will be settled out of the existing cash resources of Nedbank Limited over a period of six months, commencing from 8 February
2010. Nedbank intends to submit an application to the South African Reserve whereby it will amalgamate all the assets of Imperial Bank with
those of Nedbank.
On 5 February 2010, the Group announced the completion of the acquisition of the remaining minority shareholdings in Mutual & Federal
Insurance Company Limited, following the fulfilment of all outstanding conditions precedent. On 8 February 2010, 147,313,449 new Old Mutual
plc ordinary shares were listed on the London Stock Exchange in connection with the acquisition.
320 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
compaNy statemeNt of fiNaNcial positioN
At 31 December 2009
Assets
Investments in Group subsidiaries
Investments in associated undertakings
Investments and securities
Other assets (including inter-company)
Derivative financial instruments – assets
Cash and cash equivalents
Total assets
Liabilities
Borrowed funds
Provisions
Other liabilities (including inter-company)
Derivative financial instruments – liabilities
Total liabilities
Net assets
Shareholders’ equity
Equity attributable to equity holders
At
31 December
£m
2009
At
31 December
£m
2008
Notes
9
10
4
5
2
3
7
6
2
8,993
26
–
1,644
176
414
7,595
26
39
2,943
197
3
11,253
10,803
1,406
17
4,628
58
6,109
1,037
20
4,679
91
5,827
5,144
4,976
5,144
4,976
The Company’s financial statements on pages 321 to 337 were approved by the Board of Directors on 11 March 2010.
Julian Roberts
Group Chief Executive
Philip Broadley
Group Finance Director
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Old Mutual plc
Annual Report and Accounts 2009
321
fiNaNcial statemeNts of the compaNy
compaNy statemeNt of cash flows
At 31 December 2009
Cash flows from operating activities
Profit before tax
Capital gains included in investment income
Fair value movements on derivatives and borrowed funds
Foreign exchange movements on assets and liabilities
Other non cash amounts in profit
Non-cash movements in profit before tax
Other operating assets and liabilities
Changes in working capital
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale and maturity of other investments
Acquisition of interests in subsidiaries
Purchase of interest in associates and joint ventures
Net cash inflow/(outflow) from investing activities
Cash flows from financing 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
Issue of subordinated and other debt
Other debt repaid
Loan financing received from/(paid to) Group companies
Net cash (outflow) from financing activities
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 period
Cash and cash equivalents at end of the year
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
139
4
230
(56)
–
178
87
87
404
11
–
–
11
90
(129)
–
(38)
–
(45)
4
(6)
1
542
(404)
(16)
(1)
414
(3)
3
414
411
6
(489)
308
1
(174)
6
6
243
–
(3)
(1)
(4)
91
(162)
1
(33)
(214)
(43)
10
(5)
(175)
96
(64)
228
(270)
(31)
(7)
41
3
At 31 December 2009 and 2008 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 £658 million (2008: £343 million), of which only cash dividends from Skandia UK Holdings
Limited of £55 million were received during the year ended 31 December 2009 (2008: £55 million).
322 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
compaNy s tatemeNt of chaNges iN equity
For the year ended 31 December 2009
–
–
–
–
–
–
2
–
5,518
Millions
Number
of shares
issued and
fully paid
Millions
Number
of shares
issued and
fully paid
Share
capital
Share
premium
Other
reserves
Retained
earnings*
Perpetual
preferred
callable
securities
5,516
552
766
2,561
–
–
–
–
–
–
–
–
–
–
–
–
–
2
2
–
–
–
–
–
–
–
–
10
409
156
156
–
1
(3)
–
–
–
688
45
45
(45)
–
–
–
–
–
£m
Total
4,976
201
201
(45)
1
(3)
2
2
10
552
770
2,571
563
688
5,144
Share
capital
Share
premium
Other
reserves
Retained
earnings*
5,510
551
757
2,554
–
–
–
–
–
–
6
–
–
–
–
–
–
–
1
–
–
–
–
–
–
5
4
–
–
–
–
–
–
–
–
7
435
368
368
(214)
(175)
(5)
–
–
–
Perpetual
preferred
callable
securities
688
43
43
(43)
–
–
–
–
–
£m
Total
4,985
411
411
(257)
(175)
(5)
5
5
7
Year ended 31 December 2009
Attributable to equity holders of the
Company at beginning of the year
Profit 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 at end of the year
Year ended 31 December 2008
Attributable to equity holders of the
Company at beginning of the year
Profit 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 at end of the year
5,516
552
766
2,561
409
688
4,976
*
Included within retained earnings of £563 million (2008: £409 million) are distributable reserves of £514 million (2008: £158 million).
Other reserves
Merger reserve
Share based payment reserve
Attributable to equity holders of Company at end of the year
At
31 December
£m
2009
At
31 December
£m
2008
2,532
39
2,571
2,532
29
2,561
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Old Mutual plc
Annual Report and Accounts 2009
323
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009
1 Financial assets and liabilities
Company statement of financial position
The Company is exposed to financial risk through its financial assets, financial liabilities and inter-company balances. The most important
components of financial 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 specific 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) Categories of financial instruments
The analysis of assets and liabilities into their categories as defined 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-financial nature, or financial assets and liabilities that are
specifically excluded from the scope of IAS 39, are reflected in the non-financial assets and liabilities category.
Fair value through
income statement
Held-for-
Total
trading Designated
Available
for sale
financial
assets
Held-to-
maturity
invest-
ments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
£m
8,993
26
1,644
176
414
11,253
1,406
17
4,628
58
6,109
–
–
–
176
–
176
–
–
–
58
58
–
–
–
–
–
–
761
–
–
–
761
Fair value through
income statement
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,501
–
414
1,915
–
–
–
–
–
–
–
–
–
–
–
645
–
4,569
–
5,214
8,993
26
143
–
–
9,162
–
17
59
–
76
£m
Total
Held-for-
trading
Designated
Available
for sale
financial
assets
Held-to-
maturity
invest-
ments
Loans and
receivables
Financial
liabilities
amortised
cost
Non-
financial
assets and
liabilities
7,595
26
39
2,943
197
3
10,803
1,037
20
4,679
91
5,827
–
–
–
–
197
–
197
–
–
–
91
91
–
–
39
–
–
–
39
541
–
–
–
541
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,839
–
3
2,842
–
–
–
–
–
–
–
–
–
–
–
–
496
–
4,561
–
5,057
7,595
26
–
104
–
–
7,725
–
20
118
–
138
At 31 December 2009
Assets
Investments in Group subsidiaries
Investment in associated undertakings
Other assets (including inter-company)
Derivative financial instruments – assets
Cash and cash equivalents
Liabilities
Borrowed funds
Provisions
Other liabilities (including inter-company)
Derivative financial instruments – liabilities
At 31 December 2008
Assets
Investments in Group subsidiaries
Investment in associated undertakings
Investments and securities
Other assets (including inter-company)
Derivative financial instruments – assets
Cash and cash equivalents
Liabilities
Borrowed funds
Provisions
Other liabilities (including inter-company)
Derivative financial instruments – liabilities
324 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(b) Fair values of financial assets and liabilities
Analysis of instruments at fair value
At 31 December 2009
Total
Level 1
Level 2
Level 3
£m
Financial assets measured at fair value
Held-for-trading (fair value through income statement)
Investments and securities
Derivative financial instruments – assets
Total financial assets measured at fair value
Financial liabilities
Held-for-trading (fair value through income statement)
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Borrowed funds
Total financial liabilities measured at fair value
176
–
176
176
58
58
761
761
819
–
–
–
–
–
–
761
761
761
176
–
176
176
58
58
–
–
58
–
–
–
–
–
–
–
–
–
£m
At 31 December 2008
Total
Level 1
Level 2
Level 3
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
Financial assets measured at fair value
Held-for-trading (fair value through income statement)
Investments and securities
Derivative financial instruments – assets
Total financial assets measured at fair value
Financial liabilities
Held-for-trading (fair value through income statement)
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Borrowed funds
Total financial liabilities measured at fair value
236
39
197
236
91
91
541
541
632
–
–
–
–
–
–
541
541
541
236
39
197
236
91
91
–
–
91
e
c
n
a
n
r
e
v
o
G
–
–
–
–
–
–
–
–
–
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
325
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Financial instruments designated as fair value through income statement
Certain items in the Group’s statement of financial position that would otherwise be categorised as loans and receivables under IAS 39 have
been designated as fair value through income statement. In the prior year, the maximum exposure to credit risk on investments and securities
was £39 million.
Certain items in the Group’s statement of financial position that would otherwise be categorised as financial 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:
At 31 December 2009
Borrowed funds
At 31 December 2008
Borrowed funds
£m
Change in fair value due to change in credit risk
Fair value
Current
financial
year
Cumulative
Contractual
maturity
amount
761
264
(200)
966
£m
Change in fair value due to change in credit risk
Fair value
Current
financial
year
Cumulative
Contractual
maturity
amount
541
(489)
(471)
1,017
(c) 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 E11 to the consolidated financial statements and for ensuring the operational funding and regulatory
capital needs of the holding company and its subsidiaries are met at all times.
(d) Currency risk
The Company is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.
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.
326 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
The table below summarises the Company’s exposure to foreign currency exchange rate risk:
At 31 December 2009
GBP
ZAR
USD
Euro
SEK
Other
Reclassi-
fication
Assets
Investments in associated
undertakings
Derivative financial instruments –
assets 1
Cash and cash equivalents
Other assets
Total assets
Liabilities
Borrowed funds2
Derivative financial instruments –
liabilities 3
Other liabilities
Total liabilities
26
10
382
7,857
8,275
672
–
2,451
3,123
–
–
–
11
11
55
4
3
62
–
6
32
1,056
1,094
244
–
1,704
1,948
–
31
–
145
176
54
–
470
524
–
–
–
1,557
1,557
306
–
17
323
–
–
–
11
11
–
–
–
–
At 31 December 2008
GBP
ZAR
USD
Euro
SEK
Other
Assets
Investments in associated
undertakings
Investments and securities
Derivative financial instruments –
assets 1
Cash and cash equivalents
Other assets
Total assets
Liabilities
Borrowed funds2
Derivative financial instruments –
liabilities 3
Other liabilities
Total liabilities
26
39
11
–
7,745
7,821
76
–
2,530
2,606
–
–
–
–
–
–
–
25
–
25
–
–
13
–
1,408
1,421
420
7
1,847
2,274
–
–
24
–
50
74
153
–
279
432
–
–
–
–
1,311
1,311
296
2
35
333
–
–
–
3
24
27
–
–
8
8
–
129
–
–
129
75
54
–
129
Reclassi-
fication
–
–
149
–
–
149
92
57
–
149
£m
Total
26
176
414
10,637
11,253
1,406
58
4,645
6,109
£m
Total
26
39
197
3
10,538
10,803
1,037
91
4,699
5,827
1 The reclassified derivative financial instruments of £129 million (2008: £149 million) represent currency hedges for borrowed funds and so have been reclassified and netted
against USD borrowed funds.
2 The totals of £672 million (GBP) (2008: £76 million), £244 million (USD) (2008: £420 million) and £306 million (SEK) (2008: £296 million) of borrowed funds have been
disclosed as net of hedges in derivative financial instruments of £88 million (2008: £114 million), £41m (2008: £35 million) and £54 million (2008: £57 million) respectively.
3 The derivative financial instrument of £54 million (2008: £57 million) represents a currency hedge for borrowed funds and so have been reclassed and netted against SEK
borrowed funds.
A 10% 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 £2 million (2008: increase of £23 million).
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
327
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
(e) 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 financial assets bearing credit risk:
At 31 December 2009
Investments in associated undertakings
Derivative financial instruments – assets
Other assets (including inter-company)
Cash and cash equivalents
Financial assets bearing credit risk
At 31 December 2008
Investments in associated undertakings
Derivative financial instruments – assets
Investments and securities
Other assets (including inter-company)
Cash and cash equivalents
Financial assets bearing credit risk
Investment
Grade (AAA
to BBB)
Sub-
investment
Grade (BB
and lower)
Not rated
Total
£m
–
176
–
414
590
–
197
–
–
3
200
–
–
–
–
–
–
–
–
–
–
–
26
–
1,644
–
1,670
26
–
39
2,943
–
3,008
26
176
1,644
414
2,260
£m
26
197
39
2,943
3
3,208
(f) Interest rate risk
Interest rate risk is the risk that fluctuating 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 E7 (Hedge accounting).
(g) 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
£1,142 million (2008: £2,167 million), all of which represent liabilities to other group companies or finance 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 flows of both the Company and its subsidiaries.
The Company’s existing revolving current facility of £1.25 billion does not mature until September 2012. Details, together with information on the
Company’s borrowed funds, are given in note 3.
The key information reviewed by the Company’s executive directors and executive committee, together with the capital management
committee, is a detailed management report on the Company’s current and planned capital and liquidity position. Forecasts are updated
regularly based on new information received, and as part of the annual business planning cycle. The Company’s liquidity and capital position
and forecast is presented to the Company’s Board of Directors on a regular basis.
Further information on liquidity and the Company’s cash flows is contained in other sections of this annual report, for example the business
review and Group Finance Director’s statement.
328 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
2 Derivative financial instruments
The following tables provide a detailed breakdown of the contractual or notional amounts and the fair values of the Company’s derivative
financial 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 financial instruments with other financial 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 2009
Exchange rate contracts
Swaps
Forwards
Interest rate contracts
Swaps
Total
At 31 December 2008
Exchange rate contracts
Swaps
Forwards
Interest rate contracts
Swaps
Total
The contractual maturities of the derivatives held are as follows:
At 31 December 2009
Balance
sheet
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and
5 years
More than
5 years
No
contractual
maturity
date
Derivative financial liabilities
58
4
–
54
–
–
At 31 December 2008
Balance
sheet
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and
5 years
More than
5 years
No
contractual
maturity
date
Derivative financial liabilities
91
34
–
57
–
–
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
£m
Notional principals
Fair values
Positive
values
Negative
values
Assets
Liabilities
567
113
680
987
1,667
353
95
448
–
448
129
–
129
47
176
54
4
58
–
58
£m
Notional principals
Fair values
Positive
values
Negative
values
Assets
Liabilities
602
205
807
1,041
1,848
356
544
900
–
900
149
7
156
41
197
57
34
91
–
91
£m
Total
58
£m
Total
91
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
329
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
3 Borrowed funds
Senior debt securities and term loan
Subordinated debt securities
Total borrowed funds
Fair valued through income statement
Amortised cost
Total borrowed funds
Notes
3(i)
3(ii)
At
31 December
£m
2009
At
31 December
£m
2008
645
761
496
541
1,406
1,037
At
31 December
£m
2009
At
31 December
£m
2008
761
645
541
496
1,406
1,037
The table below is a maturity analysis of liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year end exchange rates.
Less than 1 year
Greater than 1 year and less than 5 years
Greater than 5 years
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
At
31 December
£m
2009
At
31 December
£m
2008
171
1,279
536
1,986
463
1,242
–
1,705
At
31 December
£m
2009
At
31 December
£m
2008
89
556
–
645
49
153
294
496
The Company has a £1,250 million five-year multi-currency revolving credit facility, which had an original maturity date of September 2010.
On 18 August 2007, syndicate banks agreed to extend the maturity date of £1,232 million of the facility by a further two years until September 2012.
At 31 December 2009, £480 million (2008: £826 million) of this facility was utilised, all in the form of irrecoverable letters of credit
(2008: £532 million). In the current year there was no form of drawn debt (2008: £294 million).
During the year, the Company repaid a €100 million Eurobond note and $10 million USD bond.
In the current year the Company issued a £500 million bond note and two ZAR (R550 million and R100 million) floating rate bond notes.
330 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 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
31 December
£m
2009
At
31 December
£m
2008
252
509
761
239
302
541
1 This bond, issued on 20 January 2006, has a maturity date of 21 January 2016 and pays a coupon of 5.0% to 21 January 2011 and six month LIBOR plus 1.13% thereafter.
The coupon on the bonds was swapped into a floating rate of six month STIBOR plus 0.50%. 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% to 17 January 2012 and six month EURIBOR plus 0.96%
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% and six month US LIBOR
plus 0.31% respectively. The Company has the option to repay the bonds at par on 17 January 2012 and at six monthly intervals thereafter.
4 Investments and securities
Equity securities at fair value through income statement
Unlisted
Other
Total investments and securities
At
31 December
£m
2009
At
31 December
£m
2008
–
–
–
38
1
39
Investments and securities are regarded as current and non-current assets based on the intention with which the financial assets are held as well
as their contractual maturity profile. Of the prior year amounts shown above £38 million were regarded as current and £1 million as non-current.
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
e
r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
5 Other assets
Other receivables
Corporation tax
Accrued interest and rent
Other prepayments and accrued income
Amounts owed by Group undertakings:
Amounts falling due within one year
Amounts falling due after one year
Total other assets
6 Other liabilities
Accruals and deferred income
Amounts owed to Group undertakings:
Amount falling due within one year
Amount falling due after one year
Other liabilities
Total other liabilities
7 Provisions
Post employment benefits
At
31 December
£m
2009
At
31 December
£m
2008
10
89
43
1
162
1,339
1,644
10
27
65
2
–
2,839
2,943
e
c
n
a
n
r
e
v
o
G
At
31 December
£m
2009
At
31 December
£m
2008
59
98
1,388
3,181
–
4,628
2,012
2,549
20
4,679
At
31 December
£m
2009
At
31 December
£m
2008
17
20
Note
8
Old Mutual plc
Annual Report and Accounts 2009
331
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
8 Post employment benefits
The Company holds a provision in respect of the Old Mutual Staff Pension Fund Defined Benefit pension scheme, which provides benefits
based on final 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 qualified actuaries. Actuarial advice
confirms that the current level of contributions payable to the scheme, together with existing assets, are adequate to secure members’ benefits
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 2 employees (2008: 4) were directly employed by the Company.
The costs for these Directors and ex-Directors are disclosed within the Remuneration Report on pages 167 to 168.
Pension plans
Year to
31 December
£m
2009
Year to
31 December
£m
2008
55
3
3
61
35
2
4
41
20
(3)
17
56
3
(4)
55
37
(6)
4
35
20
–
20
Pension plans
Year to
31 December
£m
2009
Year to
31 December
£m
2008
2
(3)
(1)
2
(3)
(1)
Liability for defined benefit obligations
Change in projected benefit obligation
Projected benefit obligation at beginning of the year
Interest cost on benefit obligation
Actuarial gain/(losses)
Projected benefit 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 statement of financial position
Funded status of plan
Recognised actuarial loss
Net amount recognised in statement of financial position
Expense recognised in the income statement
Expected return on plan assets
Interest costs
Total
332 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Principal actuarial assumptions
Discount rate
Expected returns on plan assets:
Equities
Debt
Cash
Annuities and other
Future salary increases
Price inflation
Pensions in payment and deferred pensions inflation
Plan asset allocation
Equity securities
Debt securities
Other investments
Pension plans
Year to
31 December
£m
2009
Year to
31 December
£m
2008
5.7-5.8% 5.5-5.8%
7.5-8.4% 6.7-8.8%
4.5-5.8% 3.7-5.8%
0.5-5.7% 3.8-5.5%
5.7-6.5% 5.5-8.8%
4.8% 4.1-4.9%
3.8-4.6% 2.8-3.1%
3.8% 2.8-3.1%
Pension plans
Year to
31 December
£m
2009
Year to
31 December
£m
2008
37%
60%
3%
34%
62%
4%
£m
Present value of defined benefit obligations
Fair value of plan assets
Deficit
Experience losses arising on defined benefit plan liabilities:
Amount
As a percentage of plan liabilities
Experience gains arising on defined benefit plan assets:
Amount
As a percentage
Year to
31 Dec 2009
Year to
31 Dec 2008
Year to
31 Dec 2007
Year to
31 Dec 2006
Year to
31 Dec 2005
(61)
41
(20)
–
0.0%
(55)
35
(20)
(1)
2.0%
(56)
37
(19)
(56)
32
(24)
–
–
–
(0.4)%
(55)
27
(28)
–
–
1
3.0%
(7)
(18.5)%
(1)
(1.8)%
–
–
3
9.9%
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Old Mutual plc
Annual Report and Accounts 2009
333
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
9 Principal subsidiaries
Balance at beginning of the year
Acquisitions
Additions
Impairments
Balance at end of the year
At
31 December
£m
2009
At
31 December
£m
2008
7,595
–
1,417
(19)
8,993
4,792
1,844
959
–
7,595
The Company purchased additional Ordinary shares in Commsale 2000 Limited during the year being 15,000,000 Ordinary shares and
5,000,000 Ordinary shares on 22 May 2009 and 21 December 2009 respectively.
On 16 June 2009, the Company increased its investment in the Ordinary shares of Skandia Europe and Latin America (Holdings) Limited by
£350 million via a reduction in loan financing.
On 17 November 2009, the Company increased its investment in the Ordinary share capital of OM Group (UK) by £900 million via a reduction in
loan financing.
During 2009, the Company made a further investment of £136,086,885 in Millpencil Limited via a reduction in loan financing.
Also, included within additions is the Company’s investment in subsidiary undertakings in respect of movements on the share based payments
(£10 million).
No companies were dissolved during the year.
Also during the year Papercoast Limited changed its name to Skandia Investment Group Holdings Limited.
The Company holds the following interests in Group companies:
At 31 December 2009
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
Skandia Investment Group Holdings
Sandlord Ltd
Selestia Holdings Limited
Skandia (London) Ltd
Skandia Europe and Latin America (Holdings) Limited
Skandia UK Holdings Limited
England & Wales
Guernsey
Sweden
England & Wales
England & Wales
England & Wales
Jersey
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & 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%
334 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
10 Investments in associated undertakings
The company holds the following interest in associated undertakings:
Kotak Mahindra Old Mutual Life Insurance Limited
India
26%
26
26
Country of
operation
% interest
held
At
31 December
£m
2009
At
31 December
£m
2008
11 Commitments and guarantees
Commitments
At
31 December
£m
2009
At
31 December
£m
2008
480
532
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.
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Old Mutual plc
Annual Report and Accounts 2009
335
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
12 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 office 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 2009
Subsidiaries:
OM Group (UK) Limited1
Primemajor
Old Mutual Holdings (Kenya)14
Global Edge Technologies Pty Limited4
Old Mutual International companies3
Fairbairn Trust Company Limited
Bermuda Holdings companies5
Skandia companies2
Old Mutual (SA) companies6
Old Mutual Financial Services companies7
Old Mutual Business Services Ltd8
Old Mutual Capital Funding L.P.9
Constantia Insurance Company (Guernsey) Limited
Old Mutual (Netherlands) BV
Pointspirit10
Nedbank12
Millpencil13
Other related parties:
Fairbairn Trust Company Limited11
£m
Balance due
from/(to)
1,335
4
10
1
4
2
(563)
(2,351)
(692)
(79)
(126)
(453)
(2)
(1)
(27)
(124)
(8)
33
1 The loan with OM Group (UK) Limited includes loan advances of $1,518 million, £22 million and A$7 million (2008: $2,051 million, £700 million and A$38 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 +0.75%. The Australian Dollar facility expires
30 November 2011 and interest is charged at 9.60% per annum. In addition, the balance also includes a subordinated loan of £350 million (2008: £350 million), with a term
agreement of 6.75%, switching to floating rate (LIBOR +2.48%) 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%
margin and is due to mature on 27 February 2013. The Company has a term loan agreement with Skandia Insurance Company Ltd were the agreement states that interest
is STIBOR +7.3% margin and is due to mature on 31 January 2011. In addition, the balance also includes various rolling deposits where, the Interest is charged at LIBOR
or EURIBOR with no margin. These deposits are with Skandia Life Assurance and consist of 2 deposits £13 million and £10 million, Skandia Invest Services GmBH (Austria)
EUR 3 million, Skandia Vits SPA (Italy) EUR 2 million, Skandia Germany EUR 20 million, Skandia Holdings Ltd £76 million, SkandiaLink (Spain) EUR 321 million and Skandia
Europe and Latin America (Holdings) Limited of £23 million. There is also a discount note with Skandia Financial Holdings BV of EUR 1.9 million with a maturity date of
16 April 2010.
3 The balance with Old Mutual International companies includes one contingent loan facility of £4 million (2008: £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 (2008: 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 floating rate note totalling $604 million. Interest charged is USD LIBOR +0.45% margin and USD LIBOR +8.45%
on the $82 million note and $522 million note respectively. The notes mature on 28 April 2013 and 1 December 2013 respectively. In addition there is a $100 million RCF and
interest is charged at USD LIBOR +0.6%. This has an expiry date of 28 July 2010.
6 The balance with Old Mutual (SA) companies includes two floating rate notes totalling $1,097 million (2008: $1,261 million). Interest charged is USD LIBOR +0.45% margin
and USD LIBOR +2.50% margin on the $1,037 million note and $60.7 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 £13.6 million, on which interest is charged at the
Bank of England base rate and a £20 million RCF, on which interest is charged at LIBOR rate.
8 The loan with Old Mutual Business Services Limited represents a long-term loan advance with no maturity date of £126 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% per annum payable quarterly.
The notes have no mandatory maturity dates.
10 The loan with Pointspirit is a £500 million revolving credit facility where the agreement states that interest be charged at LIBOR +0.15%. This RCF has no maturity date.
11 This represents amounts paid to the Fairbairn Trust Company Limited in respect of an ‘ESOP’ for the purchase of the Company’s own shares.
12 The balance with Nedbank consists of 2 loans, EUR 69.5 million and £58.9 million. Interest is charged at EURIBOR +6.55% and LIBOR +6.55%, with a maturity date of
6 August 2012 for both loans.
13 The balance with Millpencil is non-interest bearing and recallable at any time.
14 The balance with Old Mutual Holdings Limited resident in Kenya is a term loan of ZAR 122 million. This loan has no interest and has a maturity date of 30 May 2010.
336 Old Mutual plc
Annual Report and Accounts 2009
fiNaNcial statemeNts of the compaNy
Notes to the compaNy fiNaNcial statemeNts
For the year ended 31 December 2009 continued
Outstanding amounts
At 31 December 2008
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
Old Mutual (Netherlands) BV
Pointspirit
Sandlord Limited
Other related parties:
Fairbairn Trust Company Limited
Income statement information
2009
Subsidiaries
Income statement information
2008
Subsidiaries
£m
Balance due
from/(to)
2,504
4
(1,933)
4
1
(430)
(922)
(240)
(95)
(501)
(2)
(66)
(36)
(10)
30
£m
Interest
received/
(paid)
Ordinary
dividends
received/
(paid)
Other
amounts
received/
(paid)
88
658
(122)
Interest
received/
(paid)
Ordinary
dividends
received/
(paid)
£m
Other
amounts
received/
(paid)
5
343
(68)
13 Post balance sheet events
On 5 February 2010, the Group announced the completion of the acquisition of the remaining minority shareholdings in Mutual & Federal
Insurance Company Limited, following the fulfilment of all outstanding conditions precedent. On 8 February 2010, 147,313,449 new Old Mutual
plc ordinary shares were listed on the London Stock Exchange in connection with the acquisition.
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Old Mutual plc
Annual Report and Accounts 2009
337
Notes to the MCeV basis
stateMeNt of direCtors’ respoNsibilities
suppleMeNtary iNforMatioN
iN relatioN to the Market CoNsisteNt
eMbedded Value basis suppleMeNtary
For the year ended 31 December 2009
iNforMatioN
The directors of Old Mutual plc have chosen to prepare supplementary information on a Market Consistent Embedded Value (MCEV) basis.
Old Mutual’s methodology adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008)
issued in June 2008 and updated in October 2009 by the CFO Forum (‘the Principles’) as the basis for the methodology. The Principles have
been fully complied with at 31 December 2009 for all businesses.
In preparing the 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 344;
> identified and described the business covered by the MCEV methodology;
> applied the MCEV methodology consistently to the covered business;
> determined assumptions on a market consistent basis and operating assumptions on a best estimate entity specific 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.
338 Old Mutual plc
338 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Notes to the MCeV basis
iNdepeNdeNt auditors’ report to old
suppleMeNtary iNforMatioN
Mutual plC oN the Market CoNsisteNt
eMbedded Value basis suppleMeNtary
For the year ended 31 December 2009 continued
iNforMatioN
We have audited the Market Consistent Embedded Value (MCEV) basis supplementary information (‘the supplementary information’) of
Old Mutual plc (‘the Company’) on pages 340 to 389 in respect of the year ended 31 December 2009. The supplementary information has
been prepared in accordance with the CFO Forum MCEV Principles. The supplementary information should be read in conjunction with the
Group financial statements which are on pages 180 to 320.
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 explained more fully in the Directors’ Responsibilities Statement set out on page 338, the directors have accepted responsibility for preparing
the supplementary information on an MCEV basis in accordance with the MCEV Principles.
Our responsibility is to audit the supplementary information in accordance with the terms of our engagement and having regard to International
Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards
for Auditors.
Scope of the audit of the supplementary information
An audit involves obtaining evidence about the amounts and disclosures in the supplementary information to give reasonable assurance
that the supplementary information is free from material misstatement, whether caused by fraud or error. This includes an assessment of:
whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed;
the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the supplementary information.
Opinion on supplementary information
In our opinion, the MCEV basis supplementary information for the year ended 31 December 2009 has been properly prepared in accordance
with the MCEV Principles using the methodology and assumptions as detailed in the basis of preparation of the supplementary information on
page 344.
Alastair W S Barbour
for and on behalf of KPMG Audit Plc
Chartered Accountants
8 Salisbury Square
London EC4Y 8BB
11 March 2010
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
339
339
Notes to the MCeV basis
Group Market CoNsisteNt eMbedded
Value stateMeNt of earNiNGs
suppleMeNtary iNforMatioN
For the year ended 31 December 2009
For the year ended 31 December 2009
Long Term Savings
Covered business
Asset management
Banking
Nedbank
Banking
Mutual and Federal
General insurance
US Asset Management
Asset management
Other operating segments
Finance costs
Interest payable to non-core operations
Other shareholders’ expenses
Adjusted operating Group MCEV earnings before tax from core operations
Bermuda non core operations
Long term business
Adjusted operating Group MCEV earnings before tax*
Adjusting items
Total Group MCEV earnings before tax for the financial year
Income tax attributable to shareholders
Total Group MCEV earnings after tax for the financial year
Total Group MCEV earnings for the financial year attributable to:
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total Group MCEV earnings after tax for the financial year
Basic total Group MCEV earnings per ordinary share (pence)
Weighted average number of shares – millions
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
Notes
554
26
16
596
470
70
83
(104)
(40)
(69)
578
42
23
643
575
76
97
(140)
–
(19)
1,006
1,232
8
(254)
1,014
913
1,927
(145)
978
(2,037)
(1,059)
13
1,782
(1,046)
1,562
(1,284)
156
64
184
54
1,782
(1,046)
31.3
(25.7)
4,994
4,995
C1
* For long-term business and general insurance businesses, adjusted operating MCEV earnings are based on short-term and long-term investment returns respectively, include
investment returns on life funds’ investments in Group equity and debt instruments, and are stated net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in accordance with IFRS. For all
businesses, adjusted operating MCEV earnings excludes goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes,
the impact of closure of unclaimed shares trusts, profit/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt movements.
340 Old Mutual plc
340 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Notes to the MCeV basis
adJusted operatiNG Group MCeV
earNiNGs per share
suppleMeNtary iNforMatioN
For the year ended 31 December 2009
For the year ended 31 December 2009 continued
Adjusted operating Group MCEV earnings before tax
Tax on adjusted operating Group MCEV earnings
Adjusted operating Group MCEV earnings after tax
Non-controlling interests
Ordinary shares
Preferred securities
Adjusted operating Group MCEV earnings after tax attributable to ordinary equity holders
Adjusted operating Group MCEV earnings from core operations
Adjusted operating Group MCEV earnings from non-core operations
Adjusted operating Group MCEV earnings per share from core operations
Adjusted operating Group MCEV earnings per share from non-core operations
Adjusted operating Group MCEV earnings per share* (pence)
Adjusted weighted average number of shares – millions
Notes
B2
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,014
(209)
805
(179)
(64)
562
581
(19)
11.1
(0.4)
978
(135)
843
(214)
(54)
575
813
(238)
15.5
(4.5)
10.7
5,229
11.0
5,230
* Adjusted operating Group MCEV earnings per share is calculated on the same basis as adjusted operating Group MCEV earnings, but is stated after tax and non-controlling
interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted average number of shares
includes own shares held in policyholders’ funds and Black Economic Empowerment trusts.
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
341
341
Notes to the MCeV basis
CoMpoNeNts of Group MCeV aNd
adJusted Group MCeV iNforMatioN
suppleMeNtary iNforMatioN
At 31 December 2009
For the year ended 31 December 2009
Components of 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:
Long Term Savings
Bermuda
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:
Long Term Savings
Value of in-force business
Present value of future profits
Additional time value of financial 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 from core operations
Return on Group MCEV (RoEV) per annum from non core operations
Return on Group MCEV (RoEV) per annum
Number of shares in issue at the end of the financial year less treasury shares – millions
At
31 December
£m
2009
At
31 December
£m
2008
Notes
C3
C3
4,417
8,464
(2,626)
(6)
268
(688)
3,462
7,737
(2,244)
(217)
173
(688)
C3
(995)
(1,299)
3,212
4,255
(416)
(221)
(406)
7,629
144.5
11.1%
(0.4)%
10.7%
5,279
1,800
2,580
(261)
(148)
(371)
5,262
99.7
11.0%
(3.2)%
7.8%
5,277
The adjustments to include long-term business on a statutory solvency basis reflect the difference between the net worth of each business on
the statutory basis (as required by the local regulator) and their portion of the Group’s consolidated equity shareholders’ funds. In South Africa,
these values exclude items that are eliminated or shown separately on consolidation (such as Nedbank, Mutual & Federal and inter-company
loans). For some European countries and US Life the value reflected in the adjustment to include long-term business on a statutory solvency
basis includes the value of the deferred acquisition cost asset which is part of the equity.
The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £562 million (year ended
31 December 2008: £575 million) divided by the opening Group MCEV.
342 Old Mutual plc
342 Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Notes to the MCeV basis
CoMpoNeNts of Group MCeV aNd
adJusted Group MCeV iNforMatioN
suppleMeNtary iNforMatioN
For the year ended 31 December 2009
For the year ended 31 December 2009 continued
Components of adjusted Group MCEV
Group MCEV
Pro forma adjustments to bring Group investments to market value
Adjustment to bring listed subsidiaries to market value
Nedbank
Mutual & Federal
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 financial year less treasury shares – millions
At
31 December
£m
2009
At
31 December
£m
2008
Notes
7,629
805
623
182
71
221
302
9,028
171.0
5,279
5,262
68
41
27
63
169
645
6,207
117.6
5,277
B1
*
Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2008 and 31 December 2009 is the net
effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2009 and the reduction in overall shares
held due to exercises of rights to take delivery of, or net settle, share grants during the year.
Reconciliation of movements in Group MCEV (after tax)
Year ended 31 December 2009
Year ended 31 December 2008
£m
Notes
Covered
business
MCEV
Non-covered
business IFRS
Total Group
MCEV
Opening Group MCEV
Adjusted operating MCEV earnings
Non-operating MCEV earnings
Total Group MCEV earnings
Other movements in IFRS net equity
C2
Closing Group MCEV
4,183
492
1,191
1,683
161
6,027
1,079
70
(191)
(121)
644
1,602
5,262
562
1,000
1,562
805
7,629
Covered
business
MCEV
6,349
133
(2,270)
(2,137)
(29)
Non-covered
business IFRS
Total Group
MCEV
1,010
442
411
853
(784)
7,359
575
(1,859)
(1,284)
(813)
4,183
1,079
5,262
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Old Mutual plc
Old Mutual plc
Annual Report and Accounts 2009
Annual Report and Accounts 2009
343
343
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009
A: MCEV policies
A1: Basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 340 to 389 as
‘MCEV’) adopts Market Consistent Embedded Value Principles issued in June 2008 and updated in October 2009 by the CFO Forum (‘the
Principles’) as the basis for the methodology used in preparing the supplementary information.
The CFO Forum announced changes to the MCEV Principles in October 2009 to reflect inter-alia the inclusion of a liquidity premium.
These changes affirm that the risk free reference rate to be applied under MCEV should include both the swap yield curve appropriate to the
currency of the cash flows and a liquidity premium where appropriate. The CFO Forum is undertaking further work to develop more detailed
application guidance.
The Principles have been fully complied with for all businesses as at 31 December 2009. The detailed methodology and assumptions made in
presenting this supplementary information are set out in notes A2 and A3.
Where reference is made to ‘Europe’ only, this generally captures the Nordic, Retail Europe and Wealth Management businesses.
Throughout the supplementary information the following terminology is used to distinguish between the terms ‘MCEV’, ‘Group MCEV’ and
‘adjusted Group MCEV’:
> MCEV is a measure of the consolidated value of shareholders’ interests in the covered business and consists of the sum of the
shareholders’ adjusted net worth in respect of the covered business and the value of the in-force covered business.
> Group MCEV is a measure of the consolidated value of shareholders’ interests in covered and non-covered business. Non-covered business
is valued at the IFRS net asset value detailed in the primary financial statements adjusted to eliminate inter-company loans.
> The adjusted Group MCEV, a measure used by management to assess the shareholders’ interest in the value of the Group, includes the
impact of marking all debt to market value, the market value of the Group’s listed banking and general insurance subsidiaries, marking the
value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to
market, as well as including the market value of excess own shares held in ESOP schemes.
A2: Methodology
Introduction
MCEV represents the present value of shareholders’ interests in the earnings distributable from assets allocated to the in-force covered
business after sufficient allowance for the aggregate risks in the covered business and is measured in a way that is consistent with the value
that would normally be placed on the cash flows generated by these assets and liabilities in a deep and liquid market. MCEV is therefore a
risk-adjusted measure to the extent that financial risk is reflected through the use of market consistent techniques in the valuation of both assets
and distributable earnings and a transparent explicit allowance is made for non-financial risks.
The MCEV consists of the sum of the following components:
> Adjusted net worth, which excludes acquired intangibles and goodwill, consisting of:
– Free surplus allocated to the covered business; and
– Required capital to support the covered business
> Value of in-force covered business (VIF)
The adjusted net worth of the covered business is the market value of shareholders’ assets held in respect of the covered business after
allowance for the liabilities of the in-force covered business which are dictated by local regulatory reserving requirements.
MCEV is calculated net of non-controlling shareholder interests and excludes the value of future new business.
344 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Coverage
Covered business includes, where material, any contracts that are regarded by local insurance supervisors as long-term life assurance
business, and other business, where material, directly related to such long-term life assurance business where the profits are included in the
IFRS long-term business profits in the primary financial statements. For the OMSA business, following the sale of the remaining stake in Nedlife
to Nedbank, Nedlife is excluded from covered business from 2009 onwards although it is still included in comparative results for prior periods.
Some types of business are legally written by a life company, but under IFRS are classified as asset management because ‘long-term business’
only serves as a wrapper. This business continues to be excluded from covered business, for example:
> New institutional investment platform pensions business written in the United Kingdom as it is more appropriately classified as unit trust
business; and
> Individual unit trusts and some group market-linked business written by the asset management companies in South Africa through the life
Company as profits from this business arise in the asset management companies.
The treatment within this supplementary information of all business other than the covered business is the same as in the primary financial
statements, except for the adjusted Group MCEV which includes the impact of marking all debt to market value, the market value of the
Group’s listed banking and general insurance subsidiaries, marking the value of deferred consideration due in respect of Black Economic
Empowerment arrangements in South Africa (‘the BEE schemes’) to market, as well as including the market value of excess own shares held in
ESOP schemes.
Free surplus
Free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business. It is determined as
the market value of any excess assets attributed to the covered business but not backing the regulatory liabilities, less the required capital to
support the covered business.
Required capital
Required capital is the market value of assets that are attributed to support the covered business, over and above that required to back
statutory liabilities for covered business, whose distribution to shareholders is restricted. The following capital measures are considered in
determining the required capital held for covered business so that it reflects the level of capital considered by the directors to be appropriate to
manage the business:
> Economic capital;
> Regulatory capital (ie the level of solvency capital which the local regulators require);
> Capital required by rating agencies in respect of the North American business in order to maintain the desired credit rating; and
> Any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon Old Mutual’s own internal assessment of risks inherent in the underlying business.
It measures capital requirements on an economic statement of financial position, with MCEV as the available capital, consistent with a 99.93%
confidence level over a one-year time horizon.
For Emerging Markets and Europe capital determined with reference to internal management objectives is the most onerous and is the capital
measure used. For US Life the required capital is based on the amount that management deems necessary to maintain the desired credit rating
for the Company, whilst for Bermuda the required capital is set with reference to internal management objectives.
The required capital in respect of OMSA’s covered business is partially covered by the market value of the Group’s investments in banking and
general insurance in South Africa. On consolidation these investments are shown separately.
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Old Mutual plc
Annual Report and Accounts 2009
345
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements.
Emerging Markets
Nordic*
Retail Europe**
Wealth Management
US Life***
Bermuda***
Total
£m
At 31 December 2009
At 31 December 2008
Required
capital (a)
Regulatory
capital (b)
Ratio (a/b)
Required
capital (a)
Regulatory
capital (b)
Ratio (a/b)
1,225
104
32
213
462
363
2,399
930
92
52
119
193
–
1,386
1.3
1.1
0.6
1.8
2.4
n/a
1.7
1,075
105
64
197
550
34
2,025
820
66
46
116
211
–
1,259
1.3
1.6
1.4
1.7
2.6
n/a
1.6
* There has been a large increase in the regulatory capital within the Nordic region due to the strong correlation with funds under management which have increased
significantly.
** Local regulators within many of the Retail Europe countries allow intangible assets to be included as admissible regulatory capital. In such cases the required capital reported
for MCEV is net of these items, although each of the countries continues to be sufficiently capitalised on the local solvency basis. Skandia Leben in Germany is permitted
under local regulations to include the unallocated policyholder profit sharing liability as admissible capital, leading to a large decrease in the required capital from 31 December
2008 to 31 December 2009.
*** The Bermudan regulator allows intangible assets to be included as admissible regulatory capital. The total regulatory capital for US Life and Bermuda at 31 December 2008
has been restated from £245 million to £211 million due to refinement of the calculation.
Value of in-force covered business
Under the MCEV methodology, VIF consists of the following components:
> Present value of future profits (PVFP) from in-force covered business; less
> Time value of financial options and guarantees; less
> Frictional costs of required capital; less
> Cost of residual non-hedgeable risks (CNHR)
Projected liabilities and cash flows are calculated net of outward risk reinsurance with allowance for default risk of reinsurance counterparties
where material.
Present value of future profits
The PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that
are expected to emerge from the in-force covered business, including the value of contractual renewal of in-force business, on a best estimate
basis where assumed earned rates of return and discount rates are equal to the risk free reference rates. It therefore represents a deterministic
certainty equivalent valuation of future distributable earnings. The certainty equivalent valuation approach is described in more detail in note
A3. Any limitations on distribution of such earnings due to statutory or internal capital requirements are taken into account separately in the
calculation of frictional costs of required capital.
PVFP captures the intrinsic and time value of financial options and guarantees on in-force covered business which are included in the local
statutory reserves according to local requirements, but excludes any additional allowance for the time value of financial options and guarantees.
Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of investment returns (ie asymmetric impact) on future shareholder cash
flows of policyholder financial options and guarantees within the in-force covered business.
The time value of financial options and guarantees describes that part of the value of financial options and guarantees that arises from the
variability of future investment returns on assets to the extent that it is not already included in the statutory reserves. The calculations are
based on market consistent stochastic modelling techniques where the actual assets held at the valuation date are used as the starting point
for the valuation of such financial options and guarantees. Projected cash flows are valued using economic assumptions such that they are
valued in line with the price of similar cash flows that are traded in the capital markets. The time value represents the difference between the
average value of shareholder cash flows under many generated economic scenarios and the deterministic shareholder value under the best
estimate assumptions for the equivalent business. Closed form solutions are also applied in Europe provided the nature of any guarantees is
not complex.
The time value of financial options and guarantees also includes allowance for potential burn-through costs on participating business, ie the
extent to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal capital management
requirements or the extent to which reserves are inadequate to cover severely adverse experience.
346 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
In the generated economic scenarios allowance is made, where appropriate, for the effect of dynamic management and/or policyholder actions
in different circumstances:
> Management has some discretion in managing exposure to financial options and guarantees, particularly within participating business.
Such dynamic management actions are reflected in the valuation of financial options and guarantees provided that such discretion is
consistent with established and justifiable practice taking into account policyholders’ reasonable expectations (eg with due consideration
of the Principles and Practices of Financial Management, or PPFM for South African business), subject to any contractual guarantees and
regulatory or legal constraints and has been passed through an appropriate approval process by the local Executive team and, where
applicable, the Board. Assumptions that depend on the market performance (such as crediting rates or bonus rates) are set relative to the
risk free reference rates (subject to contractual guarantees) and assuming that all market participants are subjected to the same market
conditions.
> Where credible evidence exists that persistency rates are linked to economic scenarios, allowance is made for dynamic policyholder
behaviour in response to changes in economic conditions.
> Modelled dynamic management and policyholders’ actions include the following:
– changes in future bonus and crediting rates subject to contractual guarantees, including removing all or part of previously declared
non-vested balances where circumstances warrant such action;
– dynamic persistency rates for the US Life and Bermuda businesses, and dynamic guaranteed annuity option take-up rates for the South
African business driven by changes in economic conditions and management actions; and
– changes in surrender values.
In determining the time value of financial options and guarantees at least 1,000 simulations are run to ensure that a reasonable degree of
convergence of results has been obtained. Where deemed appropriate, the number of simulations is increased to reduce sampling error.
Europe
Whilst certain products within the European businesses provide financial options and guarantees, these are immaterial due to the predominantly
unit-linked nature of the business.
Emerging Markets
The financial options and guarantees mainly relate to maturity guarantees and guaranteed annuity options.
As required by the applicable Actuarial Society of South Africa guidance note, the time value of the financial options and guarantees included
in the statutory reserves in the Emerging Markets businesses as at 31 December 2009 has been valued using a risk-neutral market consistent
asset model, and is referred to as the ‘Investment Guarantee Reserve’ (IGR). This reserve includes a discretionary margin as defined by local
guidelines to allow for the sensitivity of the reserve to future interest rate movements. This discretionary margin is valued in the VIF.
US Life
The financial options and guarantees mainly relate to minimum crediting (bonus) rates.
Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum accumulation benefits on Variable Annuity contracts.
Frictional costs of required capital
From the shareholders’ viewpoint there is a cost due to restrictions on the distribution of required capital that is locked in the Company.
Where material, an allowance has been made for the frictional costs in respect of the taxation on investment return (income and capital gains)
and investment costs on the assets backing the required capital for covered business. The allowance for taxation is based on the taxation rates
applicable to investment earnings on assets backing the required capital, although such tax rates are reduced, where applicable, to allow for
interest paid on debt which is used partly to finance the required capital.
The run-off pattern of the required capital is projected on an approximate basis over the lifetime of the underlying risks in line with drivers of the
capital requirement. The same drivers are used to split the total required capital between existing business and new business.
The allowance for frictional costs is independent of the allowance for the cost of residual non-hedgeable risks as described below.
Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the time value of financial options and guarantees by using
techniques that are similar to the type of approaches used by capital markets. In addition the modelling of some non-hedgeable non-
financial risks is incorporated as part of the calculation of the PVFP (eg to the extent that expected operational losses are incorporated in the
maintenance expense assumptions) or the time value of financial options and guarantees (eg dynamic policyholder behaviour such as the
interaction of the investment scenario and the persistency rates).
Residual non-financial risks include, for example, liability risks such as mortality, longevity and morbidity risks; business risks such as
persistency, expense and reinsurance credit risks; and operational risk. All such risks for which no or insufficient allowance is made in the
PVFP or time value of financial options and guarantees, together with some allowance for hedge risk and credit spread risk in the US Life and
Bermudan businesses, are considered within the allowance for the CNHR.
Old Mutual plc
Annual Report and Accounts 2009
347
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Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
An allowance is made in the CNHR to reflect uncertainty in the best estimate of shareholder cash flows as a result of both symmetric and
asymmetric non-hedgeable risks since these risks can not be hedged in deep and liquid capital markets and are managed, inter alia, by holding
risk capital. Considering the Group as a whole, most residual non-hedgeable risks have a symmetric impact on shareholder value with the
exception of operational risk.
The CNHR is calculated using a cost of capital approach, ie it is determined as the present value of capital charges for all future non-hedgeable
risk capital requirements until the liabilities have run off. The capital charge in each year is the product of the projected expected non-hedgeable
risk capital held after allowance for some diversification benefits and the cost of capital rate. The cost of capital rate therefore represents the
return above the risk free reference rates that the market is deemed to demand for providing this capital.
The residual non-hedgeable risk capital measure is determined using an internal economic capital model based on appropriate shock scenarios
consistent with a 99.5% confidence level over a one-year time horizon. The internal economic capital model makes allowance for certain
management actions, such as reductions in bonus and crediting rates, where deemed appropriate.
The following allowance is made for diversification benefits in determining the residual non-hedgeable risk capital at a business unit level:
> Diversification benefits within the non-hedgeable risks of the covered business are allowed for;
> No allowance is made for diversification benefits between hedgeable and non-hedgeable risks of the covered business;
> No allowance is made for diversification benefits between covered and non-covered business.
The table below shows the amounts of diversified economic capital held in respect of residual non-hedgeable risks.
Capital held in respect of non-hedgeable risks
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life*
Bermuda*
Total
At
31 December
£m
2009
At
31 December
£m
2008
606
333
143
640
661
619
457
189
145
386
513
517
3,002
2,207
* The total capital held in respect of non-hedgeable risks for US Life and Bermuda at 31 December 2008 has been restated from £826 million to £1,030 million due to
refinement of the calculation.
The economic capital included in the calculation of CNHR at 31 December 2008 was calculated with reference to the old European Embedded
Value (EEV) methodology, whilst the economic capital included in the calculation of CNHR at 31 December 2009 was calculated with reference
to the MCEV methodology. This has led to a step change in the calculation for all business units. To the extent that this change affected
operating earnings, the impact is shown under ‘other operating variance’.
In addition to the change in the underlying basis used for assessing economic capital from an EEV to MCEV basis, the increase in capital held
in respect of CNHR for Europe from £720 million at 31 December 2008 to £1,116 million at 31 December 2009 is largely caused by an increase
in the economic capital held for persistency risk in light of the turbulent economic market conditions and due to a change in methodology for
waiver of premium products in Sweden to strengthen the economic capital held for morbidity risk.
A weighted average cost of capital rate of 2.0% has been applied to residual symmetric and asymmetric non-hedgeable capital at a business
unit level over the life of the contracts. This translates into an equivalent cost of capital rate of approximately 2.6% being applied to the Group
diversified capital required in respect of such non-hedgeable risks.
Participating business
For participating business in Emerging Markets, US Life and Bermuda, the method of valuation makes assumptions about future bonus or
crediting rates and the determination of profit allocation between policyholders and shareholders. These assumptions are made on a basis
consistent with other projection assumptions, especially the projected future risk free investment returns, established Company practice (with
due consideration of the PPFM for South African business), past external communication, any payout smoothing strategy, local market practice,
regulatory/contractual restrictions and bonus participation rules.
Where current benefit levels are higher than can be supported by the existing fund assets together with projected investment returns, a
downward ‘glide path’ is projected in benefit levels so that the policyholder fund would be exhausted on payment of the last benefit.
348 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Spread-based products
A market consistent valuation of spread-based products (such as Fixed Indexed Annuities in US Life and Bermuda, where investment returns
are earned at one rate and policyholders’ accounts are credited at a different rate with the difference referred to as ‘spread’) is dependent on
the extent that management discretion can target a shareholder profit margin and the decision rules that management would follow in respect
of crediting or bonus rates in any particular stochastic scenario.
Where guaranteed terms are offered at outset of a contract that dictate the payments to policyholders throughout the term of the contract,
these payments are valued using the certainty equivalent valuation technique. These products, for example immediate annuities in payment,
may therefore show a loss at point of sale under MCEV as investment margins are not anticipated while currently pricing practice does
anticipate these margins. If returns in excess of the risk free reference rates actually emerge in the future, these will be recognised in the MCEV
earnings as they arise.
For business where the crediting (bonus) rate is set in advance, crediting rates are set by considering management’s target shareholder margins
throughout the contract lifetime (subject to any guarantees). Projected crediting rates are set equal to the risk free reference rates less the
anticipated margin to cover profit and expenses (subject to any policyholder guarantees eroding the shareholder margins). However, during
the period following the valuation date the existing crediting rate is applied until the next point at which it can be varied. Given the guarantees
included within such products (including consideration of a 0% floor for crediting rates), stochastic modelling is used to value such contracts.
Valuation of assets and treatment of unrealised losses
The market values of assets, where quoted in deep and liquid markets, are based on the bid price on the reporting date. Unquoted assets are
valued according to IFRS and marked to model.
No smoothing of market values or unrealised gains/losses is applied.
Asset mix
The time value of financial options and guarantees and PVFP (where relevant) are calculated with reference to assets that are projected using
the actual asset allocation of the policyholder funds at the reporting date. However, if the current asset mix is materially different to the long-term
strategic asset allocation as a result of market movements, projected assets are assumed to revert to the long-term strategic asset allocation in
the short- to medium-term as appropriate.
Defined benefit pension scheme
Where a defined benefit pension scheme within the covered business is in surplus or deficit on the liability basis that is used to determine future
employer contributions, the employer pension fund expense assumptions incorporated within the VIF allow appropriately for the expected
release of surplus or funding of the deficit.
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Look through principle
PVFP and value of new business cash flow projections look through and include the profits/losses of owned service companies, eg distribution
and administration, related to the management of the covered business. Any profit margins that are included in investment management fees
payable by the life assurance companies to the asset management subsidiaries have not been included in the value of in-force business or the
value of new business on the grounds of materiality and because a significant proportion of these profits arise from performance-based fees.
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Taxation
In valuing shareholders’ cash flows, allowance is made in the cash flow projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying current local corporate tax legislation and practice together with
known future changes and taking credit for any deferred tax assets.
No allowance is made for any further additional tax that would be incurred on the remittance of dividends from the life subsidiaries to Old Mutual
plc, apart from the South African business where full allowance has been made for Secondary Tax on Companies (STC) that may be payable
in South Africa at a rate of 10% and the impact of capital gains tax. Furthermore, for the South African business it has been assumed that a
reasonable proportion of the shareholder fund equity portfolio (excluding Group subsidiaries) will be traded each year.
The value of deferred tax assets is partly recognised in the MCEV. Typically those tax assets are expected to be utilised in future by being offset
against expected tax liabilities that are generated on expected profits emerging from in-force business. MCEV may therefore understate the true
economic value of such deferred tax assets because it does not allow for future new business sales which could affect the utilisation of such
assets.
New business and renewals
The market consistent value of new business (VNB) measures the value of the future profits expected to emerge from all new business sold,
and in some cases premium increases to existing contracts, during the reporting period after allowance for the time value of financial options
and guarantees, frictional costs and the cost of residual non-hedgeable risks associated with writing the new business.
VNB includes contractual renewal of premiums and recurring single-premiums, where the level of premium is pre-defined and is reasonably
predictable, and changes to existing contracts where these are not variations allowed for in the PVFP. Non-contractual increments are treated
similarly where the volume of such increments is reasonably predictable or likely (eg where premiums are expected to increase in line with salary
or price inflation).
Old Mutual plc
Annual Report and Accounts 2009
349
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Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Any variations in premiums on renewal of in-force business from that previously anticipated including deviations in non-contractual increases,
deviations in recurrent single-premiums and re-pricing of premiums for in-force business are treated as experience variances or economic
variances on in-force business and not as new business.
VNB is calculated as follows:
> Economic assumptions at the start of the reporting period are used, except for OMSA’s Non-Profit Annuities and Fixed Bond products and
US Life products where point of sale assumptions are used (where applicable using economic assumptions at the middle of the reporting
period as a proxy).
> Demographic and operating assumptions at the end of the reporting period are used.
> At point of sale and rolled forward to the end of the reporting period.
> Generally using a standalone approach unless a marginal approach would better reflect the additional value to shareholders created through
the activity of writing new business.
> Expense allowances include all acquisition expenses, including any acquisition expense overruns.
> Net of tax, reinsurance and non-controlling interests.
> No attribution of any investment and operating variances to VNB.
New business margins are disclosed as:
> The ratio of VNB to the present value of new business premiums (PVNBP); and
> The ratio of VNB to annual premium equivalent (APE), where APE is calculated as recurring-premiums plus 10% of single premium.
PVNBP is calculated at point of sale using premiums before reinsurance and applying a valuation approach that is consistent with the
calculation of VNB.
Analysis of MCEV earnings
An analysis of MCEV earnings provides a reconciliation of the MCEV for covered business at the beginning of the reporting period and the
MCEV for covered business at the end of the reporting period on a net of taxation basis.
Operating MCEV earnings are generated by the value of new business sold during the reporting period, the expected existing business
contribution, operating experience variances, operating assumption changes and other operating variances:
> The value of new business includes the impact of new business strain on free surplus that arises, amongst other things, from the impact of
initial expenses and additional required capital that is held in respect of such new business.
> The expected existing business contribution is determined by projecting both actual assets and actual liabilities (including assets backing the
free surplus and required capital) from the start of the reporting period to the end of the reporting period using expected real-world earned
rates of return. The expected existing business contribution is presented in two components:
– Expected earnings on free surplus and required capital and the expected change in VIF assuming that the assets earn the beginning of
period risk free reference rates; and
– Additional expected earnings on free surplus and required capital and the additional expected change in VIF as a result of real-world
expected earned rates of return on assets in excess of beginning of period risk free reference rates.
> Transfers from VIF and required capital to free surplus includes the release of required capital and modelled profits from VIF into free surplus
in respect of business that was in-force at the beginning of the reporting period, although the movement does not contribute to a change in
the MCEV.
> Operating experience variances reflect the impact of deviations of the actual operational experience during the reporting period from the
expected operational experience. It is analysed before operating assumption changes, ie such variances are assessed against opening
operating assumptions, and reflects the total impact of in-force and new business variances.
> Operating assumption changes incorporate the impact of changes to operating assumptions from those assumed at the beginning of the
reporting period to those assumed at the end of the reporting period. As VNB is calculated using operating assumptions at the end of the
reporting period, this impact only relates to the value of in-force business at the end of the reporting period that was also in-force at the
beginning of the reporting period.
> Other operating variances include model improvements, changes in methodology and the impact of certain management actions, such as a
change in the asset allocation backing required capital.
Total MCEV earnings also include economic variances and other non-operating variances:
> Economic variances incorporate the impact of changes in economic assumptions from the beginning of the reporting period to the end of
the reporting period as well as the impact on earnings resulting from actual returns on assets being different to the expected returns on
those assets as reflected in the expected existing business contribution. It therefore also includes the impact of economic variances in the
reporting period on projected future earnings.
> Other non-operating variances include the impact of changes in mandatory local regulations and changes in taxation legislation.
350 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
An analysis of MCEV earnings requires non-operating closing adjustments in respect of exchange rate movements and capital transfers such as
those in respect of payment of dividends and acquiring/divesting businesses.
Return on MCEV for covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in local currency,
except for Wealth Management, Long Term Savings and total covered business where the calculations are performed in sterling.
The anticipated expected existing business contribution for the 12 months following the year ended 31 December 2009 (at the reference rate
as well as in excess of the reference rate) is provided to assist users of the MCEV supplementary information in forecasting operating MCEV
earnings. Note that the exchange rates that are used for such disclosure are the same rates that are used to translate current year earnings for
comparability purposes. Therefore the ultimate expected existing business contribution for the financial year ending 31 December 2010 may
differ form these results.
Analysis of Group MCEV earnings
Presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the
unadjusted IFRS net asset value. A mark to market adjustment is therefore not performed for external borrowings and other items not on a
mark to market basis under IFRS relating to non-covered business.
A3: Assumptions
Non-economic assumptions
The appropriate non-economic projection assumptions for future experience (eg mortality, persistency and expenses) are determined using best
estimate assumptions of each component of future cash flows, are specific to the entity concerned and have regard to past, current and expected
future experience where sufficient evidence exists (eg longevity improvements and AIDS-related claims) as derived from both entity-specific and industry
data where deemed appropriate. Material assumptions are actively reviewed by means of detailed experience investigations and updated, as deemed
appropriate, at least annually.
These assumptions are based on the covered business being part of a going concern, although favourable changes in maintenance expenses
such as productivity improvements are generally not included beyond what has been achieved by the end of the reporting period.
The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new
business, maintenance of in-force business (including investment management expenses) and development projects.
> All expected maintenance expense overruns affecting the covered business are allowed for in the calculations.
> Unallocated Group holding company expenses have been included to the extent that they relate to the covered business. The future
expenses attributable to long-term business include 33% of the Group holding company expenses, with 16% allocated to Emerging
Markets, 15% allocated to Europe and 2% allocated to US Life (31 December 2008: 35% of the Group holding company expenses, with
14% allocated to Emerging Markets, 17% allocated to Europe and 4% allocated to US Life and Bermuda). The allocation of these expenses
aligns to the proportion that the management expenses incurred by the business bears to the total management expenses incurred in the
Group.
> The MCEV makes provision for future development costs and one-off exceptional expenses (such as those incurred on the integration of
businesses following an acquisition, restructuring costs and costs related to Solvency II implementation) that relate to covered business to
the extent that such project costs are known with sufficient certainty, based on three year business plans.
Legislative changes were introduced in Germany in 2008 specifying the proportion of miscellaneous profits to be shared with policyholders.
According to the regulations, the revenue on in-force business can be reduced by various expense items, including those costs arising in
respect of new business acquisition expenses in any year. From 31 December 2008 Skandia Leben in Germany sets the best estimate
assumptions for the amount to be shared with policyholders in future years after making an allowance for the acquisition expenses in relation
to the new business expected to be written over the next three years. However, not that, as previously mentioned, MCEV excludes the value of
future new business.
Economic assumptions
An active basis is applied to set pre-tax investment and economic assumptions to reflect the economic conditions prevailing on the reporting
date. Economic assumptions are set consistently, for example future bonus or crediting rates are set at levels consistent with the investment
return assumptions.
Under a market consistent valuation, economic assumptions are determined such that projected cash flows are valued in line with the prices
of similar cash flows that are traded on the capital markets. Thus, risk free cash flows are discounted at a risk free reference rate and equity
cash flows at an equity rate. In practice for the PVFP, where cash flows do not depend on or vary linearly with market movements, a certainty
equivalent method is used which assumes that actual assets held earn, before tax and investment management expenses, risk free reference
rates (including any liquidity adjustment) and all the cash flows are discounted using risk free reference rates (including any liquidity adjustment)
which are gross of tax and investment management expenses. The deterministic certainty equivalent method is purely a valuation technique
and over time the expectation is still that risk premiums will be earned on assets such as equities and corporate bonds.
Old Mutual plc
Annual Report and Accounts 2009
351
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Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Risk free reference rates and inflation
The risk free reference rates, reinvestment rates and discount rates are determined with reference to the swap yield curve appropriate to the
currency of the cash flows. For Europe the swap yield curve is obtained from a number of sources including Bloomberg, Nordea Bank and
Reuters. For the Emerging Markets and United States businesses, the swap yield curve is sourced from a third party market consistent asset
model that is used to generate the economic scenarios that are required to value the time value of financial options and guarantees.
At 31 December 2009, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity
adjustment to the US Life business and OMSA’s Retail Affluent Immediate annuity business. Any other risk premiums are recognised within the
MCEV as and when they are earned.
A wide range of liquidity market data and literature was reviewed at 31 December 2009, such as the Barrie+Hibbert calibration of US corporate
bond spreads using a structural Merton-style model which decomposes the yields of illiquid assets into their constituent parts and a
comparison of the yields of similar durations on South African government bonds and bonds issues by state-owned enterprises. It is the
directors’ view that a significant proportion of corporate bond spreads at 31 December 2009 is attributable to a liquidity premium rather than
credit and default risk and that returns in excess of swap rates can be achieved, rather than entire corporate bond spreads being lost to
worsening default experience. For the US Life business and OMSA’s Retail Affluent Immediate Annuity business the currency, credit quality
and duration of the actual corporate bond portfolios were considered and adjusted risk free reference rates were derived at 31 December
2009 by adding 100bps of liquidity premium for the US Life business (31 December 2008: 300bps) and adding 50bps of liquidity premium for
OMSA’s Retail Affluent Immediate Annuity business (31 December 2008: zero allowance) to the swap rates used for setting investment return
and discounting assumptions. These adjustments reflect the liquidity premium component in corporate bond spreads over swap rates that is
expected to be earned on the portfolios. Old Mutual believes that the differences between market yields on US Life’s and OMSA’s Retail Affluent
bond portfolios and the adjusted risk free reference rates still provide adequate implied margins for default. No liquidity adjustment is applied for
other regions in light of the pending liquidity premium applicatin guidance from the CFO Forum.
When the liquidity premium adjustment was calibrated and introduced for US Life business at 31 December 2008, similar research was not yet
concluded for South Africa to estimate the quantum of the liquidity premiums inherent in South African corporate bond spreads. In addition,
the impact of a liquidity premium adjustment on US Life business was far more material than for OMSA’s Retail Affluent Immediate Annuity
business as the concentration of US Life’s investments in the corporate bond market is far greater and the widening of corporate bond spreads
has been more pronounced in the US compared to other regions. Hence the application of a liquidity premium adjustment was initially focussed
on the US and an adjustment was only introduced for OMSA at 30 June 2009 for consistency in methodology.
At those durations where swap yields are not available, eg due to lack of a sufficiently liquid or deep swap market, the swap curve is extended
using appropriate interpolation or extrapolation techniques.
Consumer price inflation assumptions are determined as those implied by index-linked government stocks or real swap yields if a liquid market
of sufficient size exists. In other markets, the consumer price inflation assumptions are modelled considering a spread compared to swap
rates. However, where modelling system capabilities are restricted (eg US Life), consumer price inflation is set as a flat assumption. Other types
of inflation such as expense inflation are derived on a consistent basis and, where deemed appropriate, include a percentage addition to the
consumer price inflation rate, for example as life company expenses include a large element of salary related expenses.
The risk free reference spot yields (excluding any applicable liquidity adjustments) and expense inflation rates at various terms for each of
the significant regions are provided in the table below. The risk free reference spot yield curve has been derived from mid swap rates at the
reporting date.
GBP
EUR
USD
ZAR
0.9
4.7
4.8
4.0
2.0
3.1
3.4
3.5
1.3
2.8
3.6
4.1
2.4
3.3
3.8
3.9
0.7
3.0
3.5
4.0
1.3
2.1
2.6
2.8
7.3
8.9
9.2
8.2
9.3
8.0
7.8
6.7
%
SEK
0.8
2.9
3.7
4.1
1.8
2.9
3.2
3.2
Risk free reference spot yields (excluding any applicable liquidity adjustments)
At 31 December 2009
1 year
5 years
10 years
20 years
At 31 December 2008
1 year
5 years
10 years
20 years
352 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Expense inflation
At 31 December 2009
1 year
5 years
10 years
20 years
At 31 December 2008
1 year
5 years
10 years
20 years
GBP
EUR
USD
ZAR
3.3
3.8
4.4
4.8
0.1
1.5
2.8
4.1
2.5-3.0
2.5-3.0
2.5-3.0
2.5-3.0
2.0-3.0
2.0-3.0
2.0-3.0
2.0-3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
6.4
7.5
7.7
6.7
6.1
5.4
5.5
4.6
%
SEK
1.1
2.6
2.8
3.0
0.2
1.0
1.8
2.1
Volatilities and correlations
Where cash flows contain financial options and guarantees that do not move linearly with market movements, asset cash flows are projected
and all cash flows discounted using risk-neutral stochastic models. These models project the assets and liabilities using a distribution of asset
returns where all asset types, on average, earn the same risk free reference rates.
Apart from the risk free reference yields specified above, other key economic assumptions for the calibration of economic scenarios include
the implied volatilities for each asset class and correlations of investment returns between different asset classes. The volatility assumptions
for the calibration of economic scenarios that are used in the stochastic models are, where possible, based on those implied from appropriate
derivative prices (such as equity options or swaptions in respect of guarantees that are dependent on changes in equity markets and interest
rates respectively) as observed on the valuation date. However, historic implied and historic observed volatilities of the underlying instruments
and expert opinion are considered where there are concerns over the depth or liquidity of the market, eg volatilities for property returns.
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 Emerging Markets stochastic models, due to the immateriality of corporate bond and property holdings, corporate bonds are assumed
to yield the same returns as equivalent long-term government bonds and property is assumed to earn a return equal to a portfolio that is
invested 50% in local equities and 50% in long-term government bonds.
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Old Mutual plc
Annual Report and Accounts 2009
353
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
The at-the-money annualised asset volatility assumptions of the asset classes incorporated in the stochastic models are detailed below.
ZAR volatilities*
At 31 December 2009
Option term
1 year
5 years
10 years
20 years
At 31 December 2008
1 year
5 years
10 years
20 years
1 year swap
5 year swap
10 year swap
20 year swap
%
Equity (total
return index)*
Property (total
return index)
18.3
16.9
15.7
14.5
30.8
35.1
32.9
25.4
16.2
15.8
15.2
13.8
32.9
33.6
30.2
22.5
15.1
15.3
14.7
13.1
30.8
30.3
25.9
18.7
14.8
15.1
14.1
12.0
26.9
25.1
19.8
13.9
27.4
25.5
26.2
27.0
37.6
31.6
29.2
28.1
17.1
14.8
14.1
14.2
23.2
19.0
15.6
15.4
* Due to limited liquidity in the ZAR swaption and equity option market, the market consistent asset model has been calibrated by extrapolating swaption and equity option
implied volatility data beyond terms of 2 years and 3 years respectively.
1 year swap
5 year swap
10 year swap
20 year swap
%
USD volatilities
At 31 December 2009
Option term
1 year
5 years
10 years
20 years
At 31 December 2008*
1 year
5 years
10 years
20 years
62.3
26.9
18.6
15.6
44.9
23.9
18.3
16.1
36.8
24.7
18.3
14.6
34.1
22.8
17.9
16.0
30.1
22.6
17.9
14.3
27.7
21.2
17.1
15.4
25.9
20.6
16.3
12.8
24.7
20.1
16.3
14.5
%
* Due to limited liquidity in the USD swap market as at 31 December 2008, the market consistent asset model was calibrated by reference to volatility data as at
30 September 2008.
International equity volatilities (applicable to Old Mutual Bermuda)*
SPX
RTY
TPX
HSCEI
TWSE
KOSP12
NIFTY
SX5E
UKX
BCAI
At 31 December 2009
Option term
1 year
5 years
10 years
At 31 December 2008
1 year
5 years
10 years
22.1
26.7
25.2
38
35
27
28.6
37.1
32.6
46
45
34
28.3
30.5
31.9
41
39
31
33.5
34.7
41.2
57
51
43
22.9
29.2
27.7
36
34
30
23.3
24.8
31.3
42
43
36
26.5
25.4
32.3
39
33
31
24.7
25.6
27.8
38
37
31
23.1
24.7
26.3
37
36
28
n/a
n/a
n/a
4
4
4
354 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
International equity volatilities (applicable to Old Mutual Bermuda)*
%
At 31 December 2009
Option term
1 year
5 years
10 years
At 31 December 2008
1 year
5 years
10 years
EEM
USAgg
EUAgg
APAgg
31.6
29.9
38.0
n/a
n/a
n/a
4.5
4.5
4.5
n/a
n/a
n/a
12.0
12.0
12.0
n/a
n/a
n/a
11.6
11.6
11.6
n/a
n/a
n/a
* These volatilities, as represented by their Bloomberg codes, refer to price indices. Due to ongoing enhancements in the fund mapping process, the indices referenced will
vary from period to period.
Exchange rates
All MCEV figures are calculated in local currency and translated to GBP using the appropriate exchange rates as detailed in note C2 of the IFRS
statements.
Expected asset returns in excess of the risk free reference rates
The expected asset returns in excess of the risk free reference rates have no bearing on the calculated MCEV other than the calculation of the
expected existing business contribution in the analysis of MCEV earnings. Real-world economic assumptions are determined with reference
to one-year forward risk free reference rates applicable to the currency of the liabilities at the start of the reporting period. All other economic
assumptions, for example future bonus or crediting rates, are set at levels consistent with the real-world investment return assumptions.
Equity and property risk premiums incorporate both historical relationships and the directors’ view of future projected returns in each region.
Pre-tax real-world economic assumptions are determined as follows:
> The equity risk premium is 3.5% for Africa and 3% for Europe and the United States.
> The cash return equals the risk free reference rate less a deduction of 2% for Africa and 1% for Europe and the United States.
> The corporate bond return is based on actual corporate bond spreads on the reporting date less an allowance for defaults.
> The property risk premium is 1.5% in Africa and 2% in Europe.
Tax
The weighted average effective tax rates that apply to the cash flow projections within the VIF at 31 December 2009 are set out below:
> OMSA – 33% (31 December 2008: 33%)
> Namibia – 0% (31 December 2008: 0%)
> Nordic – 4% (31 December 2008: 3%)
> Retail Europe – 28% (31 December 2008: 28%)
> Wealth Management – range of 4% to 21% (31 December 2008: 6% to 28%)
> US Life – 5% (31 December 2008: 0%)
> Bermuda – 10% (31 December 2008: 1%)
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Old Mutual plc
Annual Report and Accounts 2009
355
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B: Segment information
B1: Adjusted Group MCEV 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
Emerging Markets
Nordic**
Retail Europe
Wealth Management
US Asset Management
Value of the banking business
Nordic (adjusted net worth)
Nedbank (market value)
Market value of the general insurance business
Mutual & Federal
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
At
31 December
£m
2009
At
31 December
£m
2008
6,027
2,815
3,212
1,716
216
(75)
12
152
1,411
2,948
314
2,634
448
123
221
71
(385)
(477)
(224)
(253)
4,183
2,383
1,800
1,570
391
(218)
6
204
1,187
1,976
285
1,691
219
(154)
169
63
(203)
(304)
(174)
(130)
(1,664)
(1,312)
(290)
(338)
(759)
(256)
(21)
(213)
(537)
(191)
(252)
(119)
9,028
6,207
* Adjusted net worth is after the elimination of inter-company loans.
** Includes the adjusted net worth of Nordic holding companies that are classified as non-covered business, net of the holding companies investment in Group subsidiaries.
*** Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2008 and 31 December 2009 is the net
effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants in March 2009 and the reduction in overall shares
held due to exercises of rights to take delivery of, or net settle, share grants during the year.
356 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B2: Adjusted operating MCEV earnings for the covered business
Adjusted operating MCEV earnings before tax for the covered business
Long term savings
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
Tax on adjusted operating MCEV earnings for the covered business
Long term savings
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
Adjusted operating MCEV earnings after tax for the covered business
Long term savings
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
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
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
562
554
272
78
(58)
(40)
302
8
(70)
(43)
(60)
3
14
36
(36)
(27)
492
511
212
81
(44)
(4)
266
(19)
(70)
(139)
(209)
324
578
460
164
19
325
(390)
(254)
(191)
(207)
(117)
(15)
(5)
(96)
26
16
133
371
343
149
14
229
(364)
(238)
(191)
56
(135)
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Old Mutual plc
Annual Report and Accounts 2009
357
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B3: Components of MCEV of the covered business
MCEV of the covered business
Adjusted net worth
Value of in-force business
Long-Term Savings
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
Emerging Markets
Adjusted net worth*
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs**
Cost of residual non-hedgeable risks
Nordic
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
Retail Europe
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
358 Old Mutual plc
Annual Report and Accounts 2009
At
31 December
£m
2009
At
31 December
£m
2008
6,027
2,815
3,212
2,452
416
2,036
3,377
4,156
(220)
(217)
(342)
1,305
80
1,225
1,158
1,424
–
(181)
(85)
195
91
104
1,114
1,196
–
(11)
(71)
78
46
32
453
507
(6)
(7)
(41)
4,183
2,383
1,800
2,007
16
1,991
2,225
2,878
(204)
(147)
(302)
983
(92)
1,075
1,090
1,287
–
(117)
(80)
163
58
105
882
943
–
(8)
(53)
79
15
64
517
582
(12)
(12)
(41)
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B3: Components of MCEV of the covered business
Wealth Management
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
US Life
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
Bermuda
Adjusted net worth
Free surplus
Required capital
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
At
31 December
£m
2009
At
31 December
£m
2008
376
163
213
1,468
1,540
(1)
(12)
(59)
498
36
462
(816)
(511)
(213)
(6)
(86)
363
–
363
(165)
99
(196)
(4)
(64)
317
120
197
1,461
1,514
–
(8)
(45)
465
(85)
550
(1,725)
(1,448)
(192)
(2)
(83)
376
342
34
(425)
(298)
(57)
(1)
(69)
* The required capital in respect of OMSA is partially covered by the market value of the Group’s investments in banking and general insurance in South Africa. On consolidation
these investments are shown separately.
** For the OMSA business there has been a material change in the asset allocation of assets backing the Capital Adequacy Requirement (capital definition to meet internal
management objectives) from 31 December 2008 to 31 December 2009. As at 31 December 2009 the asset allocation is 75% cash/25% equity compared to 60% cash/40%
equity at 31 December 2008. This resulted in a decrease in the Capital Adequacy Requirement, but an increase in frictional tax costs as interest bearing assets are subjected
to higher tax rates than equities.
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Old Mutual plc
Annual Report and Accounts 2009
359
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax)
Total covered business
Year ended 31 December 2009
Year ended 31 December 2008
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
358
(473)
2,025
170
2,383
(303)
1,800
470
MCEV
4,183
167
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
515
(608)
1,906
172
2,421
(436)
3,928
540
7
32
813
54
(3)
(191)
239
(29)
39
249
(191)
(189)
(15)
13
114
121
142
263
6
38
355
393
(244)
(111)
(22)
301
214
93
(20)
287
87
(1)
85
3
569
(57)
(25)
110
453
64
19
536
(104)
(190)
70
16
(569)
(120)
(258)
19
39
940
168
1,147
265
–
289
(24)
–
(177)
(283)
129
492
1,004
187
1,683
161
(190)
359
(8)
63
4
939
160
(55)
172
675
(722)
(111)
(158)
1
(22)
23
–
117
180
289
469
15
19
81
100
(189)
(75)
–
(156)
(116)
5
43
(68)
187
–
187
–
750
85
(55)
16
559
(717)
(68)
(226)
188
(22)
210
–
(750)
(250)
(375)
39
–
(165)
(430)
55
(426)
(1,485)
–
133
(2,202)
(68)
(1,911)
(217)
(2,137)
(29)
–
(217)
–
(22)
(7)
–
Closing MCEV
416
2,399
2,815
3,212
6,027
358
2,025
2,383
1,800
4,183
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 flows
Foreign exchange variance
MCEV of acquired/sold business
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
Total covered business
11.8%
£m
Adjusted
net
worth
Value of
in-force
MCEV
(57)
(87)
31
(49)
48
(25)
(29)
30
10
(36)
(120)
(177)
(72)
17
13
(78)
(159)
48
(36)
(30)
(258)
(283)
(210)
64
(190)
78
(239)
94
(180)
42
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
14
1
78
25
92
26
170
163
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
360 Old Mutual plc
Annual Report and Accounts 2009
£m
MCEV
6,349
104
2.1%
£m
MCEV
262
189
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Long Term Savings (LTS)
Year ended 31 December 2009
Year ended 31 December 2008
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
16
(473)
1,991
170
2,007
(303)
2,225
470
MCEV
4,232
167
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
494
(567)
1,873
162
2,367
(405)
3,869
563
2
(1)
818
126
33
154
659
(131)
39
567
(167)
(189)
9
13
113
115
146
261
6
5
316
321
(240)
(111)
(22)
(44)
(128)
93
(20)
(55)
100
(1)
98
3
578
15
11
110
531
(38)
19
512
(67)
(190)
107
16
(578)
(99)
(212)
(63)
(20)
773
168
921
231
–
255
(24)
–
(84)
(201)
47
511
735
187
1,433
164
(190)
362
(8)
62
4
917
162
13
172
763
(460)
(111)
192
(670)
(618)
(52)
–
116
178
281
459
15
19
70
89
(187)
(58)
–
(156)
(108)
5
43
(60)
178
–
178
–
730
104
13
16
655
(455)
(68)
132
(492)
(618)
126
–
(730)
(277)
(278)
87
–
(173)
(265)
103
(284)
(1,227)
–
371
(1,682)
(68)
(1,511)
(133)
(1,379)
(625)
–
(133)
–
(618)
(7)
–
Closing MCEV
416
2,036
2,452
3,377
5,829
16
1,991
2,007
2,225
4,232
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 flows
Foreign exchange variance
MCEV of acquired/sold business
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
Long term savings (LTS)
12.1%
£m
Adjusted
net
worth
Value of
in-force
MCEV
15
(35)
31
(39)
58
(99)
(59)
17
12
(69)
(84)
(94)
48
(27)
(11)
11
(212)
(201)
(29)
30
10
–
(145)
64
(161)
30
(174)
94
(151)
30
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
14
1
75
(3)
89
(2)
161
131
£m
MCEV
250
129
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
Old Mutual plc
Annual Report and Accounts 2009
361
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£m
MCEV
6,236
158
5.9%
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£m
MCEV
2,679
61
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Emerging Markets*
Year ended 31 December 2009
Year ended 31 December 2008
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 flows
Foreign exchange variance
MCEV of acquired/sold business
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
(92)
(136)
1,075
110
983
(26)
1,090
91
MCEV
2,073
65
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
315
(86)
1,160
72
1,475
(14)
1,204
75
(7)
–
314
(9)
40
46
248
54
–
302
(130)
(146)
3
13
85
5
(146)
(9)
(29)
(27)
(11)
1
–
(10)
160
(3)
160
3
78
5
168
(18)
11
19
237
55
–
292
30
(149)
163
16
129
207
16
21
(168)
(35)
(90)
32
(25)
(39)
–
(64)
132
–
156
(24)
–
(53)
(79)
51
212
16
–
228
162
(149)
319
(8)
27
4
296
13
22
160
436
(154)
(1)
281
(688)
(645)
(43)
–
101
128
148
276
14
18
13
(134)
(19)
–
(156)
(122)
51
–
(71)
(14)
–
(14)
–
162
(6)
22
4
314
(103)
(1)
210
(702)
(645)
(57)
–
(162)
(18)
(20)
(7)
29
(139)
17
(93)
(21)
–
(21)
–
31
–
(24)
2
(3)
343
(242)
16
117
(723)
(645)
(78)
–
Closing MCEV
80
1,225
1,305
1,158
2,463
(92)
1,075
983
1,090
2,073
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
9.8%
£m
Adjusted
net
worth
Value of
in-force
MCEV
(18)
(9)
16
(30)
5
11
(29)
30
10
–
(35)
(44)
–
11
(2)
(90)
(55)
20
(55)
–
(53)
(53)
16
(19)
3
(79)
(84)
50
(45)
–
Emerging Markets
Year ended 31 December 2010
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
5
–
63
(3)
68
(3)
104
14
* The MCEV for Emerging Markets is presented after the adjustment for market value of life fund investments in Group equity and debt instruments.
362 Old Mutual plc
Annual Report and Accounts 2009
14.4%
£m
MCEV
172
11
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The decrease in ‘expected existing business contribution (reference rate)’ from 2008 to 2009 is mainly attributable to a lower one-year swap
rate at 31 December 2008 (9.3%) compared to 31 December 2007 (11.5%) and a lower opening MCEV.
Adverse persistency experience resulted from the tough economic conditions during 2009. Expense experience losses are mainly attributable
to one-off project expenditure. These adverse experience variances were partially offset by favourable Retail Mass mortality and longevity
experience.
Operating assumption changes were implemented to strengthen persistency assumptions, part of which are temporary short-term changes,
and to capitalise special project expenditure. These changes were partially offset by positive mortality assumption changes due to continued
improvement in Retail Mass mortality experience.
The other operating variances mainly relate to management actions and various methodology changes and error corrections. The management
actions include a reduction in the rate of future cover increases on certain risk products in the Retail Mass segment to achieve better alignment
between the cost of providing benefits and the value of the corresponding premium increase, offset by a reduction in the equity allocation of
shareholder assets which resulted in an increase in frictional tax costs as interest bearing assets are subjected to higher tax rates than equities.
The positive economic variances were caused by investment returns on policyholder and shareholders funds being greater than expected and
the introduction of a liquidity premium for Retail Affluent Immediate Annuity business. This was partially offset by economic assumption changes
(mainly an increase in medium- to long-term swap yields).
The capital and dividend flows mainly consist of dividends paid that were partly offset by inter-company dividends received.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in rand (including conversion of results for Mexico to rand).
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Old Mutual plc
Annual Report and Accounts 2009
363
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Nordic
Year ended 31 December 2009
Year ended 31 December 2008
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 flows
Foreign exchange variance
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
58
(57)
105
6
163
(51)
4
–
81
28
3
–
59
(5)
18
72
(39)
(37)
(2)
–
–
(17)
(7)
–
–
(18)
17
–
(1)
–
–
–
4
–
64
21
3
–
41
12
18
71
(39)
(37)
(2)
882
95
18
14
(64)
10
(30)
(3)
40
192
1
233
(1)
–
(1)
MCEV
1,045
44
22
14
–
31
(27)
(3)
81
204
19
304
(40)
(37)
(3)
Closing MCEV
91
104
195
1,114
1,309
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
75
3
2
–
1
18
–
–
24
(20)
19
23
7
–
7
122
(47)
992
79
4
–
86
28
–
(1)
70
(11)
(66)
(7)
48
31
17
50
23
(86)
(17)
32
(2)
79
(296)
(3)
(220)
110
–
110
47
(50)
2
–
85
10
–
(1)
46
9
(85)
(30)
41
31
10
58
£m
MCEV
1,114
32
54
23
–
11
32
(3)
149
(307)
(69)
(227)
158
31
127
105
163
882
1,045
12.9%
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
Nordic
8.1%
£m
Adjusted
net
worth
Value of
in-force
MCEV
21
(2)
6
3
14
3
–
–
–
3
10
5
(1)
(1)
7
(30)
(29)
19
(18)
(2)
31
3
5
2
21
(27)
(29)
19
(18)
1
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
364 Old Mutual plc
Annual Report and Accounts 2009
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
1
–
–
–
1
–
15
24
£m
MCEV
16
24
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The ‘expected existing business contribution (in excess of reference rate)’ is not significant. This is reasonable for business comprised mostly
of unit-linked products where most of the profits emanate from premium charges, acquisition charges and fund based fees. Such fees and
charges are largely captured in the ‘expected existing business contribution (reference rate)’.
The positive experience variances were largely caused by lower than expected tax payments and higher than expected fee income. In addition,
there were maintenance expense underruns in the Swedish unit-linked business. There were no one-off expense variances.
Operating assumption changes were made to recognise one-off developmental project costs and lower mortality experience mainly on
drawdown annuity products. In addition changes were made to persistency assumptions, despite overall positive persistency experience during
the year, to allow further for higher transfer rates given the change on 1 May 2008 in Swedish legislation to reinstate pension transfer rights.
The economic variances are mainly due to the positive effect of market movements on funds under management.
The other non-operating variance mainly results from a release of provisions following the favourable resolution of certain longstanding litigation
matters.
The capital and dividend flows mainly represent dividends, repayment of loans and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Swedish krona.
d
a
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r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
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v
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r
s
s
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n
s
u
B
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y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
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a
k
s
R
i
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c
n
a
n
r
e
v
o
G
l
i
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
365
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Retail Europe
Year ended 31 December 2009
Year ended 31 December 2008
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
MCEV
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
16
(80)
–
–
111
(1)
–
30
10
(17)
23
(24)
(25)
1
15
38
1
1
–
2
–
–
4
(12)
12
4
22
–
22
64
54
(79)
1
–
113
(1)
–
34
(2)
(5)
27
(2)
(25)
23
79
444
89
20
4
(113)
(12)
(13)
5
(20)
(30)
(4)
(54)
127
–
127
517
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 flows
Foreign exchange variance
Closing MCEV
Return on MCEV (RoEV) % per annum
15
(74)
1
–
97
(20)
–
18
22
(1)
20
41
(10)
(10)
–
46
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
64
1
–
–
7
1
–
(19)
(10)
4
(20)
(26)
(6)
(3)
(3)
32
79
(73)
1
–
104
(19)
–
(1)
12
3
–
15
(16)
(13)
(3)
517
68
10
3
(104)
(4)
(26)
(3)
(56)
26
3
(27)
(37)
–
(37)
596
(5)
11
3
–
(23)
(26)
(4)
(44)
29
3
(12)
(53)
(13)
(40)
78
453
531
(7.9)%
£m
Adjusted
net
worth
Value of
in-force
MCEV
(19)
(1)
3
(5)
(16)
–
–
–
–
–
(4)
(1)
1
–
(4)
(26)
2
1
(22)
(7)
(23)
(2)
4
(5)
(20)
(26)
2
1
(22)
(7)
£m
MCEV
498
10
21
4
–
(13)
(13)
5
14
(32)
(9)
(27)
125
(25)
150
596
2.6%
£m
Retail Europe
Year ended 31 December 2010
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
MCEV
–
–
–
–
–
–
8
3
8
3
366 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The ‘expected existing business contribution (in excess of reference rate)’ is not significant. This is reasonable for business comprised mostly
of unit-linked products where most of the profits emanate from premium charges, acquisition charges and fund based fees. Such fees and
charges are largely captured in the ‘expected existing business contribution (reference rate)’.
Experience variances are mainly due to higher than anticipated profit sharing on participating contracts in Germany in 2009 as a result of lower
than expected new business volumes as well as the settlement of profit sharing liabilities relating to the years 2005-2008. There were no one-off
expense variances. Mortality and morbidity experience was positive across all Retail Europe countries.
Operating assumption changes were made to recognise one-off developmental project costs and to make allowance for planned short-term
expense overruns relative to long-term maintenance expense assumptions. In addition, although a change in methodology was made in 2008
to recognise profit sharing in Germany, this allowance has been revised upwards given the adverse experience in 2009.
The economic variances are mainly due to the positive effect of market movements on funds under management.
The capital and dividend flows mainly represent dividends, repayment of loans and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in euro.
d
a
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s
a
F
s
t
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e
m
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t
a
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s
t
n
e
m
e
g
a
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a
M
i
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v
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u
B
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p
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e
R
d
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a
k
s
R
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a
n
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e
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G
i
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s
a
c
n
a
n
F
i
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o
i
t
a
m
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o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
367
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Wealth Management
Year ended 31 December 2009
Year ended 31 December 2008
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 flows
Foreign exchange variance
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
120
(171)
197
12
317
(159)
1,461
208
7
(1)
274
(10)
(10)
90
179
2
1
182
(139)
(142)
3
7
–
(30)
7
7
2
5
12
–
17
(1)
5
(6)
14
(1)
244
(3)
(3)
92
184
14
1
199
(140)
(137)
(3)
34
26
(244)
(35)
(96)
(81)
(188)
38
164
14
(7)
–
(7)
MCEV
1,778
49
48
25
–
(38)
(99)
11
(4)
52
165
213
(147)
(137)
(10)
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
56
(215)
209
3
265
(212)
1,331
279
32
–
319
25
(3)
13
171
(58)
(8)
105
(41)
(34)
(7)
1
–
(17)
(16)
–
–
(29)
(14)
12
(31)
19
–
19
33
–
302
9
(3)
13
142
(72)
4
74
(22)
(34)
12
61
21
(302)
3
51
(26)
87
27
(10)
104
26
–
26
£m
MCEV
1,596
67
94
21
–
12
48
(13)
229
(45)
(6)
178
4
(34)
38
Closing MCEV
163
213
376
1,468
1,844
120
197
317
1,461
1,778
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
Wealth Management
(0.3)%
£m
Adjusted
net
worth
Value of
in-force
MCEV
(3)
(6)
6
(24)
21
(3)
–
–
–
(3)
(35)
(39)
–
2
2
(96)
(81)
12
(66)
39
(38)
(45)
6
(22)
23
(99)
(81)
12
(66)
36
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
368 Old Mutual plc
Annual Report and Accounts 2009
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
8
1
3
–
11
1
18
11
14.3%
£m
MCEV
29
12
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The ‘expected existing business contribution (in excess of reference rate)’ is not significant. This is reasonable for business comprised mostly
of unit-linked products where most of the profits emanate from premium charges, acquisition charges and fund based fees. Such fees and
charges are largely captured in the ‘expected existing business contribution (reference rate)’.
Adverse persistency and expense variances were partially offset by positive risk and other variances. Approximately £9 million of the expense
variance relates to development and restructuring costs. The ‘other’ variances include fee income being higher than expected and a tax
variance on the transfer from VIF to adjusted net worth arising through the removal of dividend tax in respect of Skandia International.
Operating assumption changes were made to strengthen persistency and expense assumptions. The expense assumption changes are largely
caused by capitalisation of development expenditure that is expected to arise through the restructure of Wealth Management and other one-off
developmental projects. The ‘other’ operating assumption change reflects increased recognition of fee income in the United Kingdom in light of
the positive experience.
The other operating variances reflect the impact of modelling and methodology changes and the impact of the Munich Re treaty that was
effected by Skandia International to finance new business strain and repay internal loans.
The economic variances were driven by market and exchange rate movements.
The other non-operating variance relates to the effect on VIF of the removal of dividend tax in Skandia International as dividends received by
United Kingdom companies from overseas trading subsidiaries are now exempt from United Kingdom corporation tax.
The capital and dividend flows mainly represent dividends, repayments of loans and capital injections.
Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in sterling.
d
a
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s
t
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e
m
e
t
a
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s
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n
e
m
e
g
a
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a
M
i
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v
e
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s
s
e
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s
u
B
i
y
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i
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i
i
b
s
n
o
p
s
e
R
d
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a
k
s
R
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a
n
r
e
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o
G
i
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s
a
c
n
a
n
F
i
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o
i
t
a
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o
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f
i
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r
e
d
o
h
e
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a
h
S
Old Mutual plc
Annual Report and Accounts 2009
369
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
US Life
Year ended 31 December 2009
Year ended 31 December 2008
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
MCEV
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
465
6
(1,725)
8
(1,260)
14
60
(136)
391
83
451
(53)
(102)
41
550
41
21
1
(54)
(103)
–
–
(94)
59
–
(35)
(53)
–
(53)
18
1
(2)
34
–
–
57
(122)
–
(65)
98
146
(48)
(45)
(27)
257
258
2
(35)
30
(8)
209
556
–
765
144
–
144
–
(1)
30
(8)
266
434
–
700
242
146
96
1
–
106
115
(6)
–
80
(267)
–
(187)
42
55
(13)
(85)
11
1
(39)
(41)
–
–
15
–
–
15
144
–
144
550
12
1
67
74
(6)
–
95
(267)
–
(172)
186
55
131
£m
MCEV
349
(12)
14
10
–
(159)
(334)
117
(364)
(1,056)
–
2
9
(67)
(233)
(328)
117
(459)
(789)
–
(1,248)
(375)
(1,420)
(189)
–
(375)
55
(244)
465
(1,725)
(1,260)
(97.6)%
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 flows
Foreign exchange variance
Closing MCEV
Return on MCEV (RoEV) % per annum
(85)
(35)
(3)
–
52
137
–
–
151
(181)
–
(30)
151
146
5
36
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
US Life
462
498
(816)
(318)
22.7%
£m
Adjusted
net
worth
Value of
in-force
MCEV
34
(17)
–
17
34
–
–
–
–
–
(35)
20
17
–
(72)
30
18
12
–
–
(1)
3
17
17
(38)
30
18
12
–
–
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
–
–
9
–
9
–
16
79
£m
MCEV
25
79
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
370 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The segment results of US Life include allowance for Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the
United States Life Companies.
The operating MCEV earnings were largely caused by the ‘expected existing business contribution (in excess of reference rate)’, ie by
the corporate bond spread that is expected to be earned over and above the adjusted risk-free reference rate (inclusive of the liquidity
premium adjustment).
The experience variances were largely caused by positive mortality variance, from the immediate annuity business, and expense variance, which
was positive relative to the additional provision set up at the end of 2008 based on the overruns at the time. These were partially offset by an
overall increase in guarantee costs relative to expectations. Persistency experience was roughly neutral. There were no large one-off items of
expense variance.
The operating assumption changes consisted of changes to the persistency assumptions on the Fixed Indexed Annuity (FIA) business and the
slight weakening of mortality assumptions on the Single Premium Immediate Annuity (SPIA) business to align with IFRS assumptions.
The other operating variances include a refinement in the calculation of the time value of financial options and guarantees, changes to the
methodology for calculating the non-hedgeable risk capital and a model revision in respect of the dynamic lapse methodology.
The economic variances were largely driven by the reduction in corporate bond spreads during 2009.
The capital and dividend flows were due to a capital injection made in February 2009.
Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollar.
d
a
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a
F
s
t
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e
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e
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a
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n
e
m
e
g
a
n
a
M
i
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e
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e
r
s
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e
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s
u
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i
i
b
s
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o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
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o
n
f
i
l
r
e
d
o
h
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a
h
S
Old Mutual plc
Annual Report and Accounts 2009
371
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
Bermuda
Year ended 31 December 2009
Year ended 31 December 2008
Free
surplus
Required
capital
Adjusted
net
worth
Value of
in-force
MCEV
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
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 flows
Foreign exchange variance
342
–
5
33
(5)
(72)
(36)
(345)
(420)
102
–
(318)
(24)
–
(24)
34
–
1
–
(4)
–
–
345
342
–
–
342
(13)
–
(13)
376
–
6
33
(9)
(72)
(36)
–
(78)
102
–
24
(37)
–
(37)
(425)
–
(4)
39
9
(21)
(46)
82
59
167
–
226
34
–
34
(49)
–
2
72
–
(93)
(82)
82
(19)
269
–
250
(3)
–
(3)
Closing MCEV
–
363
363
(165)
198
21
(41)
1
–
22
(2)
(68)
–
(88)
(262)
–
(350)
671
596
75
342
33
10
1
–
(2)
(17)
–
–
(8)
–
–
(8)
9
–
9
34
54
(31)
2
–
20
(19)
(68)
–
(96)
(262)
–
(358)
680
596
84
376
59
(23)
8
11
(20)
27
(97)
(48)
(142)
(258)
–
(400)
(84)
–
(84)
£m
MCEV
113
(54)
10
11
–
8
(165)
(48)
(238)
(520)
–
(758)
596
596
–
(425)
(49)
(195.3)%
Return on MCEV (RoEV) % per annum
Experience variances
Persistency
Risk
Expenses
Other
Assumption changes
Persistency
Risk
Expenses
Other
Bermuda
(41.0)%
£m
Adjusted
net
worth
Value of
in-force
MCEV
(72)
(52)
–
(10)
(10)
(36)
–
–
–
(36)
(21)
(13)
–
1
(9)
(46)
(65)
–
(29)
48
(93)
(65)
–
(9)
(19)
(82)
(65)
–
(29)
12
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
372 Old Mutual plc
Annual Report and Accounts 2009
Year ended 31 December 2010
Free
surplus
Required
capital
Adjusted net
worth
Value of
in-force
–
–
3
28
3
28
9
32
£m
MCEV
12
60
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
B4: Analysis of covered business MCEV earnings (after tax) continued
The experience variances were largely caused by adverse persistency experience, with fewer surrenders than expected on Variable Annuity
contracts with heavily in-the-money guarantees, an increase in the cost of non-hedgeable risks and a negative expense variance. There were
no large one-off items of expense variance.
The operating assumptions changes consisted of a strengthening of the persistency assumptions on the Variable Annuity business with
guaranteed rider benefits, a strengthening of expense assumptions in light of this year’s adverse expense experience, and some changes to
guarantee cost assumptions. There were no large one-off expense items.
The other operating variance includes a positive variance due to an amendment of a DAC write-down made in the previous reporting period,
a refinement in the calculation of the time value of financial options and guarantees, changes to the methodology for calculation of the
non-hedgeable risk capital and improvements to the modelling of guarantee costs.
The economic variances were largely driven by the recovery in equity markets during the period and the increase in the US swap yield curve.
The increase in required capital to equal the full adjusted net worth as at 31 December 2009 is as a result of a more conservative view, relative
to 31 December 2008, of the level of capital considered by the directors to be appropriate to manage the business.
Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollars.
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Old Mutual plc
Annual Report and Accounts 2009
373
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
C: Other key performance information
C1 Adjustments applied in determining total Group MCEV earnings before tax
Analysis of adjusting items
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 non-controlling interests
Fair value gains on Group debt instruments
Adjusting items
C2: Other movements in IFRS net equity impacting Group MCEV
Year ended 31 December 2009
Year ended 31 December 2008
Covered
business
MCEV
Non-
covered
business
IFRS
Total Group
MCEV
Covered
business
MCEV
Non-covered
business IFRS
Total Group
MCEV
£m
–
1,108
18
–
–
–
–
–
1,126
65
(10)
–
(48)
–
45
(1)
(264)
(213)
65
1,098
18
(48)
–
45
(1)
(264)
–
(2,480)
(79)
–
–
–
–
–
913
(2,559)
(12)
(72)
–
53
–
43
7
503
522
(12)
(2,552)
(79)
53
–
43
7
503
(2,037)
£m
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
Correction to transfers*
Other movements
Net income recognised directly into equity
Capital and dividend flows for the year
Share buy back
Net issues of ordinary share capital by the Company
Exercise of share options
Change in share based payment reserve
Other movements in net equity
Year ended 31 December 2009
Year ended 31 December 2008
Covered
business
MCEV
Non-
covered
business
IFRS
Total Group
MCEV
Covered
business
MCEV
Non-covered
business IFRS
Total Group
MCEV
–
–
359
–
–
(8)
351
(190)
–
–
–
–
161
2
(41)
197
13
316
(7)
480
145
–
2
3
14
644
2
(41)
556
13
316
(15)
831
(45)
–
2
3
14
805
–
–
(7)
–
–
–
(7)
(22)
–
–
–
–
(29)
–
(281)
59
(1)
–
(49)
(272)
(373)
(175)
5
5
26
(784)
–
(281)
52
(1)
–
(49)
(279)
(395)
(175)
5
5
26
(813)
* Refinement arising from allocation of assets between covered and non-covered business at December 2008
374 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
C3: Reconciliation of MCEV adjusted net worth to IFRS net asset value for the covered business
The table below provides a reconciliation of the MCEV adjusted net worth (ANW) to the IFRS net asset value (NAV) for the covered business.
At 31 December 2009
IFRS net asset value*
Adjustment to include long-term business
on a statutory solvency basis
Inclusion of Group equity and debt instruments
held in life funds
Goodwill
Adjusted net worth attributable to ordinary
equity holders of the parent
At 31 December 2008
IFRS net asset value*
Adjustment to include long-term business
on a statutory solvency basis
Inclusion of Group equity and debt instruments
held in life funds
Goodwill
Adjusted net worth attributable to ordinary
equity holders of the parent
£m
Total
Long-Term
savings
Emerging
Markets
Nordic
Retail
Europe
Wealth
Manage-
ment
US Life
Bermuda
6,103
5,734
821
1,222
664
2,141
886
369
(2,632)
(2,626)
153
(841)
(382)
(1,168)
(388)
339
(995)
339
(995)
339
(8)
–
(186)
–
(204)
–
(597)
–
–
(6)
–
–
2,815
2,452
1,305
195
78
376
498
363
£m
Total
Long-Term
savings
Emerging
Markets
Nordic
Retail
Europe
Wealth
Manage-
ment
US Life
Bermuda
5,907
5,314
620
1,323
934
2,340
97
593
(2,461)
(2,244)
136
(973)
(435)
(1,340)
368
(217)
236
(1,299)
236
(1,299)
236
(9)
–
(187)
–
(420)
–
(683)
–
–
–
–
2,383
2,007
983
163
79
317
465
376
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i
*
IFRS net asset value is after elimination of inter-company loans.
The adjustment to include long-term business on a statutory solvency basis includes the following:
> The excess of the IFRS amount of the deferred acquisition cost (DAC) and value of business acquired (VOBA) assets over the statutory
levels included in the VIF;
> When projecting future profits on a statutory basis, the VIF includes the shareholders’ value of unrealised capital gains. To the extent that
assets in IFRS are valued at market and the market value is higher than the statutory book value, these profits have already been taken into
account in the IFRS equity.
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Old Mutual plc
Annual Report and Accounts 2009
375
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
C4: Value of new business (after tax)
The tables below set out the regional analysis of the value of new business (VNB) after tax. New business profitability is measured by both the
ratio of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under
PVNBP margin and APE margin below. APE is calculated as recurring-premiums plus 10% of single-premiums.
As mentioned earlier for the OMSA business, Nedlife is not recognised as part of the VNB of covered business in 2009. A similar consideration
applies to other new business measures such as PVNBP and APE in order to provide a better indication of future expected ‘normalised’
earnings. However note that in the tables below Nedlife is still incorporated in the comparative results for the year ended 31 December 2008.
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
699
249
183
62
191
14
–
699
6,806
1,437
527
53
4,240
549
15
6,821
732
230
174
84
211
33
–
732
7,327
1,321
384
75
4,520
1,027
1,448
8,775
10,202
10,814
2,834
1,150
537
5,042
639
15
2,482
991
555
5,540
1,246
1,448
10,217
12,262
4.9
5.6
3.4
7.8
4.2
6.6
n/a
4.8
5.0
3.5
5.7
4.8
6.7
n/a
Annualised recurring-premiums
Long Term Savings (LTS)
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
Single-premiums
Long Term Savings (LTS)
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
PVNBP
Long Term Savings (LTS)
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
PVNBP capitalisation factors*
Long Term Savings (LTS)
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
376 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
APE
Long Term Savings (LTS)
Emerging Markets
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
VNB
Long Term Savings (LTS)
Emerging Markets**
Nordic
Retail Europe
Wealth Management
US Life
Bermuda
PVNBP margin
Long Term Savings (LTS)
Emerging Markets***
Nordic
Retail Europe
Wealth Management
US Life
APE margin
Long Term Savings (LTS)
Emerging Markets****
Nordic
Retail Europe
Wealth Management
US Life
The PVNBP capitalisation factors are calculated as follows: (PVNBP – single-premiums)/annualised recurring-premiums.
*
** The comparative result excluding Nedlife is £53m for the year ended 31 December 2008.
*** The comparative result excluding Nedlife is 2.2% for the year ended 31 December 2008.
**** The comparative result excluding Nedlife is 16% for the year ended 31 December 2008.
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,380
1,466
393
235
67
617
68
1
362
213
91
664
136
145
1,381
1,611
167
65
44
(5)
49
14
–
167
1.6%
2.3%
3.8%
(1.0)%
1.0%
2.2%
1.6%
12%
16%
19%
(8)%
8%
20%
12%
158
61
32
10
67
(12)
(54)
104
1.5%
2.5%
3.3%
1.8%
1.2%
(0.9)%
0.8%
11%
17%
15%
11%
10%
(8)%
6%
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Old Mutual plc
Annual Report and Accounts 2009
377
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
C4: Value of new business (after tax) continued
The value of new individual unit trust linked retirement annuities and pension fund asset management business written by the Emerging Markets
long-term business is excluded as the profits on this business arise in the asset management business. The value of new business also
excludes premium increases arising from indexation arrangements in respect of existing business, as these are already included in the value of
in-force business.
The value of new institutional investment platform pensions business written in Wealth Management is excluded as this is more appropriately
classified as unit trust business.
Gross premium excluded from value of new business
Emerging Markets*
Wealth Management
Year ended
31 December
£m
2009
Year ended
31 December
£m
2008
1,625
153
458
239
* New business premiums not valued are higher than in 2008, mainly because single premium new business figures include inflows relating to in-force business following
OMSA’s acquisition of Future Growth and Acsis Life.
378 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
C5: Product analysis of new covered business premiums
Emerging Markets
Total business
Individual business
Savings
Protection
Annuity
Retail mass market
Group business
Savings
Protection
Annuity
Nordic
Unit-linked assurance
Retail Europe
Unit-linked assurance
Wealth Management
Total business
Unit-linked assurance
Life
US Life
Total business
Fixed deferred annuity
Fixed indexed annuity
Variable annuity
Life
Immediate annuity
Year ended
31 December 2009
Year ended
31 December 2008
Recurring
Single
Recurring
Single
£m
249
220
50
56
–
114
29
13
16
–
1,437
716
230
216
1,321
644
539
21
155
1
721
564
–
157
58
68
–
90
14
6
8
–
481
18
144
1
677
444
1
232
£m
Year ended
31 December 2009
Single
Recurring
Year ended
31 December 2008
Single
Recurring
183
527
174
384
£m
Year ended
31 December 2009
Single
Recurring
Year ended
31 December 2008
Single
Recurring
62
53
84
75
£m
Year ended
31 December 2009
Single
Recurring
Year ended
31 December 2008
Single
Recurring
191
187
4
4,240
4,039
201
211
205
6
4,520
4,260
260
£m
Year ended
31 December 2009
Single
Recurring
Year ended
31 December 2008
Single
Recurring
14
–
–
–
14
–
549
30
383
–
13
123
33
–
–
–
33
–
1,027
228
611
6
43
139
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Old Mutual plc
Annual Report and Accounts 2009
379
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
D: Other income statement notes
D1: Drivers of new business value for covered business
PVNBP Margin
Total 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
Change in tax/regulation
Exchange rate movements
Margin at the end of the period
Long Term Savings
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
Change in tax/regulation
Exchange rate movements
Margin at the end of the period
Emerging Markets**
Margin at the end of comparative period
Opening adjustment to the margin at the end of the comparative period for the removal of Nedlife
Adjusted margin at the end of the 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***
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
380 Old Mutual plc
Annual Report and Accounts 2009
%
Year ended
31 December
2009
Year ended
31 December
2008
0.8
0.8
–
–
0.1
–
0.1
(0.2)
1.6
1.5
(0.1)
–
–
0.1
–
0.1
–
1.6
2.5
(0.3)
2.2
(0.1)
(0.2)
–
0.4
–
2.3
3.3
(0.1)
–
–
0.4
0.2
3.8
1.7
0.1
(0.2)
–
(0.3)
(0.3)
–
(0.2)
0.8
1.6
0.1
–
–
0.1
(0.2)
–
(0.1)
1.5
2.4
–
2.4
0.2
(0.1)
–
0.1
(0.1)
2.5
3.3
0.4
0.2
–
(0.5)
(0.1)
3.3
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
D1: Drivers of new business value continued
Retail Europe ****
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
Wealth Management*
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
Change in tax/regulation
Margin at the end of the period
US Life *****
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
The PVNBP margin changes are calculated in sterling.
*
** The PVNBP margin changes are calculated in rand, and exclude Nedlife for the comparative year ending 31 December 2008.
*** The PVNBP margin changes are calculated in krona.
**** The PVNBP margin changes are calculated in euro.
***** The PVNBP margin changes are calculated in dollar.
%
Year ended
31 December
2009
Year ended
31 December
2008
1.8
(2.1)
(0.8)
(0.1)
0.5
(0.3)
(1.0)
1.2
(0.2)
–
–
(0.2)
–
0.2
1.0
(0.9)
–
1.5
–
–
1.6
2.2
5.2
(1.1)
(0.5)
(0.1)
(1.6)
(0.1)
1.8
1.2
–
–
–
0.1
(0.1)
–
1.2
(0.5)
–
(0.4)
–
1.9
(1.9)
(0.9)
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Old Mutual plc
Annual Report and Accounts 2009
381
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
E1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2009 and the value of new business for the year
ended 31 December 2009 to changes in key assumptions.
For each sensitivity illustrated all other assumptions have been left unchanged except where they are directly affected by the revised conditions.
Sensitivity scenarios therefore include consistent changes in cash flows directly affected by the changed assumption(s), for example future
bonus participation in changed economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modelling of dynamic reserves is extremely complex and the effect on value is second-
order. Therefore, in performing the sensitivities, reserving bases have been kept constant whilst only varying future experience assumptions with
similar considerations applying to required capital. However the sensitivities for South Africa in respect of an increase/decrease of all pre-tax
investment and economic assumptions, an increase/decrease in equity and property market values and increases in equity, property and swaption
implied volatilities allow for the change in the time value of financial options and guarantees that form part of the IGR.
The sensitivities for an increase/decrease in all pre-tax investment and economic assumptions (with credited rates and discount rates changing
commensurately) are calculated in line with a parallel shift in risk free reference spot rates rather than risk free reference forward rates. However,
the 1% reduction is limited so that it does not lead to negative risk free reference rates.
The equity and property sensitivities make allowance for rebalancing of asset portfolios.
VNB sensitivities assume that the scenario arises immediately after point of sale of the contract. Therefore, no allowance is made for the ability
to re-price any contracts in the sensitivity scenarios, apart from the mortality sensitivities for the South African business where allowance is
made for changes in the pricing basis for products with reviewable premiums.
Total covered business
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds
over the lifetime of the liabilities, with credited rates and discount rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
6,027
3,212
6,076
3,262
5,746
2,865
6,346
3,589
6,080
3,266
6,401
3,447
5,671
6,360
5,929
5,906
6,211
6,269
6,166
5,989
n/a
n/a
2,996
3,530
3,190
3,092
3,492
3,454
3,351
3,175
n/a
n/a
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
6,160
3,345
5,932
3,118
167
172
161
167
169
179
157
167
167
161
209
188
185
167
150
153
173
161
382 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Emerging Markets
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds
over the lifetime of the liabilities, with credited rates and discount rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges*
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
2,463
1,158
2,506
1,201
2,432
1,125
2,483
1,179
2,470
1,165
2,567
1,225
2,358
2,478
2,440
2,456
2,507
2,564
2,536
2,451
n/a
n/a
1,090
1,157
1,135
1,150
1,202
1,258
1,231
1,145
n/a
n/a
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
2,482
1,176
2,444
1,138
* No impact on with-profit annuities as the mortality risk is borne by policyholders.
65
68
61
67
66
66
63
65
65
65
82
72
74
64
57
60
66
63
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
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r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
o
i
t
a
m
r
o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
383
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Nordic
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
1,309
1,114
1,309
1,114
1,284
1,088
1,336
1,141
1,389
1,194
1,228
1,309
1,309
1,309
1,348
1,345
1,310
1,307
n/a
n/a
1,033
1,114
1,114
1,114
1,153
1,150
1,115
1,112
n/a
n/a
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
1,324
1,129
1,294
1,099
44
44
43
45
48
40
44
44
44
52
46
44
44
42
47
45
43
384 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Retail Europe
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
531
528
513
549
541
521
531
531
522
545
553
534
531
n/a
n/a
535
525
453
451
436
471
463
444
453
453
444
468
476
456
453
n/a
n/a
458
447
(5)
(5)
(8)
(3)
(5)
(5)
(5)
(5)
(5)
(4)
(3)
(5)
(5)
(8)
(4)
(5)
(6)
d
a
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r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
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r
s
s
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n
s
u
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i
l
i
i
b
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n
o
p
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e
R
d
n
a
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s
R
i
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c
n
a
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r
e
v
o
G
l
i
s
a
c
n
a
n
F
i
n
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i
t
a
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o
n
f
i
l
r
e
d
o
h
e
r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
385
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Wealth Management
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
1,844
1,468
1,848
1,472
1,820
1,460
1,916
1,521
1,900
1,524
1,810
1,844
1,844
1,844
1,932
1,906
1,889
1,844
n/a
n/a
1,434
1,468
1,468
1,468
1,556
1,530
1,513
1,468
n/a
n/a
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
1,853
1,477
1,826
1,450
49
49
46
54
56
46
49
49
49
64
59
57
49
47
54
51
48
386 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
US Life
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds
over the lifetime of the liabilities, with credited rates and discount rates changing commensurately
Recognising the present value of an additional 50% of liquidity spreads assumed on corporate bonds
over the lifetime of the liabilities, with credited rates and discount rates changing commensurately*
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
expenses increasing by 10%, with no corresponding increase in policy charges
Value of new business calculated on economic assumptions at the end of reporting period
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
(318)
(816)
(315)
(813)
(575)
(1,073)
(67)
(565)
(271)
(769)
(90)
(588)
(318)
(816)
(318)
(12)
(420)
(290)
(302)
(302)
(342)
n/a
n/a
(816)
(510)
(918)
(788)
(800)
(800)
(840)
n/a
n/a
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
(269)
(767)
(338)
(836)
14
14
20
3
15
20
14
14
14
8
16
14
15
14
12
(4)
16
13
* At 31 December 2009 the size of the base liquidity premium adjustment for US Life business of 100bps is greater than the base liquidity premium adjustment for OMSA’s
Retail Affluent Immediate Annuity business of 50bps. Therefore in addition to the 10bps liquidity spread sensitivity, that is also shown for Emerging Markets, a sensitivity was
calculated to illustrate the impact of an additional 50% of liquidity spreads for US Life business.
d
a
e
r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
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v
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r
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o
p
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s
R
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c
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a
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v
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G
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s
a
c
n
a
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F
i
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f
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d
o
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r
a
h
S
Old Mutual plc
Annual Report and Accounts 2009
387
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Bermuda
At 31 December 2009
£m
Value of
in-force
business
Value of new
business
MCEV
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
50bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
198
202
272
130
322
72
210
123
196
170
203
199
198
235
183
(165)
(163)
(171)
(158)
(143)
(188)
(153)
(164)
(167)
(97)
(159)
(163)
(165)
(128)
(179)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
388 Old Mutual plc
Annual Report and Accounts 2009
Notes to the MCeV basis
suppleMeNtary iNforMatioN
For the year ended 31 December 2009 continued
Total covered business
At 31 December 2008
Central assumptions
Effect of:
Required capital equal to the minimum statutory requirement
Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount
rates changing commensurately
Equity and property market value increasing by 10%, with all pre-tax investment and economic
assumptions unchanged
Equity and property market value decreasing by 10%, with all pre-tax investment and economic
assumptions unchanged
10bps contraction on corporate bond spreads
25% multiplicative increase in equity and property implied volatilities
25% multiplicative increase in swaption implied volatilities
Voluntary discontinuance rates decreasing by 10%
Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges
Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease
in policy charges
Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges
For value of new business, acquisition expenses other than commission and commission related
Value of
in-force
business
1,800
MCEV
4,183
4,182
1,836
4,185
1,810
4,134
1,745
4,421
2,000
3,953
4,249
5,466
3,755
4,429
4,379
4,267
4,150
1,610
1,864
3,924
1,373
2,047
1,997
1,885
1,768
expenses increasing by 10%, with no corresponding increase in policy charges
n/a
n/a
Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
and non-hedgeable risks for covered business
Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level
which is targeted by an internal economic capital model
4,315
1,933
4,095
1,713
£m
Value of new
business
104
108
121
58
n/a
n/a
n/a
171
84
140
122
115
104
81
123
96
d
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r
t
s
a
F
s
t
n
e
m
e
t
a
t
s
t
n
e
m
e
g
a
n
a
M
i
w
e
v
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r
s
s
e
n
s
u
B
i
y
t
i
l
i
i
b
s
n
o
p
s
e
R
d
n
a
k
s
R
i
e
c
n
a
n
r
e
v
o
G
i
l
s
a
c
n
a
n
F
i
n
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i
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o
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f
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d
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r
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h
S
Old Mutual plc
Annual Report and Accounts 2009
389
fiNaNCial history
For the year ended 31 December 2009
2009
2008
2007
2006
Consolidated income statement
Revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income1
Fee and commission income, and income from service activities
Other income
Total revenues
Expenses
Claims and benefits (including change in insurance
contract provisions)
Reinsurance recoveries
Net claims and benefits 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
3,820
(369)
3,451
11,616
3,989
168
2,422
202
21,848
(5,069)
328
(4,741)
(8,345)
(511)
(322)
(2,627)
(806)
(3,139)
(266)
(470)
(326)
£m
2005
4,473
(197)
4,276
6,569
2,018
–
1,274
215
5,156
(335)
4,821
(11,578)
4,059
162
2,313
270
5,566
(293)
5,273
6,318
3,190
170
2,475
245
4,713
(267)
4,446
10,439
2,441
–
2,262
324
47
17,671
19,912
14,352
(3,610)
262
(3,348)
10,051
(319)
392
(2,853)
(937)
(2,834)
(74)
779
(361)
(7,193)
236
(6,957)
(2,618)
(157)
(50)
(2,053)
(778)
(2,813)
(3)
(156)
(360)
(7,999)
245
(7,754)
(4,655)
(123)
(91)
(1,461)
(714)
(2,826)
(8)
(278)
(379)
(7,795)
226
(7,569)
(1,202)
(103)
(40)
(1,254)
(389)
(2,155)
(5)
(80)
(24)
Total expenses
(21,553)
496
(15,945)
(18,289)
(12,821)
Share of associated undertakings’ profit/(loss) after tax
(Loss)/profit on disposal of subsidiaries, associated undertakings
and strategic investments
Profit before tax
Income tax (expense)/credit
(Loss)/profit after tax for the financial year
Attributable to:
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
(Loss)/profit after tax for the financial year
Earnings per share
Basic earnings per ordinary share (pence)
Diluted earnings per ordinary share (pence)
Weighted average number of shares – millions
1 2005 and 2006 included in Banking interest and similar income
2
(50)
247
(365)
(118)
(340)
158
64
(118)
(1)
53
595
88
683
441
188
54
683
(1)
25
1,750
(504)
1,246
972
224
50
6
85
1,714
(621)
1,093
836
207
50
17
58
1,606
(484)
1,122
867
203
52
1,246
1,093
1,122
(7.8)
(7.8)
4,758
8.6
8.1
4,755
19.2
18.1
4,894
17.0
16.1
4,705
25.1
24.3
3,456
390 Old Mutual plc
Annual Report and Accounts 2009
fiNaNCial history
For the year ended 31 December 2009 continued
Consolidated statement of comprehensive income
(Loss)/profit after tax for the financial year
Other comprehensive income
Fair value (losses)/gains:
Property revaluation
Net investment hedge
Available-for-sale investments: 1
Fair value gains/(losses)
Recycled to the income statement
Shadow accounting
Currency translation differences/exchange differences on translating
foreign operations
Other movements
Income tax relating to components of other comprehensive income
Total other comprehensive income
Total comprehensive income
Equity holders of the parent
Non-controlling interests2
Ordinary shares
Preferred securities
Total comprehensive income
Year ended 31 December
Adjusted operating profit
Adjusted operating earnings per share
Adjusted operating earnings per ordinary share (pence) – H1
Adjusted operating earnings per ordinary share (pence) – H23
Adjusted operating earnings per ordinary share (pence)4
Adjusted weighted average number of shares – H1
Adjusted weighted average number of shares – H2
Adjusted weighted average number of shares
2009
2008
2007
2006
£m
2005
(118)
683
1,246
1,093
1,122
(10)
(41)
1,087
239
27
272
51
(397)
1,228
1,110
709
334
67
1,110
2009
1,170
5.3
6.8
12.1
5,232
5,226
5,229
16
281
(1,635)
414
26
429
68
366
(35)
648
305
299
44
648
2008
1,136
8.7
6.2
14.9
5,245
5,215
5,230
96
(13)
(197)
36
25
133
(4)
34
28
75
(111)
17
28
(1,060)
(4)
14
110
(1,013)
1,356
1,077
229
50
1,356
2007
1,624
8.2
8.7
16.9
5,407
5,415
5,411
80
73
(43)
50
80
2006
1,459
8.5
6.6
15.1
5,063
5,379
5,222
27
(78)
(249)
117
275
(28)
34
98
1,220
930
236
54
1,220
£m
2005
1,261
8.7
9.8
18.5
3,753
3,927
3,840
1 No split available for 2005
2 2007-2005 restated from reported to reflect ordinary share and preferred securities
3 Calculated based on full year less 1st half year
4 2008 and 2009 H1 has been restated to reflect Bermuda treated as a non-core operation as per the 2009 financial accounts.
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Old Mutual plc
Annual Report and Accounts 2009
391
fiNaNCial history
For the year ended 31 December 2009 continued
Consolidated statement of financial position1
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 life assurance 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 financial instruments – assets
Cash and cash equivalents
Non-current assets held-for-sale
2009
2008
2007
2006
5,159
882
828
1,759
570
135
3,138
1,296
120
146
42,393
98,461
169
170
3,051
2,546
2,982
1
5,882
734
682
1,478
1,590
111
3,199
1,148
115
164
35,745
83,522
118
220
3,137
3,228
3,203
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
5,367
665
499
804
511
83
1,578
763
–
–
22,804
86,452
60
–
3,635
1,238
2,951
1,165
£m
2005
1,570
568
538
847
458
93
1,089
455
–
–
18,456
49,407
29
–
2,373
1,604
3,051
36
Total assets
163,806
144,283
142,740
128,575
80,574
Liabilities
Life assurance 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 financial instruments – liabilities
Non-current liabilities held-for-sale
Total liabilities
Net assets
Shareholders’ equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total non-controlling interests
Total equity
93,876
372
2,906
3,309
263
654
905
210
4,305
170
44,135
1,990
–
81,269
344
2,591
2,295
477
598
1,452
219
4,074
220
38,171
2,990
6
84,251
–
3,547
2,353
499
462
1,413
320
6,180
165
31,817
1,716
420
80,081
–
3,041
1,676
542
311
1,393
283
5,266
–
25,052
1,060
1,107
44,445
–
966
1,433
285
138
611
178
3,320
–
21,145
1,634
–
153,095
134,706
133,143
119,812
74,155
10,711
9,577
9,597
8,763
6,419
8,464
7,737
7,961
7,237
4,751
1,537
710
2,247
10,711
1,147
693
1,840
9,577
933
703
1,636
9,597
848
678
1,526
8,763
1,012
656
1,668
6,419
1 The group adopted the provisions of IFRS 7 ‘Financial Instruments: Disclosures’ in its 2007 annual report and accounts. As part of the implementation of that standard certain
income statement and statement of financial position captions were restated. The 2006 and 2005 information has been restated where possible to be consistent with later
years, however certain balances are not fully comparable in circumstances where information is not readily available.
392 Old Mutual plc
Annual Report and Accounts 2009
fiNaNCial history
For the year ended 31 December 2009 continued
Additional information
IFRS book value per share
Equity attributable to equity holders of the parent
Less: Perpetual preferred callable securities
Shares issued and fully paid
Less: Treasury shares in issue
2009
2008
2007
2006
8,464
(688)
7,776
5,518
(239)
5,279
7,737
(688)
7,049
5,516
(239)
5,277
7,961
(688)
7,273
5,510
(105)
5,405
7,237
(688)
6,549
5,501
–
5,501
£m
2005
4,751
(688)
4,063
4,090
–
4,090
IFRS book value per share (pence)
147
134
135
119
99
Funds under management
285,010
264,814
278,878
239,433
182,166
Earnings after tax attributable to ordinary equity holders
Adjusted operating Group MCEV
Adjusted operating Group EEV
Adjusted operating Group MCEV earnings per share
Adjusted operating Group EEV earnings per share
Market consistent embedded value
European embedded value
MCEV per share
EEV per share
562
–
10.7
–
7,629
–
144.5
–
575
–
11.0
–
5,262
–
99.7
–
922
–
17.0
–
7,359
–
136.2
–
–
929
–
17.8
–
7,117
–
129.4
–
796
–
20.7
–
5,808
–
142.0
Rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are:
Year ended 31 December
2009
2008
2007
20061
2005
Exchange rates
Income statement (average rate)
Rand
US Dollars
Swedish Kronor
Euro
Statement of financial position (closing rate)
Rand
US Dollars
Swedish Kronor
Euro
13.1746
1.5655
11.9743
1.1227
11.9172
1.6148
11.5562
1.1268
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
12.832
1.3596
12.4740
1.8429
13.5918
1.4671
13.6746
1.9569
13.3924
1.4837
11.5812
1.8195
10.8923
1.7187
1 The 2006 Income statement rate applied in respect of Skandia is an eleven month average rate, reflecting acquisition date of 1 February 2006.
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Old Mutual plc
Annual Report and Accounts 2009
393
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 2009 and 2008 were as follows:
London Stock Exchange
JSE
High
121.3p
R14.86
2009
Low
30.8p
R4.80
High
169.3p
R20.15
2008
Low
39.0p
R6.97
At 31 December 2009, the geographical analysis and shareholder profile 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
2,943,298,487
2,244,993,592
69,419,901
15,782,106
5,323,976
239,434,888
53.34
40.68
1.25
0.29
0.10
4.34
Number
of holders
11,744
31,2091
32,2421
5721
4,7791
1
5,518,252,950
100
80,547
Total shares
% of whole
24,010,752
29,116,204
34,446,650
37,002,769
5,154,241,687
239,434,888
0.44
0.53
0.62
0.67
93.40
4.34
Number
of holders
67,976
10,706
1,134
226
504
1
5,518,252,950
100
80,547
Note
1 The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 1,846,383,653 shares, including
372,445,793 shares held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the benefit of 449,208 underlying beneficial owners.
The registered shareholdings on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 781,550 shares as nominee
for 3,515 underlying beneficial owners. The registered shareholdings on the Namibian section of the principal register included Old Mutual (Namibia) Nominees (Pty) Limited,
which held a total of 8,190,083 shares as nominee for 7,193 underlying beneficial owners. The registered shareholdings on the Malawi branch register included Old Mutual
(Blantyre) Nominees Limited, which held a total of 48,300 shares as nominee for 137 underlying beneficial owners.
394 Old Mutual plc
Annual Report and Accounts 2009
shareholder iNforMatioN
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
Website : www.investorcentre.co.uk/contactus
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
National Bank of Malawi
PO Box 1438
Blantyre
Malawi
Tel: +265 1 823 483/820 900
Fax: +265 1 820 054
Namibia
Transfer Secretaries (Pty) Limited
Kaiser Krone 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%, subject to a minimum charge of £15. In addition, stamp duty,
currently 0.5%, 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 certificates. 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%, 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 certificates. 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 financial
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 financial 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.
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 certificates are no longer good for delivery in respect of
such transactions.
The Company wrote to certificated 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 certificated 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
certificated shareholdings in the Company. Shareholders who have
any enquiries about these programmes or about the effect of Strate
Old Mutual plc
Annual Report and Accounts 2009
395
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shareholder iNforMatioN
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 confirm 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.
Warning to Shareholders – boiler room scams
In recent years, many companies have become aware that their
shareholders have received unsolicited phone calls or correspondence
concerning investment matters. These are typically from overseas
based ‘brokers’ who target UK shareholders, offering to sell them
what often turn out to be worthless or high risk shares in US or UK
investments. These operations are commonly known as ‘boiler rooms’.
These ‘brokers’ can be very persistent and extremely persuasive, and
a 2006 survey by the Financial Services Authority (FSA) has reported
that the average amount lost by investors is around £20,000.
It is not just the novice investor that has been duped in this way;
many of the victims had been successfully investing for several years.
Shareholders are advised to be very wary of any unsolicited advice,
offers to buy shares at a discount or offers of free company reports.
If you receive any unsolicited investment advice:
> Make sure you get the correct name of the person and
organisation
> Check that they are properly authorised by the FSA before getting
involved by visiting www.fsa.gov.uk/register/
> Report the matter to the FSA either by calling 0300 500 5000 or
visiting www.moneymadeclear.fsa.gov.uk
> If the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to
receive payment under the Financial Services Compensation
Scheme. The FSA can be contacted by completing an online form at
www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml
Details of any share dealing facilities that the company endorses will
be included in company mailings.
More detailed information on this or similar activity can be found on
the FSA website www.moneymadeclear.fsa.gov.uk
Annual General Meeting and First Quarter
Interim Management Statement
Record date for the final dividend
Final dividend payment date and issue of shares
under the scrip dividend alternative
Interim results
13 May 2010
14 May 2010
25 June 2010
6 August 2010
Third Quarter Interim Management Statement
4 November 2010
Final results for 2010
March 2011
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 2009, 25,900 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
notification. 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.
Financial calendar
The Company’s financial calendar for the forthcoming year is as
follows:
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.
Currency conversion date for the final dividend
5 May 2010
Local currency equivalents and scrip dividend
alternative calculation announced
6 May 2010
Electronic proxy appointment is available for this year’s Annual
General Meeting. This enables proxy votes to be submitted
electronically, as an alternative to filling 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.
396 Old Mutual plc
Annual Report and Accounts 2009
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 definitions are not precise or technical:
they should not be used as the basis for making investment or other
decisions.
A technical glossary of the financial terms can be found on our
website at www.oldmutual.com
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 profitability
of new and existing business.
Adjusted Net Worth (ANW)
Represents the market value of the net shareholders’ assets held in
respect of the covered business and forms part of the Embedded
Value of a life company.
Annual Premium Equivalent (APE)
A standardised measure of the volume of new life business written.
It is calculated as the sum of (annualised) new recurring-premiums
and 10% of the new single-premiums written in an annual reporting
period. It gives a broadly comparable measure across companies to
allow for differences between regular and single 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 financial institutions
on behalf of their customers.
Deferred acquisition costs
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 specified age. A deferred annuity may be funded by the
policyholder by payment of a series of regular contributions or by a
capital sum.
Embedded value (EV)
Life insurance contracts are usually long-term and may involve
complex payment flows. This means it is difficult 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 profits 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 financial 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 financial system,
thereby protecting 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.
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.
Bancassurance
An arrangement whereby banks and building societies sell life,
pension and savings products on behalf of other financial providers.
Boutique
A small investment firm specialising in offering specific services to a
select number of individuals.
Capital Adequacy Requirement (CAR)
The level of capital required by Old Mutual Life Assurance Company
(South Africa) Limited to support its insurance business. It is mostly
driven by the capital required to absorb investment risk and generally
exceeds the level of capital required by the (national) regulator (called
the Statutory Capital Adequacy Requirement).
Covered business
A concept defined 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.
Financial Services Authority (FSA)
The regulator of financial services in the United Kingdom.
Financial Services Board (FSB)
The regulator of financial 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 and casualty insurance
(Short-Term Insurance)
Non-life insurance mainly concerned with protecting the policyholder
from loss or damage caused by specific risks. Examples include
motor, contents and buildings insurance. Property insurance covers
loss or damage through, for example, fire 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.
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Glossary
Independent financial adviser (IFA)
In the UK an IFA is a person or organisation authorised to give advice
on financial matters and to sell the products of all financial services
providers. IFAs are regulated by the Financial Services Authority.
Net Client Cash Flow (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.
Insurance
A contract taken out with an insurer to give financial protection
against loss from a perceived risk. The person taking out the
insurance is called the insured. Payments for the policy are called
premiums.
Non-profit policy
Insurance cover guaranteeing certain benefits, 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-profit basis.
Lapses/withdrawals/surrenders
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 specified period
of time. Also known as life assurance.
Liquidity Premium
A liquidity premium can be viewed as compensation for the lower
liquidity of corporate bonds compared to government debt and for
the risk that the market value of bonds will fall prior to maturity due to
increasing credit spreads.
Long-term Business
A term used by the Group to describe its life, health and pensions
business and includes both covered and non-covered business.
The term is broadly used throughout the industry, for example it is
a UK regulatory expression broadly equivalent to life insurance and
pensions.
Long-term Investment Return (LTIR)
The long-term return that Old Mutual assumes can realistically be
earned on its investible shareholder assets when calculating Adjusted
Operating Profit. Long-term investment return rates are reviewed
annually and reflect the returns expected on the chosen asset
classes.
Mark-to-market adjustment
An accounting adjustment to the book value of an asset or liability to
reflect its market value.
Market Consistent Embedded Value (MCEV)
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 reflection 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 financial contract finishes
or “matures” and the benefit becomes payable.
Mutual fund/unit trust
Fund of shares, bonds and other assets held by a manager for the
benefit of investors who buy units in the fund, effectively pooling their
money with that of other investors. It enables investors to achieve a
more diversified portfolio than they might have done by making an
individual investment.
398 Old Mutual plc
Annual Report and Accounts 2009
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.
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.
Platform
Online services used by intermediaries and consumers to view and
administer their investment portfolios. Platforms provide facilities for
buying and selling investments (including Individual Savings Accounts
(ISA), Self-Invested Pension Plans (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 benefit payable under an insurance policy or contract
in circumstances which are defined 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 Profit (general insurance)
A generally accepted non-life insurance term, also referred to as
underwriting result, representing earned premiums minus the cost of
claims and operating expenses. It indicates whether premiums cover
claims and expenses or not.
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 benefits will
be linked to the value of the underlying units rather than being fixed
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 profits expected to arise from the in-force
business. VIF is calculated using a set of actuarial, economic and
operational assumptions.
Glossary
Value of new business (VNB)
The discounted value of the future profits expected to arise from all
new business sold during a reporting period. VNB is calculated by
using actuarial assumptions.
With-profit
A type of investment policy in which extra amounts (bonuses) may be
added to the sum assured to reflect profits earned during the course
of the contract. Regular bonuses are usually added each year and,
once declared, are guaranteed. A final 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 shareholdings, 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.
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Old Mutual plc
Annual Report and Accounts 2009
399
400 Old Mutual plc
Annual Report and Accounts 2009
n Fast ReaD
01 Our Group in transition
02 Our business at a glance
04 Our strategy
05 Key performance indicators
06 Key features
n Man aGeMent stateMents
08 Chairman’s statement
10 Group Chief Executive’s statement
16 Group Finance Director’s statement
n BUsiness ReView
Long-Term Savings
28 Group Executive Committee
30
72 Banking
84
90 US Asset Management
98 Bermuda
Short-Term Insurance
n RisK anD ResPonsiBilitY
102 Risk and capital management
129 Responsible business introduction
132 Customers
134 Employees
n GoVeRnanCe
142 Board of Directors
144 Chairman’s introduction
145 Directors’ report on corporate governance and other matters
161 Remuneration report
136 Environment
138 Society
140 Suppliers
n FinanCials
n MCeV
335 Statement of Director’s responsibilities
339
340 Group Market Consistent Embedded Value Basis
Independent auditors’ report
supplementary information
344 Notes to the MCEV basis supplementary
information
178 Statement of Directors’ responsibilities
179
Independent auditors’ report
180 Consolidated income statement
181 Consolidated statement of comprehensive income
182 Reconciliation of adjusted operating profit to profit after tax
183 Consolidated statement of financial position
184 Consolidated statement of cash flows
186 Consolidated statement of changes in equity
190 Notes to the consolidated financial statements
n shaReholDeR inFoRMation
395 Shareholder information
396 Glossary
The directors' report of Old Mutual plc for the year ended 31 December 2009 is set out on pages 1 to 160
and includes the sections of the Annual Report referred to in these pages.
Cover picture: We sponsor the Old Mutual Two Oceans Marathon in South Africa: long distance running
reflects our philosophy of investing for the long-term.
what’s online
n Annual Report 2009
http://www.oldmutual.com/annualreport2009
n Corporate site
http://www.oldmutual.com
> About Old Mutual
> Old Mutual Worldwide
> Investor Relations
> Corporate Responsibility
> Media Centre
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 financial 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 fluctuations in interest rates and exchange rates, policies
and actions of regulatory authorities, the impact of competition,
inflation, deflation, the timing and impact of other uncertainties or
of future acquisitions or combinations within relevant industries,
as well as the impact of tax and other legislation and regulations
in territories where Old Mutual plc or its subsidiaries operate.
As a result, Old Mutual plc’s or its subsidiaries’ actual future
financial 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
Designed and produced by Merchant www.merchant.co.uk
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All processes in the production of this report are on one site.
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 Office:
5th Floor
Old Mutual Place
2 Lambeth Hill
London EC4V 4GG
www.oldmutual.com
AnnuAl RepoRt
& Accounts 2009
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