oOh!media Annual Report 2010

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CUSTOMER FOCUSED ANNUAL REPORT AND ACCOUNTS 2010 FAST READ GOVERNANCE 02 Our business at a glance 04 Key performance indicators 06 Delivering on our strategy 08 Delivering on our strategy – case studies 18 Key features 20 Responsible business and governance at a glance MANAGEMENT STATEMENTS 22 Chairman’s statement 24 Group Chief Executive’s statement 30 Group Chief Executive’s Q&A 32 Group Finance Director’s statement 42 Group Executive Committee BUSINESS REVIEW Long-Term Savings 44 66 Banking 74 Short-Term Insurance 78 US Asset Management 84 Non-core and discontinued business operations RISK AND RESPONSIBILITY 88 Risk and capital management 118 Responsible business 130 Board of Directors 132 Chairman’s introduction 133 Directors’ report on corporate governance and other matters 152 Remuneration report FINANCIAL 170 Statement of Directors’ responsibilities Independent auditor’s report 171 172 Consolidated income statement 173 Consolidated statement of comprehensive income 174 Reconciliation of adjusted operating proﬁt to proﬁt after tax 175 Consolidated statement of ﬁnancial position 176 Consolidated statement of cash ﬂows 178 Consolidated statement of changes in equity 182 Notes to the consolidated ﬁnancial statements MCEV 330 Statement of Directors’ responsibilities 331 332 Group Market Consistent Embedded Independent auditor’s report Value basis supplementary information 336 Notes to the MCEV basis supplementary information SHAREHOLDER INFORMATION 384 Financial history 389 Shareholder information 392 Glossary WHAT’S ONLINE Annual Report: www.oldmutual.com/ar2010.oldmutual.com Corporate site: www.oldmutual.com The directors’ report of Old Mutual plc for the year ended 31 December 2010 is set out on pages 1 to 151 and includes the sections of the Annual Report referred to in these pages. FAST READ WELCOME Our strategy is to build a long-term savings, protection and investment group by leveraging the strength of our people and 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. OUR VALUES: INTEGRITY RESPECT ACCOUNTABILITY PUSHING BEYOND BOUNDARIES Old Mutual plc Annual Report and Accounts 2010 1 FAST READ OUR BUSINESS AT A GLANCE Below is a high-level summary of the Group and our four principal business units GROUP Old Mutual is an international long-term savings, protection and investment Group. Adjusted operating proﬁt (AOP) 2010 £1,481m 2009: £1,133m Funds under management 2010 £309.3bn 2009: £275.4bn Number of employees 55,7301 2009: 53,706 Primary locations (cid:81) Long-Term Savings – southern Africa, Europe, Colombia, Mexico, India and China (cid:81) US Asset Management – US (cid:81) Banking – southern Africa (cid:81) Short-term insurance – southern Africa Operational highlights (cid:81) Proﬁts up in each business unit, with Group Return on Equity (RoE) of 12.2% (cid:81) Earnings per Share (EPS) constant currency growth of 20% (cid:81) Capital position strengthened: FGD (Financial Groups Directive) surplus increased from £1.5 billion to £2.1 billion (cid:81) Total dividend for year increased from 1.5p to 4.0p (cid:81) Good progress towards delivering the 2012 ﬁnancial targets For more information see page 32 LONG-TERM SAVINGS (LTS) Adjusted operating proﬁt (AOP) 2010 £897m 2009: £636m We provide investment management and innovative life assurance-based solutions which address both protection and retirement savings needs. Funds under management 2010 £131.8bn 2009: £105.5bn Operational highlights (cid:81) Strong sales and earnings momentum (cid:81) Annual Premium Equivalent (APE) margin improvement to 13%, improved product mix with better margins (cid:81) Unit trust sales up 28% on a constant currency basis to £8.8 billion with strong performance from Wealth Management and Emerging Markets (cid:81) Net Client Cash Flow (NCCF) doubled during the year to £5 billion, with positive contribution from Emerging Markets Number of employees 24,044 2009: 22,269 Contribution to Group AOP* FUM** 60.6% 42.6% For more information see page 44 2 Old Mutual plc Annual Report and Accounts 2010 1 This includes: US Life, Bermuda and Group Head Ofﬁce *Pre-tax AOP of core operating segments less ﬁnance and other corporate costs. **FUM of core operating segments BANKING 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. For more information see page 66 SHORT-TERM INSURANCE We provide short-term insurance solutions in southern Africa through Mutual & Federal. Adjusted operating proﬁt (AOP) 2010 £601m 2009: £470m Tier 1 adequacy ratio 2010 11.7% 2009: 11.5% Number of employees 27,525 2009: 27,047. Adjusted operating proﬁt (AOP) 2010 £103m 2009: £70m Combined ratio 2010 92.4% 2009: 98.0% Number of employees 2,222 2009: 2,115 Operational highlights (cid:81) Headline earnings growth of 15% (cid:81) Improved credit loss ratio from 1.52% to 1.36% (cid:81) Capital adequacy ratios above targets, liquidity remains sound (cid:81) On track to meet medium- to long-term ﬁnancial targets in 2013 Contribution to Group AOP* FUM** 40.6% 3.5% Operational highlights (cid:81) Strong performance following renewed focus (cid:81) Better claims experience, resulting in good underwriting result (cid:81) Solvency strengthened (cid:81) Step Change Programme implemented (cid:81) Launch of iWYZE direct insurance Contribution to Group AOP* FUM** 7.0% 0.07% For more information see page 74 US ASSET MANAGEMENT Old Mutual Asset Management, a multi-boutique investment organisation consisting of 18 distinct asset managers, serves individual and institutional investors around the world. For more information see page 78 Adjusted operating proﬁt (AOP) 2010 £87m 2009: £83m Operational highlights (cid:81) Proﬁts up 4% (cid:81) Funds Under Management (FUM) up 3% with market movement and inﬂows more than offsetting outﬂows (cid:81) New afﬁliate: Echo Point Investment Funds under management 2010 Management £166.6bn 2009: 161.5bn Number of employees 1,537 2009: 1,544 Contribution to Group AOP* FUM** 5.9% 53.9% Old Mutual plc Annual Report and Accounts 2010 3 FAST READ KEY PERFORMANCE INDICATORS (KPIs) Set out below are the KPIs that we used to monitor the performance of the business. Financial KPI Deﬁnition Relevance Return on Equity (RoE)% A relative measure expressed as a percentage, calculated by dividing IFRS3 Adjusted Operating Proﬁt (AOP) (post-tax and minority interests) by the average capital tied up in the business, where capital is deﬁned as shareholder equity excluding hybrid capital. RoE%1 Return on Equity is an indicator of our proﬁtability and efﬁciency, demonstrating how much proﬁt has been generated given the resources provided by our shareholders. (cid:24)(cid:28) (cid:24)(cid:25) (cid:32) (cid:29) (cid:26) (cid:23) 0 . 2 1 2 . 3 1 3 . 1 1 1 . 9 2 . 2 1 (cid:25)(cid:23)(cid:23)(cid:29) (cid:25)(cid:23)(cid:23)(cid:30) (cid:25)(cid:23)(cid:23)(cid:31) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) Net Client Cash Flow (NCCF)/ Opening Funds under Management % This measure indicates the extent to which client funds are either retained or lost during the year. Inﬂows are driven by premiums, deposits and investments, whereas outﬂows are driven by claims, surrenders, withdrawals, beneﬁts and maturities. NCCF/Opening Funds under Management %1 NCCF/Opening Funds Under Management (FUM) measures our success in attracting new business and retaining existing customers, and provides a good indication of investor conﬁdence in our ability to effectively manage their funds. (cid:24)(cid:28) (cid:24)(cid:25) (cid:32) (cid:29) (cid:26) (cid:23) (cid:20)(cid:26) 3 . 2 1 9 . 9 4 . 0 - 7 . 0 - 1 . 2 - (cid:25)(cid:23)(cid:23)(cid:29) (cid:25)(cid:23)(cid:23)(cid:30) (cid:25)(cid:23)(cid:23)(cid:31) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) Group Value Creation % (Long-Term Savings only) Calculated as the Market Consistent Embedded Value (MCEV) value of new business plus the MCEV experience variances divided by the opening MCEV balance, expressed as a percentage. The LTS businesses achieved positive NCCF of £5bn in 2010. The USAM business had outﬂows of £11.7bn. For more discussion please see the Finance Director’s Report on page 32. Group Value Creation %1 Group Value Creation for the Long-Term Savings covered business measures the contribution to Return on Embedded Value from management actions of writing proﬁtable new business, and managing expense, persistency, risk and other experience compared with that which was assumed. (cid:28) (cid:27) (cid:26) (cid:25) (cid:24) (cid:23) 2 3 . 4 0 . 4 1 . 4 6 . 2 3 . 1 (cid:25)(cid:23)(cid:23)(cid:29) (cid:25)(cid:23)(cid:23)(cid:30) (cid:25)(cid:23)(cid:23)(cid:31) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) Notes 1 Numbers are as reported and historical ﬁgures have not been restated to make consistent with 2010/2009. 2 EEV basis 3 IFRS–International Financial Reporting Standards 4 Old Mutual plc Annual Report and Accounts 2010 Financial Relevance IFRS Operating proﬁt margin (basis points) Calculated as pre-tax adjusted operating proﬁt divided by the average funds under management for the period, expressed in basis points. IFRS Operating proﬁt margin (basis points)1 IFRS Operating proﬁt margin measures the proﬁt margin we have earned on the funds we manage. An improved basis point margin is an indicator of the success a company is having in growing its revenue at a greater rate than its expenses. (cid:29)(cid:23) (cid:28)(cid:23) (cid:27)(cid:23) (cid:26)(cid:23) (cid:25)(cid:23) (cid:24)(cid:23) (cid:23) 8 . 4 5 2 . 5 5 7 . 8 3 0 . 3 4 4 . 3 3 (cid:25)(cid:23)(cid:23)(cid:29) (cid:25)(cid:23)(cid:23)(cid:30) (cid:25)(cid:23)(cid:23)(cid:31) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) Adjusted Operating Earnings per Share (pence) Calculated as post-tax adjusted operating proﬁt divided by the adjusted weighted average number of shares (WANS), held by our investors. Adjusted Operating Earnings per Share (pence)1 Adjusted Operating Earnings per Share (EPS) is an indicator of our proﬁtability that measures how much we earn for each share held. The trend in the movement of EPS demonstrates our rate of growth. (cid:25)(cid:23) (cid:24)(cid:28) (cid:24)(cid:23) (cid:28) (cid:23) 1 . 5 1 9 . 6 1 9 . 4 1 0 . 6 1 6 . 1 1 (cid:25)(cid:23)(cid:23)(cid:29) (cid:25)(cid:23)(cid:23)(cid:30) (cid:25)(cid:23)(cid:23)(cid:31) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) Non-Financial Relevance Intent to Stay is a lead indicator of retention and Discretionary Effort is a lead indicator of performance. These two factors correlate with business performance and total shareholder return. Employee Intent to Stay and Discretionary Effort % (cid:24)(cid:23)(cid:23) (cid:31)(cid:23) (cid:29)(cid:23) (cid:27)(cid:23) (cid:25)(cid:23) (cid:23) (cid:81) (cid:81) 5 8 5 8 9 5 7 5 (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:23)(cid:32) (cid:25)(cid:23)(cid:24)(cid:23) (cid:25)(cid:23)(cid:24)(cid:23) (cid:48)(cid:85)(cid:91)(cid:76)(cid:85)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:58)(cid:91)(cid:72)(cid:96) (cid:43)(cid:80)(cid:90)(cid:74)(cid:89)(cid:76)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:89)(cid:96)(cid:3)(cid:44)(cid:77)(cid:77)(cid:86)(cid:89)(cid:91) Engagement Survey Measured by the average percentage of positive responses gathered via employee survey to two questions measuring Intent to Stay, and three questions measuring Discretionary Effort. In 2011 we will replace the Engagement Survey with a Culture Survey which will facilitate the tracking of the overall health of our culture. In 2011 we will be reporting on customer KPIs Old Mutual plc Annual Report and Accounts 2010 5 FAST READ DELIVERING ON OUR STRATEGY Our strategy is to build a long-term savings, protection and investment group by leveraging the strength of our people and capabilities in South Africa and around the world. Our strategic priorities Progress 2010 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. (cid:81) Conducted strategic reviews to identify core competencies and best market opportunities for growth (cid:81) Board agreed a set of customer metrics across the business (cid:81) Started to close product gaps and developed a clear path for more product sharing (cid:81) Begun to close distribution gaps (launched iWYZE: a direct short-term insurance offer between Mutual & Federal (M&F) and Old Mutual (SA), and opened 117 Old Mutual Finance branches in South Africa over the last 2 years) 2. 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. 3. Share skills and experience across the Group We will use our 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. (cid:81) All BUs achieved and exceeded their proﬁtability targets (with the exception of US Asset Management) (cid:81) On target to achieve cost reduction & RoE targets (cid:81) Business units continue to deliver their improvement programmes (e.g. M&F step-change, Wealth Management transformation) (cid:81) Improved relationships with key stake holders (Financial Service Authority (FSA), Reserve Bank, South African Government & Reserve Bank and governing bodies in Sweden) (cid:81) Old Mutual (SA) achieved and Nedbank maintained Broad-Based Black Economic Empowerment level 2 status; M&F achieved level 3 status and Nedbank recognised as the most sustainable bank in Africa (cid:81) Key appointments made to drive sharing of skills (Heads of IT, Product & Distribution in Long-Term Savings (LTS)) (cid:81) Clear implementation plan developed for sharing product across LTS (cid:81) LTS IT synergy plan ready for implementation (cid:81) Created IT and administration jobs in South Africa to support the Retail Europe business unit 4. Build a culture of excellence 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. (cid:81) Launched the Group Vision and Strategy (cid:81) Implemented the Group Operating Model (GOM)-see page 135 (cid:81) Launched our ACT NOW! Leadership actions-see page 125 (cid:81) Agreed consistent performance management across the Group and implemented consistent incentivisation across LTS 5. Simplify our structure to unlock value 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. 6 Old Mutual plc Annual Report and Accounts 2010 (cid:81) Substantially improved FGD (Financial Group Directive) surplus (cid:81) US Life sale close to completion (cid:81) Stabilised the Bermuda business (cid:81) Commenced exploring an IPO (Initial Public Offering) for US Asset Management We will focus, drive and optimise our businesses to enhance value for customers and shareholders. 2010 Trend 2011 Priorities NCCF % (NCCF/Opening FUM) 4 2 0 -2 -4 2009 2010 The LTS businesses achieved positive NCCF of £5bn in 2010. The USAM business had outﬂows of £11.7bn. For more discussion please see the Finance Director’s Report on page 32. (cid:81) Improve the customer experience across all markets (cid:81) Expand and improve the product proposition (cid:81) Expand and improve our distribution capability (cid:81) Develop and use meaningful customer information to better serve our customers (cid:81) Continue to build and strengthen the Old Mutual brands AOP EPS and RoE performance p 20 15 10 5 0 11.6p 9.1% 16.0p 12.2% 2009 (cid:81) AOP EPS (pence) 2010 (cid:81) RoE% (cid:81) Deliver 2011 business plan (cid:81) Secure plans to pay off £1.5bn of net debt (cid:81) Continue to drive strategic transformation in our business units (cid:81) Continue to drive proﬁtable growth (cid:81) Build an Investment Management business leveraging our existing capabilities % 20 15 10 5 0 Cost savings (£m) run-rate achieved in 2010 and 2012 target (cid:81) Deliver the Long-Term Savings IT plan and continue to 100 80 60 40 20 0 100 42 59 H1 2010 FY 2010 2012 Target LTS employees with a common performance measure 100 75 50 25 0 2010 2011 FGD £bn 4 3 2 1 0 2009 2010 improve operational efﬁciency across the Group (cid:81) Build strong functional communities across the Group (cid:81) Deliver the Group Intranet (cid:81) Implement a framework to increase international mobility for employees (cid:81) Continue to build strong executive teams in all our business units and develop the next generation of young leadership potential (cid:81) Align executive performance management and remuneration across the Group (cid:81) Measure the shift towards our ACT NOW! Leadership actions by implementing the Old Mutual Group Culture Survey (cid:81) Embed risk management as a value driver across the Group (cid:81) Complete the sale of US Life (cid:81) Explore the partial IPO for the US Asset Management business unit (cid:81) Continue to manage the run-off of the Bermuda business to reduce risk to the Group (cid:81) Hold business units accountable against operational targets and risk appetite Old Mutual plc Annual Report and Accounts 2010 7 FAST READ DELIVERING ON OUR STRATEGY – CASE STUDIES 1. DEVELOP THE CUSTOMER PROPOSITION AND EXPERIENCE 8 Old Mutual plc Annual Report and Accounts 2010 INNOVATIONS THAT GIVE CUSTOMERS MORE WAYS TO INTERACT WITH US Time invested in the customer In South Africa, Old Mutual Finance has broadened its customer value proposition, expanded service reach and engaged face to face with target customers through a retail branch network. In November 2008 it introduced a debt consolidation lending product called My Money Plan which is now a market leader. What makes it special is that it educates customers and helps them to look at their ﬁnances holistically during a 45 minute consultation. As a result they are asking us how Old Mutual can help them achieve their other ﬁnancial goals. Positive customer feedback In the two years since the launch the business has built 117* new branches offering Old Mutual life assurance products, loans and customer service. It has hired and trained 960 staff; and grown a lending book of R2.7 billion. It is now serving over 30,000 customers a month through its branches. Customers are clearly feeling the beneﬁt: their feedback indicates that the business has been very well received in the marketplace. Annual insurance sales from the branches reached R100 million; and Old Mutual Finance achieved a proﬁt of R80 million in 2010. Accessing insurance through different channels Customers can now buy short-term insurance from us directly – through iWYZE, a collaboration between Mutual & Federal and Old Mutual. It enables Old Mutual to offer a new product to its customer base while allowing M&F to expand its customer channel capability and reach. We launched iWYZE in just eight months with relatively low capital spend. In the eight months since the public launch the business has grown to over 150 staff members with close to 5,000 active policies and R36 million* of annualised premium income. Besides using Old Mutual’s distribution channels, iWYZE taps into all our traditional and emerging digital marketing channels to drive business. Thanks to the Old Mutual brand, market insight and distribution capabilities, and state-of-the- art systems and processes, iWYZE is already competing effectively with longer-established direct players in South Africa – and is very well positioned to capture a signiﬁcant part of this emerging market. Notes * As at December 2010 Main photograph: Sydney Mathebula (Old Mutual Finance) Top left: Busi Ntsokota (Branch Manager, Old Mutual Finance) and Lwana David Monareng (Customer) Top right: Adam Sekgabi and Sadiki Thingahangwi (iWYSE Call Centre) Old Mutual plc Annual Report and Accounts 2010 9 FAST READ DELIVERING ON OUR STRATEGY – CASE STUDIES 2. DELIVER HIGH PERFORMANCE IN ALL BUSINESS UNITS 10 Old Mutual plc Annual Report and Accounts 2010 ATTENTION TO DETAIL IS THE KEY TO DRIVING HIGH PERFORMANCE Transforming Wealth Management We are intent on creating a single Wealth Management business that is lean, cost competitive, growing proﬁtably, and operating on its 12-15% RoE target. Our initial goal is to reduce Wealth Management’s overall cost base by £45 million, from 2012. This will enable it to meet its part of Old Mutual’s commitment to shareholders while allowing it to reinvest for proﬁtable growth. In 2010 the business made great progress, delivering run rate savings worth £35 million. That is 35% of the Old Mutual target and over 75% of the demanding Wealth Management target. A number of initiatives that will deliver the remaining c.£10 million are in place. Most of these are already well advanced and we hope to hit the run rate savings target earlier than our 2012 deadline. Audits of the programme by KPMG and Group Internal Audit in 2010 have given it a green light. Even better, they have recommended rolling out its approach and processes as best practice for other Old Mutual cost efﬁciency programmes. Meanwhile, the Wealth Management business has not been neglecting growth. In 2010, Skandia UK’s sales reached £6 billion – taking its share of the life, pension and investment market to a record 7%1 for the ﬁrst three quarters of the year. Measuring risk with precision In 2009 Nedbank Business Banking launched a capital optimisation initiative focused on cleaning- up risk data. To help track and monitor progress we developed our own Risk Data Accuracy Measure (RDAM). This aims to quantify risk so that it can be monitored and managed right down to the lowest level. By summarising all the elements of risk data, it allows us to track progress on our various capital optimisation initiatives. Including RDAM on credit performance scorecards drove the desired behaviour around the input measures. All credit staff could see exactly which inputs were included in their ﬁnal score. By changing the inputs and the weight they carried in the ﬁnal score, we could focus employees on the areas that required closest attention. Using performance ladders to include the RDAM in the monthly internal business communication raised awareness of the importance of risk data accuracy. This instilled a healthy competitive spirit among credit employees to achieve the number one ranking. Since we launched the RDAM, the quality of Nedbank’s Business Banking’s risk data has improved signiﬁcantly. We see it as one of the key contributors to our success in cutting our capital requirements by more than 20% over the last two years. 1 Source: Skandia sales divided by combined total of ABI (traditional) and Lipper (platform). Main photograph: Sarah Andrews and Liz Hamilton (part of the Wealth Management Transformation team) Top left: Siobhan Lee, Liz Hamilton, Sarah Andrews and Sally Stephens (part of the Wealth Management transformation team) Top right: Marko Campher and Phemelo Mekoma (Nedbank Business Banking) Annual Report and Accounts 2010 Old Mutual plc 11 FAST READ DELIVERING ON OUR STRATEGY – CASE STUDIES 3. SHARE SKILLS AND EXPERIENCE ACROSS THE GROUP 12 Old Mutual plc Annual Report and Accounts 2010 MAKING BEST USE OF OUR WORLD OF EXPERTISE Serving Austria, Germany and Poland from Cape Town The IT and business know-how of our South African employees is enabling us to achieve economies of scale by establishing common workﬂow systems across the business. At the end of last year Old Mutual South Africa (OMSA) began handling policy administration and IT processes for the Retail Europe markets from Cape Town. OMSA’s consistently award-winning customer service makes it a leader in its ﬁeld, this along with its experience, lower cost base and scale will help Retail Europe prepare for future market growth. “We needed harmonised processes for both customer service and IT,” says Johannes Friedrich, deputy CEO of Skandia Retail Europe, “so we decided to use our South African businesses’ capacities and infrastructure. We have trained Polish and German speakers in South Africa, to establish a Cape Town based customer service and IT team to deliver the world- class service our customers are used to.” The transition to Cape Town will be complete in Autumn 2011. Sharing knowledge and ideas One of the best ways to share knowledge and experience is to move people around the Group. Key transfers in the past year included Katie Murray’s move from Group Head Ofﬁce to become Finance Director of Old Mutual South Africa and Emerging Markets. Steven Levin transferred in the opposite direction: his experience of launching successful products in South Africa will help us expand our product range across the Long-Term Savings businesses. During 2010, the CEO of Skandia Investment Group, Nils Bolmstrand moved to rejoin the Nordic business as Head of Product. The Nordic business is also beneﬁting from the extensive experience of Mårten Andersson, who was appointed CEO. Mårten brings valuable expertise, gained in the successful turnaround of Skandia Mexico and later Skandia Italy (part of Wealth Management), to the Nordic business. Main photograph: Beata Woolfrey (Team leader, Polish Team) Top left: Sarah Guering (German Team) and Marian Dudler-Petoors (Austrian Team) Top right: Katie Murray (OMSA and Emerging Markets Finance Director) Annual Report and Accounts 2010 Old Mutual plc 13 FAST READ DELIVERING ON OUR STRATEGY – CASE STUDIES 4. BUILD A CULTURE OF EXCELLENCE 14 Old Mutual plc Annual Report and Accounts 2010 EXCELLENCE COMES FROM GREAT PEOPLE, GREAT LEADERSHIP AND HIGH STANDARDS A team approach to better service The LEAN approach, is a way of thinking at every level about what adds value to the customer, and eliminating what doesn’t. It’s about empowering employees to own and continuously improve their processes – and that can only be good for our customers. Rose Keanly and her team at Old Mutual Service, Technology and Administration (OMSTA) in South Africa have made this kind of LEAN thinking part of their culture. Since 2007 they have reduced costs by around R660 million, with another R231 million to come over the next three years. Yet customer and intermediary service levels have gone from strength to strength – Old Mutual recently won its third successive Orange Ask Afrika award for best customer service in the South African long-term savings industry. So LEAN is helping us keep both customers and shareholders happy. And this success is satisfying for our people, too: since OMSTA’s LEAN initiative began, staff morale has improved signiﬁcantly. This LEAN approach to thinking about delivery to customers, and running a business to achieve excellence, is now being explored across the whole Long-Term Savings business with support from Rose and her team in South Africa. Top investment team picks Old Mutual Our US Asset Management business formed Echo Point Investment Management in 2010 with a newly-acquired team led by veteran portfolio manager Hans van den Berg. The entire team joined us after building a strong 15-year track record at 1838 Investment Advisors and Morgan Stanley Investment Management. Echo Point launched with $1.6 billion in assets under management. Van den Berg’s team sought clients’ views before ﬁnding a new home. “Their clear preference was to see the team operate in a stable environment supported by world-class infrastructure and strong capital backing. And we must have cultural alignment, which includes investment autonomy.” From over a dozen ﬁrms they picked Old Mutual Asset Management (OMAM) for the quality of its people, investment autonomy for afﬁliates, marketing support, and opportunity for joint ownership. “OMAM provides the infrastructure and non-investment support we need to focus on continuing to meet or exceed long-term performance and risk targets for our clients, and develop relevant product extensions to meet demands in the market place,” says Van den Berg. Main photograph: Rose Keanly (MD OMSTA and Head of LEAN, Long-Term Savings) Top left: Rose Keanly Top right: David Sugimoto, Brian Arcese, Hans van den Berg, Ben Falcone, Erin Perkins (Echo Point Investment team) Annual Report and Accounts 2010 Old Mutual plc 15 FAST READ DELIVERING ON OUR STRATEGY – CASE STUDIES 5. SIMPLIFY OUR STRUCTURE TO UNLOCK VALUE 16 Old Mutual plc Annual Report and Accounts 2010 THE BEST IDEAS ARE SIMPLE, CLEAR AND INSPIRING Simplifying ownership In 2010 we bought out the minority shareholders in Mutual & Federal (M&F) and delisted it from the Johannesburg Stock Exchange. Full ownership has removed the potential conﬂicts associated with minority interests and was the catalyst for M&F’s Step Change programme which is already delivering improved performance. M&F’s new vision and strategic objectives are aligned with the Group’s customer-centred approach. Peter Todd was appointed Managing Director in December 2010. As well as delivering good results for 2010, it has partnered with OMSA Retail Mass Foundation cluster, to launch its new iWYZE direct short-term insurance channel, and with underwriting management agencies to widen its product offering. Integrating operations We simpliﬁed operations in Nedbank by buying out Imperial Holdings’ share of Imperial Bank and integrating it fully into Nedbank. This terminated an onerous funding arrangement and enabled us to rationalise two vehicle asset ﬁnance infrastructures into one stronger business. This gave us full control of Imperial Bank’s vehicle ﬁnance brand (Motor Finance Corporation) which is well known in the car dealer market and allowed Nedbank to cross-sell to Imperial’s customer base. We avoided redundancies by redeploying some 460 people within Nedbank’s 27,500-strong workforce: this was not only good for morale but also enabled us to focus on maintaining business momentum, so there has been no loss of market share. Main photograph: Barry Groenewald and Chris Kuhn (OMSA Corporate Finance) Top left: Chris Kuhn (GM Corporate Finance) Top right: Candice-Lee Perry (Business Banking) and Gail Sharp (Nedbank Retail) Annual Report and Accounts 2010 Old Mutual plc 17 FAST READ KEY FEATURES Below are some of the key features of the business that support the delivery of our vision to our customers. Old Mutual Group LTS Emerging Markets 0.92% of pre-tax proﬁt invested in community programmes US Asset Management 29% of client base located outside the US 2009: 25% R13.7 billion (£1.2bn) invested in infrastructure funds and R8.5 billion (£0.8bn) in housing funds Banking LTS Emerging Markets Old Mutual (SA) awarded best customer service, in the Ask Afrika Orange Service Excellence Awards (Long-Term insurance) for the third year in a row. 7.4% Growth in number of customers who hold primary accounts with Nedbank LTS Nordic Skandiabanken awarded most prominent brand and best reputation in Norway Source: RepTrak Pulse survey in 2010 18 Old Mutual plc Annual Report and Accounts 2010 LTS Wealth Management Winner Best UK platform. Source: Professional Adviser Awards LTS Wealth Management £5.7 billion Single premiums up 34% to £5.7 billion and mutual funds sales up 56% to £3.3 billion UK and South Africa Top 10% Old Mutual ranked in the top 10% of UK and SA companies reporting to the Carbon Disclosure Project South Africa Level 2 Old Mutual (SA) and Nedbank rated Level 2, BBBEE (Broad-Based Black Economic Empowerment), Mutual & Federal rated Level 3. Old Mutual Group More than £10 billion of mutual funds sold in the Group Annual Report and Accounts 2010 Old Mutual plc 19 FAST READ RESPONSIBLE BUSINESS Our approach to Responsible Business is a vital enabler of our corporate vision of becoming our customers’ most trusted partner. What being a Responsible Business means to us Focusing on the issues that matter to our stakeholders During 2010, we conducted a signiﬁcant piece of stakeholder research which helped us identify nine material issue areas that will form the basis of our approach to Responsible Business for the future. These material issue areas are: (cid:81) Governance and risk systems (cid:81) Responsible marketing and selling (cid:81) Customer service (cid:81) Our employees (cid:81) (cid:81) Supply chain Financial crime (cid:81) (cid:81) Community impact (cid:81) Direct environmental impact Indirect impact of investments Responsible Business highlights from 2010 (cid:81) First full year of operation of the Responsible Business Committee which oversaw: – Responsible Business Policy rolled out across the Group – Responsible Investment taskforce set up (cid:81) Conducted stakeholder research into (cid:81) responsible business issues £13.6 million invested in our local communities focusing on ﬁnancial education, enterprise development and sustainable community development. For example: – £4.6m through the Masisizane Fund including micro-ﬁnance – £2.7m spent through the ﬁve Old Mutual Foundations. The diagram below summarises our evolving approach to Responsible Business and shows the nine material issue areas discussed in the Responsible Business section. O VIR N E SUPPLIER S T N E M N Supply chain Financial crime Direct environmental impact Community impact GOVERNANCE AND RISK SYSTEMS C U S T O M E R S Customer service Responsible marketing and selling S O C I E T Y Indirect investment impact Our employees S E E EM P L O Y 20 Old Mutual plc Annual Report and Accounts 2010 More detail on our approach to Responsible Business can be found in the Risk and Responsibility section on pages 118 to 129. FAST READ CORPORATE GOVERNANCE Our approach to governance is underpinned by our values of integrity, respect, accountability and pushing beyond boundaries. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Our approach to Corporate Governance The Board of Directors as a whole is responsible to the Company’s shareholders for corporate governance and is committed to achieving high standards in this area through an appropriate mix of checks and balances. This takes due account of the UK Corporate Governance Code and other external expectations, such as the guidelines issued by institutional investors and their representative bodies. During 2010, we have rolled out our new Group Operating Model, which seeks to clarify and enhance our governance processes within the context of a strategic controller model of oversight of our various operations around the world. This has replaced the more decentralised system of governance under which the Group previously operated and establishes clear principles of delegation and escalation that are designed to provide appropriate levels of assurance about the control environment, while retaining ﬂexibility for our businesses to operate efﬁciently. Our approach to governance is underpinned by the Group’s values of integrity, respect, accountability and pushing beyond boundaries. How our approach to governance is guided by our values Integrity (cid:3) Respect Accountability Pushing beyond boundaries We require integrity of the Group’s businesses in all their activities, including the way in which their boards of directors operate and report upwards. (cid:3) (cid:3) (cid:3) Respect is reﬂected in the dynamics between the centre and the operating units and the manner in which problems, (cid:3) when they do arise, are dealt with. (cid:3) Accountability lies at the heart of all good governance systems and is vital for the prompt escalation of matters and how they are then addressed. We aim to empower our operating units to push beyond boundaries and to be responsive and innovative to serve customers’ needs without entangling them in unnecessary red tape. i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n More detail on our approach to Corporate Governance can be found in the Directors’ Report on Corporate Governance and Other Matters section on pages 132 to 151. Annual Report and Accounts 2010 Old Mutual plc 21 MANAGEMENT STATEMENTS CHAIRMAN’S STATEMENT In 2010 we started to deliver on our promises, and we remain ﬁrmly focused on achieving our goals. Overview of 2010 The Board’s focus in 2010 was on restructuring the Group, reducing debt and improving ﬁnancial performance. I am pleased to be able to report substantial progress towards our short-term performance goals and a good start towards attainment of our medium-term restructuring targets. The Company achieved adjusted operating earnings per share on an IFRS basis of 16.0p for the year, a very satisfactory 38% increase over the 11.6p for 2009 (as restated). The results reﬂect management’s determination to improve underlying performance in our various businesses while setting industry-leading risk management standards in our operations. The sale of our US Life business, expected to complete soon, will improve the Group’s overall risk proﬁle signiﬁcantly. We have taken a write-down of £827m in the value of US Life, based on the agreed sale transaction terms, leading to a loss from discontinued operations of £713m and an overall Group basic IFRS loss for the year of £24m. Building on our leading presence in South African markets, we are making progress in transforming our Long-Term Savings business – not only in Emerging Markets, but also in those developed markets of Europe where we have or can build sustainable competitive advantage. Although we were disappointed that negotiations to sell our controlling stake in Nedbank fell through during the year for reasons beyond our control, we remain very satisﬁed with the earnings stream from this investment and continue to see the bank as a key contributor to the Group. The Group is committed to achieving its target, announced in March 2010, of reducing debt by an aggregate £1.5 billion by the end of 2012. Board developments At the start of my chairmanship, I committed to a gradual restructuring of the Board. This process is well under way. Richard Pym retired from the Board in August 2010 at the end of his ﬁrst three-year term because of the pressure of other commitments. He was replaced by Roger Marshall, who joined as an independent non-executive director and succeeded 22 Old Mutual plc Annual Report and Accounts 2010 Richard as chairman of our Group Audit Committee. Alan Gillespie joined as an independent non- executive director in November 2010. He will succeed Rudi Bogni as our Senior Independent Director when Rudi retires at the 2011 AGM. Nigel Andrews also retires at this year’s AGM. We were delighted to announce the appointment of our ﬁrst female director at plc level, Eva Castillo, in February 2011. I would like to extend my thanks to Richard, Rudi, Nigel and the other non-executive directors for their wisdom and contribution during my ﬁrst year in the chair and their willingness to commit their knowledge and experience in helping reshape our strategy. In formally welcoming Eva, Roger and Alan, I know we have a Board which can face up to the challenges of strategy implementation and future growth. We continue to look to renew and refresh the Board’s mix of skills and experience from a broad stakeholder point of view. On behalf of my Board colleagues, I would also like to express our sincere appreciation for the continued dedication and efforts of the Group’s employees during 2010 – especially to our colleagues at Nedbank, for their focus on delivering improved results during a period of signiﬁcant uncertainty. Dividend The Board is recommending an increased ﬁnal dividend for the year ended 31 December 2010 of 2.9p per share (or its equivalent in other applicable currencies). It will be paid on 31 May 2011, subject to approval by shareholders at this year’s AGM. Together with the interim dividend of 1.1p per share paid in November 2010, this makes a total of 4.0p for the year. The Board has conﬁrmed its commitment to a progressive dividend policy for the future. Following the successful launch of our scrip dividend scheme last year, we are again offering eligible shareholders the opportunity to increase their shareholdings in the Company by receiving new shares instead of the cash dividend. Further details of how to participate in the scheme are available on the Company’s website. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Annual General Meeting This year’s AGM will again be webcast from our ofﬁces in London, where it will take place on Thursday 12 May 2011. There will be an opportunity for shareholders to submit questions in advance, if they wish, to be dealt with during the AGM. The AGM circular enclosed with this report includes further details of the webcast, the resolutions to be proposed and the procedure for submitting questions ahead of the meeting. Future In 2010 we started to deliver on our promises, and we remain ﬁrmly focused on achieving our remaining goals. This Group has an illustrious past, which has been tarnished by some poor strategic decisions during the past 11 years. We have begun reshaping and improving our businesses and ﬁnancial structure so that the next decade will see us delivering real shareholder value and playing our full part in the continued development of the markets in which we operate, while recognising the opportunities and commitments that come with our position in South Africa. Patrick O’Sullivan Chairman 8 March 2011 “ The Board’s focus in 2010 was on restructuring the Group, reducing debt and improving ﬁnancial performance. I am pleased to be able to report substantial progress towards our short-term performance goals and a good start towards attainment of our medium-term restructuring targets.” G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 23 MANAGEMENT STATEMENTS GROUP CHIEF EXECUTIVE’S STATEMENT Introduction Our operating results for 2010 are signiﬁcantly ahead of the prior year results as reported with proﬁts up in each of our businesses. This excellent performance was largely due to strong growth in new business sales, our continued focus on cost control, improved persistency and favourable exchange rates. In addition to strong ﬁnancial performance, we also focused on delivering our strategy and have made good progress in 2010. We have agreed to sell US Life, a business that was outside our Group risk and return proﬁle, for $350 million, resulting in an IFRS charge of £713 million. We are awaiting regulatory approval, and expect the transaction to close at or around the end of the ﬁrst quarter of 2011. The next two years will see a continued single-minded focus to meet our strategic objectives. The Group is in sound ﬁnancial shape. At 31 December 2010 our FGD surplus was £2.1 billion and we had total liquidity headroom of £1.4 billion. Strategy Update In 2010, we set out a new strategy for the Group. Our strategy is to build a long-term savings, protection and investment group by leveraging the strength of our people and capabilities in South Africa and around the world. Through the delivery of this strategy, we will drive our businesses to enhance value for both our customers and shareholders, increasing our international cash earnings and overall return on equity. During the year, we entered into exclusive negotiations to sell our shareholding in Nedbank, but these discussions did not conclude with a formal offer being made. In 2011, we will continue to work with Nedbank to build shareholder value. We are now one year into a three-year process to deliver this strategy and are making signiﬁcant operational progress. We are rationalising our activities over time, reducing the complexity of the Group and improving our structure as we manage our business with a disciplined approach to risk management, governance and allocation of capital. We have taken steps to simplify our Group by selling the US Life business, subject to regulatory clearance, and will continue to maintain our strict criteria for keeping businesses within the Group: 24 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n they must meet our capital and risk targets; be capable of achieving a 15% return on equity; add value to other parts of the Group; and be capable of creating future value for shareholders. We have previously said that we will explore the possibility of listing a minority of the US Asset Management business and this remains our intention. The timing of the IPO will be dependent on margin progression, investment performance and growth. We have set challenging group-wide performance targets for the end of 2012: reducing costs by £100 million; improving return on equity for our Long- Term Savings (LTS) business to between 16% - 18%; and reducing debt by £1.5 billion through proceeds of rationalisation and retained earnings. We have already delivered £59 million of run-rate savings and are committed to deliver our debt reduction target. Return on equity for the LTS business was 18.5% at the year-end, as we beneﬁted from positive, non-recurring items in both the Nordic and Wealth Management businesses. Plans are in place to ensure this performance is sustained within the target range. We have implemented a new, more effective, governance and control system giving our businesses local autonomy but ensuring that they work within Group structures and disciplines, particularly on risk and product underwriting standards. This new approach has been implemented effectively and has resulted in the level of one-off operational losses reducing signiﬁcantly across the Group in 2010. We continue to manage risk effectively and have tightly managed the US Life bond portfolio and our business in Bermuda. We continue to assemble a strong management team, and recently appointed Peter Bain as CEO of US Asset Management, and Peter Todd as Managing Director of Mutual & Federal. These are key roles for the Group as we look to drive the growth of these businesses. We are clear on our strategy and are committed to delivering it. “ We are now one year into a three-year process to deliver this strategy and are making signiﬁcant operational progress” Julian Roberts Group Chief Executive Long-Term Savings (LTS) Our LTS division delivered very strong results for the year with operating proﬁts up 26% on a constant currency basis. This was driven by strong proﬁt performance by all of the businesses within LTS. Life sales for the year were up 7% and unit trust sales were up 28% on a constant currency basis. Funds under management (FUM) increased and margins improved. We continued to strengthen the LTS management team and we appointed new CEOs to the Nordic business and the investment business in South Africa (OMIGSA) as well as new heads of Product and IT, roles which are critical to leveraging our capability and delivering the strategy. £1,481m Adjusted Operating Proﬁt We made signiﬁcant strides in implementing the LTS strategy in 2010. The business delivered run-rate savings of £44 million, against the targeted cost reduction of £75 million. This was primarily driven by Wealth Management which removed £35 million of costs in 2010 against its stated target of £45 million by 2012. We are seeking to leverage our IT and administration capabilities in South Africa to drive economies of scale and in December we opened a new ofﬁce in Cape Town to provide customer service processing and IT support for Retail Europe’s customers in Germany, Poland and Austria. Launching new and innovative products through easily accessible distribution channels is key to our aim of becoming our customers’ most trusted partner. Whilst this work is still at an early stage, we introduced a number of new initiatives in 2010. Old Mutual South Africa (OMSA) and Mutual & Federal jointly developed a new short-term insurance product iWYZE for the retail mass market in South Africa. This product is distributed through traditional mass market models but also through digital channels and in the nine months since it launched, has already attracted nearly 5,000 customers. To date, iWYZE has also created approximately 150 new jobs in South Africa, primarily for young people. Annual Report and Accounts 2010 Old Mutual plc 25 MANAGEMENT STATEMENTS GROUP CHIEF EXECUTIVE’S STATEMENT CONTINUED Through our joint venture in India, Kotak Mahindra Old Mutual Life Insurance, we launched an online portal allowing customers to buy term insurance at a cheaper rate than through normal distribution channels. In Mexico, a unit-linked product was redesigned in conjunction with our team in South Africa and has since proved a key driver of our increased sales in the country. We also introduced a new Mass Retail distribution team into Mexico in December. LTS: Emerging Markets In South Africa, our business delivered a strong performance with life sales up 7% and unit trust sales up 17%. There was a noticeable improvement in sales in the second half as interest rates were cut and as the economic environment in South Africa stabilised. We saw good sales growth in both the Retail Afﬂuent and Mass Foundation segments, with a particular focus on savings products. The latest economic data is encouraging for the performance of the business in 2011. We launched the Futuregrowth Agri-Fund focusing on responsible equity investments in agricultural land, agri-businesses and farming infrastructure. OMIGSA attracted more than R8 billion into social infrastructure investment. Responsible funds are an important part of our commitment to helping build South African infrastructure and increase jobs for all parts of society. Mexico saw growth of 36% due to the introduction of a regular premium savings product in the ﬁrst half of the year. In China, our joint venture with Guodian had a strong year with APE sales up 77% to CNY163 million in 2010, following a new channel diversiﬁcation strategy. We have set a target for our proﬁts from our rest of African insurance operations to be the equivalent of 10% of our South African proﬁts by 2012, and 15% by 2015. To do this, we will leverage our experience and knowledge of the mass market sector in South Africa to grow our distribution channels through tied-agents and bancassurance and drive product development. We will also look to exploit new channels as they are established. For example, in Kenya we have seen initial success in distribution through mobile phones. We see other opportunities for growth in Africa, but remain mindful of our strict criteria for investment and any expansion must be within appropriate risk-adjusted returns. We have a solid foundation in South Africa from which we can drive growth in other emerging markets, and we are adapting our senior management structures, roles and responsibilities to achieve this. Our priorities for 2011 include growing our sales force; designing and adapting products for a wide range of customers; making it easier for our customers to access ﬁnancial services and promoting a savings culture in the markets in which we operate. We have conﬁdence in the underlying business and are well-positioned to exploit business opportunities as the economies of the Emerging Markets grow. LTS: Nordic The Nordic economies experienced positive GDP growth in 2010 and our Nordic business also had a good year, delivering a 66% uplift in proﬁt. Life sales were down 21% on the prior year, in line with management expectations, following the closure of an unproﬁtable business line in 2009. Our Danish business grew strongly. FUM was up 14% on the prior year, mainly due to improved equity markets, which also contributed to strong growth in mutual funds, up 37%. During 2010, the Nordic business focused on building distribution and product offerings, increasing efﬁciency and optimising its structures and risk frameworks. The management team was strengthened and a new CEO appointed. 2011 is a critical year for Nordic as it focuses on delivering its cost savings target of £10 million per annum. The cost of delivering these savings is likely to have a negative impact on the proﬁtability of the business in the coming year. The management will continue to focus on driving sales, increasing margins and delivering an improved distribution and product offering for the future development of the businesses in a rapidly changing marketplace. The economic outlook for the year is positive across all the geographies and we expect the Nordic savings markets to grow, albeit in a more competitive and fragmented market environment. LTS: Retail Europe Retail Europe delivered a very positive performance in 2010, in the context of GDP growth in all its markets. Equity markets were up, with the DAX showing a 16% gain for the year. Proﬁts for Retail Europe were up 140% on the prior year, with APE sales up 7% and mutual funds ﬂat. FUM was up 23%. 26 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Retail Europe continued to focus on building an integrated organisation and reducing operating costs. As part of the focus on costs, IT and client administration services for Retail Europe are being transferred to South Africa. One-off costs associated with the transfer will impact proﬁtability in 2011, before the beneﬁts start to come through in 2012. The uplift in sales was driven by new product launches in Germany, Poland and Switzerland. We also improved our marketing and sales drives to customers and built strong, more fruitful relationships with our distributors in 2010 and these proved to be signiﬁcant drivers of the business’s improved proﬁts. 4.0p Total dividend for 2010 (1.5p in 2009) Macro-economic factors will continue to inﬂuence the business in 2011. Positive equity and bond market performances will raise consumer conﬁdence although we expect there to be continued concern over unemployment levels. We have a programme of product innovation for the markets in Germany and Poland which should underpin growth in these attractive markets. LTS: Wealth Management This has been a signiﬁcant year for Wealth Management. APE sales were up 19%, and it delivered an 86% growth in proﬁt, driven by delivery of £35 million of run-rate savings, against its 2012 target of £45 million. Investor conﬁdence was boosted by the return to growth in equity markets which led to increased funds under management in all of our businesses. In the UK, we saw a continuation of the trend of IFAs converting to platform sales, for both wrapped and unwrapped sales. This was particularly noticeable in the ﬁrst half as IFAs moved large blocks of business on to our platform ahead of the tax year-end. Skandia’s market share in the UK continued to grow, and at the end of the third quarter we had captured 7.4% of all industry channels, versus 6.4% in the fourth quarter in 2009. Skandia Investment Group’s (SIG) Spectrum risk-targeted funds had a successful year with funds under management at more than £750 million with the funds now available on all the major IFA platforms in the UK. SIG also provided the technical expertise to allow the Nordic business to launch its own risk-targeted funds, based on the Spectrum concept, into Sweden. During 2011, Wealth Management will continue to focus on cost reduction, improving efﬁciency and meeting its 2012 targets, increasing risk controls and improving the functionality of the platform and the richness of the product offering. We are seeing an increasing demand from customers for products and services that are focused on their needs, are easy to understand and do not rely on heavy up-front commission to drive sales and with the forthcoming Retail Distribution Review, governments having to roll-back state retirement provision and the corresponding need for personal retirement savings, our Wealth Management business is well placed to meet customer demand. We plan for the platform to add to the proﬁts of the Wealth Management business in 2012. Nedbank Household ﬁnances improved in South Africa as debt started to reduce and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared to previous cycles. The ratio of household debt to disposable income reduced marginally and at the same time debt service levels decreased to 7.5% and are now at a level that is more conducive to improving economic growth in the consumer sector. In the corporate sector, excess capacity and uncertainty over the sustainability of the local and global recovery limited spending. Nedbank showed solid earnings growth in a challenging economic environment. Headline earnings increased by 15% to R4,900 million, and non-interest revenue increased 11% to R13.2 billion. Net interest income increased 2% to R16.6 billion. Annual Report and Accounts 2010 Old Mutual plc 27 MANAGEMENT STATEMENTS GROUP CHIEF EXECUTIVE’S STATEMENT CONTINUED US Asset Management (USAM) USAM proﬁts improved 4% over 2009 due primarily to higher average FUM. We saw net inﬂows into ﬁxed income products, which were offset by outﬂows from equity, alternative and stable value products leading to an overall negative NCCF of $18.0 billion. During the recent market dislocation, a number of our afﬁliates underperformed in certain of their strategies, but we are conﬁdent that they will deliver outperformance in time. Echo Point began operating as a USAM afﬁliate in October launching with $1.7 billion funds under management in international growth equities. Non-US clients represented more than a quarter of total funds under management and a key objective for us is to grow and diversify this base. We have expanded our global distribution through the hiring of new staff and we are expanding our distribution presence in the Middle East, resulting in US Asset Management now operating out of 13 countries. Growing the international element for US Asset Management is a priority for the business and we continue to work toward improving our margin with a target of 25-30% by the end of 2012 and improving investment performance. Peter Bain has been appointed CEO of US Asset Management. Peter has a proven track record in growing a boutique asset management company and his appointment is a key milestone for the US Asset Management business as we look to grow the business. We believe in our boutique model, with its 18 afﬁliates and 160 investment strategies. As investor conﬁdence improves, and with our extensive diversiﬁed product portfolio including non-US equity exposure, we believe we have the opportunity to capture a share of these ﬂows. We continue to explore the possibility of a partial IPO by the end of 2012. Nedbank’s credit loss ratio improved to 1.36% for 2010, its liquidity position remains sound and its capital ratios remain above target levels. The Tier 1 capital adequacy ratio of 11.7% marginally improved from that at 31 December 2009, and the total capital adequacy ratio ended the period at 15.0%. Nedbank is a strongly performing business and a signiﬁcant contributor to the Group. We have a clear strategy for growth with the key thrusts being the repositioning of Nedbank retail, growing non-interest revenue, focusing on areas that yield higher economic proﬁt and increased focus on the rest of Africa. 20% EPS up 20% (constant currency basis) Mutual & Federal 2010 was a good year for Mutual & Federal with proﬁts up 27% and a strong underwriting performance following the cancellation of unproﬁtable business, a relatively benign claims environment and a greater focus on claims cost control. During 2010, we introduced the step-change programme at M&F. Peter Todd has been appointed as Managing Director of M&F and will drive the delivery of the step-change programme over the next three years. The objectives of the programme are to embed proﬁtable and sound underwriting; to develop better products; to be more customer-focused; grow our customer base by offering the right distribution models; and improve efﬁciency. As part of the step-change programme, we aim to improve proﬁtability through growth in the direct and broker channels and through the reduction of claims costs and expenses. During the year, we entered the direct insurance channel via iWYZE, the joint initiative with OMSA. This is the ﬁrst step in extracting greater value from M&F’s position within the Old Mutual Group following the buy-out of minorities. With its strong balance sheet and increased focus on alternative distribution channels, we are conﬁdent that we can grow revenue while improving our expense ratios. 28 Old Mutual plc Annual Report and Accounts 2010 Dividend The Board has considered the position in respect of a ﬁnal dividend for year ended 31 December 2010, and is recommending a ﬁnal dividend of 2.9p per share (or its equivalent in other currencies). This makes a total dividend payment for the year of 4.0p compared to 1.5p in the previous year. A scrip alternative will be offered to eligible shareholders. South African Empowerment In South Africa in 2010, OMSA achieved and Nedbank maintained a Level 2 rating status and Mutual & Federal a Level 3 rating status as BBBEE contributors. Outlook We have made some signiﬁcant operational progress and we expect 2011 to be a year of further delivery. We are committed to our three-year strategy and meeting our stated operational targets. Julian Roberts Group Chief Executive 8 March 2011 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 29 MANAGEMENT STATEMENTS GROUP CHIEF EXECUTIVE’S Q&A’S Julian Roberts answers a range of questions on how Old Mutual is delivering its strategy – and what lies ahead for the Group. 1 2 It has been a year now since you unveiled your strategic review. How much progress have you made? What are the major challenges and opportunities for the Group in 2011? Our strategy is to build a long-term savings, protection and investment group. One year into a three-year process, we have made signiﬁcant operational progress. When we announced our strategy, we said we would streamline and simplify the Group where we could create shareholder value. We have set some criteria to test this, which are: (cid:81) Does the business meet or can it meet our RoE target? (cid:81) Does the business contribute to or can it contribute to other parts of the Group? (cid:81) Can it become meaningful in the context of the Group’s earnings? As a result of applying these criteria, we have agreed to sell our US Life business for US$350 million. We are making good progress in achieving the operational targets we set. We have delivered £59 million of run-rate savings against our target of £100 million. For our Long-Term Savings business, we set a return on equity target of 16-18%: last year, its RoE was 18.5% and we aim to ensure that this is sustained. We remain committed to reducing our debt by £1.5 billion by 2012. In addition, we have implemented a new, more effective governance and control system. This is already working well, with the number of one-off operational losses reducing signiﬁcantly during 2010. We have strengthened our management team with new CEOs in Nordic, US Asset Management, Mutual & Federal (M&F) and OMIGSA. So we have made a good start to meeting our strategic objectives – though we recognise we still have a lot of work to do over the next two years. 30 Old Mutual plc Annual Report and Accounts 2010 We have achieved a lot in 2010. The challenge now is to ensure we maintain that rate of progress. We saw good proﬁt growth last year, and sustaining that momentum is crucial. While the global outlook remains somewhat volatile, we believe that, as long as we maintain what we have been doing, we can continue to grow our sales and proﬁts. This year we must deliver further on our strategy. We need to continue to deliver cost savings, reduce our debt and work on leveraging our strengths across the Long-Term Savings division. In Emerging Markets, we will focus on designing new products for our customers and ensuring we have the right methods of selling to them. We are excited by the opportunities we see in Emerging Markets and the potential for expanding our footprint in sub-Saharan Africa. Our restructuring programme in Nordic is intended to reduce its costs and increase its proﬁtability. Retail Europe is rolling out a suite of new products and Wealth Management will continue reducing costs and improving efﬁciency. We have a new CEO at US Asset Management, whose declared priorities are maintaining investment discipline to improve performance and net client cash ﬂow, driving growth and improving margins. We are continuing to explore a partial IPO of this business. At Mutual & Federal, our new MD will be driving its Step Change Programme, which is necessary to refocus and grow the business. And Nedbank has a clear strategy for growing its retail business and non-interest revenue. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n 3 4 How are you putting the customer at the centre of everything you do? How would you judge Old Mutual’s performance last year? Putting the customer at the centre requires us to understand what our customers need, offering them the right products through the right distribution channels in each of our markets, while providing unrivalled customer service. This will create long-term, sustainable competitive advantage. We have to develop speciﬁc products, distribution systems and processes to meet the needs of customers in two distinct types of market: developed countries and emerging markets. In the UK, for example, we offer ﬂexible, transparent products primarily through our Skandia platform. Evidence of the development of the platform business can be found through our growing share of the UK savings market: by the end of the third quarter of 2010 we had achieved a 7.4% share, up from 6.4% at the end of 2009. In Emerging Markets, we have a wider product set, often centred on regular-premium protection products and distributed through the channels that suit our customers. We focus on delivering value – making sure that our products are transparent, our fees are clear and our customers get what they want and need. I am very pleased with our performance in 2010 and would say it has been a year of substantial improvement. Our adjusted operating proﬁt was up 14%, adjusted earnings per share were up 20% and Group return on equity was up from 9.1% to 12.2%. In light of these strong results, our Board has recommended an increased ﬁnal dividend of 2.9p, making a total of 4.0p for the year. Our funds under management increased during the year to £309 billion and our ﬁnancial position remains robust. Looking at our performance in more detail, we saw 7% growth in life sales on an APE basis and 28% growth in unit trust sales in Long-Term Savings. Each of our Long-Term Savings businesses grew its proﬁts during the year. Our Wealth Management business had a particularly good year, with proﬁts up 86%, and the UK platform attracted gross inﬂows of £5.2 billion. Nordic grew its proﬁts by 66% and Emerging Markets also achieved good sales and proﬁt growth. Our short-term insurance business, Mutual & Federal, had one of its best underwriting performances to date. And Nedbank reduced impairments, increased non-interest revenue and grew headline earnings by 15%. So we achieved a good performance overall, with all our businesses delivering progress. Our focus going forward will be on keeping up the good work. Annual Report and Accounts 2010 Old Mutual plc 31 MANAGEMENT STATEMENTS GROUP FINANCE DIRECTOR’S STATEMENT “... a very strong improvement in results compared to the prior year... AOP earnings per share were 16.0p and return on equity grew to 12.2%...” Philip Broadley Group Finance Director 32 Old Mutual plc Annual Report and Accounts 2010 During the year to 31 December 2010 (“the year”) Old Mutual showed a very strong improvement in results compared to the prior year. Adjusted Operating Proﬁt (AOP) earnings per share were 16.0p for 2010 compared to 11.6p for 2009. This was driven by improved operational performance across the Group and positive currency movements. Funds under management (core and continuing businesses) grew by 12% compared to the prior year, largely due to improved market conditions. Return on equity grew to 12.2%, primarily as a result of improved margins and favourable foreign exchange movements. IFRS AOP on a pre-tax basis of £1,481 million for the year was £348 million higher than in the prior year. This was made up of £181 million (52%) due to improvement in trading results, and £167 million (48%) from the positive beneﬁt of currency movements. On a constant currency basis, the AOP for 2009 was £1,300 million. Strong growth in new business sales, lower credit losses in banking, a close focus on overall cost control, improved persistency and higher proﬁts in our general insurance business drove the underlying performance. Net client cash ﬂows (NCCF) doubled in LTS to £5 billion, and were positive in all our European businesses and in our Retail South African businesses. This was offset by outﬂows in the Corporate and OMIGSA businesses in South Africa, and in certain afﬁliates of USAM. The NCCF contribution from Wealth Management was particularly strong, increasing by 56% to £3.9 billion largely from the UK Platform and Italy. Funds under management increased to £309 billion (core and continuing businesses) although there were periods of substantial market movements in the year. Across all our principal equity markets, second quarter falls more than eclipsed ﬁrst quarter rises. Markets steadily rose from August onwards, all recording their 2010 highs in the last week of the year. The JSE All Share index rose by 16% in the year, the FTSE rose by 9%, the S&P-500 by 13% and the Swedish SAX:OMX by 23%. Management Discussion and Analysis of Results for 2010 The principal businesses of the Group are the LTS division, Nedbank, Mutual & Federal and US Asset Management. During the period, Old Mutual owned on average 54% of Nedbank. At 31 December 2010 the market capitalisation of Nedbank was £6.2 billion. The results for each of the LTS businesses, Nedbank, Mutual & Federal and US Asset Management are discussed separately in the Business Review which follows this Report. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCE DIRECTORS FROM AROUND THE GROUP Iain Pearce Group Head Ofﬁce Katie Murray Emerging Markets Marek Rydén Nordic Markus Deimel Retail Europe Mark Satchel Wealth Management Raisibe Morathi Nedbank Debbie Loxton Mutual & Federal Matt Berger US Asset Management Barry Ward US Life Michael Sakoulas Bermuda Summarised Financial Information IFRS results Adjusted operating proﬁt (IFRS basis, pre-tax)1 Adjusted operating earnings per share (IFRS basis)1 Basic loss per share IFRS proﬁt/(loss) 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 proﬁt Group MCEV earnings (post-tax and non-controlling interests) Adjusted operating Group MCEV earnings per share Financial metrics Return on equity1, 2 Return on Group MCEV Net client cash ﬂows (£bn) Funds under management (£bn) Interim dividend Final dividend FGD (£bn) £m 2010 £m 2009 % Change 1,481 16.0p (6.5p) (24) 1,583 12,155 172 10,305 11.0 202.2p 830 15.5p 12.2% 10.9% (6.2) 322.8 1.1p 2.9p 2.1 1,133 11.6p (7.8p) (118) 1,381 10,217 167 7,567 9.0 171.0p 562 10.7p 9.1% 10.7% (2.7) 285.0 – 1.5p 1.5 31% 38% 17% 80% 15% 19% 3% 36% 22% 18% 48% 45% (130%) 13% – 93% 40% 1 The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued. 2 ROE is calculated as IFRS AOP (post-tax) divided by average shareholders’ equity of core businesses (excluding the perpetual preferred callable securities). Annual Report and Accounts 2010 Old Mutual plc 33 MANAGEMENT STATEMENTS GROUP FINANCE DIRECTOR’S STATEMENT CONTINUED Summary adjusted operating proﬁt statement £m Revenue Net earned premiums Investment return (non-banking) Banking interest and similar income Fees & commissions Other revenue Total revenues Expenses Net claims and beneﬁts incurred Change in investment contract liabilities Bank interest Other expenses Total expenses Year ended 31 December 2010 Year ended 31 December 20091 % Change 3,278 10,585 4,082 3,160 298 21,403 (4,564) (6,899) (2,500) (5,966) 2,746 10,903 3,989 2,538 311 20,487 (3,126) (8,341) (2,627) (5,262) (19,929) (19,356) 19% (3%) 2% 25% (4%) 4% 46% (17%) (5%) 13% 3% Share of associated undertakings proﬁt/(loss) after tax 7 2 250% Adjusted operating proﬁt/(loss) before tax and non-controlling interests 1,481 1,133 31% 1 The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued. The improvement in our AOP earnings was principally driven by increased income from rising markets, better underwriting performance in all our insurance businesses, growth in Nedbank’s non-interest revenue stream, and the beneﬁt of positive currency movements. The 19% increase in net earned premiums reﬂected the growth in new business sales, most notably, in Emerging Markets, Mutual & Federal and Wealth Management. The majority of the fee and commission income growth arose in Wealth Management, largely attributable to the increase in FUM over the period, and in Nedbank, reﬂecting a growing customer base. Investment return is driven by dividend and interest income, and gains and losses on the fair value of investments and securities, a large proportion of which are held attributable to investment contract holders. The decline in investment return in the year broadly matches the corresponding movement in investment contract liabilities in Wealth Management and Nordic given the investment nature of the contracts written in those businesses. However, in Emerging Markets the increase in investment return is not closely matched by a similar change in investment contract liabilities due to its larger proportion of insurance type products, and because substantial shareholder capital is held in South Africa. Other expenses grew by 13% over the period, reﬂecting increased levels of new business written, FX movements (primarily the strengthening of the rand) and increased remuneration costs in South Africa. Group net margin (measured as net proﬁts earned on average assets) increased by 4.3 basis points over the period from 38.7 basis points to 34 Old Mutual plc Annual Report and Accounts 2010 Net Margin (bps) 2010 72.2 98.8 5.5 43.0 2009 64.8 95.4 5.8 38.7 LTS Nedbank USAM TOTAL1 1. Includes M&F and corporate costs. Margins are calculated on the average balance of funds under management and banking assets during the year 43.0 basis points. Of this, the European LTS businesses generated 3.9 basis points as the uplift in proﬁts signiﬁcantly exceeded their average asset growth, and 0.3 basis points came from Emerging Markets, where AOP grew at a marginally higher rate than growth in average assets, resulting in a small increase. The increase in proﬁt from the non-LTS businesses resulted in a further 1.6 basis points increase, and the reduced LTIR contribution resulted in a decrease of 1.5 basis points. Operating proﬁt analysis Finance costs increased mainly as a result of inclusion of a full-year interest charge on the £500 million seven-year 7.125% ﬁxed rate senior bond placed in October 2009. The interest payable to non-core operations reﬂects the interest payable on the loan note arrangement between Bermuda and Group following a change to the terms of the arrangement. The decline in other net income and expenses is mainly attributable to a stamp duty reserve tax refund received in the ﬁrst half of the year (£16 million) and higher dividend income (£5 million). Group costs for 2010 were £60 million (2009: £70 million). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Operating proﬁt analysis £m Long-Term Savings Nedbank Mutual & Federal US Asset Management Finance costs LTIR on excess assets Interest payable to non-core operations Interest receivable from non-core operations Other net income and expenses Year ended 31 December 2010 Year ended 31 December 2009 (constant currency) Year ended 31 December 20091 (as reported) % Change % Change 897 601 103 87 (128) 31 (55) 16 (71) 713 548 81 84 (104) 91 (40) 12 (85) 26% 10% 27% 4% 23% (66%) 38% 33% (16%) 14% 636 470 70 83 (104) 91 (40) 12 (85) 1,133 41% 28% 47% 5% 23% (66%) 38% 33% (16%) 31% Adjusted operating proﬁt 1,481 1,300 1 The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued. As anticipated, the LTIR on the shareholder assets decreased from £91 million to £31 million. This was a result of the 390 basis point reduction to 9.4% in the rate applied to shareholder assets within Emerging Markets. This reﬂected the expected return from the asset allocation of 25% equities and 75% cash in 2010. The LTIR rate in Mutual & Federal was similarly reduced by 390 basis points in 2010. The LTIR rate for Emerging Markets and Mutual & Federal has been further reduced in 2011 to 8.4% to reﬂect the prevailing low interest rate environment in South Africa. Reconciliation of Group AOP and IFRS proﬁts The key adjusting items between our AOP and IFRS proﬁts for the year are deductions of £214 million in respect of acquisition accounting (mainly the amortisation of acquired present value of in-force business), £83 million for short-term ﬂuctuations in investment return (of which £71 million relates to the smoothing of previous years’ deferred tax assets), and £203 million in respect of the impact of marking-to-market of Group debt, as the improvement in the external valuation of Group debt in the year negatively impacted proﬁt after tax Reconciliation of Group AOP and IFRS proﬁts 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 Proﬁt/(loss) from continuing operations after tax Proﬁt/(loss) from discontinued operations after tax Proﬁt/(loss) after tax for the ﬁnancial year Other comprehensive income for the ﬁnancial period Total comprehensive income for the ﬁnancial period Attributable to Equity holders of the parent Non-controlling interests Ordinary shares Preferred securities Total comprehensive income for the ﬁnancial period 1 The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued. £m Year ended 31 December 2010 Year ended 31 December 20091 1,481 (482) (3) 996 149 1,145 (456) 689 (713) (24) 1,151 1,127 594 428 105 1,127 1,133 (973) 1 161 192 353 (400) (47) (71) (118) 1,228 1,110 709 334 67 1,110 Annual Report and Accounts 2010 Old Mutual plc 35 MANAGEMENT STATEMENTS GROUP FINANCE DIRECTOR’S STATEMENT CONTINUED for the year. This reverses previous years’ mark-to- market gains on Group debt. Other adjustments net to £18 million. As previously reported, the prior year AOP results beneﬁted from the structural tax efﬁciency applicable to UK companies writing unit-linked business in the UK, together with the smoothing of previous years’ deferred tax assets. These assets arose during the signiﬁcant market volatility of the preceding two years where falls in the value of policyholder assets resulted in the recognition of signiﬁcant deferred tax assets in the IFRS income statement, which were spread forward under AOP. The pre-tax smoothing for 2010 gave rise to a proﬁt of £71 million, a similar amount to 2009. For 2011, the pre-tax impact will be a proﬁt of £27 million, falling to nil thereafter. The proﬁt on continuing operations of £689 million was offset by a loss on discontinued operations of £713 million, resulting from the impairment of the US Life business in anticipation of its sale at the terms agreed with the purchaser. The Group produced a loss after tax of £24 million on an IFRS basis. In addition to this the Group generated other comprehensive income of £1,151 million largely from favourable currency movements. There was therefore an increase in net assets of £1,127 million in the period. Progress against ROE and margin targets Group cost savings and ROE and margin targets At the 2009 Preliminary Results and Strategy Update, the Group introduced three-year cost saving and return on equity targets. The improvement in RoE has been driven by the achieved cost savings, and increased FUM resulting from strong growth in new business sales and positive market levels. We are in the process of delivering the reduction in the cost base of our businesses as announced in March 2010. Wealth Management has made good progress with £35 million of run-rate savings achieved to date against the 2012 target of £45 million. Retail Europe has achieved £6 million of run-rate savings as a result of reduced staff costs and centralisation of functions in Berlin. US Asset Management delivered around £15 million of actual savings in the year as a result of restructuring in 2009, and therefore on a run-rate basis, the business is already exceeding its target. Costs to achieve this in 2010 totalled £45 million. Our focus in 2011 and 2012 will be on continued execution, particularly in Wealth Management, Nordic and Retail Europe, while maintaining the reductions we have achieved to date. The costs of executing the cost reduction process will restrict 2011 proﬁts from these businesses. Nordic restructuring costs are anticipated to be approximately £30 million in 2011. Long-Term Savings1 Emerging Markets Nordic Retail Europe Wealth Management LTS Total USAM Operating Margin 2010 2009 2012 Target 25% 11% 20% 14% 18.5% 18% 23%2 12% 9% 8% 14.8%3 18% 20%-25% 12%-15% 15%-18% 12%-15% 16%-18% 25%-30% 1 ROE is calculated as IFRS AOP (post tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles. 2 Within Emerging Markets, OMSA is calculated as return on allocated capital. Full year 2009 has been adjusted to the 2010 LTIR rate. 3 Long-Term Savings 2009 restated from 14.9%. Progress against 2012 cost reduction targets £m Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management LTS Total USAM Group-wide corporate costs Total 1. Run-rate savings delivered to date. 36 Old Mutual plc Annual Report and Accounts 2010 Cost to achieve in 20101 2010 2012 Target – 3 6 35 44 15 – 59 – 5 5 27 37 8 – 45 5 10 15 45 75 10 15 100 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Summary MCEV results Adjusted Group MCEV per share at 31 December 2009 Adjusted operating Group MCEV earnings per share Covered business Non-covered business Below the line effects Economic variances and other Foreign exchange movements Dividends to shareholders Nedbank market value adjustment M&F dilution BEE and ESOP adjustment Marking debt to market value Adjusted Group MCEV per share at 31 December 2010 p 171.0 15.5 11.0 4.5 15.7 11.2 15.9 (2.7) 1.7 (7.1) 1.1 (4.4) 202.2 Summary MCEV results The adjusted Group MCEV increased 22% from £9.0 billion at 31 December 2009 to £11.0 billion at 31 December 2010. The adjusted Group MCEV per share increased by 18% (or 31.2p) from 171.0p to 202.2p over the same period. The net risk-free return from investment in new business in LTS (calculated as VNB based on the risk-free return, divided by the free surplus invested in new business) has increased from 35p per £1 in 2009 to 48p per £1 in 2010, with all LTS businesses contributing to the improvement. The adjusted operating Group MCEV earnings per share increased by 4.8p from 10.7p for 2009 to 15.5p for 2010. Non-covered business operating earnings per share, at 4.5p, were 3.2p higher for 2010 compared to the 2009 result of 1.3p, as a result of: (cid:81) Higher proﬁts in the asset management businesses, arising from higher funds under management, and (cid:81) Higher sterling proﬁts in the banking business due to greater fee income and lower bad debt charges. Covered business operating MCEV earnings of 11.0p were 1.6p higher in 2010 compared to 9.4p in 2009 as a result of: (cid:81) A strong turn-around in the contribution from experience variances, due to improved persistency experience relative to the assumption changes made at December 2009, and improved expense experience; (cid:81) Lower contribution from operating assumption changes, particularly for persistency and expenses; offset by (cid:81) A lower expected existing business contribution, mainly resulting from a reduction from the contribution made by US Life due to lower yields on the corporate bond portfolio at the start of 2010 compared to the start of 2009; and (cid:81) An adverse contribution from methodology changes and error corrections, (reﬂected as part of other operating variances). A substantial component of the increase in adjusted Group MCEV per share during 2010 was due to signiﬁcant foreign exchange gains as a result of the strengthening of the rand, dollar and krona to sterling. The balance of the increase was due to the impact of economic variances (the increase in the equity markets and reductions in interest rates), and the expected existing business contribution from covered business. This is partially offset by the dilutionary effect of the Mutual & Federal (M&F) acquisition of minorities and the adjustment to mark the debt to market value. The M&F minority interests were acquired on 8 February 2010, in consideration for 147 million Old Mutual plc shares. This transaction diluted the adjusted Group MCEV per share by 7.1p as a result of a change of the basis of valuation of M&F as an unlisted entity (reduction of 2.5p), and the additional shares issued as consideration to the M&F minorities (reduction of 4.6p). M&F is now incorporated in the adjusted Group MCEV at the IFRS net asset value (31 December 2010: £409 million). Previously it was included at the Group’s share of the market value (31 December 2009: £448 million), which was higher than IFRS net asset value (31 December 2009: £265 million). The MCEV methodology does not capitalise returns on assets in excess of the adjusted risk-free reference rates. For the US Life business, we have estimated that the present value of credit spreads not valued at December 2010 amounted to £593 million, compared to £571 million at December 2009. Annual Report and Accounts 2010 Old Mutual plc 37 MANAGEMENT STATEMENTS GROUP FINANCE DIRECTOR’S STATEMENT CONTINUED Sources and uses of free surplus Gross inﬂows from core and continuing operations were £1,016 million (2009: £1,064 million), and new business spend was £419 million (2009: £438 million). Total net free surplus generated of £645 million was lower than the £782 million in 2009 due to cash costs of restructuring in 2010 and the acceleration of cash ﬂow in respect of the VIF ﬁnancing for Skandia International in 2009. Capital, liquidity and leverage Capital The Group’s regulatory capital surplus, calculated under the EU Financial Groups Directive, at 31 December 2010 was £2.1 billion. The Group followed the FSA’s requirements, and gave it six months advance notice of its right to call a £300 million Lower Tier 2 instrument at the ﬁrst call date of 21 January 2011. The bond was subsequently called on this date. As a result of that notice, the Lower Tier 2 instrument had been excluded from the regulatory capital surplus calculations as at 31 December 2010. On a like-for-like basis, the regulatory capital surplus at 31 December 2010 was £2.4 billion (31 December 2009: £1.5 billion). The FGD of £2.1 billion represented a coverage ratio of 146%, compared to 135% at 31 December 2009. The increase in the coverage ratio since 31 December 2009 comprises statutory proﬁts in LTS (Emerging Markets and UK) and Nedbank, reduced resilience risk capital requirement in Bermuda due to hedging and a reduction in Nedbank’s capital requirement reﬂecting a change to the “capital ﬂoor” regime operated by the South African Reserve Bank. These positive changes have been partially offset by increased capital requirements in Emerging Markets, deduction of intangible assets in Nedbank for the ﬁrst time and by the payment of Group ordinary and preferred dividends. On completion of the US Life transaction, and as previously announced, we would anticipate a reduction in FGD surplus of approximately £100 million. Our Group regulatory capital, calculated in line with the FSA’s prudential guidelines, is structured in the following way as noted in the table below: 2010 5,168 653 5,821 2,363 (1,439) 6,745 % 77 10 87 35 (22) 100 20091 4,171 611 4,782 2,562 (1,497) 5,848 £m % 71 10 81 44 (25) 100 Taking this into account, we estimate that the value of US Life including an appropriate allowance for additional credit spreads (a proxy to the European Embedded Value basis) was £404 million at December 2010 compared to £253 million at December 2009. Risk management using Economic Capital and Market Consistent Embedded Value The Group’s current internal Economic Capital models form the basis of the Risk Appetite and limit-setting framework, which is applied on the basis of Market Consistent valuation methodologies and assumption setting processes. In this way the Group is able to ensure that Risk Appetite and exposures are derived with respect to a risk-neutral benchmark, which adds value by ensuring that the Group makes explicit decisions regarding risk assumption inherent in New Business and management of the in-force book. We believe that this disciplined approach facilitated better decision-making around risk assumption over the past year. The new Solvency II internal model builds on the work done under the current Economic Capital model, and will be used in future to generate beneﬁt in respect of making decisions which formally quantify potential investment and market risk exposures, hence support better informed decision-making. Free surplus generation The Group generated £759 million of free surplus in the period (2009: £434 million), of which £503 million (2009: £581 million) was generated by the LTS division. £519 million (2009: £249 million) of the £759 million was generated from covered business (which includes US Life and Bermuda). We anticipate that the value of our in-force business will generate £3 billion of free surplus from the covered business over the next ﬁve years. Free surplus generated from the in-force business is used to cover investment in new business, to pay dividends, and to provide free cashﬂow to the Group. Capital Ordinary Equity Other Tier 1 Equity Tier 1 Capital Tier 2 Deductions from total capital Total Capital 1 2009 restated to reﬂect actual FSA submission. 38 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Subsidiary businesses’ local statutory capital cover Business unit OMLAC(SA) Mutual & Federal US Life Nordic UK Nedbank1 1 This includes unappropriated proﬁts. Tier 1 Capital includes £203 million of 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 Group’s FGD surplus is calculated using a method called “deduction and aggregation”, and is the Group’s capital resources less the Group’s capital resources requirement. Group capital resources is the sum of the business unit net capital resources, which is calculated as its stand-alone capital resources less the book value of the Group’s investment; the Group capital resources requirement is the sum of each business unit’s capital requirement. The contribution made by each business unit to the Group’s regulatory surplus will, therefore, be different from its locally reported surplus since the latter is determined without the deduction for the book value of the Group’s investment. Thus, although all our major business units have robust local solvency surpluses, a number of them do not make a positive contribution to the Group’s FGD position. The corollary of this is that a disposal of a business unit at a value equal to or greater than its net asset value will normally have the effect of increasing the Group’s FGD surplus. Holding company net debt At 31 December 2010 At 31 December 2009 Ratio Ratio 3.9x 2.02x 350% 9.8x 2.8x 4.1x 1.53x 312% 10.8x 2.9x Core Tier 1: 10.1% Core Tier 1: 9.9% Tier 1: 11.5% Total: 14.9% Tier 1: 11.7% Total: 15.0% We have set a target to reduce the Group’s debt by at least £1.5 billion on a cash basis by the end of 2012, whilst ensuring also that the Group’s balance sheet and the holding company’s liquidity continues to be prudently managed against our internal targets. In 2010 the holding company repaid £97 million of Old Mutual senior debt and on 21 January 2011 the Group repaid its £300 million Lower Tier 2 security. Liquidity As a Group we continue to maintain effective dialogue and strong commercial relationships with our banks and credit investors. As of 31 December 2010, the Group has available cash and committed facilities of £1.4 billion (31 December 2009: £1.2 billion). Of this cash on hand at the holding company was £0.4 billion (31 December 2009: £0.4 billion). G o v e r n a n c e In addition to the cash and available resources referred to above at the holding company level, each of the individual businesses also maintains liquidity to support their normal trading operations. Net inﬂows from businesses less expenses increased compared to 2009 and included a net remittance from US Life of £51 million. The holding company made ordinary dividend payments in the period of £65 million and offered a scrip dividend i F n a n c a s l i Opening net debt Inﬂows from businesses Outﬂows to businesses and expenses Debt and equity movements: Ordinary dividends paid (net of scrip dividend elections) Equity issuance Other movements Closing net debt Net decrease/(increase) in debt 2010 (2,273) 433 (201) (65) 4 (334) (2,436) (163) £m 2009 (2,263) 529 (339) – – (200) (2,273) (10) S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 39 MANAGEMENT STATEMENTS GROUP FINANCE DIRECTOR’S STATEMENT CONTINUED election. Of the total other movements of £334 million, £183 million is in respect of the revaluation of the fair value of Group bonds relating to improved credit spreads and the balance is foreign exchange movements and other net ﬂows. Dividend Dividend policy The Board intends to pursue a progressive dividend policy consistent with our strategy, having regard to overall capital requirements, liquidity and proﬁtability, and targeting dividend cover of at least 2.5 times IFRS AOP earnings over time. Final dividend for 2010 The Board has carefully considered the position in respect of a ﬁnal dividend for 2010, and is recommending the payment of a ﬁnal 2010 dividend of 2.9p per share (or its equivalent in other applicable currencies). A scrip option is also being offered. Corporate disposals and acquisitions and related party transactions As set out in the Strategy Update in March 2010, the Group continues to simplify its structure and reduce its spread of businesses to focus on areas of key competence and competitive strength, and drive operational improvements. On 6 August 2010, the Group announced the disposal of the US Life operations to Harbinger Capital Partners. In February 2011, we agreed to enter into an amended SPA with an afﬁliate of Harbinger Capital Partners LLC. The Board of Harbinger Group Inc. – a public company listed on the NYSE – has recently agreed to acquire this afﬁliate. We await regulatory approval for the transaction, and closing is expected at or around the end of the ﬁrst quarter of 2011. The US Life business has been classiﬁed as a non-core discontinued operation, and as such its proﬁts are excluded from the Group’s IFRS adjusted operating proﬁt. US Life made a trading proﬁt of £51 million before the deduction of inter-company interest paid to Group. In accordance with IFRS 5, the assets and liabilities of US Life have been classiﬁed as held for sale in the statement of ﬁnancial position for the current year. The amount recognised as the impairment on remeasuring the business to fair value (less the costs to sell) was £827 million. The loss after tax on the sale was £713 million. A summarised review of the operating performance of US Life is set out in the Review of Non-core and Discontinued Business Operations which follows the core operating Divisions. Solvency II, Risk Allocation and iCRaFT and Financial Controls Initiative project update Our integrated Capital, Risk and Finance Transformation (“iCRaFT”) project is progressing well. The Group has entered the FSA’s internal model approval process, and is on track to deliver all requirements for Solvency II compliance. We were the ﬁrst major UK retail group to submit our Group QIS5 results and the Self Assessment Questionnaire in respect of the internal model to the FSA. In 2011, we will enter the “Use Test” phase, during which we will demonstrate the extent to which we have embedded the new tools and processes, and will hold dry runs of selected Solvency II processes. We expect to be ready to make our full internal model application at the earliest date that the FSA is ready to accept such submissions. In the LTS showcase presented on 13 October 2010, we published the Group’s target risk proﬁle versus current risk proﬁle, along with a range of risk preferences, which considered the trade-offs between capital required to back different classes of liabilities, the risk assumed when underwriting these liabilities, and the margins available from doing so. The work that we have done is focused on ensuring that we deploy capital to underwrite risks that increase shareholder value, within a framework that fully protects promises made to policyholders. The Business Planning process requires business units to deﬁne and adopt their risk strategies, indicating how they intend to manage their existing liabilities and which products they wish to offer in future, within the framework of applying capital to these risks in order to create value at the BU level. We are satisﬁed that we are making good progress with this activity, and that we are achieving our objective to delivering better outcomes, within a stronger risk, capital and value framework. In 2010, we completed the implementation of our Financial Controls Initiative project putting in place an internal certiﬁcation framework across all the Group’s ﬁnancial reporting processes to a standard broadly equivalent to the US Sarbanes-Oxley requirements. Tax and non-controlling interests The effective tax rate on adjusted operating proﬁts was 23% (2009: 25%). The effective rate reduced as an increased proportion of proﬁts were earned on low-taxed dividends and capital proﬁts, utilisation of group relief against taxable UK income in appreciating markets, and the beneﬁt of secondary tax on companies (STC) credits in OMSA. This was partially offset by increased provisions and deferred tax assets not being 40 Old Mutual plc Annual Report and Accounts 2010 recognised on losses arising in the UK. Looking forward, and depending on proﬁt mix, we would anticipate the long term effective tax rate on AOP returning to the 25% to 28% range. The non-controlling interests’ share of adjusted operating proﬁt increased by £34 million reﬂecting the minority share of higher Nedbank earnings, supported by the strengthening of the rand. Risks and Uncertainties There are a number of potential risks and uncertainties that could have a material impact on the Group’s performance and cause actual results to differ materially from expected and historical results. Whilst world economic conditions have improved from a year ago a number of other factors could impact the Group’s ability to create value. Increasingly, governments are recognising the need for effective retirement provision, which provides future opportunities. At the same time, the regulatory environment is moving towards more transparency and providing consumers with more choice, protection and better value for money. Whilst we believe that many of our products align with this requirement, increased consumerism could lead to adverse reputational outcomes across the industry, which may have an impact on our business even though our products may not be the ones leading to such outcomes. Regulatory developments are also impacting on commission structures. The increased regulatory activity may increase the cost of doing business and drive margins down, resulting in a more competitive environment and competition for customers is increasing from both traditional and new players in all markets. Continued economic uncertainty has contributed to lower consumer conﬁdence, and may inﬂuence product preferences to lower risk investment products and affect termination experience in respect of existing and new business. There is also an increased drive from consumers for products with increased capital protection rather than complexity. Movements in asset prices lead to changes in funds under management and the fees that the Group earns from those funds. In instances where these lead to reduced fund values and fees, such movements will have an adverse impact on earnings. The Group monitors these uncertainties, takes appropriate actions wherever possible, and continues to meet Group and individual entity capital requirements and day to day liquidity needs. Progress has been made with the US Life sale, effective management of Bermuda Variable Annuity guarantee risks and initial activity to explore the US Asset Management IPO. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l The implementation of the new operating model is almost complete. Changes designed to implement the “strategic controller” model at the Group level through revision of the governance structure and processes, clarifying roles and responsibilities of Group and business units, and increasing Group presence on business unit Boards and Committees are progressing. Risks remain and may arise from the implementation of cost reduction programmes, streamlining of businesses and processes and other strategic initiatives. Business Performance Executives were appointed in 2010 and form a key part of the Operating Model, increasing engagement and understanding between the Group Head Ofﬁce and Business Units, focusing on strategic delivery and informing the appropriate decisions. The Group continues to strengthen and embed its risk management framework, with increasing importance placed upon ensuring business decisions are within Risk Appetite, and that risk exposures are monitored against Appetite, allocated limits and budgets. Risk Appetite limit allocation is now a key part of the Business Planning Process and the Group is progressing in embedding the Risk Appetite process by increased challenge on risks and management actions, as part of the Quarterly Business Reviews. The Board of Directors has the expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the ﬁnancial statements contained in this document. Philip Broadley Group Finance Director 8 March 2011 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 41 MANAGEMENT STATEMENTS GROUP EXECUTIVE COMMITTEE 42 Old Mutual plc Annual Report and Accounts 2010 Julian Roberts (53), B.A., F.C.A., M.C.T. Group Chief Executive Julian has been Group Chief Executive of Old Mutual plc since September 2008. He is also a non- executive Director of Nedbank Group Limited, Nedbank Limited and Old Mutual Life Assurance Company (South Africa) Limited. He 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, before that, Chief Financial Ofﬁcer of Aon UK Holdings Limited. Philip Broadley (50), 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. Peter Bain (52), B.A., J.D. President and Chief Executive Ofﬁcer, Old Mutual Asset Management (US) Peter is President and Chief Executive Ofﬁcer of Old Mutual Asset Management, the US based global asset management business of Old Mutual plc. He has more than two decades of experience leading and advising ﬁrms in the investment management industry. Previously he was a Senior Executive Vice President at Legg Mason, Inc, where he held leadership positions from 2000 to 2009. Most recently he served as Head of Afﬁliate Management and Corporate Strategy, with responsibility for overseeing the ﬁrm’s investment managers. Prior to that, he was Chief Administrative Ofﬁcer, responsible for the ﬁrm’s overall administration and operations. Andrew Birrell (41), 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 that, he was Chief Financial Ofﬁcer at Capital Alliance Holdings. His early career was at Metropolitan Life. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Mike Brown (44), 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 (49), 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 (54) 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 is Chairman of Old Mutual (Bermuda) Limited and a non-executive director of Nedbank Group Limited and Nedbank Limited. G o v e r n a n c e 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 that, Don worked for Morgan Stanley for 13 years and he held a variety of senior HR roles in both New York and London. Don started his career as a consultant in human resources. From the left: Peter Bain, Don Hope, Mike Brown, Julian Roberts, Andrew Birrell, Don Schneider, Philip Broadley, Paul Hanratty. Annual Report and Accounts 2010 Old Mutual plc 43 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n BUSINESS REVIEW LONG-TERM SAVINGS KEY FINANCIAL HIGHLIGHTS Adjusted operating proﬁt (pre-tax) £897m 2009: £636m Funds under management £131.8bn 2009: £105.5bn Number of employees 24,044 2009: 22,269 Some of our brands Return on equity (RoE) % APE sales (£m) 487 Emerging Markets 393 18.5 4.7 2010 2009 2010 2009 2010 69 2009 67 2010 2009 201 235 Nordic Retail Europe MCEV (£m) 734 Wealth Management 617 3,953 2,971 Emerging Markets 2010 2009 2010 2009 2010 2009 2010 2009 1,836 1,548 Nordic 637 543 Retail Europe 2,148 1,996 Wealth Management 617 734 2010 2009 14.8 Net Client Cash Flow (NCCF)/Funds Under Management (FUM) % 2010 2010 2009 2009 2.6 3,668 2,765 Emerging Markets Unit trust sales (£m) 2010 2009 2010 581 2009 393 Nordic 2010 23 2009 24 Retail Europe 2010 2009 3,210 4,507 Wealth Management 4,507 Value added (VNB + Experience Variance)/MCEV % 2010 2009 1.3 4.1 4.1 LTS EXECUTIVE COMMITTEE1 Kuseni Dlamini CEO OMSA & Emerging Markets Mårten Andersson CEO Nordic Jonas Jonsson CEO Retail Europe Bob Head CEO Wealth Management Richard Boynett CIO Long-Term Savings Steven Levin Director Group Product Rose Keanly Managing Director OMSTA and Head of LEAN, LTS Mike Harper Managing Director Customer Solutions 1 Andrew Birrell, Don Hope and Don Schneider, members of the Group Executive Committee, are also on the LTS Executive Committee. 44 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l The Long-Term Savings (LTS) division offers life assurance, pensions and investment products and operates through four main business units: Emerging Markets, Nordic, Retail Europe and Wealth Management. Overview In each of these markets our vision is to be “our customers’ most trusted partner, passionate about helping them achieve their lifetime ﬁnancial goals”. Our strategy to achieve this vision is to build a cohesive long-term savings, protection and investment division through leveraging the strength of our people and capabilities both in South Africa and around the world. Business units: Emerging Markets: Old Mutual South Africa (OMSA) is one of the largest and longest- established ﬁnancial services provider in South Africa, providing individuals, businesses, corporates and institutions with long-term savings, protection and investment solutions. Because we are now leveraging the business into other high growth economies, we have combined it with our Latin American, Asian and African businesses. Nordic: Operating in Sweden, Norway and Denmark under the Skandia brand, we offer banking and insurance services for individuals and corporates. Retail Europe: Operating in Austria, Germany, Poland and Switzerland under the Skandia brand, we are one of the leading unit-linked providers – offering innovative and ﬂexible products and strong investment knowledge. Wealth Management: Operating mainly under the Skandia brand with businesses in the UK, Italy, France and in our offshore International bases. Our offer is based on open and guided architecture accessed through unit-linked life insurance, pensions and mutual funds. Strategy Within LTS we have three different types of businesses which together provide high returns combined with high growth: (cid:81) High returns on equity (RoE) and high cash generation businesses (cid:81) High revenue growth potential businesses but which are not operationally efﬁcient at this stage. Because of their product design and structure these businesses are very capital- efﬁcient and new business is self-ﬁnancing (cid:81) Businesses in emerging markets, which we have the opportunity to grow. These will require funding for a number of years but in the long run will produce growth and value for shareholders. The funding needs of the latter two business types are modest in relation to the rest of the portfolio, so in combination the three different categories provide an excellent mixture of high RoE and good growth potential, in both the medium and longer term. Our strategy aims to: (cid:81) complement our strong, highly proﬁtable and mature OMSA business by leveraging our South African capabilities to grow and develop our businesses in selected African, Latin American and Asian markets (cid:81) operate capital-efﬁcient, fast-growth businesses in selected UK and European markets (cid:81) exploite capital, cost and revenue synergies between the various businesses. The strategy is underpinned by building a culture of customer focus and value creation internationally. “ Our key strengths are our knowledge of managing distribution, product design and controls and efﬁcient administration. Our challenge is to develop this across all of our LTS businesses.” Paul Hanratty CEO Long-Term Savings and Chaiman, Old Mutual South Africa S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 45 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED The LTS portfolio provides high returns combined with high growth High RoE/High cash generation High revenue growth potential Opportunity to grow (cid:3)(cid:81)(cid:3)(cid:3)Slow growth (cid:81)(cid:3)(cid:3)Large market share (cid:81)(cid:3)(cid:3)Generate high cash returns that (cid:3) (cid:3)(cid:3)(cid:3) fund new business, allow for acqui- sitions and Group dividend (cid:81)(cid:3)(cid:3)OMSA (cid:81)(cid:3)(cid:3)Namibia (cid:81)(cid:3)(cid:3)Colombia (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Low proﬁt generation relative (cid:3) to enterprise value (cid:3) (cid:81)(cid:3)(cid:3)High cost bases (cid:81)(cid:3)(cid:3)Potential for rapid proﬁt growth on restructuring / efﬁciency gains (cid:81)(cid:3)(cid:3)Largely self funding in terms of new business and growth (cid:81)(cid:3)(cid:3)New business tends to be cash demanding (cid:3)(cid:81)(cid:3)(cid:3)Wealth Management (cid:81)(cid:3)(cid:3)Nordic (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Require funding of business at least until breakeven (cid:81)(cid:3)(cid:3)Rapid growth of sales (cid:81)(cid:3)(cid:3)New business tends to be capital intensive (cid:81)(cid:3)(cid:3)Potential to grow embedded / enterprise value rapidly (cid:81)(cid:3)(cid:3)Cash generation is far out (cid:3) (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Retail Europe (cid:81)(cid:3)(cid:3)Africa (cid:3) (cid:81)(cid:3)(cid:3)Asia (cid:3) (cid:3) (cid:81)(cid:3)(cid:3)Mexico While we are primarily focused on leveraging our capabilities in South Africa into emerging markets and improving the operational performance of our European businesses, there are also opportunities to achieve synergies between them. Our businesses connect at a capital level and are well resourced for future growth. At the same time, there are opportunities for cost and revenue synergies. The cost synergies lie primarily in the IT area and in outsourcing some work to South Africa. The revenue opportunities lie in sharing product knowledge and ideas as well as what we know about building distribution channels. The recent ﬁnancial crisis highlighted the need for the ﬁnancial industry to operate more efﬁcient businesses in order to compete for market share among more ﬁnancially-conscious customers. We have introduced a number of efﬁciency programmes in four basic categories: 1. Transforming Wealth Management: implementing shared services models to reduce costs by taking out expensive layers of overhead and management and producing simpliﬁed management information. 2. Transferring Retail Europe back-ofﬁce to South Africa: outsourcing to lower-cost geographies, where we can achieve process efﬁciencies and scale. 3 Reviewing Wealth Management and Nordics: driving LEAN methodology thinking across the businesses. 4. Transforming IT: we are optimising outsourcing, shared computing and IT sharing applications. We are enabling business efﬁciency and innovation for both local and international competitive advantage through one IT partnership. By identifying where customer needs are not being met, we are able to exploit synergies across LTS, for example by taking proven retail products from OMSA’s mass foundation cluster to other markets where product penetration levels are low and where economic growth will happen over time. We are applying strong risk capital management and performance management frameworks with strong local management teams. In addition we have developed LTS-wide roles to ensure we exploit synergies and establish centres of excellence. These roles – covering IT, product, LEAN methodology and distribution – will help us to gain competitive advantage by delivering appropriate products and services efﬁciently. In South Africa we already have scale and exceptional levels of quality, straight-through processing and low unit costs. We are experienced in developing products for sophisticated markets as well as in developing simple products for middle-income markets and we have experience in pricing diverse risks. We run multiple distribution channels and have a comprehensive understanding of different types of distribution. We already have experience in leveraging these capabilities into high-growth markets such as India. Our approach to leveraging our skillset in South Africa to the rest of Emerging Markets is based on sharing product experience, people and professional skills, systems and processes, and distribution knowledge. Through our Skandia businesses we have built excellent market positions as capital-efﬁcient businesses in Europe and in the UK. These have a history of innovation and are very well positioned because of the customer value that they deliver, exploiting opportunities to take market share from more traditional, less customer-orientated competitors. We aim to grow their revenues while constraining costs and ultimately driving up operating performance by adopting LEAN methodology. 46 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Implementation Measures (cid:3)(cid:81)(cid:3)(cid:3)Exploit growth opportunities in emerging markets (cid:81)(cid:3)(cid:3)Position for sweet spot in Europe (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Speciﬁc efﬁciency programmes in each business (cid:3)(cid:81)(cid:3)(cid:3)(VNB + Exp Var) / MCEV (cid:81)(cid:3)(cid:3)NCCF / FUM (cid:3)(cid:81)(cid:3)(cid:3)Administration expenses (cid:3) (cid:3) (cid:81)(cid:3)(cid:3)Adopt LEAN methodology across all businesses (cid:81)(cid:3)(cid:3)Potential IT synergies, particularly in outsourcing (cid:81)(cid:3)(cid:3)Product lines extended to other markets (cid:3) (cid:3) (cid:81)(cid:3)(cid:3)Expenses (cid:81)(cid:3)(cid:3)APE (cid:3) Achieving our LTS targets (cid:3)Driving revenue growth Reducing cost Synergies Capital efﬁciency (cid:81)(cid:3)(cid:3)Focus on capital light products (cid:81)(cid:3)(cid:3)Diversiﬁcation beneﬁts (cid:81)(cid:3)(cid:3)Equity (E) Achieving our LTS targets We are focusing on four main areas to create shareholder value. Each has associated measures to track the result. These are set out in the table above. We are gradually rolling out a common approach to creating shareholder value across all our business units. This focuses on the creation of economic proﬁt – generating proﬁts that exceed the risk-adjusted cost of the capital that these businesses absorb. The economic proﬁt framework is beginning to shape all our capital allocation decisions and we are extending it to assess business performance and determine management reward. We recognise that many of our investors favour embedded value as a measure of enterprise value. So we monitor very closely the value added by management, through the sale of proﬁtable new business and the control of experience relative to assumptions, in adding to embedded value returns (ie (VNB +experience variance)/MCEV)). We have a large and growing part of our non-life or non-covered business and we apply these measures equally to both. Current products and product development We are creating long-term, sustainable competitive advantage by putting the customer at the centre of everything we do. As shown in the table below, we work in two different kinds of markets: developed countries and emerging markets. Emerging market countries generally enjoy fast GDP growth but have low average GDP per capita, whereas more mature markets such as Sweden, Germany, the UK and France offer opportunities to penetrate into wealthier customer segments. The improving demographics of the emerging market economies are likely to support economic growth through for example, larger pools of labour. As emerging economies’ manufacturing exports grow, we expect corresponding growth in their labour markets and evolution of their consumer segments. By contrast, we do not anticipate such shifts in the existing wealth of the UK and European economies. Our offerings in the South African market span across the wealth divide. In Emerging Markets we have developed a wider product set. This applies also to our business in Germany, Austria and Poland. We focus on regular premiums and delivering product value to customers – making sure that our products are transparent, that fees are clear and that customers receive the solution that best meets their needs. i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i Putting the customer at the centre ) a t i p a c / P D G ( h g H i h t l a e W i m u d e M (cid:81)(cid:3)(cid:3)(cid:3) (cid:81)(cid:3)(cid:3)(cid:3)(cid:3) (cid:81)(cid:3)(cid:3)(cid:3)(cid:3) Regular premium Risk products Agency distribution Personal ﬁnancial services (cid:81)(cid:3) (cid:81) (cid:81) (cid:81) Single premium Guided investment platform IFA Self service SA SA Customer proposition Wealth management S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 47 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED Product development structure decisions OM: Current Risk Managed Model OM: Aspiration Leveraged Model l o r t n o C l a b o G l Federal Model Tactical OM: Past Global Capability Leverage Source: NMG Consulting, Old Mutual. Our LTS product offering aims to meet customers’ needs for savings, investments, pensions and annuities as well as protection. In some of our businesses we also address their healthcare and transactional needs. While local market differences exist, the solutions our customers require in different regions are, in our experience, very similar. Essentially, customers everywhere have the same basic ﬁnancial needs. What is more, products are distributed via the same distribution channels and regulatory regimes are increasingly convergent. As a result we believe we have an increasing opportunity to leverage our product knowledge and expertise across the different markets in which we operate. Before the creation of LTS, Old Mutual and Skandia businesses around the world operated independently in a federal model within the Group. Group control was insufﬁcient and few synergies were realised between regions. After the global ﬁnancial crisis and the operational losses we incurred in Old Mutual Bermuda, we implemented stronger Group controls and risk management. As can be seen in the chart above, we are now driving an LTS product view across all our markets and we are actively leveraging capabilities from one market to another to exploit synergies. Old Mutual and Skandia’s products and propositions are generally regarded by customers, intermediaries and competitors as market-leading. Our businesses have recognised track records of innovation and we have won numerous awards in several markets for the quality of our product offering, the fund ranges we offer on our platforms, our tools for advisers and our interactive websites. We are determined to maintain leadership in product innovation and we are implementing new techniques and processes that have successfully stimulated innovation in other industries. In OMSA and Nordic, our product ranges are extremely comprehensive, covering almost all the 48 Old Mutual plc Annual Report and Accounts 2010 ﬁnancial needs of our customers. By contrast, in some of our other markets our current product offering addresses a relatively narrow spectrum of customer needs: our Wealth Management business, for example, has market-leading platform offerings but a very limited offering in the decumulation (annuity) and protection markets. Similarly, in our Retail Europe business we have good regular savings products but no meaningful decumulation, protection or lump-sum offerings. We therefore see great opportunities to expand our product offering in these and other markets by leveraging our product expertise, designs and structures and our IT platforms from markets such as South Africa and Sweden. We have already begun executing projects to do this. In the developed countries served by our UK, French, Italian, Nordic and International businesses, we are focused mainly on the mass afﬂuent segment. Our proposition, including products, distribution and processes, is built around that segment and is orientated to customer needs. The ﬂexibility and transparency of our products, and the value that we deliver, place us in a good position in those markets. South Africa also has a vibrant wealth management industry, so we present a very similar offering there to the mass afﬂuent market. Notwithstanding the platform business in the UK operates a version of the technology we developed in South Africa for the South African market. Above and beyond the continuous enhancements we make to our product ranges every year, we will pay particular attention over the next few years to: (cid:81) Expanding our protection offering into emerging markets outside South Africa, and into our European businesses (cid:81) Enhancing the range of downside-protected, structured products or guaranteed investment offerings available on our investment platforms across most of our markets (cid:81) Developing appropriate decumulation offerings to capture the investment proceeds of customers reaching retirement age. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (cid:42)(cid:92)(cid:89)(cid:89)(cid:76)(cid:85)(cid:91)(cid:176)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:176)(cid:87)(cid:86)(cid:89)(cid:91)(cid:77)(cid:86)(cid:83)(cid:80)(cid:86) Customer needs: Savings and Investments Pensions Protection Healthcare Transactional and Lending Products: Life Wrapped Non-Life Accumulation Decumulation Wrapped South Africa Nordic1 Emerging Markets Wealth Management UK Wealth Management Non-UK Retail Europe (cid:58)(cid:87)(cid:76)(cid:74)(cid:91)(cid:89)(cid:92)(cid:84)(cid:3)(cid:86)(cid:77)(cid:3)(cid:51)(cid:59)(cid:58)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:3)(cid:74)(cid:72)(cid:87)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96)(cid:33) (cid:81) (cid:51)(cid:80)(cid:84)(cid:80)(cid:91)(cid:76)(cid:75)(cid:3)(cid:86)(cid:89)(cid:3)(cid:85)(cid:86)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:3)(cid:74)(cid:72)(cid:87)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) (cid:81) (cid:42)(cid:86)(cid:84)(cid:87)(cid:89)(cid:76)(cid:79)(cid:76)(cid:85)(cid:90)(cid:80)(cid:93)(cid:76)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:3)(cid:74)(cid:72)(cid:87)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) 1 Certain products are packaged jointly with Skandia Liv, who provide the guarantees. Development of distribution strategy Distribution in Emerging Markets is affected by both ﬁnancial and non-ﬁnancial drivers. Financial drivers such as relative wealth, money transmission mechanisms and the availability of state social support inﬂuence the types and distribution of products. Non-ﬁnancial drivers such as literacy, life expectancy and respect for legal title affect pricing, product complexity, and communication techniques and content. Countries with lower average customer income need simple, cost- effective products. Here, the educational aspect of selling the product is critical. The mature markets allow for more effective leveraging of existing relationships and capabilities, and development of new distribution channels such as the internet. Skandiabanken is an example of innovative distribution using the internet as a gateway. The factors outlined above inﬂuence the way we think about the retail consumer in our various markets. We are carrying out detailed work to understand the evolution of customer segmentation in the new retail markets that we are targeting. And we maintain ongoing research on the framework within which customers buy or get access to ﬁnancial services in their particular markets. In bringing together the LTS division, Old Mutual is managing distribution channels across its life markets more strategically. We are intent on understanding how and what organic growth opportunities can be better leveraged to achieve growth in our various markets – and in particular on leveraging our achievements in South Africa, Namibia, Sweden, the UK and Colombia. We manage distribution country by country, using local market experts resident in those countries. LTS will invest in the channels that are most likely to increase effective distribution. Channels are most effective where they are directed to the appropriate consumer segment and offer us the greatest control. The principal detractors from channel performance are poor persistency and poor agent productivity. Using our own agents (employed advisers) can be more expensive, but there are long-term beneﬁts: their closeness to the customer enhances loyalty and customer retention. The current size and projected growth of the emerging market countries where LTS operates suggest that more investment is needed in distribution to capture the growth opportunities. Annual Report and Accounts 2010 Old Mutual plc 49 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED Our current approach to enhancing distribution has four broad aspects: 1. 2. 3. 4. Growing advisers organically. Tied agency forces are critical – particularly in Emerging Markets, where they remain the dominant form of distribution. Strengthening efﬁciencies. An inefﬁcient sales force incurs large overhead costs which may lead to acquiring poor-quality customers and delivering poor-quality advice to customers. Strengthening bancassurance. Several of our retail markets have large, dominant retail banks. Adding new channels selectively in relevant markets such as Retail Europe, Latin America and Asia. Total contribution to APE by business, split by distribution channel (%) Emerging Markets 66 19 10 41 Nordic 23 3 Retail Europe Wealth Management 70 15 1 96 1 93 7 (cid:81) Own advisers (cid:81) IFAs (cid:81) Bank (cid:81) Direct (cid:81) Other Our distribution channels and their mix differ by market maturity and by country. The chart above shows the mix by business across all LTS markets. Tied or employed agency forces (own advisers) are dominant in Emerging Markets while independent ﬁnancial advisers (IFAs) are the main distribution channel for us in Europe and the UK. The differences in distribution mix between Emerging Markets, Europe and the UK are mainly due to factors such as ﬁnancial services sector development and maturity, and the relative expense of having own sales force versus the use of independent ﬁnancial advisers. There are some differences in the terminology used internationally to describe distribution channels. We use the term ‘tied agency’ for distribution channels contractually tied to the product provider or employed agents, or worksite marketing. The term ‘IFA’ is used more broadly here to include independent brokers and independent insurance advisers. Tied agency distribution gives us more control and can be targeted more accurately at the relevant consumer segments. In mature markets life companies have access to and can use independent advisers or brokers as well as retail bank or bancassurance advisers. In some mature markets, and in Asia, the fast-developing internet model offers a completely 50 Old Mutual plc Annual Report and Accounts 2010 new means of accessing consumers. While we acknowledge its potential, we believe the internet’s role as an effective distribution channel within a country is largely dependent on the development and widespread roll-out of broadband technology as, for example, in the Nordics. Old Mutual has a long history in southern Africa of establishing and growing new distribution channels. OMSA established independent insurance brokers or IFAs in the late 1970s and established mass market worksites shortly thereafter. Skandia has been effective at establishing IFA networks and channels. Tied agency and worksite marketing is very effective in reaching the mass market and middle market consumers, while IFAs are very effective at penetrating and developing the wealth markets of UK, Europe, China and southern Africa. Regulatory Developments The range of regulatory issues affecting distribution design and control is fairly consistent across our LTS division countries. Regulators in all our LTS markets have become more effective and consistent in dealing with market abuse and tightening up the approach to regulation. Regulatory enhancements are good for consumers and new regulation creates opportunities for life companies to build better, more mature, high quality sales forces and face-to-face advisory businesses. EMPLOYEE WELLNESS WEEK AT OUR PROPERTY BUSINESS “ It was a great success. Very well attended and well received, especially by the younger members of staff who were not aware that they faced certain health risks. It also demonstrated our concern for the wellbeing of our staff, and we received very appreciative feedback.” Adelah Malick, Human Resources Manager (OMIGPI) This year, to coincide with Aids Awareness Day on 1 December, we held a hugely successful Employee Wellness Week to get us all thinking about our health. Professional nurses visited our head office and our main regional offices in South Africa to invite employees to have their blood pressure, cholesterol, glucose levels and body mass index checked. Over 250 employees took part. The nurses also answered employees’ health questions and raised awareness of the support that the company offers to people with disabilities. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n LEAN administration and IT Each LTS regional organisation currently has its own administration and IT structure, but these share many common products, processes, IT platforms and customer/intermediary interfaces. Our strategy is to actively seek cost synergies, drive LEAN methodology and achieve a quality service culture across all our IT provision. LEAN administration Our OMSA business has run its LEAN programme for four years. LEAN is about building an organisation culture that starts with the customer, identiﬁes duplication or over-engineering of procedures across processes and then streamlines those processes using extensive standardisation and simpliﬁcation. By doing this sustainably and continually, we reduce unit costs and improve customer service quality. In OMSA we have driven down unit costs year-on-year across our retail and corporate products and will continue to do so. OMSA’s unit costs compare favourably with those of our South African competitors, due mainly to our scale in South Africa and the extent to which we have used LEAN. OMSA’s unit costs are also signiﬁcantly lower than those of other businesses in LTS because of scale, LEAN and labour arbitrage within the business – which offers some opportunities for LTS. LEAN methodology is allowing us to combine lower unit costs with improved service. Research shows that we have improved our customer and intermediary service year-on-year; and we have won our industry’s national Best Provider of Customer Service award in South Africa three years running. We see a number of opportunities to enhance administration across LTS: (cid:81) Potential to move administration from other parts of LTS to South Africa, using the capability and scale we have there to improve capabilities and unit costs. We are currently moving processes and IT from Retail Europe (Germany, Poland and Austria) to South Africa, which will give us a capability that we can exploit further in LTS (cid:81) In businesses where it does not make sense to move administration to South Africa, we will apply LEAN principles to streamline processes, reduce unit costs, improve our service and provide a very strong foundation for future growth (cid:81) Applying LEAN principles beyond the servicing and operations area to reduce businesses’ overheads, streamline IT and even improve sales processes. As the chart shows, we have an established history of driving down unit costs and improving service in OMSA with LEAN. We are now sharing this expertise across the LTS division. (cid:52)(cid:72)(cid:80)(cid:85)(cid:91)(cid:76)(cid:85)(cid:72)(cid:85)(cid:74)(cid:76)(cid:3)(cid:74)(cid:86)(cid:90)(cid:91)(cid:3)(cid:80)(cid:85)(cid:75)(cid:76)(cid:95)(cid:3)(cid:87)(cid:76)(cid:89)(cid:3)(cid:87)(cid:86)(cid:83)(cid:80)(cid:74)(cid:96)(cid:22)(cid:84)(cid:76)(cid:84)(cid:73)(cid:76)(cid:89) Forecast Index 100 90 80 70 60 50 2006 2007 2008 2009 2010 2011 2012 2013 (cid:57)(cid:76)(cid:91)(cid:72)(cid:80)(cid:83)(cid:3) (cid:40)(cid:77)(cid:77)(cid:83)(cid:92)(cid:76)(cid:85)(cid:91) (cid:52)(cid:72)(cid:90)(cid:90)(cid:3) (cid:45)(cid:86)(cid:92)(cid:85)(cid:75)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85) (cid:42)(cid:86)(cid:89)(cid:87)(cid:86)(cid:89)(cid:72)(cid:91)(cid:76) IT Our IT mission is to enable business efﬁciency and innovation for both local and international competitive advantage, through one world-class IT partnership. These potentially contradictory aims form the core strategy for running IT across LTS. IT needs to be an efﬁcient, well-governed, common function without sacriﬁcing the speed-to- market and innovation needed in our local markets. LTS IT will now provide all IT services, to LTS and to the local businesses. The IT ‘front-ofﬁce’ – the LTS-run local IT departments – will continue to manage projects and generate requirements for the local business. Free of managing IT commodity work, the local IT department will improve their focus delivering the technology that underpins the local business needs and strategy. These teams have the greatest opportunity to drive business results through harnessing the innovative use of technology. The LTS IT back-ofﬁce is focused on two goals: the Global Delivery Centres for Infrastructure and Applications will leverage the economies of scale across LTS to deliver IT more cost-effectively and more consistently across the division. The Governance and Architecture functions within the LTS IT back-ofﬁce are then responsible for ensuring that LTS is well governed from an architectural, ﬁnancial, risk and control perspective. This hybrid operating model for LTS IT will comply with regulatory requirements, ensuring local accountability and control, but leveraging common governance, efﬁciencies and economies of scale from a modern IT function in a global business. Annual Report and Accounts 2010 Old Mutual plc 51 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED Front-ofﬁce of LTS IT focuses on local business to improve competitive advantage Emerging Markets Wealth Management Nordic Retail Europe l a c o L Locally-based IT Departments IT Innovation Improve competitive advantage Back-ofﬁce of LTS IT focuses on improving IT efﬁciencies and effectiveness l a b o G l Application Development & Maintenance Infrastructure Architecture Governance Efﬁciency through Global Delivery Centres Improved effectiveness from global governance Review of Results 2010 LTS AOP earnings beneﬁted from higher fees generated from positive net client cash ﬂows particularly in Wealth Management, rising funds under management and the strengthening of the rand and Swedish krona against sterling. On a constant currency basis, earnings were up 26%. The Emerging Markets business accounts for 60% of the LTS IFRS AOP earnings, 43% of LTS FUM, and 33% of LTS APE sales. This compares to 70% of restated AOP, 41% of FUM, and 30% of APE sales in 2009. APE sales increased by 14% for the LTS division as a whole, with the growth coming largely from the regular premium products in the Retail businesses of Emerging Markets, and Wealth Management single premium products, notably in the UK and Italy. A managed shift in business mix in Nordic was executed with sales decreasing from prior year levels. There was encouraging growth in both single and recurring premiums in Retail Europe. Sales for the second half of 2010 were ahead of the ﬁrst half for Emerging Markets and Retail Europe, and evenly spread across the year in Nordic. Wealth Management sales were slightly higher in the ﬁrst half of the year than the second given the usual seasonal weighting to the ﬁrst quarter of the year, and the beneﬁt of the short- term Italian tax shield. Mutual fund sales were up by £2,387 million, with strong performance in Wealth Management and Emerging Markets particularly in the second half of the year. In transforming LTS IT, we see a number of synergy opportunities across LTS to help reduce cost, support the business strategy and drive innovation. These fall into three categories: (cid:81) Reviewing the existing LTS IT environment Each business or geography currently has its own set of data centres, networks and bespoke systems. To a large degree, we can consolidate these so that we can reduce costs while also improving disaster recovery and business continuity, and enabling signiﬁcant business change. We have world-class platforms in some areas of LTS. Working closely with our local businesses we are aiming to share and extend the capability across the division. We are leveraging our scale and our willingness to partner with the best companies in the industry to create a lower, total cost of IT. (cid:81) Internal partnerships with our back-ofﬁce business functions. This involves working together to get value from LEAN processes to reduce errors as well as complexity and IT support costs. (cid:81) Working cohesively across LTS as well as working in close partnership with our local businesses. This means creating economies of scale and improved delivery of IT solutions through a common IT back-ofﬁce function and mutually beneﬁcial external partnerships. This includes a consistent governance framework that will ensure correct management of IT ﬁnances, project control and improved control of IT-related risk, security and audit items. If it is possible to do that in one place, we will be more effective and efﬁcient. More importantly, our partnerships with the local businesses improves our ability to use technology to create solutions and capability that enable new and innovative business strategies. 52 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Long-Term Savings Key performance statistics for the LTS division are as follows: 2010 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) (VNB + Exp Var)/MCEV (covered business) Emerging Markets 487 3,269 86 3,668 – 57 539 344 4.7% Nordic 201 1,104 41 581 0.7 14 110 45 4.7% Retail Europe Wealth Management 69 513 7 23 0.4 5 51 66 2.2% 734 6,380 66 4,507 3.9 56 197 112 3.1% 2009 (as reported1) 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) (VNB + Exp Var)/MCEV (covered business) Emerging Markets Nordic Retail Europe Wealth Management 393 2,834 65 2,765 (1.6) 44 446 212 0.5% 235 1,150 44 393 1.0 11 62 81 7.5% 67 537 (5) 24 0.5 4 22 (44) (5.1%) 617 5,042 49 3,210 2.5 47 106 (4) 0.6% 1 The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued £m Total 1,491 11,266 200 8,779 5.0 132 897 567 4.1% £m Total 1,312 9,563 153 6,392 2.4 106 636 245 1.3% Across LTS as a whole, new business APE margins improved to 13% for 2010 (2009: 12%). This reﬂects the focus on selling more proﬁtable products with better margins, notably in Nordic, and increased sales of a higher margin product in the ﬁrst half of the year in Emerging Markets. The APE margin in Emerging Markets increased from 16% to 18%. In Nordic, the APE margin has increased from 19% to 21%, beneﬁting from the managed reduction of low margin product sales such as Link regular. In Retail Europe, the APE margin has improved considerably to 11% from a negative position in the comparative period. Across Wealth Management, the APE margin increased from 8% to 9%, with the UK increasing from 2% to 3%, and International from 18% to 19%. The most signiﬁcant increase in APE margin was in respect of the Continental European markets, which increased from 3% to 8% as result of the increase in volumes in Italy. Sales of mutual funds, which make up the bulk of Wealth Management’s sales, are not included in the APE margin. The IFRS operating margin rose to 38bps from 25bps for Wealth Management as a whole. For LTS as a whole the PVNBP margin improved to 1.8% (2009: 1.6%). The market-consistent value of new business (VNB) improved for all of our LTS businesses, with the exception of Nordic, where although the underlying margins of the business improved, the absolute value of new business fell as a result of the decline in new business volumes (due to the cessation of sales of an unproﬁtable recurring premium product) and changes in assumptions. The LTS net client cash ﬂows more than doubled as improvements in Wealth Management and Emerging Markets more than outweighed the lower net ﬂows in Nordic given lower sales volumes. Funds under management for LTS at 31 December 2010 increased by 25% to £131.8 billion (31 December 2009: £105.5 billion) although there were periods of substantial market movements during the year, with notable falls in the second quarter and increases towards the end of the year. The rand started the year at 11.92 against sterling, strengthening to 11.45 at 30 June 2010, and to 10.28 by 31 December 2010. The US dollar and Swedish krona also strengthened, although to a lesser degree, appreciating 4% and 10% respectively in the year. The average exchange rates to sterling over the year were 11.31 (2009: 13.17), 1.55 (2009: 1.57) and 11.14 (2009: 11.97) for the rand, US dollar and Swedish krona respectively. The cumulative effect of foreign exchange movements for LTS was an increase of £77 million on IFRS proﬁtability. Annual Report and Accounts 2010 Old Mutual plc 53 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED EMERGING MARKETS Emerging Markets Emerging Markets Kuseni Dlamini Old Mutual (cid:3) Investment Group (OMIGSA) (cid:3) (cid:3) Old Mutual South Africa (OMSA) Corporate Mass Foundation Retail Afﬂuent New Markets Rest of Africa (Namibia, Kenya, Malawi, Swaziland, Zimbabwe) Latin America (Colombia, Mexico) Joint Ventures in China and India (Old Mutual-Guodian and Kotak Mahindra) Good results combined with strong growth in regular premium sales Highlights (Rm, unless otherwise stated) 2010 2009 % Change Adjusted operating proﬁt (IFRS basis, pre-tax) Return on local equity Return on allocated capital (OMSA only) Life assurance sales (APE) Unit trust/mutual fund sales PVNBP Value of new business APE margin PVNBP margin Operating MCEV earnings (covered business, post-tax) Return on embedded value (covered business, post-tax) Net client cash ﬂows (Rbn) Funds under management (Rbn) Overview Equity markets in the Emerging Markets have enjoyed a strong year, with the JSE increasing by 16%. The South African rand appreciated 13% against the US dollar and 14% against sterling. Low inﬂation contributed to interest rate cuts in South Africa from 10.5% to 9%. We continue to focus on innovation and product improvements which will beneﬁt our customers. In South Africa we developed and launched a new direct short-term insurance product, iWYZE, in conjunction with Mutual & Federal – and its success has exceeded expectations. Old Mutual Corporate launched Old Mutual SuperFund, the largest multi-employer or umbrella fund in South Africa with over 300,000 members, to provide a simple, affordable and strictly-governed platform enabling employees to save for their retirement. We launched the Futuregrowth Agri-Fund in March 54 Old Mutual plc Annual Report and Accounts 2010 6,099 25% 25% 5,505 41,488 36,975 972 18% 2.6% 3,877 13.2% 0.2 585.7 5,879 25% 26% 5,178 36,421 37,339 853 16% 2.3% 2,794 9.8% (20.5) 518.4 4% 6% 14% (1%) 14% 39% 101% 13% 2010, focusing on responsible equity investments in agricultural land, agri-businesses and farming infrastructure. As a Socially Responsible Investment fund, it seeks long-term returns and tangible social and developmental impacts. We are integrating social, environmental and economic principles into our core business. OMSA achieved Level 2 Broad-Based Black Economic Empowerment (BBBEE) status in October 2010. Furthermore, OMIGSA attracted more than R8 billion from institutional investors into social infrastructure investment. Our sales improved in the year, notably in the second half. This resulted in a 6% increase in APE sales compared to 2009, and we beneﬁted from improved persistency. Our NCCF improved signiﬁcantly, and we saw increasing contributions from new markets, with non-South African NCCF higher than South African NCCF (excluding ﬂows relating to the Public Investment Corporation of South Africa). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Asset management proﬁts grew signiﬁcantly as a result of higher fees being earned from higher FUM, stronger performance fees in OMIGSA, a ﬁrst full-year contribution from ACSIS (acquired in the second half of 2009), a higher contribution from OMF due to growth in the business, and mark-to-market proﬁts in Old Mutual Specialised Finance (OMSFIN). These were partially offset by lower transactional income. The LTIR decreased by 26% to R1,221 million in 2010 reﬂecting the reduced rate applied to OMLAC(SA) assets due to the implementation of a higher ratio of cash to equity in the asset portfolio backing the Capital Adequacy Requirement. Life APE sales summary APE sales increased by 6% from R5,178 million to R5,505 million, driven largely by strong growth in regular premium sales across the majority of our Emerging Markets businesses. IFRS AOP results IFRS AOP (pre-tax) increased by 4% from R5,879 million to R6,099 million, with strong asset management proﬁts (up 62% to R1,550 million), partially offset by lower long-term investment return (R1,221 million compared to R1,658 million in 2009). Rm Long-term 2010 2009 % Change business AOP 3,328 3,263 2% Asset management AOP Long-term investment return (LTIR) AOP (IFRS basis, pre-tax) 1,550 958 62% 1,221 1,658 (26%) 6,099 5,879 4% The growth in long-term business proﬁts is mainly due to the signiﬁcant improvement in Retail persistency in 2010 following the signiﬁcant strengthening of the basis in 2009 as well as continued business effort to improve retention experience. Good investment performance in the annuity and permanent health insurance (PHI) portfolios and increased asset-based fees due to higher equity market levels also contributed to proﬁt growth. The comparable 2009 life proﬁts beneﬁted from a number of large non-recurring items, including the impact of assumption changes and proﬁts from the Nedbank joint ventures in the ﬁrst ﬁve months of 2009. Excluding these items, underlying life proﬁts increased by 37% over the comparative period. PROTECTING CONSUMERS IN SOUTH AFRICA AGAINST FRAUD “ It was a groundbreaking campaign and an extremely important step towards creating a more informed public. We’re very pleased to see this Old Mutual initiative being supported by other major life insurers, which demonstrates the industry’s commitment to educating consumers.” Kurt Magnet – Senior Forensic Services Manager (Old Mutual South Africa) This year we initiated an anti-fraud campaign that was taken up by the South African life insurance industry. The campaign aimed to educate consumers about how to protect themselves against fictitious insurance policies. It included adverts in daily newspapers providing detailed explanations of what a fictitious policy is, where they originate from, why customers might be targeted and practical tips on preventing fraud. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 55 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED By Cluster: New business (Rm) 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% Gross single premiums Gross regular premiums Total APE Total PVNBP OMSA Mass Foundation1 Retail Afﬂuent Institutional2 Total OMSA Rest of Africa3 Total New Markets4 Total Emerging Markets By Product: 14 9,620 7,892 16 8,751 9,205 (13%) 1,571 10% 1,381 454 (14%) 17,526 17,972 (2%) 3,406 475 528 (10%) 196 1,452 1,213 360 3,025 195 8% 1,572 14% 2,343 26% 1,244 13% 5,159 1% 244 1,454 2,088 1,281 4,823 247 8% 6,994 12% 16,345 (3%) 11,788 6,767 15,413 12,831 7% 35,127 35,011 3% 6% (8%) 0% (1%) 1,363 1,653 (18%) 231 432 (47%) 79 64 23% 102 108 (6%) 485 675 (28%) 18,232 18,932 (4%) 3,681 3,284 12% 5,505 5,178 6% 36,975 37,339 (1%) New business (Rm) 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% OMSA Savings Protection Annuity Total OMSA Rest of Africa3 Total New Markets4 Total Emerging Markets 14,062 6 3,458 13,874 2 4,096 1% 1,654 1,752 – (16%) 17,526 17,972 (2%) 3,406 475 528 (10%) 196 1,390 1,635 – 3,025 195 19% 3,060 7% 1,753 346 13% 5,159 1% 244 2,773 1,639 411 4,823 247 10% 22,441 7% 9,228 3,458 (16%) 21,785 9,132 4,094 7% 35,127 35,011 3% 1% (16%) 0% (1%) 1,363 1,653 (18%) 231 432 (47%) 79 64 23% 102 108 (6%) 485 675 (28%) 18,232 18,932 (4%) 3,681 3,284 12% 5,505 5,178 6% 36,975 37,339 (1%) 1 Previously described as Retail Mass 2 Institutional sales include Corporate and OMIGSA life sales 3 Rest of Africa represents Namibia only 4 New Markets represents Latin America only OMSA Regular premium sales Regular premium sales grew by 13% compared to 2009 and by 25% in the second half of 2010 compared to the ﬁrst half, with particularly strong growth in savings sales in the second half in the Mass Foundation Cluster which beneﬁted from lower overall cancellation rates, higher average premiums, improved adviser productivity and signiﬁcant improvement in the direct channel sales performance. Retail Afﬂuent sales growth was driven by Max Investments savings products, experiencing 21% and 31% growth for Life and LISP wrappers respectively in 2010, following the stabilisation of the economic outlook. Greenlight experienced a lower than expected growth of 6% over 2009 in some measure due to increased turnover of the Retail Afﬂuent sales force. Corporate sales increased by 26% in 2010 – driven primarily by savings sales in the umbrella market, where the Evergreen umbrella fund grew its membership by two thirds to just over 56,000. Corporate risk sales grew strongly due to our success in selling a number of new policies to large schemes in this highly competitive market. Corporate sales have more than doubled since 2008 due to innovative product introductions. 56 Old Mutual plc Annual Report and Accounts 2010 Single premium sales Single premium sales decreased by 2% relative to 2009, due mainly to lower institutional ﬂows. Retail Afﬂuent achieved strong Investment Frontiers Fixed Bond sales in the ﬁrst half and an increase in new contracts issued to clients with unclaimed maturities. Annuity sales declined by 16%, driven by lower CPI-linked annuity sales in the Corporate segment as very few annuity tenders ﬂoated in 2010 were concluded. With-proﬁt annuity sales did show a marked improvement, increasing by 48% as we continued to lead in this market segment. Retail Afﬂuent annuity sales stabilised in the fourth quarter, following improvements in annuity rates, to end marginally below the 2009 level. Rest of Emerging Markets Namibian regular premium sales in the Retail Mass and Retail Afﬂuent segments increased by 6% and 5% respectively, mainly as a result of solid sales growth from tied agents despite difﬁcult economic conditions. Corporate segment regular premium sales decreased by 14% due to lower Orion sales volumes. Single premium sales decreased by 10%, with lower new business inﬂows from both Retail Afﬂuent and Corporate businesses. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Sales growth of 36% in Mexico was largely driven by the introduction of a minimum premium for the regular premium savings product in the ﬁrst half of 2010, implemented as a consequence of working closely with South Africa. We introduced a Retail Mass distribution team in December. We will continue to grow this team in the coming months and its pipeline is very promising. Included in the 2009 comparative is R28 million APE relating to the Chilean business which was sold in 2009. APE sales in China increased by 77% from CNY92 million in 2009 to CNY163 million in 2010, despite poor sales during the ﬁrst half. The signiﬁcant improvement in the second half is mainly due to increased management focus on sales, supported by execution of our joint venture’s product and channel diversiﬁcation strategy (new bank, broker and telemarketing products were launched during the second half). The reopening of the Bank of China distribution channel in Beijing (with the assistance of our JV partner), following a three- month suspension of sales during the ﬁrst half of 2010, further contributed to this improvement. Sales at our Indian joint venture, Kotak Mahindra Old Mutual Life Insurance, increased by 6% compared to 2009. A more detailed analysis of sales by segment is included in the Financial Disclosure Supplement, available at www.oldmutual.com. Unit trust / mutual fund sales summary Rm OMSA Rest of Africa New Markets Total Emerging Markets 2010 21,452 5,360 14,676 2009 18,384 4,546 13,491 +/-% 17% 18% 9% 41,488 36,421 14% In South Africa, unit trust sales recovered in the second half of 2010 following a weak ﬁrst half. We achieved growth of 17% from the 2009 level, mainly due to signiﬁcant ﬂows into Old Mutual Unit Trust money market funds during the third quarter and improved ﬂows into OMIGSA’s Marriott afﬁliate following revised asset allocations. We have made progress towards our goal of becoming our customers’ most trusted partner, evidenced by the number of awards received during the year – including our third Ask Afrika Orange Index award for service excellence in the long-term insurance business category, and the number one position in South Africa’s 500 best managed companies. In the rest of Emerging Markets, unit trust sales also performed well. Namibian sales increased by 18% to R5.4 billion following strong inﬂows from institutional and corporate clients as a result of more competitive investment returns. Unit trust sales in Mexico and Colombia (COLMEX) were 9% ahead of the prior year in rand (25% in US dollars), with strong growth in Colombia resulting from a successful marketing campaign and stronger relationships with corporate and institutional customers. We increased productivity, with greater sales from fewer advisers. Mexico beneﬁted from a large scheme acquired in September 2010 and improved performance in both ﬁxed income and equity portfolios. Value of new business and margins The value of new business increased by 14% to R972 million, with a strengthening performance during the course of the year. The APE margin increased from 16% to 18% due to a higher proportion of sales of higher-margin smoothed- bonus and with-proﬁt annuities in OMSA’s Corporate business and Investment Frontier Fixed Bonds in Retail Afﬂuent. MCEV results Operating MCEV earnings (post-tax) increased by 39% from the 2009 level. This was mainly due to positive experience variances and operating assumption changes in 2010, compared to negative variances in 2009. The improvement in experience variances is mainly due to an improvement in persistency, partly due to the 2009 assumption changes, and partly because management actions improved persistency. These were partially offset by a signiﬁcant decrease in the expected existing business contribution due to the reduction in one year swap yields during 2009. In addition to the effects above, other signiﬁcant movements affecting the closing MCEV include a large positive impact from economic variances due to a combination of better than assumed equity returns and the effect of the changes in the shape of the swap yield curve. This was partially offset by modelling enhancements to the economic scenario generator used to calculate the investment guarantee reserve, which caused a decrease in the margin (buffer) held to protect against future market volatility, resulting in less value being released as proﬁts in the future. The net impact of these resulted in a growth in MCEV of 16% over 2010. We made good progress towards implementation of Solvency II as part of the overall Group programme, and also in respect of the South African equivalent framework known as SAM (Solvency Assessment and Management), launched in 2010 by the South African regulator. Annual Report and Accounts 2010 Old Mutual plc 57 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED DREAMFIELDS “ Our partnership with Dreamﬁelds is about making a difference in the everyday lives of ordinary South Africans” Kuseni Dlamini, CEO OMSA & Emerging Markets We understand sport has a great potential to transform the lives of young people. That’s why we’re a Founding Partner of Dreamfields – a groundbreaking ‘sport for development’ charity in South Africa. This year we’ve continued our support by funding the development of sports fields, donating DreamBags of sports kit to schools, supporting events, and watching the improving confidence, life skills and sense of unity among the young people taking part. Growing our sales force remains a priority, as does promoting a savings culture in Emerging Markets, designing and adapting products that are relevant to a wide range of customers, and providing easier access to ﬁnancial services for our customers across our businesses. With these strategies in place we are well positioned to optimise business opportunities in 2011 and further strengthen a highly successful Emerging Markets business. Net client cash ﬂow NCCF for the year was R0.2 billion, a signiﬁcant improvement on 2009 outﬂows of R20.5 billion. South African NCCF beneﬁted from signiﬁcantly lower PIC outﬂows of R5.1 billion (R16.2 billion in 2009), improved inﬂows across a number of OMIGSA boutiques (mainly Electus and Futuregrowth), improved net ﬂows in retail businesses and lower outﬂows in Corporate. Excluding PIC outﬂows, OMSA’s NCCF for the second half of 2010 was positive R1.8 billion compared to negative R6.3 billion in the second half of 2009. Further PIC outﬂows are expected in 2011. The rest of our Emerging Markets business delivered R7.6 billion in NCCF. In Colombia and Mexico NCCF increased by 12% from R4.3 billion in 2009 to R4.8 billion in 2010. The Colombian business attracted new customers within targeted segments, experiencing lower surrenders on core products and improved sales of Retail voluntary products. In Namibia, NCCF increased by R1.0 billion to R1.4 billion due to improved unit trust inﬂows and R672 million inﬂows from the rebalancing of the Government Institutions Pension Fund portfolios. Funds under management FUM increased by 13% to R586 billion as a result of higher market levels and overall neutral NCCF for the year. Of the total, R498 billion (2009: R449 billion) is in South Africa. Overall, OMIGSA investment performance (over three years) was average, with satisfactory performance in specialist areas contrasted against mixed performance in our balanced capabilities. Outlook We have conﬁdence in the underlying performance of the business, despite the low investment return assumptions in 2011 and mark-to-market gains recorded in the asset management results in 2010. We will continue to strive for a balance that combines strong risk management and governance with a culture that encourages innovation, across our four main strategic themes: (cid:81) Continuing to invest in our Emerging Market business (cid:81) Improving OMIGSA’s investment performance and value creation for customers (cid:81) Putting the customer at the centre of our business (cid:81) Enhancing our high-performance culture and further developing our Emerging Markets management team. 58 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i NORDIC Nordic Nordic Mårten Andersson Sweden Norway Denmark (cid:3) (cid:3) (cid:3) Improved proﬁtability, higher funds under management and strong APE margin Highlights (SEKm, unless otherwise stated) 2010 2009 % Change Adjusted operating proﬁt (IFRS basis, pre-tax) Return on local equity1 Life assurance sales (APE) Unit trust/mutual fund sales PVNBP Value of new business APE margin PVNBP margin Operating MCEV earnings (covered business, post-tax) Return on embedded value (covered business, post-tax) Net client cash ﬂows (SEKbn) Funds under management (SEKbn) 1,227 11% 2,238 6,466 12,292 460 21% 3.7% 503 3.3% 7.4 145.4 737 12% 2,819 4,708 13,774 526 19% 3.8% 965 8.1% 11.6 127.2 66% (21%) 37% (11%) (13%) (48%) (36%) 14% 1 Return on local equity is IFRS AOP (post-tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles Overview The economies in the Nordic countries experienced a strong recovery in 2010, with positive GDP growth (estimated at 5.6% in Sweden, 2.0% in Denmark and 2.2% in Norway). The Swedish equity market grew by 23% in 2010. The Nordic business delivered a strong IFRS AOP result in 2010. With changes in the management team, including a new CEO Mårten Andersson, we are delivering on our key priorities of strengthening distribution power and product offerings, stimulating future NCCF growth, increasing operational efﬁciency to secure proﬁtable growth, and optimising structures and risk frameworks to unlock value. However, we face a challenging year of change for the business in delivering our 2011 operating sales, efﬁciency and proﬁtability targets in a rapidly changing business environment. Life sales summary APE sales at SEK2,238 million were down by 21% compared to 2009, following management action in the Swedish Retail segment to close the unproﬁtable Link Regular product in late 2009. The APE of the Corporate business decreased by 14%, mainly due to slower sales of the highly competitive TPS Regular product. Denmark performed strongly, with product success in the unit-linked and healthcare markets. APE grew by 22% to SEK514 million. New business (SEKm) 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% Gross single premiums Gross regular premiums Total APE Total PVNBP Sweden Corporate Retail Total Sweden Denmark Total Denmark Total Nordic 1,429 3,672 5,101 1,471 4,288 5,759 (3%) (14%) 1,033 181 1,221 601 (15%) (70%) 1,176 548 1,368 1,030 (14%) (47%) (11%) 1,214 1,822 (33%) 1,724 2,398 (28%) 9,001 11,260 (20%) 1,280 6,381 547 134% 386 366 5% 514 421 22% 3,291 2,514 6,306 1% 1,600 2,188 (27%) 2,238 2,819 (21%) 12,292 13,774 31% (11%) S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 59 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED Unit trust / mutual fund sales summary Mutual fund sales of SEK6,466 million were up 37% on 2009. This was driven by improved retail investment activity spurred by rising global equity markets. However, fourth quarter sales showed a decrease compared to the same period in 2009 due to changing product demand and customer behaviour in Skandiabanken. SEKm Skandiafonder Skandiabanken Total Nordic 2010 2,431 4,035 6,466 2009 1,510 3,198 4,708 +/-% 61% 26% 37% IFRS AOP results The IFRS AOP (pre-tax) increased by 66% to SEK1,227 million compared to 2009. The key driver behind the improvement was higher client funds, which increased fund-based fees and rebates in the long-term business. In particular the unit-linked business performed strongly in the second half. A gain realised from divestment of a private equity holding in the ﬁrst half contributed proﬁt of SEK126 million. SEKm Long-term business AOP Banking business AOP Asset management AOP AOP (IFRS basis, 2010 2009 % Change 1,016 181 30 502 193 42 102% (6%) (29%) pre-tax) 1,227 737 66% The Healthcare business showed a strong turnaround in 2010 as pricing and product changes and underwriting discipline helped stabilise claims costs in the Lifeline business – which delivered AOP of SEK26 million compared to a negative SEK42 million in 2009. The 2010 ﬁgure includes divestment costs of SEK20 million for the Lifeline branch in Norway. Skandiabanken’s results were below 2009 levels, due mainly to lower net interest income and increased development costs. Skandiabanken Sweden suffered from the exceptionally low base interest rate during the ﬁrst half, although this increased towards the end of the year. Credit losses remained very low (0.09% in 2010 compared to 0.14% in 2009), reﬂecting the traditionally low-risk nature of our lending business. Skandiabanken Norway grew its proﬁts, due mainly to higher net interest income. Value of new business and margins The value of new business decreased compared to 2009, driven by lower new sales, negative operating assumption changes for anticipated price pressure in the Corporate segment, and expectations of more adverse persistency in the future. The APE margin increased from 19% to 21% due to a more proﬁtable business mix resulting from a higher proportion of TPS business sales in Sweden and Match product sales in Denmark. 60 Old Mutual plc Annual Report and Accounts 2010 MCEV results Operating MCEV earnings after tax declined to SEK503 million, due to the negative assumption changes driving the decline in the value of new business. However, total MCEV increased over the year, due mainly to positive client fund performance. The Nordic business is making good progress towards the implementation of Solvency II, as a component of the overall Group Solvency II initiative. Net client cash ﬂow NCCF for the year was SEK7.4 billion, a decrease of 36% compared to 2009. This was driven by a combination of higher surrenders (because of higher fund value and an increase in partial surrenders), lower single premium sales and higher paid-ups in the occupational pension business. Funds under management FUM were SEK145.4 billion at 31 December 2010, up 14% from the previous year. The increase is mainly due to the positive movement of equity markets. The investment performance in the Swedish unit- linked portfolio was good in the fourth quarter, and our average client enjoyed investment performance of 6.2% for the quarter and 10.9% for the year. Clients have generally increased their risk exposure, with the majority of all net investments being allocated to Swedish, Asian and Emerging Markets equity funds. Fund performance has been strong over the 12-month period, with 63% of our funds performing above average compared to their peers. Outlook The economic outlook for 2011 is positive, with forecast GDP growth of over 3% in Sweden and Norway and around 2% in Denmark, and public spending is under control. We believe household incomes will increase, that the debate over credit expansion is turning the emphasis towards savings, and increased activity in the equity market is attracting inﬂows. As a result of this, the Nordic savings market is expected to grow despite some ongoing concerns around the continued high level of unemployment. The competitive environment will continue to be challenging, with competition pushing down fee levels. The market is heading towards further fragmentation into two main segments: the advised market, with high levels of added value from ﬁnancial advisers, and the ‘self-service’ market. Management action continues to focus on improved sales, healthy margins over the long- term, reductions in the cost base, and improvement of the distribution and product offerings to enhance NCCF. We delivered cost savings of £2.5 million in 2010. In 2011, cost reduction activity will increase and we estimate restructuring costs of £30 million in the year. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n RETAIL EUROPE Retail Europe Retail Europe Jonas Jonsson Austria Germany Poland Switzerland (cid:3) (cid:3) (cid:3) Foundations laid for further development of the business Highlights (€m, unless otherwise stated) 2010 2009 % Change Adjusted operating proﬁt (IFRS basis) (pre-tax) Return on local equity1 Life assurance sales (APE) Unit trust/mutual fund sales PVNBP Value of new business APE margin PVNBP margin Operating MCEV earnings (covered business, post-tax) Return on embedded value (covered business, post-tax) Net client cash ﬂows (€bn) Funds under management (€bn) 60 20% 80 27 597 9 11% 1.4% 77 12.8% 0.5 5.8 25 9% 75 27 603 (6) (8%) (1.0%) (49) (7.9%) 0.6 4.7 140% 7% – (1%) 150% – 157% (17%) 23% 1 Return on local equity is IFRS AOP (post-tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles containment, ensured signiﬁcant improvement in our IFRS, MCEV and value of new business, with IFRS proﬁts more than doubling. The transfer of our IT and client administration functions to South Africa continues, and our ofﬁce in South Africa was ofﬁcially opened in December 2010. Life sales summary APE sales reached €80 million, an increase of 7% compared to 2009. Sales in Poland increased markedly, while Austria and Switzerland showed a slight decline. Although the unit-linked market in Germany has declined slightly, we increased our share of this market from 1.9% in the fourth quarter of 2009 to 2.2% in the fourth quarter of 2010. Overview GDP growth improved in all our markets throughout 2010 following government stimulus packages and better conditions in export markets. Although labour markets improved in Germany and Switzerland, unemployment in Austria and Poland increased slightly. Equity markets rebounded from their 2009 lows, with the German DAX index posting a 2010 gain of 16%. Our customers continued to demand primarily guaranteed products and IFAs still view unit-linked policies with caution, preferring traditional life policies. In the light of these challenges, Retail Europe’s performance in 2010 has been very positive. Our sales improved on 2009 levels, primarily driven by Germany and Poland, we continued the formation of the Retail Europe organisation, and we reduced operating costs. In addition to our sales and marketing activities, which were focused on the end customer, we also developed initiatives to maintain and grow relationships with our existing distribution partners. These initiatives, underpinned by strong cost Annual Report and Accounts 2010 Old Mutual plc 61 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED Gross Single Premiums Gross Regular Premiums Total APE Total PVNBP New business (€m) 2010 2009 Germany Poland Austria Switzerland Total Retail Europe 31 21 7 14 73 24 14 6 15 59 +/-% 29% 50% 17% (7%) 24% 2010 2009 29 18 17 9 73 27 12 19 11 69 +/-% 7% 50% (11%) (18%) 6% 2010 2009 32 20 18 10 80 30 14 19 12 75 +/-% 7% 43% (5%) (17%) 7% 2010 2009 278 114 109 96 597 260 87 142 114 603 +/-% 7% 31% (23%) (16%) (1%) The main driver of increased sales was new product launches. In Germany we launched the new single premium Investmentpolice product towards the end of the year, combining the tax beneﬁts of a unit-linked contract with the transparency of a pure investment contract. In Poland we launched a new regular premium product, and in Switzerland we launched Easy Combi. All these launches were successful and we expect their impact to continue in 2011. We also made concerted efforts to improve our distributor relationships through marketing campaigns designed to support our partners during these difﬁcult times. IFRS AOP results IFRS AOP has increased signiﬁcantly to €60 million, due to improved results in all countries. The main factors were lower administration expenses and higher fees – driven by higher fund-based fees resulting from improved equity markets. Net client cash ﬂow NCCF was €465 million for the year. The decline of €86 million on 2009 reﬂected the increase in fund values of surrenders due to positive equity markets, although persistency levels were broadly stable year-on-year. Funds under management FUM of €5.8 billion at 31 December 2010 reﬂected a rise of 23% compared to 2009, largely driven by positive stock market performance. Value of new business and margins The value of new business increased by €15 million to €9 million, with a PVNBP margin for the year of 1.4% and an APE margin of 11%. The main reasons for the improvement were higher new sales and successful expense management. MCEV results The operating MCEV earnings after tax increased by over €100 million to €77 million compared to 2009, driven by positive experience variances and positive assumption changes for rebates and persistency. Although the Retail Europe business expects to be a Standard Formula entity under Solvency II, we have made excellent progress as part of the Group iCRaFT programme in ensuring that all of our processes and governance structures will be Solvency II compliant. Outlook We anticipate that macro-economic factors will continue to have a signiﬁcant impact on our markets in 2011. The development of equity and bond markets will continue to be the key to restoring consumer conﬁdence after the ﬁnancial crisis. Our customers will also be impacted by unemployment levels and their own sense of job security. Ongoing Solvency II developments and the low interest rate environment will also provide challenges for traditional insurers. While this should be positive for the unit-linked market, it may intensify competition. Our focus in 2011 is to extend our product range and distribution through growth initiatives in Germany and Poland. At the same time we will maintain our focus on capital efﬁciency and cost containment through our consolidated base in Berlin and our operations in South Africa. We will incur further implementation costs for outsourcing the administration and IT support teams to South Africa but will gain scope for operational leverage in due course. 62 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n WEALTH MANAGEMENT Wealth Management Wealth Management Bob Head Skandia UK Skandia International France, Italy (cid:3) (cid:3) (cid:3) A very positive year for Wealth Management Highlights (€m, unless otherwise stated) Adjusted operating proﬁt (IFRS basis, pre-tax) Return on local equity1 Life assurance sales (APE) Unit trust/mutual fund sales PVNBP Value of new business (post-tax) APE margin PVNBP margin Operating MCEV earnings (covered business, post-tax) Return on embedded value (covered business, post-tax) Net client cash ﬂows (£bn) Funds under management (£bn) Skandia Investment Group 2010 197 14% 734 4,507 6,380 66 9% 1.0% 112 6.1% 3.9 55.9 2009 % Change 106 8% 617 3,210 5,042 49 8% 1.0% (4) (0.3%) 2.5 46.9 86% 19% 40% 27% 35% 56% 19% 1 Return on local equity is IFRS AOP (post-tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles Overview Wealth Management enjoyed a very positive year in 2010. We achieved signiﬁcant year-on-year sales growth, margins improved and the cost reduction programme delivered £35 million of run-rate savings which contributed to improved proﬁtability. The FTSE100 grew by 9% during the year, contributing to continued positive investor sentiment which in turn led to strong growth in FUM across our markets. Sales grew across the business, particularly in the UK and Continental Europe. We continue to see a rapid shift in the UK towards both platform business with an insurance wrapper and mutual fund products. Although we do not target growth in market share as a KPI, Skandia UK’s market share continued to grow in the third quarter of 2010, to 7.4% across all industry channels compared to 6.4% in the fourth quarter of 2009, suggesting the increased importance of the platform model. This is a record for Skandia in the UK and compares to a range of 3.5% to 5.5% over 2001-2007. The scale of our UK Platform, and our investment to deliver reliability and ﬂexibility, position us ideally to lead and beneﬁt from this industry shift; we are actively looking at how to further enhance our platform offering and rationalise our suite of products over the coming year. We are making good progress in building the Wealth Management operations and systems on a single operating model. Throughout 2010, Skandia Investment Group’s (SIG’s) highly successful Spectrum range of risk-targeted funds has been launched on all the UK’s major ﬁnancial adviser platforms. The FUM of Spectrum exceeded the £750 million mark, and this range has now been successfully exported to Sweden as the Skala range. Life covered sales summary APE sales were £734 million, a 19% increase on 2009. This is mainly attributable to sales in the UK and in Continental Europe, which improved by 28% (£76 million) and 50% (£52 million) respectively compared to 2009. Annual Report and Accounts 2010 Old Mutual plc 63 BUSINESS REVIEW LONG-TERM SAVINGS CONTINUED New business (£m) 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% 2010 2009 +/-% Gross single premiums Gross regular premiums Total APE Total PVNBP UK Pensions Bonds Protection Savings Total UK International Unit-linked Bonds Total International Continental Europe Unit-linked Total Wealth 2,021 597 – – 2,618 324 1,253 1,577 1,452 473 – – 1,925 190 1,154 1,344 39% 26% 36% 71% 9% 17% 1,490 971 53% 71 – 10 9 90 44 23 67 9 70 – 8 5 83 63 39 102 1% 25% 80% 8% (30%) (41%) (34%) 273 60 10 9 352 77 148 225 216 47 8 5 276 83 153 236 26% 28% 25% 80% 28% 3,023 2,289 32% (7%) (3%) (5%) 1,826 1,741 5% 6 50% 157 105 50% 1,531 1,012 51% Management 5,685 4,240 34% 166 191 (13%) 734 617 19% 6,380 5,042 27% The UK Legacy business APE sales volumes of £113 million were down by £24 million compared to 2009, due to a shift in market sentiment towards platform offers. Following a review of the legacy products, we decided to close some legacy products to new business. IFRS AOP results IFRS AOP (pre-tax) increased by 86% to £197 million, primarily due to higher FUM, which provided a healthy boost to returns on equity because of the operating leverage in the business. FUM growth remains strongly positive, driven by NCCF and market growth. As previously reported, the prior year AOP results beneﬁted from the structural tax efﬁciency applicable to UK companies writing unit-linked business in the UK, together with the smoothing of previous years’ deferred tax assets. These assets arose during the signiﬁcant market volatility of the preceding two years where falls in the value of policyholder assets resulted in the recognition of signiﬁcant deferred tax assets in the IFRS income statement, which were spread forward under AOP. The pre-tax smoothing for 2010 gave rise to a proﬁt of £71 million, a similar amount to 2009. For 2011, the pre-tax impact will be a proﬁt of £27 million, falling to nil thereafter. Within the MCEV earnings, these proﬁts are recognised as they arise as investment variances. With continued equity and bond market growth, the UK Life Companies have moved into a full XSI tax position. This raises the effective tax rate because it means that only a relatively small proportion of the Life dividend income is treated as belonging to the shareholder. This has increased the overall effective tax rate for Wealth Management to 22% in 2010 (2009: 19%). Unit trust / mutual fund sales summary £m +/-% 2009 2010 UK International Continental Europe Total Wealth Management 3,256 1,228 23 2,090 1,100 20 56% 12% 15% 4,507 3,210 40% The strong UK platform performance reﬂects the continued conversion of IFAs to platform business and particularly strong sales during the ﬁrst half in the lead-up to the end of the tax year. APE sales of £239 million were up £100 million on 2009. Second half volume growth decreased, with re-registering activity slowing and a greater impact from the UK holiday season. The majority of the mutual fund sales growth was from the platform, where buoyant markets and increased ISA allowances made positive contributions in 2010 and late 2009. Gross inﬂows onto the platform were £5.2 billion in 2010 (2009:£3.3 billion) – an indicator of our proposition’s success. Continental Europe APE sales volumes of £157 million were strongly ahead of 2009’s £105 million. Italy has been the main contributor to increased Europe sales, with very high sales earlier in the year partially driven by changes in tax legislation. The period covered by these tax changes has now expired, and volume growth has returned to normal levels as we continue to make progress through good distributor relationships. APE sales volumes of £225 million in the offshore International market were 5% lower than the £236 million achieved in 2009, impacted by a managed decline in regular premium sales in Finland as a result of legislation changes in 2009. 64 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n SKANDIA UK: GETTING THE FACTS TO OUR CUSTOMERS We have made excellent progress in implementing our Solvency II readiness programme, in conjunction with the Group-led iCRaFT initiative. “ Increasingly the web is becoming the critical medium for any business and it’s essential we embrace it. The new Skandia website provides a vital channel for communication with our end customers and ﬁnancial advisers.” Jeremy Mugridge, Platform Specialist, Skandia UK As research shows the growing importance of the internet to customers for accessing financial information, Skandia UK has launched a brand new website as a hub for all online activity. We carried out customer research to ensure that the structure, navigation and functionality of the new website would be as user-friendly and engaging as possible, and we have linked the site to our existing systems to enable rapid updates to news and data – getting the facts to our customers faster. Value of new business and margins The value of new business increased by £17 million to £66 million due to strong sales in UK platform and Continental Europe combined with operating assumption changes at year-end 2010 across all markets in Wealth Management. This was partially offset by economic assumption changes in UK and Continental Europe (as a result of decreased assumed growth rates and increased future inﬂation) and the shift from UK Legacy to UK Platform offerings. 2010 PVNBP margin was level with 2009 at 1.0%, as growth in volumes and cost reductions were fully offset by the shift to the UK platform offering, the decline in regular premium business sales and higher acquisition expenses in International. MCEV results Covered business adjusted operating MCEV post-tax earnings increased by £116 million to £112 million. 2009 was signiﬁcantly impacted by operating assumption changes reﬂecting surrender experience in International and UK Legacy. In 2010 VNB was higher and overall we saw a signiﬁcant improvement in experience effects, especially persistency and rebates. However, persistency has worsened on the UK Legacy pension business as the market anticipates the implementation of the Retail Distribution Review. This has resulted in some product closures and consequently the MCEV assumptions have been strengthened. Planned return on MCEV was lower than in 2009 as a result of the reduction in the one-year yield on risk-free investments. Net client cash ﬂow NCCF for the year was £3.9 billion, up 56% on 2009, driven by strong contributions from the UK platform and Italy, which outweighed surrenders in the UK Legacy book. Funds under management FUM grew 19% to £55.9 billion, driven by strong NCCF and the positive market movements. Outlook Our outlook for 2011 is optimistic, based on continuing positive investor sentiment. So far 2011 sales are in line with our expectations but below those of the prior year which included the one-off positive impact of the Italian tax shield and particularly signiﬁcant UK platform sales in the build up to the 2010 tax year-end. These were helped by April 2010 changes in pension rules coupled with rising investor conﬁdence at the time of the 2010 ISA season. We anticipate continued strong support for the platform model in all our markets and the shift in the UK market towards a simpliﬁed investment and pension product suite. Following the closure of a number of our UK Legacy products during 2010, we have put retention strategies in place for this part of the business – anticipating that we will continue to see net client outﬂows from this book of business in the build-up to implementation in 2013 of the changes resulting from the Retail Distribution Review (RDR). We expect ﬁnal clariﬁcation of the review in a Policy Statement during the ﬁrst half of 2011. We believe that we are well-placed for the RDR changes since a large proportion of our new business is already written on the basis of client-agreed adviser remuneration. In addition, we are considering plans to introduce a fully unbundled charging structure, under which we will pass on rebates to the customer in advance of December 2012. Our focus on cost reduction will continue and we remain conﬁdent that we will meet our 2012 expense and RoE targets. £6 billion Skandia UK’s gross sales reached £6 billion in 2010 Annual Report and Accounts 2010 Old Mutual plc 65 BUSINESS REVIEW BANKING KEY FACTS Nedbank Group is South Africa’s fourth largest banking group measured by assets, with a strong deposit franchise and the second largest retail deposit base. Old Mutual owned on average 54% of Nedbank Group during 2010. Nedbank is listed on the Johannesburg and Namibian Stock Exchanges. As at 31 December 2010, its market capitalisation was £6.2bn. Adjusted operating proﬁt (pre-tax and minorities) Number of employees £601m 2009: £470m Total Assets £58.9bn 2009: £47.7bn 27,525 2009: 27,047 Some of our brands (cid:57)(cid:76)(cid:91)(cid:92)(cid:89)(cid:85)(cid:3)(cid:86)(cid:85)(cid:3)(cid:76)(cid:88)(cid:92)(cid:80)(cid:91)(cid:96)(cid:3)(cid:15)(cid:57)(cid:54)(cid:44)(cid:16)(cid:3)(cid:12) (cid:42)(cid:86)(cid:89)(cid:76)(cid:3)(cid:59)(cid:80)(cid:76)(cid:89)(cid:3)(cid:24)(cid:3)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:3)(cid:12)(cid:3)(cid:3) 2010 2009 11.8 2010 2010 11.8 2009 2009 (cid:53)(cid:76)(cid:91)(cid:3)(cid:80)(cid:85)(cid:91)(cid:76)(cid:89)(cid:76)(cid:90)(cid:91)(cid:3)(cid:80)(cid:85)(cid:74)(cid:86)(cid:84)(cid:76)(cid:3)(cid:137)(cid:84)(cid:3)(cid:3) (cid:53)(cid:76)(cid:91)(cid:3)(cid:80)(cid:85)(cid:91)(cid:76)(cid:89)(cid:76)(cid:90)(cid:91)(cid:3)(cid:84)(cid:72)(cid:89)(cid:78)(cid:80)(cid:85)(cid:3)(cid:12)(cid:3)(cid:3) 2010 2009 1,468 2010 2010 1,238 2009 2009 10.1 2010 9.9 2009 3.35 3.39 2010 2009 66 Old Mutual plc Annual Report and Accounts 2010 Overview Nedbank Group provides a wide range of wholesale and retail banking services and a growing insurance, asset management and wealth management offering through ﬁve main business clusters, namely Nedbank Capital, Nedbank Corporate, Nedbank Business Banking, Nedbank Retail and Nedbank Wealth. Focused on southern Africa, but with an aspiration to grow its business reach across the whole of the African continent, Nedbank Group is positioned as a bank for all – from both a retail and a wholesale banking perspective. Acknowledged for its sustainability leadership, Nedbank Group is the ﬁrst and only carbon-neutral ﬁnancial services organisation in Africa. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Business proﬁle Nedbank Capital (cid:3) (cid:3) (cid:3)(cid:3)(cid:3) Nedbank Corporate (cid:3) (cid:3) Nedbank Business Banking Provides comprehensive investment banking solutions to institutional and corporate clients. Has ofﬁces in South Africa and London and a representative ofﬁce in Angola. (cid:3) (cid:3) (cid:3) (cid:3) Provides full-service corporate banking to large corporates with an annual turnover in excess of R400 million, including commercial, industrial, retail and residential property (cid:3) ﬁnance solutions, and Nedbank Africa, comprising operations servicing both retail and corporate market segments in Lesotho, Malawi, Namibia, Swaziland and Zimbabwe. (cid:3) (cid:3) The cluster comprises: (cid:81)(cid:3)(cid:3)Investment Banking (cid:81)(cid:3)(cid:3)Global Markets (cid:81)(cid:3)(cid:3)Treasury. (cid:3) (cid:3) (cid:3) (cid:3) The cluster comprises: (cid:81)(cid:3)(cid:3)Corporate Banking (cid:81)(cid:3)(cid:3)Property Finance (cid:81)(cid:3)(cid:3)Nedbank Africa (cid:3) (cid:81)(cid:3)(cid:3)Transactional Banking (cid:81)(cid:3)(cid:3)Corporate Shared Services. (cid:3) (cid:3) (cid:3) (cid:3) i R s k a n d R e s p o n s b i i l i t y Provides commercial banking solutions to small- to medium-sized businesses with an annual turnover of between R7.5 million and R400 million. The cluster comprises: (cid:81)(cid:3)(cid:3)Four geographically decentralised client-facing business units (cid:81)(cid:3)(cid:3)A strategic business unit, including Specialised Finance, Debtor Management and Client Value Propositions (cid:81)(cid:3)(cid:3)Specialist services, including Investment Management, Transactional Banking Sales, Finance and Business Intelligence/Client Value Management. G o v e r n a n c e Nedbank Retail Serves the ﬁnancial needs of individuals and small businesses with up to R7.5 million in annual turnover. Provides transactional, card, lending and investment products and services. The Nedbank Retail Cluster also services merchants and large corporates in respect of card-acquiring services. Nedbank Wealth Comprises three divisions, namely Insurance, Asset Management and Wealth Management, with ofﬁces in South Africa and London and on the Isle of Man, Jersey and Guernsey. The cluster comprises: (cid:81)(cid:3)(cid:3)Secured Lending, including mortgages and motor ﬁnance (cid:81)(cid:3)(cid:3)Retail Relationship Banking, which combines Private Banking and Small- Business Services and offers products in a client-centric value proposition (cid:81)(cid:3)(cid:3)Consumer Banking, which consists of channels, personal loans, deposits, transactional banking, client value management and mass tailored offerings based on client insights (cid:81)(cid:3)(cid:3)Card Issuing and Acquiring. The cluster comprises: (cid:81)(cid:3)(cid:3)Insurance includes short-term insurance, life insurance and insurance broking (cid:81)(cid:3)(cid:3)Asset Management offers a range of local and international ‘best of breed’ unit trusts, private client asset management and multimanagement solutions (cid:81)(cid:3)(cid:3)Wealth Management includes private banking and ﬁduciary services locally and internationally as well as stockbroking and ﬁnancial planning. Annual Report and Accounts 2010 Old Mutual plc 67 Mike Brown Chief Executive, Nedbank i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n BUSINESS REVIEW BANKING CONTINUED Nedbank Group’s headquarters are in Sandton, Johannesburg, while it has large operational centres in Durban and Cape Town, complemented by a regional branch network throughout South Africa and facilities in other southern African countries. These facilities are operated through Nedbank Group’s eight afﬁliated banks and subsidiaries, as well as through branches and representative ofﬁces in certain key global ﬁnancial centres that serve to meet international banking requirements of Nedbank Group’s South Africa- based multinational clients. Strategy During 2010 Nedbank Group’s vision was reﬁned to: ‘Building Africa’s most admired bank by our staff, clients, shareholders, regulators and communities’. This represents a signiﬁcant enhancement to Nedbank Group’s vision and highlights the increasing focus by Nedbank Group on growing its business reach across the African continent not just in South Africa. However, the Nedbank Group recognises that, to become the most admired bank in Africa, it must achieve this in South Africa ﬁrst, which is why its primary focus during 2010 was on developing more competitive domestic strategies for each of its front-line businesses. Nedbank Group assessment of strategic operating environment Identiﬁed trend Nedbank Group will … Bank returns are structurally declining. The SA ﬁnancial services’ economic proﬁt pool is large, but higher growth is expected in the rest of Africa in the longer term. SA prospects continue to be driven by infrastructural investment (mostly government) and a wealthier consumer. There is high growth from bandwidth, electronic, internet, mobile and new technology developments. SA demographic shifts are enabling consumer opportunities. The voice of and focus on the client are increasing. Non-banking solutions are growing faster than banking, but deposits have become a key priority. Demand for talent is greater than growth of the talent pool. Pressure on natural resources is increasing. ... respond through active portfolio management and ‘tilting’ of its portfolio of businesses to optimise sustainable proﬁtability, utilise capital and liquidity judiciously, invest to exploit new growth opportunities, and build a lean operating model. ... focus domestically, but continue to explore expansion opportunities in Africa. ... ensure that it beneﬁts from the opportunities created through infrastructure development, increase its focus on wholesale banking, and improve its retail proposition to capture disposable income shifts. Nedbank Group will also continue to bring more people into the formal banking system through innovative and affordable products such as M-PESA. ... leverage new technologies and then lead in these high-growth markets and banking markets linked to these, such as mobile banking. ... target large and growing segment opportunities such as the underbanked, youth, small and medium enterprise and senior citizen markets. A differentiated approach is essential to service such new markets in a cost-efﬁcient manner. ... meet the need for simplicity, convenience, choice, affordability, advice, and trust from clients. Client centricity will remain a core focus, with the aim to increase direct engagement with clients. ... seek out add-on growth solutions while improving transactional banking capabilities, such as cross-sell, primary clients, and functionality. ... develop unique ways to retain, develop and grow the staff talent pool, especially in businesses that will be targeting higher growth. ... continue to reduce and neutralise its own operational impact, consider environmental impacts in its lending activities and actively support its clients in their endeavours to reposition their businesses accordingly. 68 Old Mutual plc Annual Report and Accounts 2010 Nedbank Group’s vision continues to be supported by its long-term objectives, which are referred to internally as Deep Green aspirations. Against this strategic backdrop the business plan for 2011 to 2013 will see Nedbank Group focus on: (cid:81) building enduring primary banking relationships These are: (cid:81) to become a great place to work, a great place to bank and a great place to invest (cid:81) to be world class at managing risk (cid:81) to create a community of leaders with more retail and wholesale clients in South Africa (cid:81) improving its primary banking positioning across all businesses (cid:81) becoming the leader in business banking for South Africa (cid:81) to have the most respected and aspirational (cid:81) becoming the public sector bank of choice ﬁnancial services brand (cid:81) continuing as one of the top two wholesale (cid:81) to be recognised for being highly involved in the banks community and environment (cid:81) to lead in transformation (cid:81) to be great at collaboration (cid:81) to live its values. Portfolio approach to capital allocation A portfolio approach has been adopted for sustainably optimising returns in an environment where resources, capital and liquidity are scarce commodities. The Nedbank Group must be more judicious in selecting strategic business opportunities that will allow better alignment of risk and returns, taking into account liquidity, capital and credit risks. Doing so will allow a transition from some of the existing portfolios, such as retail home loans (where the economic returns continue to be poor), while growing low-capital-intensive businesses. The Nedbank Group will, however, continue to take a long-term sustainable view of its products, client needs and its societal impact. (cid:81) ramping up the wealth and asset management, and insurance businesses (cid:81) leveraging the Imperial Bank integration (cid:81) becoming the leader in client service delivery (cid:81) building on its position as a leader in, and inﬂuencer of, integrated sustainability. The Nedbank Group will also continue to evolve its strategy of building Africa’s most admired bank by: (cid:81) implementing its three-tier strategy to grow its physical network in the southern African Development Community (cid:81) leveraging boutique investment banking opportunities (cid:81) leveraging the Ecobank Nedbank Alliance to provide clients with access to a Pan-African network (cid:81) evaluating selective investment opportunities. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 69 BUSINESS REVIEW BANKING CONTINUED Solid earnings growth Highlights (Rm) Adjusted operating proﬁt (IFRS basis, pre-tax) Headline earnings1 Net interest income1 Non-interest revenue1 Net interest margin1 Credit loss ratio1 Cost to income ratio1 RoE1 RoE (excluding goodwill)1 Core Tier 1 ratio Adjusted operating proﬁt (IFRS basis, pre-tax) (£m) 2010 6,799 4,900 16,608 13,215 3.35% 1.36% 55.7% 11.8% 13.4% 10.1% 601 2009 % Change 6,192 4,277 16,306 11,906 3.39% 1.52% 53.5% 11.8% 13.4% 9.9% 470 10% 15% 2% 11% 28% 1 As reported by Nedbank Group in its report to shareholders as at 31 December 2010 Certain of the Nedbank Group’s reporting ratio calculations have been adjusted. The ratios for RoE have been restated with the denominator changing from simple average to daily average for equity and total asset values, respectively. The calculation of the credit loss ratio has been changed from simple-average advances to daily-average banking advances (thereby excluding trading advances from the calculation). Comparatives have been restated accordingly. The current strong capital position of the Nedbank Group, combined with these strategic focus areas, places it in a position for sustainable growth. The full text of Nedbank Group’s results for the year ended 31 December 2010, released on 28 February 2011, can be accessed on Nedbank Group’s website http://www.nedbankgroup.co.za/ ﬁnancial/2010AnnualResults/downloads/ NedbankGroup.pdf. Banking environment Real gross domestic product (GDP) in South Africa grew by 2.8% in 2010 compared with a decline of 1.7% in 2009. The local economy had a strong start to the year, primarily driven by improved global demand for commodities and a rebound in manufacturing production off the depressed levels of 2009. Economic activity was also boosted by strong infrastructural spending ahead of the FIFA 2010 World Cup and by the event itself, with consumer spending rising steadily for most of the year. However, ﬁxed investment by the private sector contracted for the second year off the elevated levels seen in 2008. Growth in both the emerging and some parts of the developed world surprised on the upside, underpinned by China’s economic strength and continued demand for commodities and capital goods. Massive liquidity injections by major central banks and historically low interest rates helped to stimulate economic growth further, particularly in emerging economies. In contrast, the underlying economic and ﬁnancial environment remained fragile in the developed world, with ﬁscal difﬁculties in parts of Europe and America, continued weakness in credit markets, limited employment growth and inﬂationary concerns returning in emerging economies. 70 Old Mutual plc Annual Report and Accounts 2010 Household ﬁnances improved in South Africa as debt started to decrease and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared with previous cycles. Household demand for credit was contained by the consumer debt burden remaining relatively high, increased regulatory requirements, policy uncertainty and employment growth only resuming late in the year. Against this background the ratio of household debt to disposable income declined marginally to 78.2% from just over 80% at the end of 2009. At the same time debt service costs decreased to 7.5%, the lowest level since June 2006, and are now at a level that is more conducive to improving economic growth in the consumer sector. In the corporate sector excess capacity and uncertainty over the sustainability of the local and global recovery limited spending. Government ﬁxed-investment spending, although continuing to contract, emerged as the main foundation for growth. Review of results Nedbank showed solid earnings growth in a challenging economic environment. After a strong fourth quarter Nedbank ﬁnished the year with earnings marginally ahead of management’s expectations set out in the third-quarter trading update. Headline earnings increased by 14.6% from R4,277 million to R4,900 million. Diluted headline earnings per share increased by 8.7% from 983 cents to 1,069 cents, slightly above the forecast range of 0% to 8% provided in the third-quarter trading update. Diluted earnings per share (DEPS) decreased by 5.3% from 1,109 cents to 1,050 cents. As previously reported, 2009 DEPS included a once-off International Financial Reporting Standards (IFRS) revaluation gain of R547 million (after taxation) from the acquisition and consolidation of the Nedbank Wealth joint ventures. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Nedbank recorded a return on average ordinary shareholders’ equity (RoE), excluding goodwill, of 13.4% and a RoE of 11.8%. Nedbank maintained its well-capitalised balance sheet with core Tier 1 capital at 10.1% (2009: 9.9%), while advances grew by 5.5%, with market share gains in most lending classes aside from home loans. The net asset value per share grew by 8.0% from 9,100 cents in December 2009 to 9,831 cents in December 2010. This is a pleasing result given the increase in the average number of shares in issue following the acquisition of the joint ventures from Old Mutual and scrip dividend distributions last year. Financial performance Net interest income (NII) NII increased by 1.9% to R16,608 million (2009: R16,306 million) and Nedbank’s net interest margin held up well at 3.35% (2009: 3.39%), despite the impact of lower interest rates. Average interest- earning banking assets increased by 3.0% (2009 growth: 9.0%). Margin compression was less than expected. Margin pressure primarily resulted from a smaller endowment from lower average interest rates and the cost of lengthening the funding proﬁle. This was partially offset by the widening of margins from asset pricing and a change in asset mix, including strong growth in Nedbank’s retail motor ﬁnance and personal loans businesses, a relative prime/Johannesburg Interbank Agreed Rate (JIBAR) reset beneﬁt as a result of less aggressive interest rate cuts during 2010 compared with 2009, and a decline in the market cost of term liquidity during the last quarter of the year. Impairments charge on loans and advances The credit loss ratio on the banking book improved to 1.36% for the period (2009: 1.52% (restated)). The reduction in the impairments charge was driven mostly by Nedbank Retail, particularly in the secured portfolios that had lagged the recovery in the unsecured portfolios. Lower interest rates and the stabilising of job losses contributed to the retail credit loss ratio improving signiﬁcantly from 3.17% in 2009 to 2.67%. Nedbank further strengthened its provisioning by reducing certain security assumptions in speciﬁc impairments, increasing levels of portfolio provisioning on debt restructures of R97 million and lengthening the bad debt emergence period assumptions within Nedbank Retail home loans at an additional cost of R114 million within portfolio impairments. The credit portfolios in Nedbank Corporate, Nedbank Business Banking and Nedbank Wealth are of high quality and credit loss ratios remained within or below the respective clusters’ through- the-cycle levels. Nedbank Capital impairments increased in the higher-risk private equity portfolio. Defaulted advances declined by 1.04% to R26,765 million (2009: R27,045 million). Defaulted advances to total advances decreased from its peak of 6.01% in June 2010 to 5.63%. Total impairment provisions increased by 14.6% to R11,226 million (2009: R9,798 million) resulting in strengthened coverage ratios. Non-interest revenue (NIR) Nedbank’s focus on NIR generated growth across all the clusters. NIR increased 11.0% to R13,215 million (2009: R11,906 million). On a comparable basis NIR growth was 10.5% after adjusting for the acquisitions in 2009 of the Nedbank Wealth joint ventures and before fair-value adjustments. The ratio of NIR to expenses improved to 79.6% (2009: 78.8%). Core fee and commission income grew strongly by 13.7% (like-for-like growth of 11.2%, adjusting for the Nedbank Wealth joint ventures) through volume growth, new products and new client acquisitions. Nedbank reduced its retail transactional banking charges in 2006 and 2007. Since then price increases have been modest, with 2010 increases in line with inﬂation, resulting in current banking charges being similar to 2005 levels. Insurance income grew 39.8% (18.4% on a like-for-like basis, adjusting for the Nedbank Wealth joint ventures) primarily as a result of the provision of insurance on a fast-growing personal loans book as well as the introduction of new products and improved levels of cross-selling. Trading income increased by 13.9% to R2,096 million (2009: R1,841 million). In 2009 interest rates decreased at a rapid pace and created favourable trading conditions. Low volatility in the ﬁrst half of 2010 resulted in difﬁcult conditions for global markets and continued pressure on foreign exchange volumes and margins. This was offset by improved equity trading in the second half of the year. Private equity markets remained constrained throughout the year. Listed-property private equity investments showed some modest gains. Overall NIR from the private equity portfolios decreased by 25.0%. NIR was negatively impacted by R213 million (2009: R6 million proﬁt) over the period as a result of the adverse fair-value adjustments of Nedbank’s subordinated debt resulting from the narrowing of credit spreads. Nedbank Corporate also reﬂected a negative fair-value adjustment of R55 million (2009: R72 million proﬁt) due to a downward movement in the yield curve and related convexity in the ﬁxed-rate advances book and associated interest rate swaps. Annual Report and Accounts 2010 Old Mutual plc 71 BUSINESS REVIEW BANKING CONTINUED Expenses Nedbank has maintained a strong cost discipline over an extended period, resulting in the increase in expenses remaining below the market guidance given at the beginning of 2010. Expenses grew by 9.9% to R16,598 million (2009: R15,100 million). The increase was partly due to the acquisition of the Nedbank Wealth joint ventures and the consolidation of Merchant Bank of Central Africa. Expenses increased by 8.5% on a comparable basis. Taxation The taxation charge (excluding taxation on non-trading and capital items) increased by 10.9% to R1,366 million (2009: R1,232 million) arising from proﬁt growth adjusted for dividend income as a proportion of total income being lower than in 2009, the lower provision for secondary tax on companies, owing to an increase of shareholders (81.5%) who elected to take scrip for the 2009 ﬁnal dividend distribution (2008 ﬁnal dividend distribution: 32.0%), and the reduced accounting effect from structured ﬁnance transactions that continued to unwind. The effective tax rate increased marginally from 20.2% to 20.7%. Non-trading income Income after taxation from non-trading and capital items decreased to a R89 million loss from a R549 million proﬁt in 2009. The main component of this was an anticipated R34 million writedown on Imperial Bank computer software following the acquisition. The 2009 proﬁt arose from the accounting-related revaluation of BoE (Pty) Limited and Nedgroup Life Assurance Company Limited on the acquisition of the remaining shares in the joint ventures. Capital Nedbank’s capital adequacy ratios remain well above its internal targets and marginally ahead of December 2009. This resulted from ongoing capital and risk-weighted asset optimisation, a strategic focus on ‘managing for value’ and a 0.6% increase in capital from higher levels of scrip takeup and other share issues for staff incentives and black economic empowerment (BEE) structures. This growth was offset by the approximately 1.3% negative impact on Nedbank’s capital adequacy ratios from the cash acquisition of 49.9% of Imperial Bank and the treatment of capitalised software as an intangible asset rather than as a ﬁxed asset for capital adequacy purposes. Liquidity Nedbank’s liquidity position remains sound. Nedbank continues to focus on diversifying its funding base, lengthening its funding proﬁle and maintaining appropriate liquidity buffers. Nedbank increased its long-term funding ratio from increased capital market issuances under the domestic medium-term note programme (R6.23 billion) and also increased the duration in the money market book. Nedbank’s liquidity position is further supported by a strong loan-to- deposit ratio of 97% and a low reliance on interbank and foreign currency funding. Nedbank is able to leverage off its favourable retail, commercial and wholesale deposit mix, which compares well with domestic industry averages. Loans and advances Nedbank continued to make good progress in improving asset quality, and active management of the bank’s portfolios towards higher-economic-proﬁt businesses resulted in slower asset growth in selected areas. Nedbank grew advances ahead of the industry at 5.5% to R475 billion (2009: R450 billion). Deposits Deposits increased by 4.5% to R490 billion (2009: R469 billion). Optimising the mix of the deposit book remains a key focus in reducing the high cost of longer-term and professional funding. This is critical as banks compete more aggressively for lower-cost deposit pools with longer behavioural duration and as they start to take cognisance of the possible Basel III liquidity ratios. Low interest rates, coupled with low domestic savings levels and the deleveraging of consumers, led to modest growth in retail deposits during 2010. Relatively higher deposit growth in the wholesale sector indicated increasing working capital and available capacity among corporates. Throughout the year demand for higher-yielding negotiable certiﬁcates of deposit remained strong within the professional funds and corporate markets. Capital adequacy Core Tier 1 ratio Tier 1 ratio Total capital ratio 2010 ratio 10.1% 11.7% 15.0% 2009 ratio 9.9% 11.5% 14.9% Target range 7.5% to 9.0% 8.5% to 10.0% 11.5% to 13.0% Regulatory minimum 5.25% 7.00% 9.75% Capital adequacy ratios include unappropriated proﬁt 72 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Outlook Lower domestic interest rates and rising levels of income should boost consumer spending. Together with improving global demand, this is expected to increase conﬁdence levels and lead to better consumer demand and capital formation in 2011 and further momentum in 2012. continue to invest to generate sustainable revenue growth, underpinned by ongoing cost optimisation and efﬁciency improvements. Growing the bank’s overall franchise and maintaining momentum on the turnaround in the Retail Cluster, supported by a liquid and well-capitalised balance sheet, are key to delivering sustainable growth. Retail banking credit growth should fare better as household credit demand improves, house prices edge higher and impairments moderate. Corporate markets are expected to show modest improvement, while the small and medium enterprise (SME) market is likely to remain under pressure until ﬁxed-investment activity improves. Government spending should continue to underpin growth, although this is expected to be limited by the reduction in ﬁscal deﬁcits over the medium term. Government’s stronger focus on job creation is also positive and much will depend on the ability to create a more enabling environment for business growth. Key to this will be improvements in the building of infrastructure and a more conducive and certain regulatory and policy environment to reduce the medium-term constraints on economic growth. Nedbank is well placed for earnings growth in 2011 and remains on track to meet its medium- to long-term ﬁnancial targets in 2013. Nedbank will Margins should widen slightly, given that interest rates are expected to remain unchanged, and hence the negative effect of assets repricing quicker than liabilities out to three months will decrease. In addition, the cost of term liquidity is expected to decline as more expensive deposits mature and as below-trend economic growth continues, albeit at higher levels than last year. Overall advances growth is expected to be in the mid to upper single digits. Impairments are expected to continue reducing in line with the improved quality of assets supported by asset pricing on new advances that appropriately reﬂects risk and the related cost of funds. The credit loss ratio is currently expected to decrease but to remain above Nedbank’s target range in 2011. Transactional volumes are expected to increase as the economy improves and Nedbank’s focus on growing primary clients is maintained. Nedbank’s medium-term targets remain unchanged. G o v e r n a n c e Nedbank Group’s medium- to long-term targets Metric 2010 Performance Medium- to long-term target ROE (excl goodwill) improving, impairments charge 13.4% Growth in diluted headline earnings per share (EPS) 8.7% Impairments charge (credit loss ratio) 1.36% NIR:expenses ratio 79.6% Efﬁciency ratio 55.7%1 Basel II core Tier 1 capital adequacy ratio 10.1% 5% above monthly weighted average cost of ordinary shareholders’ equity At least consumer price index + GDP growth + 5% Between 0.6% and 1.0% of average banking advances > 85% < 50.0% 7.5% to 9.0% Basel II Tier 1 capital adequacy ratio Basel II total capital adequacy ratio Economic capital 11.7% 8.5% to 10.0% 15.0% 11.5% to 13.0% 2011 Outlook Improving, remaining below target Forecast to exceed target Improving, remaining above target Improving, remaining below target Improving, remaining above target Improving, remaining above top end of target range Improving, remaining above top end of target range Improving, remaining above top end of target range Capitalised to 99.93% conﬁdence interval on economic capital basis (target debt rating A including 10% buffer) Dividend cover policy 2.30% 2.25 to 2.75 times 2.25 to 2.75 times 1 Actual efﬁciency ratio is 55.7% including BEE costs Annual Report and Accounts 2010 Old Mutual plc 73 BUSINESS REVIEW SHORT-TERM INSURANCE KEY FACTS Mutual & Federal (M&F) is the second-largest short-term insurer in South Africa, with operations in Namibia, Botswana and Zimbabwe. It provides a full range of short-term insurance products to commercial and domestic customers in ﬁve principal portfolios: Commercial including Agriculture, Corporate, Personal, Risk Finance, and Credit. Adjusted operating proﬁt (pre-tax) £103m 2009: £70m Combined ratio 92.4%2009: 98.0% Number of employees 2,222 2009: 2,115 Our brands (cid:60)(cid:85)(cid:75)(cid:76)(cid:89)(cid:94)(cid:89)(cid:80)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:89)(cid:76)(cid:90)(cid:92)(cid:83)(cid:91)(cid:3)(cid:3)(cid:15)(cid:137)(cid:84)(cid:16) (cid:46)(cid:89)(cid:86)(cid:90)(cid:90)(cid:3)(cid:87)(cid:89)(cid:76)(cid:84)(cid:80)(cid:92)(cid:84)(cid:90)(cid:3)(cid:15)(cid:137)(cid:84)(cid:16) 2010 2009 10.6 45.9 2010 2009 746.4 642.1 74 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i Overview In 2009, Old Mutual plc announced its intention to buy out the minority stake in M&F, making it a wholly-owned subsidiary. On completion of the transaction in 2010, M&F delisted from the Johannesburg Stock Exchange and developed a three-to-ﬁve-year strategic programme to deliver a real step change for the company. To drive delivery of the programme, Peter Todd was appointed as Managing Director in December 2010, following Keith Kennedy’s decision to retire in 2011. Strategy M&F’s new vision and strategic objectives are aligned with Old Mutual Group’s theme of customer-centricity. The strategy aims to deliver the desired shareholder outcomes by identifying key market segments and providing them with relevant and suitably priced product solutions and efﬁcient services through appropriate channels. The new vision, strategy and ﬁve strategic thrusts will be delivered through the Step Change Programme. Our vision is to become the short-term insurer of choice, trusted by our customers to provide innovative solutions to protect them ﬁnancially in the event of a loss. Our strategy is to deliver strong underwriting proﬁt and revenue growth by building a multi-channel business focused on delivering value for the customer and fostering close relationships with our strategic business partners. The ﬁve strategic thrusts are: 1. Embed proﬁtable and sound underwriting processes 2. Develop compelling and innovative offerings for targeted customer and broker segments 3. Grow our customer base by servicing them through their channel of choice 4. Deliver value through efﬁcient and customer- centric processes 5. Transform our business to beneﬁt our people and other stakeholders. Over the next three years, M&F will continue focusing on implementation of the Step Change Programme to build a leadership position in the South African short-term insurance market. 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Corporate offerings include protection, ﬁre policies, accident policies and motor ﬂeet insurance. This portfolio is staffed with specialists in corporate insurance, supporting the major brokers in this sphere, with expertise in mining, engineering, chemical production, motor vehicle manufacture and other major sectors. 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(cid:90)(cid:76)(cid:78)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:94)(cid:79)(cid:76)(cid:89)(cid:76)(cid:3)(cid:80)(cid:91)(cid:3)(cid:75)(cid:86)(cid:84)(cid:80)(cid:85)(cid:72)(cid:91)(cid:76)(cid:90)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:21) Peter Todd Managing Director Appointed, December 2010 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 75 BUSINESS REVIEW SHORT-TERM INSURANCE CONTINUED Strong performance following renewed focus Highlights (Rm) Underwriting result Long-term investment return (LTIR) Restructuring costs Income from associates Adjusted operating proﬁt (IFRS basis, pre-tax) Gross premiums Earned premiums Claims ratio Combined ratio Solvency ratio Return on equity Adjusted operating proﬁt (IFRS basis, pre-tax) (£m) Market context In 2010, although market conditions had improved compared to 2009, tough economic conditions prevailed for consumers, and spending was constrained. The improvement in market conditions resulted from several factors – including successive interest rate cuts during the year, which reduced the cost of debt; consumer inﬂation declining and remaining within the target range, and improved customer conﬁdence. GDP grew at the expected rate of 3.0% by the end of 2010, a turnaround from the 1.8% decline in 2009. Car sales increased as a result of car rental company purchases for the 2010 Soccer World Cup, and consumers bought motor vehicles in anticipation of the new CO2 emissions tax. Lastly, there was growth in the short-term industry market – particularly in the mass market area, where penetration is still low. On the other hand, challenges were presented by debt-income ratios and unemployment that remained high, constraining spending, particularly retail expenditure. Market competition has intensiﬁed with the entry and growth of direct businesses, aggregators and banks in the short- term insurance space. In addition, the short-term insurance industry has had to face increased legislation such as the Financial Advisory and Intermediary Services Act (FAIS) Amendment to the General Code of Conduct enacted in October 2010. Review of results 2010 Mutual & Federal delivered a very strong underwriting result in 2010, with exceptional performance from the commercial, corporate and credit insurance portfolios assisted by a relatively benign claims environment. As a result of seasonal weather factors our performance in the second half is traditionally stronger than the ﬁrst half, which is affected by heavy rains. This was particularly marked in 2010, when our performance steadily improved throughout the year after a weak ﬁrst quarter, also helped by the absence of signiﬁcant ﬁre claims. 76 Old Mutual plc Annual Report and Accounts 2010 2010 519 639 (8) 12 1,162 8,442 6,859 63.8% 92.4% 73% 19.0% 103 2009 % Change 140 791 (13) – 918 8,456 6,874 68.7% 98.0% 56% 21.2% 70 271% (19%) 38% – 27% – – 47% We were pleased to record an improvement in client service in 2010. This was conﬁrmed when we took second place in the Ask Afrika Orange survey on short-term insurance, which assesses customer service standards. The year also marked our ﬁrst entry into the direct insurance market, with the launch of our iWYZE initiative in May. This has progressed extremely well, although it will continue to require investment in the near term. We are also making good progress in our preparation for Solvency II and its equivalent in South Africa, which is known as Solvency Assessment and Management (or SAM). BOOSTING FINANCIAL LITERACY “ 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 Managing Your Money is one of our financial literacy programmes run by Mutual & Federal. It helps teachers in South Africa to prepare effective and relevant mathematics literacy lessons by providing free training workshops and printed and multimedia resources that are fully aligned with the school curriculum. 692,000 Over the last three years we have reached over 692,000 children The programme is helping hundreds of thousands of young people to set out on the path to financial independence, and demonstrating our commitment to membership of the South African Insurance Association and the Financial Sector Charter. While we will continue to maintain our focus on the broker market and look to grow our share of this channel through improved systems and service, 2011 will see a growing contribution from alternative channels. Besides the expected growth from iWYZE, we will increase our focus on niche businesses through alternative channels. Following the successful buy-out of minorities in 2010, the business is well positioned to extract more value from full membership of the Old Mutual Group. Coupled with a strong balance sheet and a greater focus on building new distribution channels, this should see us grow revenue while improving our expense ratios. Underwriting and IFRS AOP results Premiums remained ﬂat on 2009 levels, largely as a result of the cancellation in late 2009 and early 2010 of some unproﬁtable portfolios that had consistently run at claims ratios above 80%. Our claims ratio decreased from 68.7% to 63.8% due to the favourable trading environment and focused management of claims costs. The improving quality of our book of business, combined with a focus in 2010 on claims costs and improved pricing, allowed the business to deliver an underwriting result of 7.6%. Our operations in Namibia and Botswana continued to generate about 11% of our underwriting result between them. Our expenses increased by 13% – primarily driven by inﬂation and proﬁt-related pay, given the improved underwriting result. Solvency margin There has been a pleasing improvement in the solvency ratio (the ratio of net assets to net premiums) from 56% to 73%. This reﬂects the capital generated from the much-improved underwriting result and investment income. Outlook In 2011 we will continue to see the beneﬁts of increased collaboration with OMSA, both in further growth of the iWYZE initiative, and as we identify opportunities for capital optimisation. Under our new Managing Director, Peter Todd, we have begun delivering our three-year strategic Step Change Programme. This aims to enhance proﬁtability by focusing on growth while improving operating efﬁciencies across the business. However, the benign local claims environment in 2010 is likely to see a softening in rates in 2011, which will put some pressure on underwriting margins. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 77 BUSINESS REVIEW US ASSET MANAGEMENT KEY FACTS Trading as Old Mutual Asset Management (OMAM) and based in Boston, US Asset Management (USAM) is a global multi-boutique investment organisation serving institutional and individual investors around the world. Our 18 boutique ﬁrms specialise in active investment management, offering more than 160 investment strategies that span an array of asset classes and investment solutions. Adjusted operating proﬁt (pre-tax) Selected afﬁliates Net client cash flows £bn 200 150 100 50 0 Opening FUM Inflows Outflows Market and Other Closing FUM £87m2009: £83m Number of employees 1,537 2009: 1,544 Funds under management £166.6bn 2009: £161.5bn US ASSET MANAGEMENT Linda Gibson Executive Vice President, Chief Operating Ofﬁcer Acting CEO in 2010 78 Old Mutual plc Annual Report and Accounts 2010 USAM afﬁliate capabilities Over 160 investment strategies across a wide array of categories M a n a g e m e n t s t a t e m e n t s US Equities (cid:3)(cid:81)(cid:3)(cid:3)Large, Mid, Small, Micro, All-Cap (cid:81)(cid:3)(cid:3)Growth, Value, Core (cid:81)(cid:3)(cid:3)Fundamental, Quantitative Global & Non- US Equities Fixed Income Alternatives (cid:3) (cid:81)(cid:3)(cid:3)Global, International, Regional, Country Speciﬁc (cid:81)(cid:3)(cid:3)Large, Small, All-Cap (cid:81)(cid:3)(cid:3)Developed, Emerging, Frontier Markets (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:81)(cid:3)(cid:3)Long Duration, (cid:3) Intermediate, Short-Term (cid:81)(cid:3)(cid:3)Core, Core Plus, High Yield (cid:81)(cid:3)(cid:3)Stable Value (cid:81)(cid:3)(cid:3)Liquidity Management, Money Market (cid:81)(cid:3)(cid:3)TIPS (cid:81)(cid:3)(cid:3)Global, International, Emerging Markets (cid:3) (cid:3) (cid:3) (cid:81)(cid:3)(cid:3)130/30 (cid:81)(cid:3)(cid:3)Long/Short Variable Bias (cid:81)(cid:3)(cid:3)Market Neutral (cid:81)(cid:3)(cid:3)Absolute Return (cid:81)(cid:3)(cid:3)Global Tactical Asset Allocation (cid:81)(cid:3)(cid:3)Portable Alpha (cid:81)(cid:3)(cid:3)Hedge Fund Seeding (cid:81)(cid:3)(cid:3)Hedge Fund Emerging Managers (cid:81)(cid:3)(cid:3)Options Overlay (cid:81)(cid:3)(cid:3)Managed Futures (cid:81)(cid:3)(cid:3)Volatility Management (cid:81)(cid:3)(cid:3)Currency Management (cid:81)(cid:3)(cid:3)Real Estate (Public, Private, Global) (cid:81)(cid:3)(cid:3)Timber Full offering of investment vehicles (cid:81)(cid:3)(cid:3)Mutual Funds (cid:81)(cid:3)(cid:3)Separate Accounts (cid:3) (cid:3) Designed to meet investor needs (cid:81)(cid:3)(cid:3)High Net Worth (cid:81)(cid:3)(cid:3)Individual Investors (cid:81)(cid:3)(cid:3)Sub-Advisory (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Commingled Funds (cid:81)(cid:3)(cid:3)Collective Trusts (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Plan Sponsors (Private & Public) (cid:81)(cid:3)(cid:3)Endowments & Foundations (cid:81)(cid:3)(cid:3)Corporations Not all strategies are offered in all vehicles. (cid:3)(cid:81)(cid:3)(cid:3)Hedge Funds (cid:81)(cid:3)(cid:3)Fund of Hedge Funds (cid:3) (cid:3) (cid:3)(cid:81)(cid:3)(cid:3)Deﬁned Beneﬁt (cid:81)(cid:3)(cid:3)Deﬁned Contribution (cid:81)(cid:3)(cid:3)Taft-Hartley (cid:3) Markets and strategy overview The investment environment in 2010 was characterised by a continued rebound in equity markets globally, although investors remained cautious in the wake of the global ﬁnancial crisis. As a result, ﬁxed income and alternative strategies remained in high demand among both individual and institutional investors while equity strategies (excluding emerging markets) broadly experienced outﬂows. i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Peter Bain President and Chief Executive Ofﬁcer Appointed February 2011 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 79 BUSINESS REVIEW US ASSET MANAGEMENT CONTINUED Proﬁts up 4% on higher average FUM, improving investment performance as markets began returning to fundamentals Highlights ($m, unless otherwise stated) 2010 2009 % Change Adjusted operating proﬁt (IFRS basis, pre-tax) Return on Capital Operating margin Net client cash ﬂows ($bn) Funds under management ($bn) Adjusted operating proﬁt (IFRS basis, pre-tax) (£m) USAM seeks to become the leading multi-boutique investment organisation globally, with several sources of competitive advantage: (cid:81) A proven model for multi-boutique management. Over the past 10 years, USAM has demonstrated the ability to manage and develop a diverse portfolio of investment ﬁrms successfully. Our boutiques enjoy investment autonomy and equity incentives that attract and retain talented investors and promote business continuity. We enhance our boutiques’ growth and proﬁtability through central services, including distribution, product development, capital support, strategic planning, risk management and a scaled shared services platform. (cid:81) Investment-focused and broadly diversiﬁed. As boutique investment managers singularly focused on asset management, our ﬁrms succeed when our clients succeed. Our boutiques invest with conviction and discipline, employing rigorous and consistent investment processes focused on delivering long-term results. Our ﬁrms serve institutional and individual investors around the world and beneﬁt from the insights gained through a global client base. (cid:81) Well-positioned for proﬁtable growth. Our boutiques offer sought-after traditional and alternative products with signiﬁcant FUM capacity. Capital investments offer the potential to accelerate growth by funding acquisitions and lift-outs, seeding new products, and making operating investments. With access to the breadth and depth of a large international ﬁnancial services company like Old Mutual, USAM is well-positioned to continue its expansion outside the US. 135 4.2% 18% (18.0) 259 87 130 4.1% 18% (7.1) 261 83 4% (254%) (1%) 5% USAM represents an attractive business partner for talented investment managers. The business continues to invest in growth by expanding investment capabilities and growing its global client base through international distribution. Review of results 2010 FUM across all afﬁliates totalled $259 billion, of which $217 billion (84%) was in long-term investment products and $42 billion (16%) was in short-term products. Long-term investment products were broadly diversiﬁed across equities ($127 billion, 49%), ﬁxed income ($60 billion, 23%) and alternative investments ($29 billion, 11%). Short-term products comprised stable value funds ($41 billion, 16%) and cash ($1 billion, <1%). USAM proﬁts improved 4% over 2009 due primarily to higher average FUM, although year-end FUM were ﬂat versus 2009. Gains from market appreciation and net inﬂows into ﬁxed income products were offset by net outﬂows from equity, alternative and stable value products. In February 2011, we announced the appointment of Peter Bain as USAM’s new Chief Executive Ofﬁcer. Peter has over two decades of experience in leading and advising asset management ﬁrms, and his appointment is a key milestone in the ﬁrm’s growth plans. Investment performance Investment performance improved during the year across global equity, non-US equity and ﬁxed income products. US equity strategies underperformed for the year as a whole, but showed improvement in the fourth quarter as the return to fundamentals began in US markets. Stable value products underperformed due to the impact of prior years’ underperformance in current-year returns. 80 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n In aggregate, 51% of FUM across all strategies outperformed their respective benchmarks for the year, while 38% and 67% of FUM outperformed over three- and ﬁve-year time periods. This compared to 51%, 58% and 61% in 2009. Excluding short-term products, 60%, 45% and 60% of long-term assets outperformed over one-, three- and ﬁve-year periods. Management remains conﬁdent that its multi-boutique model, which encourages investment conviction and retention of investment talent, will deliver investment outperformance over full market cycles. IFRS AOP results IFRS adjusted operating proﬁt increased 4% or $5 million to $135 million in 2010, beneﬁting from higher average FUM. Management fees were up $50 million or 8%, while other revenues were ﬂat. Performance fees increased during the second half compared to the second half of 2009, reﬂecting recent improvements in investment performance. Operating margin and cost management Our operating margin of 18% was consistent with 2009, although we realised annual expense savings of $23 million through restructuring actions undertaken in 2009. Total expenses were 8% or $46 million higher than 2009. The increase was driven by higher variable compensation, in line with revenue growth, one-time charges associated with acceleration of the DAC write-off given net client cash outﬂows in 2010, and equity plan implementations. (cid:52)(cid:72)(cid:89)(cid:78)(cid:80)(cid:85) (cid:12) 30 20 10 0 H1 2009 H2 H1 H2 2010 Net client cash ﬂows Net client cash outﬂows totalled $18.0 billion (2009: $7.1 billion) as net inﬂows into ﬁxed income products were offset by outﬂows in equity, alternative and stable value products. Similar trends were observed in our US peer group. Net outﬂows were primarily driven by rebalancing- related withdrawals from continuing clients as both institutions and individuals continued to favour ﬁxed income over equity investments during the year. The bulk of the net outﬂows was concentrated in three afﬁliates and was weighted towards the second half, traditionally a peak period for mandate changes. Gross inﬂows from new accounts exceeded $10 billion as all 18 USAM afﬁliates won new business during the year, with ﬁxed income and international equity products attracting the bulk of new investment. Funds under management FUM were $259 billion at the year-end (2009: $261 billion). The USAM business is broadly diversiﬁed, with, for example, international and global equity products accounting for 22% of the FUM. Non-US clients accounted for 29% of FUM. The addition of Echo Point Investment Management in October 2010 brought $1.6 billion in FUM, while the sale of Thomson Horstmann & Bryant reduced FUM by $1.7 billion. The restructuring of the discontinued US Life business portfolio resulted in the transfer of $5.4 billion of FUM from USAM during the year. Afﬁliate developments Echo Point Investment Management began operation as a USAM afﬁliate on 1 October 2010, launching with $1.6 billion in FUM in international growth equities. During the fourth quarter the ﬁrm received additional investment commitments from two current clients as it demonstrated its ability to operate effectively in a multi-boutique structure. Product and distribution developments Barrow, Hanley, Mewhinney & Strauss surpassed $1.9 billion FUM in its international value product as investors bought into this non-US equity application of the ﬁrm’s proven expertise in value investing. The ﬁrm also launched a global equity product in the fourth quarter, and with a mandate from Old Mutual’s South African business, the product now has $1.0 billion in FUM. Annual Report and Accounts 2010 Old Mutual plc 81 BUSINESS REVIEW US ASSET MANAGEMENT CONTINUED USAM boutique investment managers Afﬁliate Established Investment style 1951 Fundamental US growth manager Funds under management 31 December 2010 $0.5bn 2005 Quantitative commodity trading adviser of managed futures portfolios $0.2bn 1986 Quantitative US, global & international equity manager $49.0bn 1970 Quantitative equity & ﬁxed income manager 1973 Fundamental US growth manager 1979 1981 Fundamental US global & international value equity & US ﬁxed income manager Second-largest timber investment management company in the US $6.3bn $4.0bn $60.3bn $5.7bn 2005 Fundamental US small/SMID growth & global equity manager $1.7bn 1983 US ﬁxed income manager $47.3bn 2010 Fundamental international growth equity manager $1.6bn 1966 Public and private real estate, real estate debt manager $16.9bn 1972 Fundamental US value equity manager 1999 Multi-strategy fund of hedge funds manager & hedge fund seeding specialist $2.4bn $1.5bn 1982 Fundamental global value equity and ﬁxed income manager $2.9bn 2009 Fundamental concentrated US equity manager $0.7bn 1986 Fundamental & quantitative global and ﬁxed income manager $7.1bn 1981 Fundamental global ﬁxed income manager 1969 Fundamental US/international value equity & ﬁxed income manager $42.8bn $8.0bn 82 Old Mutual plc Annual Report and Accounts 2010 Larch Lane Advisors launched the Alpha Evolution Fund, a fund of hedge funds that leverages the ﬁrm’s expertise in early-stage hedge funds by identifying and investing in smaller and/or newer funds. Target investors for Alpha Evolution are primarily institutions that are unable to commit to a long lock-up of their capital because of liquidity guidelines, but want the potential beneﬁts of an investment in early-stage hedge funds. USAM afﬁliates launched several new UCITS vehicles in 2010 to tap global investors’ growing preference for registered pooled vehicles. Rogge Global Partners (Global High Yield), Acadian Asset Management (Emerging Market Equities) and Heitman (Global REIT) each introduced new UCITS products that expand the global marketability of their respective investment capabilities. Our global distribution continued to expand, with the addition of new staff and the opening of an ofﬁce in the Middle East. We continue to focus our US retail distribution efforts on professional buyer channels that value the institutional orientation of USAM afﬁliates. (cid:60)(cid:58)(cid:3)(cid:40)(cid:90)(cid:90)(cid:76)(cid:91)(cid:3)(cid:52)(cid:72)(cid:85)(cid:72)(cid:78)(cid:76)(cid:84)(cid:76)(cid:85)(cid:91)(cid:33)(cid:3)(cid:77)(cid:92)(cid:85)(cid:75)(cid:3)(cid:84)(cid:80)(cid:95) (cid:81) (cid:60)(cid:58)(cid:3)(cid:61)(cid:72)(cid:83)(cid:92)(cid:76) (cid:81) (cid:60)(cid:58)(cid:3)(cid:46)(cid:89)(cid:86)(cid:94)(cid:91)(cid:79) (cid:81) (cid:60)(cid:58)(cid:3)(cid:42)(cid:86)(cid:89)(cid:76) (cid:176) (cid:81) (cid:53)(cid:86)(cid:85)(cid:20)(cid:60)(cid:58) (cid:176) (cid:81) (cid:81) (cid:45)(cid:80)(cid:95)(cid:76)(cid:75)(cid:3)(cid:48)(cid:85)(cid:74)(cid:86)(cid:84)(cid:76) (cid:58)(cid:91)(cid:72)(cid:73)(cid:83)(cid:76)(cid:3)(cid:93)(cid:72)(cid:83)(cid:92)(cid:76)(cid:22)(cid:74)(cid:72)(cid:90)(cid:79) (cid:81) (cid:40)(cid:83)(cid:91)(cid:76)(cid:89)(cid:85)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:22)(cid:57)(cid:76)(cid:72)(cid:83)(cid:3)(cid:44)(cid:90)(cid:91)(cid:72)(cid:91)(cid:76)(cid:22) (cid:42)(cid:72)(cid:90)(cid:79)(cid:3)(cid:42)(cid:86)(cid:83)(cid:83)(cid:72)(cid:91)(cid:76)(cid:89)(cid:72)(cid:83) 2010 (cid:25)(cid:23)(cid:23)(cid:32) 59 6 10 51 61 42 30 (cid:28)(cid:29) (cid:30) (cid:24)(cid:25) (cid:27)(cid:28) (cid:28)(cid:32) (cid:27)(cid:30) (cid:26)(cid:28) Outlook During the recent period of market dislocation, investors and their advisers increased their focus on macro investment performance rather than investing on a fundamentals basis. Many USAM afﬁliates found it challenging to deliver superior performance in these conditions, and this contributed to net client cash outﬂows. However, 2010 saw the beginning of a return to fundamentals-based investing and our investment performance improved as a result. If US markets maintain this trend in 2011, we are well positioned to achieve further improvements in investment performance and, over time, a reversal of net client cash outﬂows. In an environment where investors begin to increase their risk appetite and migrate towards equities, our extensive equity product portfolio is positioned to capture its share of growing ﬂows. The growing attractiveness of non-US equity exposure in both investment allocation and equity management should favour the USAM business model and strategy. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 83 BUSINESS REVIEW NON-CORE AND DISCONTINUED BUSINESS OPERATIONS US Life Life sales summary APE sales at $143 million increased by 34% relative to the comparative period. Fixed indexed annuities, which represent more than half of the total APE, increased 30% in 2010 compared to 2009. The increase was driven by product revisions and competitive annuity rates. The sales levels are within the range set for the business and reﬂect the approach to managing capital within the business. Our top 10 annuity distribution partners who have represented an average of 60% of our total sales volume over the past ﬁve years grew sales collectively by 62% in 2010. IFRS results The IFRS pre-tax proﬁt for the year for the US Life business was $50 million (2009: loss of $195 million), with ﬁnancial performance beneﬁting from lower impairment losses and the reversal of prior impairments, partially offset by higher deferred policy acquisition costs amortisation as a result of higher gross proﬁts. Value of new business The value of new business decreased by $66 million relative to the comparative period. The decrease in VNB was mainly due to the extended low yield environment and a lower assumed liquidity premium. The negative VNB position is largely the result of the MCEV basis used, where credit spreads in addition to the liquidity premium are not valued in the determination of MCEV, but shown as earnings when earned. Although we believe that the VNB is positive on an EEV basis, the negative ﬁgure on the MCEV basis quantiﬁes the extent to which the business would rely on earning credit spreads in order to provide the guarantees underwritten. Management actions taken during the period included lowering commission rates and increasing bonus on certain products, which improved consumer value. MCEV results The 2010 operating MCEV earnings after tax of $72 million decreased signiﬁcantly relative to the comparative period. This was mainly due to the 2009 expected returns being based off higher asset yields, higher credit spreads and a very depressed starting position. The persistency assumption changes of Universal Life insurance plans (UL) and Return of Premium term insurance plans (ROP) also contributed to the lower MCEV operating earnings. Operating experience variances were higher than 2009. Fixed Indexed Annuity (FIA) contributed most to the favourable result in 2010. The positive variance of FIA was primarily due to higher than expected surrenders of FIA contracts that are unproﬁtable on an MCEV basis, while in 2009, the positive impact from higher than expected surrenders were more than offset by the negative impact from lower than expected interest margins. MCEV increased by $220 million over the year. In addition to the effects above, other signiﬁcant movements affecting the closing MCEV were the variances related to the change in economic conditions, largely due to reduced risk-free rates and lower credit spreads, partially offset by the liquidity premium reducing from 100 bps to 75 bps. Funds under management Funds under management ended the year at $17.2 billion, up $0.5 billion from the opening position, primarily due to a $0.8 billion increase in the market value of the investment portfolio for the year and increased net investment income. Net client cash ﬂows improved by 47% in 2010 compared to 2009 primarily due to lower surrender activity and higher sales in 2010. Net cash and short term holdings at 31 December 2010 were $630 million. Investment portfolio The net unrealised position on the ﬁxed income security portfolio improved to a net gain of $309 million at 31 December 2010 ($497 million net unrealised loss at 31 December 2009 and $138 million net unrealised gain at 30 June 2010). Although the increase in Treasury yields during the fourth quarter of 2010 negatively affected the net unrealised position, as credit spreads were tighter overall on a year-on-year basis, the unrealised position improved compared to the prior year. In addition, management undertook selective de-risking of the investment portfolio. As at 31 December 2010, $546 million of the total $551 million of the speciﬁed securities in the stock purchase agreement with Harbinger Capital Partners had been sold at terms better than those expected on signing of the sale agreement. The remaining $5 million of speciﬁed securities have been sold since the year end. The quality of the investment portfolio improved throughout the year and 92% of the total portfolio had a market-to-book value ratio greater than 90% at the end of 2010. The market to book value ratio of the ﬁxed income portfolio improved from 97% at the beginning of the year to 102% at 31 December 2010. 84 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n There were no defaults in 2010. Net realised gains in 2010 of $19 million include $22 million of trading gains on previously impaired securities that had recovered in fair value and $70 million of losses realised on the sale of securities in anticipation of the sale of the company. US Life also generated $64 million of net gains on de-risking trades during favourable market conditions. Expected cash ﬂows on certain previously impaired structured securities improved signiﬁcantly in 2010, resulting in $54 million of revaluation gains. These revaluation gains were partially offset by impairments. During 2010, IFRS impairments were $50 million, generally in line with our long-term assumption of $48 million, and compared to $389 million in 2009. The 2010 impairments on 42 securities related primarily to structured securities, with the losses due to adverse changes in expected cash ﬂows, or the likelihood of diminished loss coverage from distressed monoline insurers that guaranteed the performance of the security. The impairment losses were primarily in RMBS ($30 million), ABS ($8 million), and CMBS ($6 million). Capital OM Financial Life‘s risk-based capital ratio increased from 312% as at 31 December 2009 to 350% as at 31 December 2010. Regulatory capital grew $83 million during 2010 driven by strong statutory operating earnings. OM Financial Life’s required capital decreased (at the targeted 300% level) primarily due to a lower risk investment portfolio offset by capital required for new business growth. The US Life Group distributed a total of $109 million to Old Mutual plc in 2010 comprising of $59 million from OM Financial Life Insurance Company and $50 million from OM Re. Bermuda As disclosed in our Preliminary Results in March 2010, Bermuda remains a non-core business, and as such its proﬁts are therefore excluded from the Group’s IFRS adjusted operating proﬁt. A review of the operating performance of Bermuda is set out below: Overview The business continued to perform well against its strategy with signiﬁcant enhancements delivered in 2010 including business service improvements, further enhancements to liability management and to management information to improve the dynamic management of exposures and further de-risk the Guaranteed Minimum Accumulation Beneﬁts (GMABs) attached to certain of the in-force variable annuities. Surrender activity in 2010 occurred largely in respect of variable annuity contracts without GMABs, with the business instituting a focused conservation strategy supported by high customer interaction in order to retain as much of this proﬁtable business as possible. Surrender behaviour with respect to variable annuity contracts with GMABs is directly inﬂuenced by the differential between the value of the underlying funds and the nominal level of the guarantee, as well as the ﬁnancial circumstances of the policyholder. The recovery across global equity markets, particularly in the fourth-quarter in 2010, resulted in an increase in the number of contracts where the underlying fund values were greater than the level of the guarantee. This resulted in a sharp increase in the levels of contracts with GMABs surrendering in the fourth quarter of 2010, with overall surrender activity across GMAB contracts for the year at close to double 2009 levels (2010: 1,211 policies; 2009: 638 policies). Further gains across global equity markets in 2011 would be expected to result in increased levels of surrenders across variable annuity contracts with GMABs, accelerating the run-off of these contracts. Ultimately, surrender activity will determine the speed of the run-off and the extent and timing of any associated capital, or cash release for this business. In February 2011, the business launched an offer to account holders with non-Hong Kong UGO contracts permitting them to surrender their contracts without incurring penalties. The special offer increased the rate and number of surrenders across this book, further de-risking the business. The take-up rate was 6.2% at 4 March 2011. Management will continue to assess demand for similar such offers in the future. IFRS Results The IFRS pre-tax proﬁt for the year for the Bermuda business was $34 million (2009: $34 million), with ﬁnancial performance beneﬁting from lower guarantee losses as a result of the improved effectiveness of the hedging programme, improved basis risk management, favourable equity markets and currency movements. The impact of the dynamic hedging programme over the course of 2010 was also beneﬁcial in reducing losses in respect of GMABs and favourable equity markets over the course of the year further resulted in lower GMAB reserve requirements at the end of the year. Annual Report and Accounts 2010 Old Mutual plc 85 BUSINESS REVIEW NON-CORE AND DISCONTINUED BUSINESS OPERATIONS CONTINUED MCEV results The 2010 operating MCEV earnings resulted in a loss after tax of $36 million, a marginal decrease relative to the comparative period. Operating earnings include negative corrections and modelling changes in 2010 compared to signiﬁcant positive corrections and modelling changes in 2009. This is however partially offset by much improved persistency experience variances in 2010 and large negative persistency assumption changes in 2009 that were not repeated. In addition to the effects above, other signiﬁcant movements affecting the closing MCEV related to the movement in GMAB reserve requirements due to market performance and changes in economic conditions, net of the effects of hedging guarantees. Performance beneﬁted from favourable equity and currency markets, with improved basis risk management and effectiveness of the hedging programme. This was dampened by reductions in interest rates as hedges were lifted early on in the year. Reserves Of total insurance liabilities of $6,106 million (2009: $6,741 million), $4,495 million (2009: $4,688 million) is held in the separate account, relating to variable annuity investments where all risk is borne by policyholders. The remaining reserves amount to $1,611 million (2009: $2,053 million), which is split into $672 million (2009: $766 million) in respect of GMAB / GMDB liabilities on the variable annuity business, and $939 million (2009: $1,290 million) in respect of 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). Non-separate account reserves are calculated on a policy-by-policy basis, updated frequently and veriﬁed independently. GMAB / GMDB reserve calculations rely on the mapping of policyholder investment funds to hedgeable indices to determine market-consistent assumptions. Fund mapping updates are performed at least quarterly, the results of which better allocate exposures to Asian and other emerging markets (which require higher levels of reserving given their higher inherent volatility) thereby improving the accuracy of the reserve calculations. Overall, this market-consistent valuation methodology is guided by the fund mapping process. Throughout the year, the business continued to maintain a very signiﬁcant statutory capital surplus against its minimum required capital of $250,000, ending the year with statutory surplus capital of $625 million (2009: $586 million). Investment portfolio No defaults or impairments were recorded during 2010 (2009: $20 million). The net unrealised position improved to a gain of $31 million as at 31 December 2010 ($29 million loss as at 31 December 2009) as a result of de-risking efforts within the portfolio through the sale of a number of holdings offsetting gains and losses and the narrowing of corporate spreads. The book value of the portfolio reduced from $1.0 billion at the end of 2009 to $0.8 billion as at 31 December 2010, largely as investments were sold to meet surrender activity and withdrawals. The ﬁxed income portfolio remained at an average credit quality of A2 (Moody’s rating scale), with investment grade quality holdings continuing to represent more than 90% of the portfolio. As at 31 December 2010, the book value of the investment portfolio with a market value to book value ratio of 80% or less was $3 million (compared to $71 million at 31 December 2009). Management of hedging Over the course of 2010, the business continued to dynamically manage the underlying economics of the hedging programme in order to strike a balance between the potential changes in the income statement, available cash, liquidity and transactional costs arising from movements in market levels. A number of adjustments to the hedging programme were made over the course of 2010 as a result of turbulent market conditions, with the business ending the year approximately 57% hedged against adverse equity and foreign exchange market movements. The accumulated unrealised proﬁt or loss, as measured by the stop-loss metric from the time the current hedge framework was implemented on 17 September 2009 was a gain of $145 million by 31 December 2010 (2009: $104 million). The hedging team evaluates the hedging strategy, including the most appropriate level of hedges on a continuing basis, with any proposed changes to the strategy subject to strict oversight. The stop-loss protocol established in September 2009 remains in place, and continues to be monitored daily by Group to ensure that a common understanding of the resultant impact on capital, cash and proﬁt and loss on a timely basis. 86 Old Mutual plc Annual Report and Accounts 2010 Outlook Whilst turbulent market conditions could have a material impact, the business has performed credibly over the past year, with the key priorities for 2011 focused on continuing this momentum through continued efforts to de-risk the GMAB exposure in the variable annuity book, through a range of measures. These include execution against the stated dynamic hedging strategy to contain key risk exposures; continued implementation of the conservation strategy to better retain proﬁtable non-guaranteed business, supported by enhanced customer and service offerings; ongoing prudent management of capital and liquidity; ongoing evaluation of risk management and key business decision-making processes across the business to align with Group’s Enterprise Risk Management framework; and maintenance of cost discipline, with a focus on delivering further planned expense reductions. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 87 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT Embedding a risk and value management culture “ We view risk not only as a threat or uncertainty, but also as an opportunity to grow and develop the business, within the context of our risk appetite.” Andrew Birrell Group Risk and Actuarial Director One of our major strategic objectives for 2010 was to align capital management more closely with our risk proﬁle at both Group and business unit level, thus enhancing our capability to create value within a clearly deﬁned risk appetite. Our revised operating model, in conjunction with a more robust risk management framework, has enabled us to make more informed decisions to take risks in areas where we: Risk and Capital Drive Value Value Created Required capital is a function of the risk distribution Risk proﬁle is a key driver of value creation Risk Assumed Capital Required Risk and capital need to be considered in conjunction with each other, in order to determine risk-adjusted returns (cid:81) Understand the nature of the risks we are taking and the consequences of those risks (cid:81) Demonstrate the ability to accurately determine the capital required to assume these risks (cid:81) Model and validate the range of returns that we can earn on the capital required to back these risks (cid:81) Optimise the risk adjusted rate of return we can earn by reducing the range of adverse outcomes and increasing the range of acceptable return. We have made signiﬁcant progress in implementing a model framework where risk, capital and value are fully aligned with commercial objectives and the new European Solvency II regulations taking effect from 1 January 2013. This Andrew Birrell Group Risk and Actuarial Director 88 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n has been driven by our integrated Capital, Risk and Financial Transformation (iCRaFT) programme, which will deliver signiﬁcant beneﬁts to the business – including compliance with the Solvency II requirements. Our progress was recognised in August 2010 when the Financial Services Authority accepted us into its Internal Model Approval Process, enabling us to give both shareholders and stakeholders assurance of our capability to deliver Solvency II readiness in line with corporate objectives. unacceptably high risk of capital depletion in the event of adverse outcomes. In 2010 we completed one of the key steps towards achieving this objective and bringing risk ‘alive’ by deﬁning a clear risk strategy. This outlines the risks that we believe give the Group the appropriate risk/capital balance; it is aligned with the Group’s objectives and will be reviewed annually. The integration of risk with performance and business strategy will build long-term value and ensure that we avoid following short-term gain with later disappointments. This section of the report describes the progress made by our Group during 2010 in developing our risk and capital modelling frameworks. Risk management is integral to the Group’s corporate vision and is an expression of how we consider potential downside outcomes and upside value- creating opportunity in the context of sustainable, high-quality returns on capital utilised, to deliver ﬁnancial value for our shareholders and peace of mind to our customers. We have strengthened operational, strategic and ﬁnancial risk processes to ensure that where we accept risk we do so within an appetite and control environment supported by a clearly deﬁned ‘three lines of defence’ model: First line of defence: day-to-day management of risk is the responsibility of senior management in our businesses and plays an integral part in their decision-making process. Second line of defence: risk oversight is provided by the Group and business unit Chief Risk Ofﬁcers and Board and Management Risk Committees, whose role is to provide robust challenge to the management teams based on quantitative and qualitative metrics. These committees are supported by the specialist risk management and compliance functions across the Group. Third line of defence: independent veriﬁcation and challenge of the adequacy and effectiveness of the internal risk and control management framework is provided by the Group and business unit Internal Audit teams. The pursuit of value requires us to balance risk assumed with capital required – aiming to provide higher certainty of risk-adjusted returns within an acceptable level of risk assumed and capital required, without exposing ourselves to We continually strive to enhance risk and capital management methodologies by quantifying risk more consistently to identify threats, uncertainties and opportunities and in turn develop mitigation and management strategies that achieve optimal outcomes. Within our model, the Group’s capital is quantiﬁed according to the metrics described on page 100. Businesses plan their capital consumption using internally agreed targets, which have been set to ensure that strategic objectives can be delivered under a wide range of market and trading conditions. Business units need to consider these capital requirements against the potential margin that can be earned from their activities, and the resulting risk exposures are assessed on the basis of the expected variance in key metrics in response to speciﬁc risk events, covering the full range of risks to which the Group is exposed. Risk management forms an integral part of the strategic planning process and is directly linked to the Group’s corporate objectives. It provides a group-wide overview that links all business units within a single framework. This process enhances the Group’s capability to assess strategic allocation of capital and the ability to identify, monitor and manage emerging risks. We view risk not only as a threat or uncertainty, but also as an opportunity to grow and develop the business, within the context of our risk appetite. So our approach to risk management is not limited to considering downside impacts or risk avoidance; it also encompasses taking risk knowingly for competitive advantage. Solvency II will require companies to consider their approach to risk, capital and value management more robustly, and we believe that our initiatives to date ﬁt well with this. Annual Report and Accounts 2010 Old Mutual plc 89 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Risk management is integral to the Group’s decision-making and management processes. The Group’s ambition, which we continue to embed through iCRaFT, is to make effective risk management part of all our day-to-day roles, thus enhancing the quality of strategic, capital allocation and day-to-day business decisions. This has to be driven from the top of our organisation, and we made signiﬁcant progress in 2010 by starting the cultural change process through extensive education and training sessions across our businesses at all levels, including at Board level. This was aided in 2010 by the Group Remuneration Committee, which requested explicit reports on the extent to which risk exposures have linked into results delivered, and whether these risk exposures have complied with the agreed risk appetite. This information has been used as a factor in determining incentive payments. I believe we have continued to make great strides in 2010 on our journey towards achieving and embedding best practice standards in risk management – and applying and integrating them with governance, capital, ﬁnancial and performance management. I believe the activities outlined in this report will give you a better understanding of the progress we have made, provide insight into how we intend to continue our journey towards better outcomes, and ensure we fulﬁl the requirements of Solvency II. Andrew Birrell Group Risk and Actuarial Director A pragmatic, balanced approach High Return Managing risk to add value Exposed and destroying value Control to minimize risk Low “Brakes off, destroying value” “Brakes on, going nowhere” Ignorant Managing Obsessed Value Approach to risk Optimising the upside and managing the downside Risk management is an integral part of our management’s decision-making process, enabling us to manage adverse impacts by helping to ensure that: (cid:81) Risk-taking is a consciously chosen strategic decision and not accidental (cid:81) Risk management is optimal and capital is effectively employed (cid:81) 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 risk by exploring and exploiting risk opportunities, while ensuring that risks associated with these opportunities are fully understood and acceptable. This allows the Group: (cid:81) Greater ﬂexibility for reallocation of capital and risk capacity when opportunities arise (cid:81) Competitive advantage through greater understanding of risk types, pricing and management. 90 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Achievements in 2010 and objectives for the future The following section sets out the progress we made in 2010 and our objectives for the future, as we instil risk management techniques to generate value. Achievements in 2010 During the last 12 months we made signiﬁcant progress towards embedding the ‘strategic controller’ operating model across the Group by revising the governance structure and processes, clarifying roles and responsibilities of Group and business units, and increasing the Group presence on business unit Boards and committees. We introduced revised governance committees and mandates in line with the recommendations made by the Walker Review of corporate governance. We set up dedicated Board Risk Committees in the major subsidiaries by separating the risk component from the previously combined Audit and Risk Committees. Heads of control functions in business units have an additional reporting line to their equivalent Group function head. Any concerns or issues raised by a business unit Chief Risk Ofﬁcer will also be addressed at equivalent Group level. Group Operating Model Business unit Group CRO Group GRO In June 2010 the new Old Mutual Group Risk Strategy was completed and ratiﬁed by the Group Board. This is an integral part of the business planning process in which business units are required to ensure that plans align with strategy and reﬂect risk appetite limits. Over the past 12 months we made signiﬁcant progress in developing and rolling out the tools that will help embed risk management more deeply during 2011 – including a system to monitor and to report on risks, issues and controls and their management, and a system for monitoring counterparty credit exposures. Learning from any previous errors and issues is vital in the continuing development of risk frameworks and management. The reduction in operational losses, compared with the previous year, reﬂects how well this was embedded throughout the organisation in 2010. We will continue striving to reduce these losses further throughout 2011. Our consistent group-wide ‘three lines of defence’ approach has enabled us to quantify exposures and, where appropriate, implement strategies to mitigate levels of risk deemed to be beyond our appetite. Where risk exposures are higher than our determined appetite we have implemented arrangements that allow us to monitor exposures continuously, implement proactive measures and ensure that they do not increase further. Risk management system We ﬁrmly believe that robust IT is a vital aid to embedding risk management in the Group. We have moved to implement our long-term strategy for a Group risk assessment and modelling tool in light of Solvency II and the iCRaFT vision. This tool has been designed to record qualitative data for all risk types and help calculate the capital required for operational risk. A centrally-hosted version has been piloted and will be embedded across the Group in 2011, providing a consistent group-wide platform for rapid collation and analysis of risks. We have developed risk and control self- assessment, loss event and key risk indicator functionality, which will be implemented across the business by Q3 2011. All business units will be trained on the new system and methodology reﬁnements. In the longer term we expect the risk tool to enable us to align our methodologies for risk management and ﬁnancial controls. As the system can only be as good as the data in it, we are paying particular attention to reviewing and cleansing all risk data before moving it to the new system. In the ﬁrst half of the year we will introduce the ability to calculate the capital required for the operational risks we have in the business; and this system will align with the capital modelling tool for all risks which is also due for completion in H1 2011. Objectives for the year ahead We are committed to building on our accomplishments in risk management to date in order to ensure best practice standards in our risk management framework. The iCRaFT programme is key to our aim of embedding a culture of ‘managing for value’. We began it in April 2008 and it remains on target to be fully delivered by the end of 2012. As a business owned initiative, rather than a risk and actuarial programme, it will deliver positive beneﬁts to the Group – including, we believe, full compliance with Solvency II requirements. Annual Report and Accounts 2010 Old Mutual plc 91 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Our focus in 2011 is on embedding a consistent risk framework in the business units’ ﬁrst line of defence, with increased emphasis on risk considerations in strategic decision making through business planning, to obtain better outcomes in terms of returns, capital and risk exposure. This will be achieved through education and cultural change, using the tools developed in the iCRaFT programme. Integrated Capital, Risk and Financial Transformation (iCRaFT) programme and Solvency II The group-wide iCRaFT business change programme is designed to deliver the tools and processes that support management in achieving its key objectives by improving risk management standards and capital modelling techniques, and integrating them with strategic business performance management. By linking risk to business performance and capital management, the iCRaFT programme will deliver a platform that enables business units to maximise long-term value, and evidence Solvency II compliance, by January 2013. Over the past 12 months the iCRaFT programme has focused on developing an internal model capable of meeting these key business requirements: Strategic planning and capital management (cid:81) The calculation of a Solvency Capital Requirement (SCR) that accurately reﬂects the risk proﬁle of the business at legal entity level (cid:81) The completion of an Own Risk and Solvency Assessment (ORSA) that accurately reﬂects the risks in the business and the economic capital required to deliver the Group’s strategic objectives (cid:81) A capital control framework aimed at allocating capital more effectively within the Group, which is capable of responding dynamically to changing capital needs. Capital modelling (cid:81) Measurement, projection, reporting and scenario testing capability for solvency and economic capital. The internal model is a key concept in Solvency II Internal Model Internal Model Deﬁnition Data Processes (cid:81)(cid:3)(cid:3)Policy systems (cid:81)(cid:3)(cid:3)Claims systems (cid:81)(cid:3)(cid:3)Asset systems (cid:81)(cid:3)(cid:3)External Data Risk Assessment (cid:81)(cid:3)(cid:3)Risk Universe (cid:81)(cid:3)(cid:3)Operational risk data (cid:81)(cid:3)(cid:3)Risk register (cid:81)(cid:3)(cid:3)Concentrations (cid:81)(cid:3)(cid:3)Counterparty Data (cid:81)(cid:3)(cid:3)Risk Transfer Business Processes (cid:81)(cid:3)(cid:3)Business Plans (cid:81)(cid:3)(cid:3)Pricing (cid:81)(cid:3)(cid:3)Mangagement Actions (cid:81)(cid:3)(cid:3)Reserving Level 1 Asset & Liability Models (cid:81)(cid:3)(cid:3)Various Data policies Assumption setting policy Data grouping/ model point policy Assumption setting process Input and output data attributes (data directory) y odolo g th e M C o d e Calculation Kernel Platfo r m Internal Model Control Framework Model Governance Model Change Policy Validation Policy Internal Model Output Current & Projected Capital Require- ments (SCR & Economic Capital) Balance Sheet (assets & liabilities) Analysis of Change Sensitivity Analysis Use Test Governance (cid:81)(cid:3)(cid:3)Board (cid:81)(cid:3)(cid:3)Executive (cid:81)(cid:3)(cid:3)Risk Management (cid:81)(cid:3)(cid:3)Finance (cid:81)(cid:3)(cid:3)Actuarial (cid:81)(cid:3)(cid:3)Underwriting Risk & Capital Management (cid:81)(cid:3)(cid:3)Capital strategy (cid:81)(cid:3)(cid:3)Risk Proﬁle (cid:81)(cid:3)(cid:3)ORSA (cid:81)(cid:3)(cid:3)Risk appetite (cid:81)(cid:3)(cid:3)Exposure management (cid:81)(cid:3)(cid:3)Asset-liability management (cid:81)(cid:3)(cid:3)Capital management Business Processes (cid:81)(cid:3)(cid:3)Strategy (cid:81)(cid:3)(cid:3)Mergers and aquisitions (cid:81)(cid:3)(cid:3)Business planning (cid:81)(cid:3)(cid:3)Product development (cid:81)(cid:3)(cid:3)Capital allocation (cid:81)(cid:3)(cid:3)Pricing (cid:81)(cid:3)(cid:3)Underwriting (cid:81)(cid:3)(cid:3)Reinsurance purchase (cid:81)(cid:3)(cid:3)Performance management & reward 92 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n We believe our 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 and other management bodies enhanced tools for meeting their responsibilities to shareholders and customers 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 whilst we 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 staff. Robust, evolving Enterprise Risk Management During the past 12 months we have strengthened our risk management framework, embedding a risk appetite process into the ﬁrst line of defence and increasing challenge on risks and management actions. We have developed a process and accompanying dashboards to assess the effectiveness of the embedded framework in business units. We have reviewed and revised the Group top risks to better reﬂect the risk proﬁle and developed processes for continuous review. We continually review our risk management framework, including risk assessment and modelling tools, against Solvency II and longer term requirements. We have aligned our risk categorisation model with our internal capital model framework and developed key risk indicators for the Group’s top risks. A clearly deﬁned escalation process for all risk-related matters is now ﬁrmly embedded in business units. We have enhanced our operational loss data collection and analysis processes, enabling business units to focus on action to prevent recurrences as well as remediation. We have put thresholds in place for reporting losses to appropriate committees, and a greater emphasis on analysing losses by category has enabled us to take more streamlined action. The enhanced risk reporting framework provides better quality management information and the introduction of standard risk reports has ensured consistency of reporting to committees. Snapshot reporting outlines key risk information in each business unit and supports the Executive Committee’s decision making processes. Policies will be amended in line with the revised strategic controller model, risk management categories and Solvency II. Improved oversight and governance (cid:81) An embedded risk and control self-assessment process giving us the capability to monitor all risks and associated events across all risk categories (cid:81) Deﬁned key risk indicators (KRIs) (cid:81) Strong asset and liability management incorporating embedded risk escalation mechanisms. Risk Appetite (cid:81) The ability to monitor risk limits against risk appetite by risk type at business unit and Group level (cid:81) An embedded credit and investment concentration risk process capable of delivering accurate group-wide credit and counterparty data and a combined credit and concentration risk exposure across the Group. Risk optimisation (cid:81) Enhanced ability to optimise risk positions. Management information (cid:81) Timely, consistent quantitative measurement and reporting of risks across the Group. Business planning (cid:81) An economic proﬁt metric which reﬂects risk-adjusted business performance and is embedded into all Group reporting, planning and incentive targets. Product design, pricing and underwriting (cid:81) Forecasting risk-adjusted proﬁtability and portfolio effects in product design and proﬁtability (cid:81) A risk/reward balance in product design that minimises unwanted risks (cid:81) Risk-adjusted technical pricing and primary proﬁtability metrics. Training (cid:81) Education and training materials around the iCRaFT concepts, tools and management information process (cid:81) An iCRaFT ‘simulator’, demonstrating how risk-adjusted metrics will be used to support decision-making, to facilitate learning and participation at all levels of the organisation. External communications (cid:81) Capability to meet Pillar 3 (public) minimum disclosure requirements (cid:81) Clear, consistent and proportional risk and capital disclosures to inform external stakeholder understanding. Annual Report and Accounts 2010 Old Mutual plc 93 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Risk management processes Old Mutual Strategy Risk appetite limits and policy setting Risk identiﬁcation Risk and control-self assessments Management actions Monitoring Risk reporting Risk-adjusted performance measurement Capital allocation s y s t e m e n a b e r l i R s k M a n a g e m e n t Risk, Actuarial and Treasury systems and tools The following sections set out our risk management framework, illustrating how each layer of tools and systems gives us assurance to manage the upside of risks better by maximising opportunities while minimising the downsides or threats. In this context, this section covers: (cid:81) Risk management governance (cid:81) Group oversight, including – Strategy and business planning – Risk appetite – Stress and scenario testing – Policy setting (cid:81) The risk framework employed by each of our business units to provide consistent information. Risk management governance We strengthened our risk governance framework in 2010 with the introduction of clearly deﬁned risk appetite reporting, which allows us to rapidly identify and respond to changes in risk exposure. Developments expected in Q2 2011 will enable Group Risk and business units to model a number of different scenarios against risk appetite and align these scenarios with investment decisions. Focus will now move towards more active risk-based steering of the business. We consolidated our ‘three lines of defence’ approach to provide greater clarity within each of the lines. Changes included: (cid:81) Reviewing and enhancing the Group’s risk governance structure by strengthening the mandate of the risk committees (cid:81) Dual reporting of business unit Chief Risk Ofﬁcers to line management and the Group Risk and Actuarial Director (cid:81) Segregation of the Board Risk Committee and Board Audit Committee in accordance with the recommendations in the Walker Report (cid:81) Adoption of a ‘strategic controller’ model. The governance framework is designed to align the risk/reward balance with corporate governance objectives and ensure it promotes effective risk management. The framework includes a remuneration policy for determining risk tolerances that do not encourage risk taking outside the Group’s risk appetite. The remuneration policy has been designed to eliminate conﬂicts of interest and support business strategy, objectives, values, and the long-term interests of the Group. The policy is overseen by a Remuneration Committee which is appointed by the Board and consists of at least three non-executive directors with relevant experience and a good knowledge of the Company and the environment in which it operates. This enables the committee to exercise competent judgement on compensation policies and the incentives for managing risk, value and capital in line with stakeholders’ expectations. In this report, we focus on the responsibilities of the second line of defence committees: Board Risk Committee, Group Executive Risk Committee and Group Capital Management Committee. The responsibilities and remit of the ﬁrst- and third-line forums can be found in the governance report (See page 130 of this annual report). Group Board Risk Committee This committee’s primary purpose is to review, on behalf of the Board, managements’ recommendations on risk in relation to the structure and implementation of the Group’s risk framework. This includes the quality and effectiveness of the internal controls, risk appetite limits, risk proﬁle and capital management processes. The committee reports to the Board any signiﬁcant risks to the Group where it considers actions or improvements are needed, and makes recommendations as to the adequacy of the risk mitigation plans. The committee works closely with the Group Audit Committee in assessing the effectiveness of risk managements systems and 94 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Board and Committees Old Mutual plc Board Group Chief Executive Group Finance Director Group Risk & Actuarial Director Group Board Risk Committee Group Audit Committee Group Actuarial Group Risk Business Units CROs* & Chief Actuaries Group Executive Committee Group Capital Management Committee Group Executive Risk Committee Group Internal Audit Business Unit Chief Executives Business Managers Risk management 1st line of defence Business Unit Board Risk Committees Business Unit Executive Risk Committee Risk oversight 2nd line of defence Business Unit Audit Committees Independent assurance 3rd line of defence * CRO- Chief Risk Ofﬁcer internal controls. Additionally, the committee provides advice to the Board and Remuneration Committee on the appropriate targets for risk adjusted performance measures and relationship between performance objectives, remuneration decisions and risk proﬁle. The committee meets at least four times a year and otherwise as required, to review any signiﬁcant issues that occur outside its scheduled meetings. The committee monitors, reviews and provides advice to the Board on the following key areas: (cid:81) The effectiveness of the Group’s risk framework and the risk and regulatory operating plans (cid:81) Alignment of the risk appetite to the Group’s strategy, including approving actions plans to bring risk exposures within appetite (cid:81) Optimisation of risk by reviewing, monitoring and challenging the Group’s risk proﬁle in terms of risk exposures, risk trends, risk concentration and performance versus appetite (cid:81) The impact and management of signiﬁcant issues and losses to the Group (cid:81) Proposed strategic acquisitions and disposals of assets (cid:81) Allocation of capital within the Group and within businesses to ensure compliance with regulatory requirements and consistency with risk appetite limits (cid:81) The Group’s resilience to unforeseen economic and other shocks, as evidenced via stress and scenario testing exercises (cid:81) Regulatory compliance processes including changes to the regulatory environment and the adequacy of management actions to correct regulatory breaches (cid:81) Effectiveness of the Group’s policy suite and any changes necessary to evidence compliance with the Group’s minimum standards. The committee also provides advice to the Board on a number of inherent risks within the business and is required to act independently to investigate any activity within its terms of reference. The committee is authorised by the Board to obtain external legal, accounting or other independent professional advice it considers necessary. In addition to an internal reporting line to the Group Finance Director, the Group Risk and Actuarial Director has a reporting line to the committee, with direct access to the Chairman on a regular basis. The committee, including its chairman, is appointed by the Board and includes the Group Finance Director and independent non-executive directors, at least one of whom must have recent and relevant risk experience. Group Executive Risk Committee (GERC) This committee provides support and assurance to the Group Risk and Actuarial Director on the implementation of the Group’s risk framework including the quality and effectiveness of internal controls, risk appetite, risk proﬁles and capital modelling processes. The committee forms part of the second line of defence at Group level and is not responsible for any ﬁrst line activities. The committee comprises senior Group executives from Risk, Actuarial, Capital, Compliance, and Internal and External Audit. Its main responsibility is to support the Group Executive Committee in Annual Report and Accounts 2010 Old Mutual plc 95 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED understanding and overseeing the implementation of the Group’s risk framework, including risk appetite and capital management. provided to senior management to set clear parameters and balance capital and value on a forward-looking risk-sensitive basis. These parameters determine our risk appetite and provide a basis for business units to plan and control business activities by setting clearly deﬁned boundaries, aligning capital, risk and return on a basis proportionate to stakeholder expectations. They are a critical path within our policy framework which supports the Group’s corporate objectives by providing a consistent high-level approach to managing the risks that we face. Risk strategy A project to formalise the Group’s risk strategy was completed in May 2010. It identiﬁed ﬁve key elements for strategic management of risk in the Group: (cid:81) Risk philosophy (cid:81) Approach to measuring and managing risk (cid:81) Risk and return preferences (cid:81) Current risk proﬁle (cid:81) Target risk proﬁle for the future. Business unit risk strategies have now been formalised as part of 2011-13 business planning process. Quarterly business reports provide a check that limits are embedded within the business process following formal implementation. Old Mutual’s Group risk strategy is intended to have a lifespan of three to ﬁve years and is aligned with Group strategic targets. Strategy process Group Strategy Business Performance Risk Strategy Business Plan The committee’s other key responsibilities are: (cid:81) Monitoring and reviewing the Group’s risk proﬁle including losses and control breakdowns (cid:81) Proposing risk appetite limits for approval by the Group Board Risk Committee, allocating these to the Group’s respective business units to optimise results (cid:81) Providing assurance that effective risk optimisation is being fully achieved both within business units and across the Group (cid:81) Providing oversight of capital management to ensure allocation is consistent with risk appetite limits. The committee receives reports from Group Risk and Actuarial, Group Finance, Treasury and iCRaFT. It provides input to the Group Executive Committee and the Group Audit and Risk Committees. It also works closely with the Group Capital Management Committee. Group Capital Management Committee This committee 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 an appropriate risk/return basis, as identiﬁed by the GERC. It is the mechanism by which the Group ensures that capital is allocated to business units in line with Group strategy, and that appropriate return rates are set and monitored. If necessary it will reallocate capital for greater reward. The committee comprises senior Group executives, including the Group Chief Executive, Group Finance Director and Group Risk and Actuarial Director, and representatives from Capital, Treasury, Strategy and Compliance. The committee’s key responsibilities are: (cid:81) Recommending to the Board the Group’s capital allocation and structure and investment strategy (cid:81) Setting an appropriate framework for managing capital (cid:81) Issuing guidelines and/or recommending targets to ensure the appropriate management of capital within the agreed risk appetite limits. Group risk proﬁle The Group risk proﬁle is deﬁned by the level of each risk type and the balance between them inherent in the business. Corporate guidance is 96 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Risk philosophy Our Group risk strategy starts by considering the type of business that we are, our business strategy and its implications for the way we think about risk. We are a risk intermediary, in the business of taking on (and in most cases repackaging) risks and capital market solutions for customers where we can manage them efﬁciently, through diversiﬁcation, access to markets and economies of scale. We will accept the risks implicit in this, where we are rewarded for doing so and where we have the skills to manage these risks. However, we will not take on other signiﬁcant risks on our own account, or risks that would threaten our future ability to act as a risk intermediary. We will focus on risks where we believe we can provide value to policyholders and depositors, and for which they are willing to pay us the correct amount to protect them. These risks primarily relate to liability, business, investment and operational risks in respect of insurance entities, business risk in respect of asset management entities and credit (loan), business and operational risks in respect of banking entities in the Group. We will not take on pure market risk on our own account, nor exposure to signiﬁcant catastrophe risk, which we have neither the skills nor the capital to manage. We will take a group-wide perspective on risk when making decisions. This is aligned with our shareholders’ view: they invest in Old Mutual as a Group and so we should think and act as a Group. In line with the Group operating model, the Group functions will achieve this through discussion and the right of veto, in particular through the business planning process, rather than centralised control. Business units will be required to hold and manage to local capital standards and we will not operate a ‘group support’ system that takes account of diversiﬁcation between business units. This avoids any potential concerns over contagion and gives Group and business units maximum freedom to manage their businesses without constraints. However, the Group functions will monitor risks group-wide and encourage mitigation at a level appropriate for the Group as a whole rather than for individual business units. Group functions will facilitate intra-group risk transfers and mitigation, and the efﬁcient use of available ﬁnancial resources across and between Group entities to the extent allowed by the Board and regulatory considerations. In particular, Group functions will facilitate the use of ﬁnancial resources around the Group to support risks wherever they may occur, and will take advantage of group diversiﬁcation to obtain maximum ﬂexibility in capital raising and management. In designing products, making investments and deciding the business strategy, the Group and each business unit will seek to optimise the risk/return/capital trade-off (as opposed to taking a purely loss-minimisation approach). Risk should be considered in terms of both the potential reward it brings and the threat it presents. In particular, the risk must be appropriately rewarded, allowing for all its characteristics, for the expected return and the relative upside and downside it brings. The expected reward for the opportunity must at a minimum exceed the return available to shareholders directly for exposure to similar risks through other means, having fully allowed for all costs of management and risk capital. We need to ensure that we earn the required minimum return on the capital that we put at risk (usually the capital required in order to underwrite the risks) and that we at all times have adequate capital to cover the requirements from business activities. We recognise that business units have the choice of whether or not to take on only certain risks – a product exposes the Group to a bundle of risks, and it may not be possible to price them all at a proﬁt or even to know the split of charges made by risk. However, business units must be clear that overall their business is proﬁtable, understand what risks they are exposed to, and be clear on the cost of providing speciﬁc features, regarding the reasons, implications of and beneﬁts gained should the price charged to the customer be below cost. These questions should be explicitly considered in pricing, product design and business planning. This extends to lines of business that are supported by cross- selling or renewals. Such products may appear unproﬁtable on a standalone basis but be value-adding in total. However, in writing such business it is necessary to be clear as to where such cross-subsidies exist, and how they are managed to ensure that business which provides subsidies is sustained over time. The risks in any business must be well understood and we need to have the appropriate skills and systems to manage them. To the extent that this is not the case, we will limit exposure to such risks until we have developed appropriate expertise. As an overarching principle, risks accepted must not fundamentally threaten the Group’s ability to continue writing new business freely, since we are in the business of providing risk intermediation and repackaging, not of taking off-strategy bets with our capital. We consider the risk assumed, capital required and value created in the business from a market consistent economic perspective, recognising that regulatory and accounting systems can impose additional constraints. While seeking to Annual Report and Accounts 2010 Old Mutual plc 97 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED mitigate these constraints we will not make decisions that are fundamentally uneconomic. This means that business and pricing decisions will be made on a ‘market-consistent’ basis, fully allowing for the additional costs of holding risk and regulatory capital. This view is aligned with best practice in the ﬁnancial services industry and also the Basel II regulations for banks and Solvency II regulations for EEC insurance companies due to be introduced in January 2013. Our approach to measuring and managing risk We will continue to measure and manage risk using the same risk metrics that we currently use: earnings at risk, economic capital at risk and cash ﬂow at risk. As Solvency II becomes a reality, economic capital at risk is likely to become the dominant measure. In addition, we closely track operational losses as an indicator of operational risk, to ensure that there are no repeatedly-occurring inherent weaknesses in systems and controls. However, we will reﬁne the way that we set risk limits around these targets. In particular, we will make limit-setting an iterative part of the business Group risk preferences planning process, and ensure that local risk limits are an output of this process, reﬂecting local business plans rather than set in a purely top- down fashion. As part of this we will set risk limits by risk type at both Group and business unit level. Group risk preferences As a Group we want to accept risks that we are rewarded for assuming, and which we have the skills to manage. We wish to avoid risks where we earn less than our cost of capital (after allowing for all costs) or where we expose ourselves to very volatile or extreme potential outcomes, which would threaten our ability to continue acting as a risk intermediary. Finally, we wish to write business which diversiﬁes well against our current book. By acting in accordance with these preferences we will enhance overall capital efﬁciency and returns, and will hence maximise economic proﬁt and value creation for all stakeholders (see page 105 onwards for deﬁnitions on the different risk types). Avoid Neutral Seek ALM Market Currency Liability Credit* Business Operational Reduce operational losses *We seek well managed banking credit risk in Nedbank Risk type Old Mutual risk preference Liability (insurance underwriting) Strongly for Asset liability management (policyholder) Business Credit Market (shareholder) Currency Operational For Neutral Against ** Against Against Strongly against Marginal impact of extra exposure on economic capital at Group level 11% 86% 47% 64% 78% 81% 42% * Assumes risk is correctly priced, ** Unless taken in the form of well governed and managed banking related credit risk Expected return relative to target* Excellent Excellent Good Neutral Poor Poor Very poor Marginal contribution to Group economic capital: for every £100 of economic capital that a business unit has to set aside to underwrite a risk type, the Group has to set aside the percentage in brackets per risk type: so for every £100 of additional economic capital for liability risk, the Group needs to hold £11 on a diversiﬁed basis, and for every £100 of asset liability management-related economic capital risk in a business unit, the Group needs to set aside £86 on a diversiﬁed basis. Thus when we consider economic proﬁt (see below for deﬁnition), if we are earning a given IFRS-adjusted operating proﬁt (AOP), and have a given cost of capital, we can maximise economic proﬁt by minimising economic capital. Hence we have certain preferences for activities that will maximise AOP, yet minimise economic capital on a Group diversiﬁed basis. Economic proﬁt = AOP – (cost of capital x allocated capital) 98 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Risk proﬁle – current and target In order to better align the Group’s risk proﬁle with our stated risk preferences and to ensure the Group achieves a good level of diversiﬁcation, we have deﬁned a target risk proﬁle based on economic capital exposure without any allowance for diversiﬁcation beneﬁt. We will steer the business towards this proﬁle over the next three to ﬁve years. This target proﬁle is preferred to the current proﬁle as it better matches our risk preferences and is also well diversiﬁed across risk types. The current and target proﬁles are shown below. We aim to increase liability risk by increasing the volume of protection products written and to reduce operational risk. The anticipated disposal of US Life will signiﬁcantly reduce the Group’s credit risk exposure and hence assist with the move towards the target risk proﬁle. This will provide capacity to take on additional ALM risk, in markets where we believe we can earn acceptable risk-adjusted returns on the capital invested in such products. Current Risk Proﬁle (cid:81) (cid:40)(cid:51)(cid:52) (cid:81) (cid:41)(cid:92)(cid:90)(cid:80)(cid:85)(cid:76)(cid:90)(cid:90) (cid:81) (cid:42)(cid:89)(cid:76)(cid:75)(cid:80)(cid:91)(cid:3)(cid:53)(cid:76)(cid:75)(cid:73)(cid:72)(cid:85)(cid:82) (cid:81) (cid:42)(cid:89)(cid:76)(cid:75)(cid:80)(cid:91)(cid:3)(cid:54)(cid:91)(cid:79)(cid:76)(cid:89) (cid:176) (cid:81) (cid:42)(cid:92)(cid:89)(cid:89)(cid:76)(cid:85)(cid:74)(cid:96) (cid:176) (cid:81) (cid:51)(cid:80)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) (cid:81) (cid:52)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91) (cid:81) (cid:54)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83) Target Risk Proﬁle (cid:81) (cid:40)(cid:51)(cid:52) (cid:81) (cid:41)(cid:92)(cid:90)(cid:80)(cid:85)(cid:76)(cid:90)(cid:90) (cid:176) (cid:81) (cid:42)(cid:89)(cid:76)(cid:75)(cid:80)(cid:91)(cid:3)(cid:54)(cid:91)(cid:79)(cid:76)(cid:89) (cid:81) (cid:42)(cid:92)(cid:89)(cid:89)(cid:76)(cid:85)(cid:74)(cid:96) (cid:176) (cid:81) (cid:51)(cid:80)(cid:72)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) (cid:81) (cid:52)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91) (cid:81) (cid:54)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83) 26% 24% 7% 15% 4% 8% 4% 12% 35% 24% 6% 5% 17% 3% 10% Note: The current risk proﬁle is based on the Group’s present structure, prior to any disposals, and since it is expressed on a standalone basis, ignores diversiﬁcation between risks and between business units. Later tables refer to post diversiﬁcation exposures. Group return preference 1 Change the shape of distribution of returns to increase upside & reduce downside 2 Shift the expected returns to the right by avoiding negative outcomes Probability -Illustrative- Current Future Return Risk appetite We continue to develop our risk appetite methodology to ensure that there is a seamless transition of economic capital at risk into a Solvency II compliant internal model calculation, which will include: (cid:81) Moving away from the use of market consistent embedded value as a proxy to estimate changes in assets and liabilities in stress scenarios, towards a direct calculation of the results of these stresses (cid:81) Redeﬁning hard available ﬁnancial resources to be compliant with a Solvency II market-value balance sheet calculation (cid:81) Reviewing risk-factor stress assumptions and the approach to modelling diversiﬁcation beneﬁts, with methodology changes required to ensure a statistically robust approach (cid:81) Internal model initiatives will transition to business as usual reporting during Q3 2011, to show that they are used in decision-making within our business. 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: (cid:81) Economic capital at risk (ECaR) (cid:81) Financial Group Directive (FGD) surplus capital at risk (FCaR) (cid:81) Earnings at risk (EaR) (cid:81) Cash ﬂow at risk (CFaR) (cid:81) Operational risk (OpRisk) Annual Report and Accounts 2010 Old Mutual plc 99 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Risk appetite results AFR* ECaR (7-10,000) Solvency Ratio EaR (1-in-10) CFaR (1-in10) OpRisk (1-in-10) FGD Surplus Post stress FGD Surplus (1-10) Total Group Results Jun-10 8,692 6,869 127% 807 613 165 1,953 1,232 Dec-09 8,258 6,849 121% 872 726 162 1,504 751 Effect of US Life Disposal on June 2010 8,719 5,452 160% 703 513 162 1,892 1,247 *AFR – Available Financial Resources that can be used to cover the Economic Capital requirement Economic capital at risk (ECaR) ECaR is deﬁned as the reduction in post-tax economic value (broadly deﬁned as market consistent embedded value for life companies and IFRS equity for non-life companies) over a one-year forward-looking time horizon that should only be exceeded seven times in 10,000 years (99.93% conﬁdence level). ECaR helps us to optimise risk-based decisions. The stress tests underlying ECaR allow us to monitor our exposures and deepen our understanding of where the business could further improve its capital allocation. We have set risk appetite limits for economic capital based on the ratio of available ﬁnancial resources to economic capital. The Group risk appetite is for this ratio not to fall below 100%. This is an economic measure of capital requirements similar to the Solvency Capital Requirement measure in Solvency II and has been calculated and reported within the Group for more than ﬁve years. FGD surplus capital at risk (FCaR) FCaR is deﬁned as the reduction in Financial groups directive surplus over a one-year forward- looking time horizon that should only be exceeded once in 10 years (90% conﬁdence level). We recognise that FGD is a key regulatory measure which 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. We have set risk appetite limits for FGD surplus capital based on the minimum surplus capital that the Group would tolerate. The Group risk appetite for this metric, given the current composition of the Group, is that the FGD surplus should not fall below £1 billion more than once in 10 years. For further details on our FGD position throughout the year see page 278. 100 Old Mutual plc Annual Report and Accounts 2010 Earnings at risk (EaR) EaR is deﬁned as the reduction in pre-tax IFRS adjusted operating proﬁt (AOP) over a one-year forward-looking time horizon that should only be exceeded once in 10 years (90% conﬁdence level). We have set risk appetite limits for EaR as a percentage of pre-tax AOP. The Group risk appetite is for this percentage not to rise above 30% of planned earnings over the next year. Cash ﬂow at risk (CFaR) CFaR is deﬁned as the reduction in the cash portion of earnings over a one-year forward- looking time horizon that should only be exceeded once in 10 years (90% conﬁdence level). We have set risk appetite limits for CFaR based on the maximum reduction in cash earnings that the Group would tolerate. The Group risk appetite is that this reduction should not exceed £500 million. Operational risk (Op Risk) The operational risk metric is deﬁned as the reduction in post-tax economic value due to one-in-10 unexpected operational loss events (90% conﬁdence level) and expected day-to-day losses, including reputational risk impacts. We have set risk appetite limits for this metric as a percentage of pre-tax AOP. The Group risk appetite is for this percentage not to rise above 10% of planned earnings over the next year. In addition to quantitative risk appetite limits, we also use qualitative risk appetite principles and statements to provide guidance to our business units and help to improve the clarity of our risk strategy in line with the Group’s appetite for risk. During 2010 we continued to reﬁne the basis under which limits are set and developed the link between operational risk loss data through the alignment of key risk indicators and risk appetite limits. We continually strive to reﬁne the models and assumptions we use to increase the robustness of these calculations. Risk appetite limits are now fully integrated into our strategic decision making process and support the M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n business planning and quarterly business review process including the robustness and governance of the action plans to reduce risk exposure. help management to prepare for signiﬁcant changes in the environment and protect shareholders and investors from unexpected loss. The embedding of our risk appetite methodology is a cornerstone of our risk analysis capability. Using the economic capital at risk metric 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. The internal risk and control proﬁle of the business is effective and continues to improve. Credit risk has reduced signiﬁcantly as the investment portfolio continues to be de-risked on a capital neutral basis. Although exposure to corporate bonds still exceeds our risk appetite, we have continued to improve the investment grade of the portfolio in line with our target operating model. Market yields have improved, enabling better matching of new assets to sales. Yields are still below desired levels and continue to place pressure on long-term guarantees. Surrenders and lapses in excess of pricing assumptions adversely affect our ability to achieve target proﬁt margins and recover expenses. Stress and scenario testing The Group performs ongoing stress and scenario testing and sensitivity analysis to monitor the robustness of our regulatory and economic capital position. These assessments help to inform management understanding of the capital that would be required in the event of any of the scenarios crystallising. The outputs of these tests The Group’s current economic capital framework is a stress test calculated at the 99.93% conﬁdence level, based on shocks calibrated to a 7 in 10,000 severity. Shock calculations are performed every six months: they are modelled as occurring instantaneously at the beginning of a period, with the impact assessed at the end of the period. Thus there is a high level of prudence built into the shocks. Allowances are made for diversiﬁcation beneﬁts, since not all shocks occur simultaneously, although the level of independence of shocks varies according to the factors. Tests are performed to model the aggregation of impacts on: (cid:81) Business risk (primarily related to expense and persistency risks) (cid:81) Asset/liability management risk (the interaction of changes in markets on policyholder assets and liabilities) (cid:81) Operational risk (risks related to people, systems and processes and changes in the environment) (cid:81) Credit risk (non-payment on credit instruments and counterparty concentration risk) (cid:81) Liability risk (related to underwriting insurance risks such as mortality) (cid:81) Market risk (shocks to shareholder assets) (cid:81) Currency risk (risks related to our reporting currency). Risk appetite in action Example 1 Old Mutual South Africa (OMSA) has in recent years leveraged investments in carefully chosen credit assets with the capability of delivering more attractive returns to clients, based on market trends. Ongoing analysis of the risk of overexposure to credit risk, in light of the recent economic crisis, identiﬁed the need to limit the amount of new exposure to credit risk from annuity and guaranteed products. The new limits look at the contribution of credit risk to overall OMSA risk exposure and economic capital and also at the exposure to credit risk from new business volumes. Example 2 A business unit recently proposed to launch a new product with guarantees. In line with the Group product approval policy, this had to be signed off by the Group Chief Actuary. Analysis revealed that the maturity guarantee risk for one of the variants was excessive, and there were surrender guarantees that had not been properly considered. The proﬁle was not compliant with the Group risk appetite and approval for this variant was denied. The business unit acknowledged this was the correct decision and the product was launched without the variant concerned. Example 3 The US Life business was exposed to credit risk as a result of signiﬁcant holdings of corporate bonds. Although improvements were made to the quality of the investment portfolio the overall Group exposure to credit risk exceeded the Group risk appetite. A strategic decision to divest our interests in US Life (expected to close in March 2011) will bring Group credit risk exposure within the determined risk appetite limits and in line with Group operating model objectives. Conclusion Setting risk appetite limits across the business has proved a valuable management tool and will ensure that going forward we grow our exposure in a controlled manner. Annual Report and Accounts 2010 Old Mutual plc 101 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED The Group’s risk appetite is tested twice annually on the same basis as economic capital described above, in terms of impacts to earnings, FGD surplus, cash ﬂow and operational risk, at a 90% (1-in-10) conﬁdence level. Old Mutual’s strategy has already considered the likely impact of the current Solvency II proposals on our Group and we do not presently anticipate that we would be required to raise additional capital as a consequence. Management uses these calculations to determine whether the business is resilient to a 1-in-10 and 7-in-10,000 instantaneous shock, and the impact of management actions on the risk appetite framework of the business (to ensure that the business remains within the chosen risk appetite). We have developed the capability of our suite of tools to regularly test the Group’s resilience to a 1980’s V-shaped single-dip recession and recovery and the more recent regulatory recommended reverse stress test (testing to completely deplete regulatory capital). Information on stress testing is reported to the Board Risk Committee and to management so that decision making is based on an understanding of potential impacts. Solvency II Quantitative Impact Study 5 (QIS5) Old Mutual successfully participated in the ﬁfth Quantitative Impact Study (QIS5), as part of the ongoing Solvency II industry consultation led by the Committee of European Insurance and Occupational Pension Scheme Supervisors (CEIOPS). This was based on our 31 December 2009 balance sheet and involved an assessment of the Group’s solvency position under technical speciﬁcations to test assumptions and dependency structures underlying Solvency II proposals. We discussed our economic capital methodology in the previous section. As part of the iCRaFT programme we are implementing a new Internal Capital Model, which will give us the ability to calculate and aggregate group-wide shocks more rapidly. This model will be rolled out across the Group by Q3 2011. The QIS5 results were in line with our FGD Solvency I ratio and the results from our current economic capital internal model when equivalently calibrated to a 99.5% conﬁdence level. Notwithstanding this, we believe that the QIS5 calibration is not completely appropriate for our business and so we will be seeking approval of our internal capital model before Solvency II begins, to ensure that the most appropriate model is in place to describe our risks, accurately calibrated for the markets we operate in. A number of technical industry issues have been raised with the European Insurance and Occupational Pension Scheme Authority (EIOPA, prevously CEIOPS) and the European Commission. Clariﬁcation on these issues – which include contract boundaries, treatment of expected proﬁts on future premiums and grandfathering of hybrid debt – needs to be provided before the ﬁnal impact of Solvency II can be understood. 102 Old Mutual plc Annual Report and Accounts 2010 Policy setting The policy framework supports our corporate purpose by providing a consistent high level approach to managing the risks we face in pursuit of our strategic objectives. Group risk policy statements set out the minimum standards that must be applied consistently across the Group. Their purpose is to ensure that risks are managed in line with the risk appetite and that businesses operate effectively and efﬁciently, in compliance with all applicable laws and regulations. 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. Policies are subject to regular review to reﬂect changes in circumstances and the Group risk appetite. Group policies in place cover a range of topics, including liquidity risk, market risk, new product and business approval, capital and treasury risk and business continuity. These policies are agreed by the GERC and approved by the Board Risk Committee. 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. For further information on Group policies, see the Governance section of this report page 130. Consistent business unit risk methodology During 2010 we made a number of changes to the risk governance framework. One of the core requirements was further streamlining of techniques and tools to identify, monitor and mitigate risk in accordance with the Group’s risk appetite. OpenPages was chosen as the designated risk management and reporting tool employed across the Group to ensure consistency of the risk management process and the determination of operational risk capital requirements. The creation of a central data store for all risk information is a key part in transfering accountability for risk management into the ﬁrst line of defence. The use of this tool will: M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (cid:81) Provide greater insight and transparency of risk within the business units and at an overall Group level (cid:81) Show where risk exposures lie in relation to risk appetites across the Group (cid:81) Provide relevant management information more efﬁciently and improve the consistency of risk trends and the development of appropriate controls (cid:81) Provide a more consistent way of continuously identifying, monitoring and measuring risk across the ﬁrst line in all business units (cid:81) Support the escalation of issues within business units and Group (cid:81) Support risk-based business decisions by management (cid:81) Link risk indicators to events and management actions in order to reduce the likelihood of risks occurring in the future (cid:81) Calculate the capital required to offset operational risk and feed into the internal capital model. Extensive training of the risk tool began in 2010. By the end of December 2010 most business units had been trained to use the tool, including the risk methodology, and one was actively using it. The roll out of a further release of OpenPages functionality (which will include the operational risk capital modelling capability), is planned to be completed at the end of Q2 2011. We have attached great importance to importing cleansed data into OpenPages and business unit senior management, Chief Risk Ofﬁcers and Group Risk will be required to sign-off the data being migrated to the system. Product development process Risk assumption starts with the product development process, where new products are designed, priced, implemented on administration systems and sold to customers. Following our experience with guarantees in the Old Mutual Bermuda business, the Board implemented, in 2008, a centralised approval process for all products which may have implicit or explicit guarantees requiring sign-off from the Group Chief Actuary. The new process aims to ensure that product design is better understood and for aspects such as pricing, administration arrangements, marketing material and investment requirements to be rigorously challenged by an independent party, particularly in order to ensure that we fully understand product and capital consequences in the event of substantial product and market shocks. Risk categorisation Risk categorisation has promoted 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. Risk categorisation will be used to introduce commonality of risk events within both the risk and control self-assessment and capital modelling processes. 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 RCSAs 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: (cid:81) Ongoing identiﬁcation of risks that threaten the achievement of objectives (cid:81) Assessing these risks in terms of ﬁnancial and qualitative impacts such as reputational, regulatory or customer (cid:81) Determining whether the level of risk being taken is acceptable (cid:81) Determining and implementing management action plans to bring risk exposures to an acceptable level if required (cid:81) 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 assessments 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. Annual Report and Accounts 2010 Old Mutual plc 103 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED The Group has subscribed to a database outlining signiﬁcant operational losses in 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 changes that will provide a better customer experience and reduce unexpected costs. Key risk indicators (KRIs) KRIs provide data on whether a risk is trending up, down, or is stable, both now and in the future. This acts as an early warning system, enabling management to take action to prevent the risk materialising. During 2010 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 2011 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 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 quickly and take remedial action where necessary. The MCEV Risk Monitoring/Control Cycle Approve Implement Review and Revise Monitor and Report 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 provides information on the extent of investment risk that is embedded in new products. For further details, see the MCEV supplementary information in this report. Understanding and identifying signiﬁcant risks to Old Mutual Old Mutual has previously experienced downside surprises due to a combination of imprudent lending decisions, insufﬁcient reserving for claims and complex ﬁnancial products. We have sought to learn from our experiences to ensure they do not recur. All ﬁnancial service organisations are required to act quickly in tough environments and the recent ﬁnancial crisis, aftershocks of which are still being felt, has brought many shortcomings to light. The consequence is that it is 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. These are some of the most signiﬁcant risks the Group faced during 2010: Examples of identiﬁed KRIs KRI Expense levels – actual v forecast Risk type addressed Business risk Level (%) of voluntary turnover in key jobs Operational risk What it tells us If trending up, Group’s costs will be higher than planned, which if not compensated by a rise an income will mean proﬁts will be lower than forecast. This trend will also show an increased exposure to business risk. The indicator allows proactive analysis to identify the reasons for the increase in expenses and guide appropriate management action. If trending up, this indicator can highlight a failure to retain top talent, which could drive recruitment costs higher than planned and prevent the Company from delivering on business plans. The exposure for the risk increases with the time key jobs are left vacant. The indicator allows analysis of the reasons people leave and guides corrective action. Solvency risk Assets in excess of local regulatory capital requirements If trending up, this indicates that the Group’s solvency position is worsening and the risk of regulatory intervention is increasing. The reasons for the reduction in surplus assets can be identiﬁed and strategic decisions considered to ensure the trend does not continue. 104 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Signiﬁcant risks to Old Mutual Risk type Risk as a threat and uncertainty Mitigating actions and opportunities Business risk 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. Business risks arise where business performance falls below projections as a result of negative variances in new business volumes, margin, lapse experience and expenses. 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 failure of distribution providers) could have an impact on our business. Credit risk The Group is exposed to the risk of credit defaults. This includes counterparty risk where an asset (in the form of a monetary claim against counterparty) is not repaid in accordance with the terms of the contract. Market risk 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 on where clients default on their obligations with respect to the ﬁnancial guarantees. The risk that adverse changes in market values of assets and liabilities negatively impact future earnings. Market volatility is a speciﬁc concern for us insofar as the Group may be unprepared in conditions of extreme market volatility resulting in unexpected capital calls and stressed liquidity. 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 needs, enabling us to ﬁnd opportunities even in challenging market conditions. Business units pay great attention to product strategy, with increased focus on product proﬁtability and improved persistency. 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 Group has adopted a policy of only dealing with approved counterparties and obtaining sufﬁcient collateral where appropriate as a means of mitigating the ﬁnancial loss from defaults. We continuously monitor the Group’s exposure and the credit ratings of counterparties. As part of getting ready for Solvency II regulations, developments are underway to enable reporting on and analysing credit exposure holistically across the Group. 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. Annual Report and Accounts 2010 Old Mutual plc 105 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Signiﬁcant risks to Old Mutual continued Risk type Risk as a threat and uncertainty Mitigating actions and opportunities Liquidity risk Liquidity risk for the Group could materialise where we are unable to sell assets in an illiquid market – leading to potential asset liability matching problems and depleting capital. Liquidity risk could also pose potential losses where the Group is unable to meet its obligations as they fall due (as a result of counterparties providing short-term funding or where they withdraw or do not roll-over the funding). Operational risk The risk arising from operational activities, for example a failure of a major system, or losses incurred as a consequence of people and or process failures, including external events. Speciﬁc examples include the ability to attract and retain key staff with the necessary skills to help the Group meet its objectives, and adequate protection of people, premises and data (including IT sustainability and infrastructure). Liability risk Liability risk for long-term insurance business arises through exposure to unfavourable claims experience on life assurance, critical illness and other protection business. For general insurance it also includes the risk of loss from ﬁre, accident or other claim sources. This is the risk that there are more claims than expected or claims are more severe than expected. Liability risk includes underwriting risk, which is the misalignment of policyholders to the appropriate pricing basis or impact of anti-selection, resulting in a loss. The business units which incur signiﬁcant liability risk are Emerging Markets, which provides long-term insurance, and M&F, which provides short-term insurance. 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 Executive Risk Committee providing additional oversight and challenge. By monitoring our liquidity position prudently, we are well positioned to identify surplus liquid assets available. Liquidity headroom is a key risk indicator and control for managing Group liquidity risk. It ensures we have sufﬁcient liquidity to cover both asset liquidity risk and ﬁnding liquidity risk. Taking greater operational risk rarely gives the Group greater reward and therefore we aim to minimise our operational risk exposure across the Group. The Group has developed OpenPages as its strategic risk management system which is currently being rolled out and embedded across the various business units. This will increase our understanding of the operational risks in the business and facilitate improvement in the controls to reduce losses. Operational risk is one of the metrics in our risk appetite framework: it is continuously monitored and we take action if it approaches the limit. Liability risk is managed by: (cid:81) Maintenance and use of sophisticated management information systems which provide current data on the risks to which we are exposed (cid:81) Use of actuarial models to calculate premiums and monitor claims patterns using past experience and statistical methods (cid:81) Guidelines for concluding insurance contracts and assuming liability risks – such as underwriting principles and product pricing procedures (cid:81) Reinsurance to limit our exposure to large single claims and catastrophes (cid:81) An effective mix of assets that back insurance liabilities based on the nature and term of these liabilities. Strategic risk The risk that discretionary decisions will adversely affect future earnings and the sustainability of the business. Speciﬁc exposures include the ability of the Group to successfully implement the current levels of change experienced. Another possible risk could be from external constraints imposed by regulatory or government bodies impacting on our ability to deliver our strategy. We actively monitor our strategic implementation portfolio for any material changes. Progress and activities are co-ordinated with the Group strategy to ensure that the 2011 strategy can be tracked. This includes actively working with the different business units and Group Executive Committee on change capability development. 106 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i allow the Group to adopt a more dynamic and timely approach to identifying and managing credit risk exposures. The Group Executive Risk Committee monitors and challenges large exposure concentrations across the Group. (cid:46)(cid:89)(cid:86)(cid:92)(cid:87)(cid:3)(cid:42)(cid:89)(cid:76)(cid:75)(cid:80)(cid:91)(cid:3)(cid:44)(cid:95)(cid:87)(cid:86)(cid:90)(cid:92)(cid:89)(cid:76)(cid:90)(cid:3)(cid:73)(cid:96)(cid:3)(cid:58)(cid:76)(cid:74)(cid:91)(cid:86)(cid:89)(cid:3) (cid:26)(cid:24)(cid:3)(cid:43)(cid:76)(cid:74)(cid:76)(cid:84)(cid:73)(cid:76)(cid:89)(cid:3)(cid:25)(cid:23)(cid:24)(cid:23) (cid:81) (cid:41)(cid:72)(cid:85)(cid:82)(cid:90)(cid:3)(cid:13)(cid:3) 39.67% (cid:45)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:58)(cid:76)(cid:89)(cid:93)(cid:80)(cid:74)(cid:76)(cid:90) (cid:81) (cid:53)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)(cid:13)(cid:3)(cid:51)(cid:86)(cid:74)(cid:72)(cid:83)(cid:3) (cid:46)(cid:86)(cid:93)(cid:76)(cid:89)(cid:85)(cid:84)(cid:76)(cid:85)(cid:91) (cid:81) (cid:57)(cid:76)(cid:72)(cid:83)(cid:3)(cid:44)(cid:90)(cid:91)(cid:72)(cid:91)(cid:76) (cid:176) (cid:176) (cid:176) (cid:176) (cid:81) (cid:59)(cid:76)(cid:83)(cid:76)(cid:74)(cid:86)(cid:84)(cid:84)(cid:92)(cid:85)(cid:80)(cid:74)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90) (cid:58)(cid:76)(cid:89)(cid:93)(cid:80)(cid:74)(cid:76)(cid:90) (cid:81) (cid:52)(cid:80)(cid:85)(cid:80)(cid:85)(cid:78) (cid:81) (cid:48)(cid:85)(cid:90)(cid:92)(cid:89)(cid:72)(cid:85)(cid:74)(cid:76) (cid:81) (cid:81) (cid:81) (cid:54)(cid:80)(cid:83)(cid:3)(cid:13)(cid:3)(cid:46)(cid:72)(cid:90) (cid:44)(cid:83)(cid:76)(cid:74)(cid:91)(cid:89)(cid:80)(cid:74)(cid:80)(cid:91)(cid:96) (cid:46)(cid:76)(cid:85)(cid:76)(cid:89)(cid:72)(cid:83)(cid:3)(cid:57)(cid:76)(cid:91)(cid:72)(cid:80)(cid:83)(cid:76)(cid:89)(cid:90) 14.58% 7.52% 5.27% 3.79% 3.17% 3.13% 2.53% 2.33% (cid:81) (cid:54)(cid:91)(cid:79)(cid:76)(cid:89) 18.01% The top ﬁve exposures by sector remain unchanged from 2009, although there has been an increase in our total exposure to banks and ﬁnancial services, offset by a reduction in exposure to national and local government. This mirrors the shift in credit risk to sovereigns from the ﬁnancial sector throughout 2010. Most of the exposure to the banks and ﬁnancial services sector stems from the non-banking book, while the banking book accounts for the largest portion of the national and local government sector. This is driven by the substantial amount of South African government debt which Nedbank is required to hold as a minimum reserve requirement. i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i The term ‘insurance risks’ in the notes to the accounts on pages 260-274 is deﬁned, for accounting purposes, as the risks other than ﬁnancial risk that inﬂuence the insurance liabilities associated with insurance contracts. For the long-term insurance businesses these arise 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. For general insurance it also includes the risk of loss from ﬁre, accident or other claim sources. These risks are included within the liability risk and business risk categories described on page 105 and 106. Group risk proﬁle The table below shows the signiﬁcant risks to the Group, in order of importance. These ﬁgures are stated after allowing for the beneﬁt of diversiﬁcation between risk types and between business units. The overall diversiﬁcation beneﬁt gives rise to a reduction of 38% in the risk exposures when compared to the standalone exposures, since the correlation between risk types and different geographies is less than 100%, which limits the likelihood of multiple risks occurring simultaneously. 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 Group policies and principles. Business units are responsible for ensuring that their credit risk exposures remain within the appetite limits set by the Group. As part of our plans to enhance the Group’s credit risk management framework, we are reviewing the Group’s credit risk policy, limits, and reporting systems. We are introducing improvements to Signiﬁcant risk exposures by business unit and risk type Long-term savings Banking US Life Legacy Short-term insurance (M&F) US Asset Management GHO 1. Asset liability management risk (policyholder) 2. Credit risk 3. Business risk 4. Operational risk 5. Currency risk 6. Market risk (shareholder) 7. Liability risk 19% 3% 18% 4% 0% 2% 1% 0% 8% 3% 1% 0% 3% 0% 6% 14% 0% 0% 0% 0% 0% 6% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 1% 7% 0% 0% S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 107 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED The Group’s exposure to the European peripheral economies is not deemed signiﬁcant and is primarily to highly-rated institutions. As at the date of writing, the Group had less than £10m of exposure to the sovereign debt of European peripheral economies. We intend to maintain our exposures at low levels and to continue to monitor further developments in this region. Looking ahead, the planned disposal of US Life in 2011 is expected to reduce the Group’s credit risk exposure signiﬁcantly, particularly in the banks and ﬁnancial services sector. Market risk We deﬁne market risk as the risk of changes in the value of our ﬁnancial assets or liabilities arising from changes in equity, bond and real estate prices, interest rates and foreign exchange rates, in the way they impact on shareholder assets. The impact of such movements on policyholder assets and liabilities are deﬁned under ALM-related risks, which can cover mismatches of assets relative to liabilities, and also the impact of a change in fund related management fees earned from client portfolios as a consequence of movements in asset markets. 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 101 for details). We conduct separate analyses to understand the impacts on both shareholder and policyholder assets. In respect of the investment of shareholders’ 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 OMSA. To mitigate the risk of falling equity markets adversely impacting the shareholder capital position, we use extensive equity hedging. We regularly evaluate the value and protection offered by the hedges that we operate in order to decide the appropriate level. 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 information section of this Annual Report. For our insurance operations, equity and property price risk and interest rate risk are modelled in accordance with the Group’s risk-based capital practices, which require sufﬁcient 108 Old Mutual plc Annual Report and Accounts 2010 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 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 monthly 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 those planned and in previous years, as well as the level of surrender activity. All new life assurance product developments 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 before launch. In all cases a series of product development committees and stringent requirements must be passed before the new product can proceed to launch. This has been supplemented during 2010 with the establishment of the Long-Term Savings (LTS) product team, who are responsible for reviewing all product proposals from the LTS business units as well as leveraging synergies across product developments within the Group. This provides additional mitigation against the risk of poor product performance and design. Many of these additional requirements have been introduced following experience relating to the Old Mutual Bermuda UGO Variable Annuity product. All potential risks to the Group as a result of writing the new product are considered before the product is 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). 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Quarterly group-led business reviews with each of the businesses ensure regular dialogue and oversight of business performance. At each meeting, business risk is monitored and, where appropriate, actions are agreed to mitigate negative trends. We make particular use of MCEV to monitor experience as it emerges. Liability (insurance underwriting) risk The Group assumes liability (also referred to as insurance underwriting risk) 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 and morbidity risk in the LTS business units and a risk of loss from ﬁre, accident and other sources in M&F, our short-term insurance business unit. Our liability risk exposure is relatively low as we manage it effectively through: (cid:81) The relatively weak correlation of liability risk with our other risk types, which reduces our exposure after diversiﬁcation over several insurance classes and a number of geographical segments (cid:81) Maintenance and use of sophisticated management information systems which provide current data on the risks to which we are exposed (cid:81) Use of actuarial models to calculate premiums and monitor claims patterns using past experience and statistical methods (cid:81) Guidelines for concluding insurance contracts and assuming liability risks, such as underwriting principles and product pricing procedures (cid:81) Reinsurance to limit our exposure to large single claims and catastrophes (cid:81) An effective mix of assets that back insurance liabilities based on the nature and term of those liabilities. Long-term insurance The table below shows our key liability risks associated with long-term insurance, along with risk management actions within the LTS business units: Risk Underwriting risk Deﬁnition Risk management 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 (longevity) risk Possible increase in annuity costs due to policyholders living longer Catastrophe risk Natural and non-natural disasters, including war and terrorism, could result in increased mortality risk and pay-outs on policies Experience is closely monitored. For universal life business, mortality rates can be reset. Underwriting limits, health requirements, spread of risks and training of underwriters all mitigate the risk. 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 pre-requisite 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. 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 limits. Annual Report and Accounts 2010 Old Mutual plc 109 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED The Group RCSA process places responsibility directly onto line management for identifying, monitoring and managing operational risk within each business unit. We further enhanced the RCSA process in 2010 by beginning the roll out of our OpenPages strategic risk management system which records, consolidates and reports risks, controls and losses at business unit and Group level. The improvement in the quality of data generated 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 remains the key driver to assess, escalate and prioritise signiﬁcant operational risks across the Group. These risks are then reassessed and monitored by the GERC and the Group Executive on at least a quarterly basis. General insurance Reinsurance plays an extremely important role in the management of liability risk and exposure at M&F. 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. 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 The Group’s size and complexity mean that operational risk represents a signiﬁcant proportion of our risk proﬁle (approximately 12%, with a target of 10%). 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 external fraud 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 operational risk exposures for M&F and Old Mutual Bermuda are above appetite. M&F has increased exposure as a result of processing errors and losses and Old Mutual Bermuda is exposed to trade execution errors and outsourcing failures. All other divisions and business units are currently within their operational risk appetite. 110 Old Mutual plc Annual Report and Accounts 2010 The principal operational risks Old Mutual faces are listed in the table below. 2010 trend 2010 commentary The regulatory environment is increasing in intensity, particularly in the areas of customer protection in developing markets, and information security/privacy. While banking and asset management related regulation was already very intense, there has been further tightening in the wake of the ﬁnancial crisis. Many of the new requirements are still evolving. In addition, Solvency II will create a step change for insurance prudential regulation, with its focus on internal risk and capital management and the more proactive nature of Group supervision under the internal model approval process The roll-out of the Group Risk Strategy during 2010 highlighted the need for improved processes and reporting on operational losses. Risk description 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 at the beginning of 2013. 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. 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 process breakdowns, human error or IT systems issues. Key mitigating actions Old Mutual is well positioned to meet increased regulatory expectations. Dedicated Group and business unit compliance teams closely monitor new and changing regulatory developments and liaise regularly with their local regulators. The Group provides a co-ordination role in relation to the FSA, which is the lead regulatory authority for Old Mutual plc under the Financial Groups Directive. The iCRaFT project is designed to deliver all Solvency II requirements, as a minimum. It has been progressing well during 2010 and project deliverables are on target. 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 new risk management framework and tool has been developed and is being rolled out across the Group. This provides an opportunity to embed the ERM processes which should lead to greater consistency of assessment and assumptions applied across all business units. This should also enable effective comparison and challenge of the operational risk capital derived by business units. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 111 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED Risk description IT and data security IT sustainability and infrastructure is a concern across the Group, particularly in Skandia UK and M&F. There is a risk that if these issues are not resolved within an appropriate timescale we could experience problems with the current IT systems. HR risk The lack of leadership and talent throughout the organisation at the levels required to deliver the business strategy and achieve the necessary culture change. 2010 trend 2010 commentary An LTS Chief Information Ofﬁcer has been appointed in the drive to consolidate and enhance IT infrastructure and exploit IT synergies. Physical and information security are areas of increasing risk and regulatory focus – particularly in relation to information security, where the UK and Europe have seen increasing intensity in ﬁnes and enforcement activity. New privacy and consumer protection laws have also been introduced in South Africa, although the practical regulatory enforcement bodies are still evolving. The year saw changes in the regulatory requirements surrounding remuneration policy. Turnover among the key leadership roles reduced for the second consecutive year. During 2010 a number of initiatives were delivered to improve senior talent attraction, retention and development. New CEOs started in Nordic in 2010, and M&F and USAM in early 2011. This increased the risk of staff turnover increasing and initiatives slowing until the new CEOs were ﬁrmly established. However, no material increases in turnover occurred in those businesses in the interim periods. Key mitigating actions 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. Work has started and is co- ordinated with the LTS Chief Information Ofﬁcer to embed Information Security within LTS IT strategy, including adoption and embedding of Group standards and benchmarking of business units against those standards. Group information security standards are based on good practice and data privacy obligations. New long-term incentive plans for Group senior executives were implemented together with consistent approaches to short-term (annual) incentive structures across business units. To support governance requirements revised remuneration principles have been implemented across the Group. A set of required leadership actions was introduced and leadership programmes were modiﬁed to target development needs. The year ahead will see more focus on the behavioural changes required to ensure our culture is aligned to the business strategy and reﬂects what matters most to our employees. Capital modelling for operational risk Maintaining a strong capital position is critical to the Group’s ability to conduct business and withstand losses resulting from inadequate or failed internal processes, people and systems or from external events. The determined operational risk capital requirement should be sufﬁcient to satisfy the Board’s risk appetite across all operational risks faced by the Group. We are nearing the completion of a new operational risk capital model which will enable a much more robust assessment of the capital requirement. 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 holding company has £1.4 billion of cash and undrawn committed facilities as at 31 December 2010. 112 Old Mutual plc Annual Report and Accounts 2010 RISK AND RESPONSIBILITY RISK PROFILES BY SEGMENT Long-Term Savings (LTS) 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 market (equity and interest) and business risk (see table on page 114). During 2010 LTS has deﬁned its risk strategy for the next three years. This is aligned to the Group strategy and aims to optimise the trade-off between risk assumed, capital required and volatility of return. These are LTS’s risk preferences: LTS ALM risk ALM risk is the risk that adverse changes in the market value of policyholder assets and liabilities will negatively impact LTS future earnings. The key factors that could lead to negative variances include asset prices, their volatility, interest rates and currency. Risk management strategies designed to mitigate market risk are dependent on the type of contracts held by policyholders. 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. 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 sets 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 Old Mutual South Africa Board and are disclosed to the Financial Services Board of South Africa, Old Mutual South Africa’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 South African guaranteed non- proﬁt annuity book, which is closely matched with ﬁxed interest securities. 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 and the use of hedging. Within Old Mutual South Africa, 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 hold investment guarantee resources and undertake regular and ongoing activity related to interest rate and equity hedging to mitigate this risk. 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 loss of value. If large numbers of policies lapse, the business is exposed to losses on up-front expenses and commissions that cannot be recouped, and also to per-policy maintenance costs increasing above pricing assumptions, resulting in losses as remaining 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. 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. We also take steps to manage lapse risk in case it varies from assumption. During 2010, customer retention was a key risk to the business. Signiﬁcant focus and effort from the business, coupled with improved economic and social outlook, resulted in improved persistency during the year and this trend is expected to continue into 2011. Annual Report and Accounts 2010 Old Mutual plc 113 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED 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 cause 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. 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 important in Emerging Markets, they represent a lower proportion of overall risk. LTS credit risk During 2010 we have made signiﬁcant progress in enhancing the aggregation of credit exposures across the Group as part of the iCRaFT programme. In 2011 this will be complemented by a review and update of the credit risk policy and limits. The top ﬁve exposures by sector remain unchanged from 2009, although there has been an increase in our total exposure to banks and ﬁnancial services, offset by a reduction in exposure to national and local government. This mirrors the shift in credit risk to sovereigns from the ﬁnancial sector throughout 2010. The Group’s exposure to the European peripheral economies is not deemed signiﬁcant and it is primarily to highly rated institutions. We intend to maintain our exposures at low levels and continue to monitor further developments in this region. LTS operational risk LTS’s operational risk proﬁle is similar to the Group operational risk proﬁle on page 110. Banking Banking credit risk As our primary banking business, Nedbank carries the majority of our credit risk through its lending and other ﬁnancing activities. Nedbank’s ﬁnancing activities contribute to its signiﬁcant credit risk exposure. We expect impairment levels to remain stable or even start to reduce during 2011. 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 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: LTS risk preferences Liability (insurance underwriting) risk Market risk Credit risk Life – Catastrophe Shareholder equity risk Life – Disability Life – Longevity Life – Mortality Liquidity (cid:81) Strongly avoid (cid:81) Tend to avoid (cid:81) (cid:81) Tend to seek (cid:81) Strongly seek Neutral (indifferent) Policyholder equity risk Currency – at Group level Inﬂation Corporate bonds spread widening, default and migration Counterparty default (reinsurance) Shareholder interest rate risk Concentration risk Hedgeable policyholder interest rate risk Property LTS exposures as a percentage of overall Group risk exposure (stated post diversiﬁcation) 1 ALM risk (policyholder) 2 Business risk 3 Operational risk 4 Credit risk 5 Market (shareholder) equity 6 Liability (insurance underwriting) risk Emerging Markets % 7.5 5.7 1.9 1.2 2.1 0.6 Wealth Management Nordic % 5.2 5.4 1.5 0.8 0.0 0.0 % 5.3 5.2 0.6 0.9 0.0 0.0 Retail Europe % 0.7 1.3 0.1 0.1 0.0 0.0 Note: Ranked in order of importance to the Group based on economic capital ﬁgures as at June 2010. 114 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (cid:81) Closely monitored credit risk loss ratios and other key indicators through its credit risk monitoring committees (cid:81) The bank has a mismatch in net non-rate- sensitive balances, including shareholders’ funds, that do not reprice for interest rate changes (cid:81) 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 (cid:81) Tightened controls over large payments to and from global banks (cid:81) 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. (cid:81) Increased staff to administer collections. Banking market risk The principal market risks in the Group’s banking operations arise from: (cid:81) Trading risk in Nedbank Capital (cid:81) 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. 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 a 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: (cid:81) The bank writes a large quantum of prime- linked assets and raises fewer prime-linked deposits (cid:81) Funding is prudently raised across the curve at ﬁxed-term deposit rates that reprice only on maturity (cid:81) Short-term demand-funding products reprice to different short-end base rates (cid:81) Certain ambiguous maturity accounts are non-rate-sensitive Liquidity risk There are two types of liquidity risk: funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that Nedbank Group will be unable to meet its payment obligations as they fall due. These payment obligations could arise from depositor withdrawals, the inability to roll-over maturing debt or contractual commitments to lend. Market liquidity risk is the risk that the Nedbank Group will be unable to sell assets, without incurring an unacceptable loss, in order to generate cash required to meet payment obligations under a stress liquidity event. Liquidity risk management is a vital risk management function in all entities across all jurisdictions and currencies, and is a key focus of the Nedbank Group. We maintain a portfolio of marketable and highly liquid assets which could be liquidated to meet unforeseen or unexpected funding requirements. The market liquidity by asset type (and for a continuum of plausible stress scenarios) is considered as part of the internal stress testing and scenario analysis process. The quantum of unencumbered assets available as collateral for stress funding is measured and monitored on an ongoing basis. The Basel Committee on Banking Supervision issued new liquidity standards on 16 December 2010. Many of the key principles are already encapsulated in Nedbank’s Liquidity Risk Management Framework. However, in order to meet the requirements of the liquidity coverage ratio by 2015 and the net stable funding ratio by 2018, Nedbank and the other South African banks are working closely with SARB and National Treasury to address the structural challenges of compliance for the local banking industry, while at the same time considering the unintended economic consequences which may arise from the proposed liquidity standards. Nedbank’s securitisation activities Nedbank Group uses securitisation primarily as a funding diversiﬁcation tool. However, these securitisation activities, which are mostly restricted to low-risk and non-complex transactions, are not signiﬁcant relative to the overall Nedbank Group risk proﬁle. Annual Report and Accounts 2010 Old Mutual plc 115 RISK AND RESPONSIBILITY RISK AND CAPITAL MANAGEMENT CONTINUED It is important to note that the Nedbank Group is fully integrated into the Old Mutual Group economic capital and risk appetite framework, which is based on a more conservative approach to calculating capital requirements. All securitisation transactions are subject to Nedbank Group Risk Committee oversight and the stringent SA Regulatory Securitisation Framework. 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 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 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. Operational risk Nedbank’s operational risk proﬁle is similar to the Group operational risk proﬁle on page 110. Mutual & Federal (M&F) The decision to acquire the minority interests and delist M&F was a key step in our strategy to rationalise and consolidate our Group structure into a focused long-term savings, protection and investment business . The delisting of M&F enabled local management to focus on stabilising the operating platform during 2010 and responding to changes in the market to continue to offer growth, proﬁtability and value to clients. M&F is South Africa’s second largest short-term insurer and also conducts business in Botswana, Namibia and Zimbabwe. It has developed a ﬁve-year strategic programme to proﬁtably grow its market share while introducing innovative products and entering new market segments. In 2010 it focused on the basics with the launch of new initiatives designed to stabilise the business. Early positive results include the recent move to second place for service in the Ask Africa Orange Index, from fourth a year earlier. The beneﬁts of action plans implemented throughout 2010, which include changes to top management, should materialise in the 2011-13 planning period. 116 Old Mutual plc Annual Report and Accounts 2010 M&F’s primary concern is underwriting risk, the risk that insurance products are incorrectly measured and priced. Adverse weather patterns and large numbers of commercial ﬁres impacted our underwriting proﬁtability in H1 2010. However, management actions taken to clean up the book, improve underwriting discipline and better manage claims costs resulted in improved underwriting results. This focus on the fundamental soundness of M&F’s portfolios, diligence in rate setting and continuing adherence to responsible underwriting standards will continue into 2011. US Asset Management For USAM, as an asset management business, market volatility presents the greatest risk. Since we conduct our asset management activities in an agency capacity, clients take both the upside and downside risk in their portfolios. As a consequence we characterise the resulting risk as an ALM risk, the risk that expected fees are not earned due to lower asset levels than anticipated. USAM 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 continued to feel the impact of the ﬁnancial crisis in a lower level of asset-based fees and substantially lower performance fees resulting from net cash outﬂows and lower asset values. USAM’s investigation of a possible partial Initial Public Offering includes multiple detailed work streams that holding company management is currently completing. While certain aspects of these IPO related activities represent business as usual activities, adding IPO related activities to management’s regular daily operations raises a resource bandwidth concern. US Life The internal risk and control proﬁle of the business is effective, and continues to improve. Credit risk has reduced signiﬁcantly as the investment portfolio continues to be de-risked on a capital neutral basis. Although exposure to corporate bonds still exceeds our risk appetite we have continued to improve the investment grade of the portfolio in line with our target operating model. Market yields have improved – enabling better matching of new assets to sales but lowering the unrealised gain position. Yields are still below desired levels and continue to place pressure on long-term guarantees. Surrenders and lapses in excess of pricing assumptions adversely affect our ability to achieve target proﬁt margins and recover expenses. The exposure to US Life credit risk has been one of the signiﬁcant metrics driving the divestment of US Life from the Group – see Group risk proﬁle on pages 107 and 108. The planned disposal is expected to reduce the Group’s credit risk exposure signiﬁcantly, particularly in the banks and ﬁnancial services sector. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Old Mutual Bermuda (legacy business) In Old Mutual Bermuda, reductions in interest rates can cause more of the investment guarantees and options within its life assurance businesses 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. For variable annuities, 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. 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 85. Businesses outside Group risk appetite: M&F, Old Mutual Bermuda and US Life Measured against the risk appetite limits set by the Group Executive Risk Committee and ratiﬁed by the Executive Committee and Board, all the Group’s businesses are within the Group’s appetite except M&F, Old Mutual Bermuda and US Life. It is worth noting that: (cid:81) M&F and Old Mutual Bermuda are managing their positions to reduce the risk in their business gradually, within their capabilities and minimising loss of value (cid:81) We have entered into a transaction to dispose of US Life (cid:81) We established oversight committees for Old Mutual Bermuda and US Life in 2009, and both of these bodies are still in force. The committees monitor risk exposures, help optimise risk-taking within the businesses and track progress – fortnightly in US Life, and monthly in Old Mutual Bermuda. The committee members include the Group Risk and Actuarial Director, the Group Finance Director and relevant executives from the business units (cid:81) 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 (cid:81) The Group monitors Old Mutual Bermuda’s hedging and related risks daily, and the company has been closed to new business to prevent any increase in risk exposures brought on by growing the book through selling contracts with inappropriately designed and priced product structures. Over time we expect exposures to reduce signiﬁcantly as policies terminate or mature and exit the book. Within the business, we continue to monitor hedging activity closely: hedging effectiveness has increased signiﬁcantly as a result (cid:81) Weekly liquidity reporting has been instigated, which includes stress-sensitivity scenarios (cid:81) Monthly liquidity/ cash ﬂow forecasting has been introduced, consisting of projections which include consideration of: – All anticipated Old Mutual Bermuda needs and sources of cash ﬂow – The speciﬁc timing of cash ﬂows required to settle expected policyholder beneﬁts – The impact of market changes on the need for and timing of cash ﬂows – An assessment of the optimal asset strategy to ensure appropriate liquidity at all times (cid:81) Old Mutual Bermuda’s operational risk exposure is expected to increase over the period 2010-12 due to migration of transformation initiatives related to valuation systems and processes combined with recruitment of new staff (cid:81) M&F’s operational risk remains above risk appetite in 2010-11, due mainly to the uncertainty surrounding certain regulatory and legislative requirements. We expect that exposure is to reduce and fall within appetite over the plan period. Summary Old Mutual continued in 2010 to focus on and progress to effectively manage risk and capital in order to create value. Our progress is due to the continued emphasis the Board places on risk management through our Big Five priorities and the iCRaFT programme. The risk environment will continue to evolve: we are now focusing on embedding the use of tools that will drive the collection of data and information on 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 2010 and are therefore effective. Annual Report and Accounts 2010 Old Mutual plc 117 RISK AND RESPONSIBILITY RESPONSIBLE BUSINESS INTRODUCTION FOUNDATIONS FOR THE FUTURE “ I am very proud this year of the way we have listened to our stakeholders and developed a group-wide approach to responsible business which lays the foundations for a sustainable future as a company and as an investor. This approach is designed to ensure we actively address the issues that matter most to our stakeholders and will help us realise our vision of becoming our customers’ most trusted partner.” Don Schneider Group Human Resources Director and Chairman of the Responsible Business Committee Responsible Business highlights from 2010 (cid:81) First full year of operation of the Responsible Business Committee which oversaw: – Responsible Business Policy rolled out across the Group – Responsible Investment taskforce set up (cid:81) Conducted stakeholder research into responsible business issues (cid:81) £13.6 million invested in our local communities focusing on ﬁnancial education, enterprise development and sustainable community development. For example: – £4.6m through the Masisizane Fund including micro-ﬁnance – £2.7m spent through the ﬁve Old Mutual Foundations. 118 Old Mutual plc Annual Report and Accounts 2010 Responsible Business is central to our corporate strategy Being a responsible business lies at the heart of building trust, an issue that has become ever more important for any ﬁnancial services company since the recent ﬁnancial crisis. In order to obtain their trust, our stakeholders must believe that we are taking our responsibilities as a business seriously, and are actively managing the most important issues we face from a social, environmental and ethical perspective. Our approach to responsible business is therefore a vital enabler of our corporate vision of becoming our customers’ most trusted partner. Developing our approach in 2010 During 2010, we have laid the foundations for the future of responsible business at Old Mutual. We conducted research with our stakeholders, who included: (cid:81) customers (cid:81) shareholders (cid:81) employees (cid:81) industry experts (cid:81) non-governmental organisations (cid:81) corporate responsibility experts (cid:81) the media. We used this research to identify and explore which issues our stakeholders felt were most important for a ﬁnancial services company to address. And we have used the ﬁndings of this research to develop a group-wide approach to responsible business. We will roll this out in 2011 to ensure that we are addressing these priority issues in a systematic, structured and strategic way. The diagram on the following page summarises our evolving approach to responsible business and shows the nine ‘material issue’ areas, identiﬁed in our stakeholder research, which we discuss in the following sections. We believe this approach leaves us well placed to build on the progress made by individual business units in recent years and to ensure we all work together to deliver responsible business consistently across all our operations in the future. Metrics and more We want to be accountable when it comes to responsible business. So we are working to develop a series of key metrics and performance indicators. We believe it is vital to have these quantiﬁable markers of our approach, but we also believe that responsible business is much more than this. It is how all of our employees approach every decision they make on a day-to-day basis. It is the way we communicate with our customers. The way we ensure that we understand them and their needs. And how we make sure they understand what we are doing and why we are doing it. Looking forward In the following pages we set out details of the progress we have made on each of these issues. We also set out our plans for the future and outline the key initiatives planned for 2011. Our goal is to be able to report back, a year from now, on all that has been achieved. And for this ongoing activity to begin to come together to tell a bigger story about us as a business, and our progress towards building people’s trust in us to help them achieve their lifetime ﬁnancial goals. Don Schneider Group Human Resources Director M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Don Schneider Group Human Resources Director S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 119 RISK AND RESPONSIBILITY OUR APPROACH TO RESPONSIBLE BUSINESS BUILDING TRUST BY MAKING SURE WE ADDRESS OUR STAKEHOLDERS’ KEY ISSUES The diagram below summarises our evolving approach to responsible business and shows the nine ‘material issue’ areas, discussed in the following sections, which were identiﬁed in our stakeholder research. MATERIAL ISSUES AND IMPACT AREAS O VIR N E SUPPLIER S T N E M N Supply chain Financial crime Direct environmental impact Community impact GOVERNANCE AND RISK SYSTEMS C U S T O M E R S Customer service Responsible marketing and selling S O C I E T Y Indirect investment impact Our employees S E E EM P L O Y 120 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Highlights from 2010 (cid:81) We completed the ﬁrst full year of the Responsible Business Committees co-ordination of our management approach towards social and environmental issues (cid:81) We rolled out our Responsible Business Policy across the Group (cid:81) We are developing a series of group-wide social and environmental metrics, against which we will report in 2011 (cid:81) We conducted our own stakeholder research on our responsible business approach (cid:81) We participated in the Carbon Disclosure Project and continued to be a member of the JSE SRI and FTSE4Good Indices (cid:81) We received external recognition for our progress in 2010. A full list can be found on our website. Examples include: – Old Mutual South Africa (OMSA) was commended in the Life Insurance category of the Top 500 Survey for South Africa’s Best Managed Companies – Commended by the Financial Services Authority for our Risk and Governance Reporting in our 2009 Annual Report – Highly commended in PricewaterhouseCooper’s Building Public Trust Awards for our Executive Remuneration Reporting in our Annual Report. Our future plans (cid:81) We plan to roll out our group-wide responsible business metrics and to continue building on our established governance and risk systems to manage our social and environmental impacts. GOVERNANCE & RISK “ Good governance and risk systems help us understand and manage our impacts in a clear and consistent way. For us, this means being able not only to minimise potential threats effectively, but also to seize opportunities when they arise.” Andrew Birrell Group Risk and Actuarial Director, Old Mutual Risk management is central to how we manage our capital. This puts it at the heart of how we do business. Understanding the nature of the risks we take, and their implications, is critical to building trust among our customers and, ultimately, to making our business successful. This drives us to analyse our risks rigorously and regularly. We incorporate social and environmental risks and opportunities into this analysis, and build stakeholder perspectives into our business strategy. This is fundamental to understanding our risk proﬁle, and building a sustainable and successful business. EMBEDDING VALUES THROUGH EXPEDITION SKANDIA “We’re a values-driven organisation and I believe this beneﬁts our customers and they appreciate it. In Expedition Skandia, we all embarked on a journey aiming to understand our brand promise and how that connects to our DNA and core values.” 81% Employee participation in Skandia Expedition Expedition Skandia employee game Marie Agren, Interim Human Resources Director, Skandia Nordic Expedition Skandia was an innovative employee engagement project to build a solid understanding of and commitment to Skandia Nordic’s brand promises and company values. The project was structured as a journey through five stages exploring the business, history and goals of the company, using team tasks such as storytelling, dilemma games and knowledge tests. It was a huge success, inspiring an 81% participation rate, extremely positive feedback and improved team spirit. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 121 RISK AND RESPONSIBILITY RESPONSIBLE BUSINESS CONTINUED RESPONSIBLE MARKETING AND SELLING “ One of the most important issues is to help improve ﬁnancial education – to help more people understand our products, as well as providing access to those products.” Employee Old Mutual Stakeholder research 2010 The importance of marketing and selling ﬁnancial products and services in a responsible way has been reinforced by the turmoil of the past few years. It is absolutely vital that we provide clear and transparent information on our products and services which is easy for our customers to understand, and that we do everything we can to ensure our customers not only have access to, but also choose, the product or service that best ﬁts their ﬁnancial situation and their needs. This is the best path to customer satisfaction and one of the most important ways in which we can build trust with our customers. Highlights for 2010 (cid:81) We delivered training for employees across many of our business units on how to improve the clarity of our customer communication (cid:81) We continued to review the approval process, at a business unit level, that all our marketing material must go through – including legal, actuarial and marketing screening (cid:81) We delivered initiatives to help build ﬁnancial understanding. For example: – Skandia Germany and Skandia Poland offer comprehensive support for distributors including information packs, video podcasts, an extranet for brokers, and workshops about products and services – Old Mutual South Africa (OMSA) has focused on changing the way it assesses ﬁnancial advisors to focus on customer relationships rather than only on number and value of policies sold – Skandia UK launched an online video to explain its fund platforms and how to manage investments – My Money Plan in South Africa provides advice and help with debt consolidation (see page 9 for a more detailed case study) (cid:81) We helped more people access our ﬁnancial products and services. For example: – A mobile money-transfer service, M-Pesa, introduced by Nedbank and Vodacom in South Africa – Across South Africa we continued to expand access for low-income individuals and community groups by using supermarkets and post ofﬁces as distribution points. Our future plans (cid:81) Responsible marketing and selling will continue to be a focus area for us across all our business units throughout 2011 and beyond. 122 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n CUSTOMER SERVICE “ Good customer service is about doing what we said we would do, or more. And doing it when we said we would do it, or sooner. And at the price we set, or better.” Rose Keanly, MD Old Mutual Services, Technology and Administration (OMSTA) Head of LEAN, Old Mutual Long-Term Savings We want to be our customers’ most trusted partner. We can only achieve this if they believe we are committed to providing a good service to them in all their dealings with us. Good service stems from understanding our customers’ needs and giving them good advice and suitable products. It means being transparent and accountable in our discussions with them. And always delivering what we say we will. Highlights from 2010 (cid:81) We launched new initiatives designed to improve our customer communications. For example: – Skandiabanken and Retail Europe now use online social media channels to gather customers’ opinions and reach new customers – Old Mutual Wealth Management’s UK business has launched a new customer website and a centralised system for emails from customers (cid:81) We continued to deliver customer service training across the Group – such as Skandia France’s programme on meeting customers’ expectations, which includes seminars and workshops on technical and behavioural training (cid:81) We recognised outstanding examples of customer service through initiatives such as OMSA’s Workplace Heroes competition (cid:81) More business units now monitor and track complaints and customer satisfaction. For example, Nedbank has developed a Client Complaints Tracker system to improve its approach to resolving customer complaints (cid:81) We received a number of awards for customer service, including: – Skandiabanken Norway won the Norsk Kundbarometer 2010 award for ‘Most Satisﬁed Customers’ for the ninth year in a row – Skandia UK won ﬁve-star awards for both the Investment and Life and Pension categories in the FTAdvisor.com Online Service Awards – OMSA won the annual Ask Afrika Orange Index for Service Excellence in the long-term insurance category. Our future plans (cid:81) We plan to adopt a further customer advocacy metric to measure customer satisfaction across the Group and help improve the service we deliver to our customers. SHARING OUR CUSTOMERS’ INTERESTS “Clients can have peace of mind knowing that Old Mutual Investment Group’s fund managers invest their own money in the funds they manage, alongside that of their clients. This ensures that every investment decision is made with a view to achieving longer-term outperformance.” 84% of all deferred (bonus) pay of our investment professionals was invested in OMIGSA’s funds in 2010 Diane Radley, CEO, Old Mutual Investment Group South Africa (OMIGSA) We are committed to acting in the best interests of our customers, while operating a sustainable and profitable business. That is why we have clear safeguards in place to avoid conflicts of interest. For example, most boutique investment managers and senior executives at OMIGSA have a significant proportion of their variable pay invested into the funds that they manage for customers. This co- investment establishes a client-agent shared interest in the performance of the fund, providing an additional layer of security below our Code of Ethics. Annual Report and Accounts 2010 Old Mutual plc 123 RISK AND RESPONSIBILITY RESPONSIBLE BUSINESS CONTINUED OUR EMPLOYEES “ Employees are key to excellent delivery and we work hard to provide the conditions under which they can excel and deliver on our promises to our customers.” Basetsana Magano Human Resources Director, Mutual & Federal Treating our employees well is one of our most important priorities. We have 55,730 employees in 34 countries, who will help us reach our vision of becoming our customers’ most trusted partner. Leveraging the strength of our people and making the most of their capabilities is fundamental to our future. It is essentia l that we work with our people in a way that enables them to perform to the fullest extent of their abilities and that shows that we believe in them, and want them to succeed. Highlights from 2010 (cid:81) We launched our ActNow! Leadership Actions, translating values into actions and behaviours (see opposite page) (cid:81) We made our new Group Vision and Strategy accessible to employees via a special workbook edition of our employee magazine intouch, translated into ﬁve languages (cid:81) In a World Cup year, we showcased our South African heritage and united our employees through our Old Mutual Group Football Tournament (cid:81) We renewed our commitment to the UN Global Compact, which is focused on promoting diversity, human rights and labour rights (cid:81) We introduced new development initiatives including leadership assessments and redesigned our leadership development programmes (cid:81) We delivered wellness at work initiatives across the Group, such as Skandia Colombia’s week-long programme providing health, sports and recreational activities for employees and their families (cid:81) We won external recognition for our employee relations, which included: – Skandia UK was awarded Gold Investor in People status – Nedbank won ‘Best Training Programme’ at the Achiever Awards in South Africa – OMSA achieved, and Nedbank maintained, a level 2 rating status and Mutual & Federal (M&F) a level 3 status as Broad-Based Black Economic Empowerment Contributors. Our future plans (cid:81) We plan to integrate our ActNow! Leadership Actions into all aspects of how we evaluate and develop our employees, introduce a new employee culture survey to explore gaps between our current culture and where we would like to be, and update our mobility practices to encourage knowledge transfer around the Group. DEVELOPING OUR PEOPLE “In-house training gave me the chance to study at a pace and time that suited me. It’s given me a recognised qualiﬁcation and it has built my conﬁdence at work.” Bevan Manchest, Business Development Consultant, Central Gauteng Regional Ofﬁce 1,935 employees trained through Mutual & Federal’s in-house training programme Building the skills of employees is an important part of our approach to responsible business. Mutual & Federal’s (M&F) in-house training programme, run by our accredited training provider, enables employees to gain credits towards the National Short-term Insurance Level 4 qualification. This programme is a long-term strategy to build M&F’s internal skills base – offering personal development, benefiting the company and tackling the skills shortage facing the South African economy. 124 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n INDIRECT INVESTMENT IMPACT “ From the perspective of an asset manager, the indirect impacts of investments have become much more important.” Shareholder Stakeholder Research 2010 We recognise that our investment decisions have signiﬁcant impacts on the environment and society, and on the communities where our investments are based. We encourage our fund managers to think about these impacts – and how they may inﬂuence ﬁnancial returns – when they make these decisions, subject to client mandates. We also recognise that many of our customers want environmental, social and governance (ESG) factors to be incorporated explicitly into the investment-making process in a structured way. We aim to offer our customers a choice of products that include an ethical perspective or can be tailored to include one. Highlights from 2010 (cid:81) We established the Responsible Investment Taskforce with representatives from Group Head Ofﬁce and business units, to explore how we could embed responsible investment principles across the business (cid:81) We had over £2.8 billion of funds under management in speciﬁcally social, environmental and transformation related-investments, including Old Mutual Investment Group (SA)’s Futuregrowth Fund, the African Infrastructure Investment Managers Fund, and Skandia’s Ideas For Life Fund (cid:81) Futuregrowth (£7 billion funds under management) and Acadian Asset Management (over £31.6 billion funds under management) remained signatories to the UN Principles for Responsible Investment (cid:81) Skandia Denmark and Skandia Investment Group drew up plans to put expanded agreements in place with external fund managers that include social and environmental criteria for 2011 (cid:81) In South Africa we continued to focus particularly on investments that are central to the transformation of the South African economy – for example, Old Mutual Investment Group (SA) created the country’s ﬁrst Housing Impact Fund, providing over £700 million to help redress South Africa’s huge shortfall in affordable housing. Our future plans (cid:81) During 2011, the Responsible Investment Taskforce will continue working on group-wide policies and frameworks on responsible investment, as well as helping individual business units to reﬁne their approach and increase the range of responsible investment products we offer. THE ACTNOW! LEADERSHIP ACTIONS A C T N im high and take your team with you ustomer ﬁrst – they’re the reason we’re here reat the business like it’s your own eed to listen carefully and talk honestly O wn our decisions – decide and deliver W in together – help others succeed Annual Report and Accounts 2010 Old Mutual plc 125 RISK AND RESPONSIBILITY RESPONSIBLE BUSINESS CONTINUED FINANCIAL CRIME “ Companies have to have systems in place that help prevent ﬁnancial crime and reduce the probability of it occurring.” Shareholder Stakeholder research 2010 Maintaining our customers’ trust by delivering both strong ﬁnancial returns and high levels of service to our customers requires the effective management of ﬁnancial crime risks (including fraud, money laundering, bribery and threats to customer data security). Part of this includes giving our employees effective frameworks and training so that they can make the right decisions for our customers in different jurisdictions. In the process of managing these risks, we seek to ensure that customer protection is balanced with customers’ need to access our services easily and quickly. Highlights from 2010 (cid:81) We began a group-wide anti-bribery risk and control assessment in relation to the requirements of the new UK Bribery Act in readiness for its implementation during 2011 (cid:81) We reviewed our Group Code of Conduct to make sure that it provides a clear statement of what we expect from employees in relation to our business practices and ﬁnancial crime. The Code will add to the framework of controls helping our employees to make the right decisions for our customers, and will form part of our approach to Bribery Act compliance when it is issued to business units in 2011 (cid:81) We continued to work closely with regulators, law enforcement agencies and trade associations to share good practice both inside and outside the Group. For example: – Skandia Nordic’s Financial Crime Prevention Team shared knowledge and experience with the Swedish Finance Police on both anti-money laundering and fraud prevention measures – Nedbank is working closely with Department of Home Affairs and the South African Banking Risk Information Centre to use biometric data to help reduce identity theft. Our future plans (cid:81) We intend to continue our work to ensure that appropriate ﬁnancial crime controls, such as completion of our anti-bribery risk and control assessment and our new Group Code of Conduct, are embedded in employee behaviour. 126 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n SUPPLY CHAIN “ The people who have been impacted the most by the ﬁnancial crisis and are still trying hard to meet our requirements are our suppliers.” Shareholder Stakeholder research 2010 We procure goods and services from a broad range of suppliers. By engaging them in our vision and approach to responsible business, we will be in a better position to meet our objectives. Through our procurement policies, we also have the opportunity to play a vital role in helping build local economies in the markets where we operate. Our choice of suppliers reﬂects our values and has a direct impact on the places where we operate. Highlights from 2010 (cid:81) All business units signed up to our new Responsible Business Policy, which includes commitments to factor into their procurement decisions, where practical, the environmental and social impact of our suppliers and to work with suppliers to create awareness and promote understanding of their social and environmental impact (cid:81) Across the Group our business units have continued to develop systems and policies that deliver against this policy. For example: – Nedbank has developed a nine-point procurement scorecard as a requirement for prospective suppliers (cid:81) (cid:81) – Skandia UK now includes a requirement in all Requests for Proposals that suppliers have a corporate responsibility policy that matches or exceeds the Group policy These policies have helped us deliver supplier initiatives such as Skandia Nordic’s policy of sourcing environmentally friendly new ofﬁce furniture, textiles, ﬂooring and cleaning services for its ofﬁces In South Africa we maintained our commitment to help in the transformation agenda through our supply chain. For example in 2010: – Old Mutual Investment Group Property Investments (OMIGPI) ran a series of roadshows in which we explained our policy and helped smaller suppliers to get accredited to the Broad-Based Black Economic Empowerment strategy (BBBEE). Our future plans (cid:81) We plan to share best practice on green procurement across the Group, and in our South African business units we will continue to practise preferential procurement in line with the requirements of BBBEE. BLACK ECONOMIC EMPOWERMENT THROUGH OUR SUPPLY CHAIN “The construction and planning team for our new Head Ofﬁce at Mutual Place consists of 26 different companies. It is a very large and diverse team who are tasked with delivering a ﬂagship investment for Old Mutual. The power of the team lies in its diversity.” Brent Wiltshire, Property Development Executive, OMIGPI £17.8m BBBEE procurement from all suppliers (R201m based on exchange rate of 11.3095) We are committed to promoting Broad-Based Black Economic Empowerment (BBBEE) through all avenues, including our supply chain. This year, Old Mutual Investment Group Property Investments (OMIGPI) ran a series of roadshows to explain our procurement policy to smaller suppliers, and to help them achieve BBBEE accreditation. We also continued to train employees and engage larger suppliers on the issues. We are already seeing the results: for example, Mutual Place in Johannesburg is using professional suppliers from uniquely diverse backgrounds. Annual Report and Accounts 2010 Old Mutual plc 127 RISK & RESPONSIBILITY RESPONSIBLE BUSINESS INTRODUCTION CONTINUED COMMUNITY IMPACT “ There are broader issues in South Africa, to do with creating jobs, investing in local housing and infrastructure, and also recognising that ﬁnancial services cannot exist as an island of prosperity in a sea of poverty.” Employee Stakeholder Research 2010 Our support for communities in all the countries in which we operate is not just about giving money to good causes, but also about making real and sustainable positive impacts. It is in our interests to build a stronger society by supporting communities effectively, especially in the emerging markets where we operate. So where appropriate, we work with others to deliver programmes that reach further and wider. This view is reﬂected in ‘responsible to all stakeholders’ being one of the three building blocks of our Group strategy. Highlights from 2010 (cid:81) In 2010 we invested £13.6 million in our local communities (cid:81) We delivered ﬁnancial education to our customers and other groups, aimed at giving them the knowledge and skills to make informed choices about their ﬁnances. For example: – Group Head Ofﬁce continued our support of ﬁnancial education in London through the Young Enterprise Personal Economics Programme – In OMSA we continued to deliver activity through the ﬁnancial wellbeing programme, the Financial Sector Charter programme and our Masisizane Fund (cid:81) We continued to help develop the economic infrastructure in the countries where we operate. For example: – In Namibia we supported Women’s Action for Development, helping develop basic vocational and business skills for marginalised women – Skandia’s businesses in Mexico and Colombia continued an employee mentoring programme to help orphaned children develop life skills (cid:81) We continued to work with local communities to deliver real social change through our business units, our ﬁve Old Mutual Foundations and the Nedbank Foundation. For example: – Nedbank Group’s ‘Caring for our Communities and Saving our World’ programme, which reached 23 schools – The Bulungula Incubator in South Africa, helping rural communities through developing education, health, basic services and sustainable livelihoods. Our future plans (cid:81) We will continue to focus on ﬁnancial education, enterprise development and community development. We will share best practice and extend the policies for employee volunteering across the Group. MASISIZANE: FINANCING DEVELOPMENT IN SOUTH AFRICA “After the drought I was devastated – I didn’t know what my animals would eat or drink. But with the loan, I was able to revive old boreholes, buy machinery and expand and feed the herd. Now my business is booming.” Mrs Nduzulwana, Masisizane recipient £1,496,659 invested through the Masisizane Fund in 2010 (R16.9m based on exchange rate of 11.3095) Masisizane is a non-profit organisation set up by Old Mutual which provides financial support to enterprise and community development initiatives in South Africa. Funding has been granted to diverse development projects – from community financial education and skills programmes to micro-finance for rural women, youth and people with disabilities. Its main aim is to be a catalyst for sustainable employment creation. So far over 1,000 people, have benefited from Masisizane. Including Mrs Nduzulwana, pictured here, who was named 2010 female farmer of the year in the Eastern Cape. 128 Old Mutual plc Annual Report and Accounts 2010 DIRECT ENVIRONMENTAL IMPACT “ Through initiatives such as the Carbon Disclosure Project, companies are already making a lot of progress towards helping address the impacts of climate change; however, we want to help encourage these companies to do more.” Non-Governmental Organisation Stakeholder research 2010 We recognise that we, like other businesses, have a duty to do what we can to minimise the risks created by the direct environmental impacts of our operations. Our focus on putting the right systems in place and building a coherent approach across the Group means we are now better positioned than in the past to manage these impacts appropriately. Highlights from 2010 (cid:81) We have developed a Group Climate Change Strategy, which aims to: – Improve the completeness and accuracy of our emissions data – Set a Group target for carbon reductions – Create initiatives to engage all our stakeholders (cid:81) We increased the proportion of business units accurately reporting energy consumption to just over 80% and we work directly with the remainder to calculate estimated consumption (cid:81) We decreased scope 1 and 2 emissions * intensity to 2.32 tonnes of CO2e per employee (2009: 2.33) but recorded an increase in emissions intensity in our South African property portfolio to 0.17 tonnes CO2e/m2 (2009: 0.16)** (cid:81) We continued to improve the environmental performance of our buildings by reﬁtting existing buildings and building or leasing more environmentally-friendly buildings. For example: Skandia Nordic has recently relocated four of its largest workplaces – including its headquarters – to new, highly energy-efﬁcient ofﬁce buildings (cid:81) We completed our fourth public submission to the Carbon Disclosure Project (CDP) and maintained our place in the CDP leadership index (cid:81) We have continued to work with our employees to inspire them to reduce our environmental impact. For example: – Old Mutual Swaziland ran a workshop helping employees reduce their carbon footprints – Skandia’s businesses in Colombia and Mexico ran an employee communication campaign on Skandia Green Year for 2010 (cid:81) We continued to support a number of international climate change forums, including the Cancun Communiqué and (through Nedbank) the Prince’s Rainforest Project. Our future plans (cid:81) We will develop tools, frameworks and metrics to help our business units deliver our Group Climate Change Strategy, and will expand our data collection processes across our business units. * Categorisation as per GHG Protocol Corporate Standard methodology. ** 2009 ﬁgures have been restated in light of improved data collection in 2010. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 129 GOVERNANCE BOARD OF DIRECTORS 1. Patrick O’Sullivan (61)3 B.B.S., F.C.A. (Ireland), M.Sc. Chairman Patrick O’Sullivan joined the Board 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 Group Finance Director and CEO, General Insurance and Banking, of its UKISA division. Qualiﬁed as a chartered accountant, his prior experience includes positions at Bank of America, Goldman Sachs, Financial Guaranty Insurance Company (a subsidiary of GE Capital), Barclays/ BZW and Eagle Star Insurance Company. He is also a non-executive director of COFRA Group in Switzerland, Man Group plc and Bank of Ireland. 2. Julian Roberts (53)3 B.A., F.C.A., M.C.T. Group Chief Executive Julian Roberts has been Group Chief Executive of Old Mutual plc since September 2008. He is also a non-executive Director of Nedbank Group Limited, Nedbank Limited and Old Mutual Life Assurance Company (South Africa) Limited. He 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, before that, Chief Financial Ofﬁcer of Aon UK Holdings Limited. 3. Philip Broadley (50)2 M.A., F.C.A. Group Finance Director Philip Broadley 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 (63)2, 3, 4 B.Sc., M.B.A. Independent non-executive director Nigel Andrews has been an independent non-executive director of the Company since June 2002. He is also non-executive Chairman of the Company’s principal US holding company, Old Mutual (US) Holdings, Inc. He is a 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 (63)1,2,3 B.Sc., F.I.A. Independent non-executive director Mike Arnold has been an independent non-executive director of the Company since September 2009 and chairs the Board Risk Committee. 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 Marine and General Mutual Life Assurance Society, Financial Information Technology Limited and the Scottish Equitable Policyholders Trust. 6. Rudi Bogni (63)1,3,4 D.Econ. (Bocconi) Senior independent non-executive director Rudi Bogni has been the senior independent non-executive director of the Company since May 2008, having served on the Board since February 2002. He chairs the Remuneration Committee. He is also Chairman of Medinvest International SCA, Luxembourg, a director of the LGT Foundation, Moody’s UK, French and German businesses, Common Purpose CT, Steadfast Advisory Services Limited and Kedge Capital HJ, and a member of The Governing Council of the Centre for the Study of Financial Innovation, of The International Council for Capital Formation and of the 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. Eva Castillo (48)2,3,4 B.A.s in Business and Law Independent non-executive director Eva Castillo was appointed as an independent non-executive director of the Company on 4 February 2011. She led the Global Wealth Management business of Bank of America Merrill Lynch in Europe, Middle East and Africa (EMEA) from 2006 to 2009, having held a number of other senior positions in Merrill Lynch from 1997, including as head of Global Markets and Investment Banking in Iberia and President of Merrill Lynch Spain and, before that, as Chief Operating Ofﬁcer for Merrill Lynch EMEA Equity Markets. Previously she had worked for the International Equities division of Goldman Sachs in London between 1992 and 1997. She has been a non-executive director of Telefonica SA since the beginning of 2008. 1 2 3 130 Old Mutual plc Annual Report and Accounts 2010 4 5 6 7 8. Russell Edey (68)1, 3, 4 F.C.A. Independent non-executive director Russell Edey has been an independent non-executive director of the Company since June 2004. He is Chairman of Avocet Mining Plc, 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 retired from the chair of Anglogold Ashanti Limited in May 2010, having served on its board for 12 years. Previously he had also served on the boards of English China Clays plc, Wassall plc, Northern Foods plc, Associated British Ports 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. 9. Alan Gillespie (60)1,3,4 B.A., M.A., Ph.D., CBE Independent non-executive director Alan Gillespie was appointed as an independent non-executive director of the Company on 3 November 2010. His background is in investment banking and ﬁnancial services. His banking career began at Citibank, where he spent 10 years from 1976 to 1986. He joined Goldman Sachs in New York in 1986 and was made a partner of the ﬁrm in 1990, with responsibility for corporate ﬁnance and mergers and acquisitions in the UK and Ireland. He jointly led the ﬁrm’s ﬁnancial services practice in Europe and in 1996 established Goldman Sachs’ presence in South Africa. After retiring from Goldman Sachs in 1999, he became Chief Executive of the Commonwealth Development Corporation in the UK. In 2001 he became Chairman of Ulster Bank, a subsidiary of Royal Bank of Scotland plc. He is also currently Senior Independent Director of United Business Media Limited and Chairman of the Economic & Social Research Council and of the International Finance Facility for Immunization (IFFIm). 10. Reuel Khoza (60)2,3 Eng.D., M.A. Non-executive director Reuel Khoza has been a non-executive director of the Company since January 2006 and Chairman of Nedbank Group since May 2006. He 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 Holdings Limited and non-executive directorships of Glaxo Wellcome SA, IBM SA, Vodacom, the JSE, JCI, Standard Bank Group and Liberty Life. He is currently a Fellow and President of the Institute of Directors of South Africa. 11. Roger Marshall (62)1,2,3 B.Sc. (Econ.), F.C.A. Independent non-executive director Roger Marshall was appointed as an independent non-executive director of the Company on 5 August 2010 and became Chairman of the Group Audit Committee at the end of that month. He was formerly an audit partner in PricewaterhouseCoopers, where he led the audit of a number of major groups, including Zurich Financial Services and Lloyds TSB. Outside appointments included six years as a member of the Accounting Standards Board. He is currently Interim Chairman of the Accounting Standards Board, a Director of the Financial Reporting Council and a non-executive director of Genworth Financial’s European insurance companies. 12. Bongani Nqwababa (44)1,3,4 B.Acc., C.A., M.B.A. Independent non-executive director Bongani Nqwababa has been an independent non-executive director of the Company since April 2007. He has been Chief Financial Ofﬁcer of the South African mining group, Anglo Platinum Limited, since 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. 13. Lars Otterbeck (68)2,3,4 Dr. Econ. Independent non-executive director Lars Otterbeck has been an independent non-executive director of the Company since November 2006. Prior to joining the Board he had held various senior business positions in Sweden, including as President and CEO of the Swedish mutual pension insurance company, Alecta, from 2000 to 2004. He is also Deputy Chairman of Skandia Insurance Company Limited and a non-executive director of Skandia Liv. His outside positions include being Chairman of Hakon Invest AB and Näringslivets Börskommitté (Industry and Commerce Stock Exchange Committee) and Deputy Chairman of the Swedish Corporate Governance Board. Key 1. Member of the Group Audit Committee 2. Member of the Board Risk Committee 3. Member of the Nomination Committee 4. Member of the Remuneration Committee M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 8 9 10 12 13 Annual Report and Accounts 2010 Old Mutual plc 131 GOVERNANCE CHAIRMAN’S INTRODUCTION Corporate governance – the bedrock for a successful Group We have made good progress during 2010 in improving the governance of Old Mutual to reﬂect the changing business and regulatory environment. Patrick O’Sullivan Chairman Achievements during 2010 Priorities for 2011 (cid:81) Roll-out of our new Group Operating Model (cid:81) Further Board training on Solvency II (cid:81) Separation of the functions of the Group Audit and Risk Committee into two Board-level committees (cid:81) Addressing other recommendations in the Walker Review (cid:81) Board succession and renewal (cid:81) Focus on customer matters (cid:81) More Board engagement with the businesses and their key employees and relationships (cid:81) Continued emphasis on delivery of our strategic objectives We have made good progress in a number of areas relating to the Group’s governance during 2010. The roll-out of our Group Operating Model, which is designed to provide greater assurance about the effectiveness of the Company’s strategic control over the Group’s businesses, moved successfully from project mode into business as usual. At Board level, we established a separate Board Risk Committee alongside the Group Audit Committee in line with recommendations contained in the Walker Review. This new committee has made a sound start and has enabled more time and focus to be dedicated to risk-speciﬁc issues, thereby contributing to the Board’s own discussions of risk appetite and related issues in the run-up to the implementation of Solvency II. We have also during 2010 widened the membership of the Board’s standing committees so that all of the non-executive directors now each serve on at least two such committees. We have been pleased to appoint three new non-executive directors to our Board. Roger Marshall joined us in August, succeeding Richard Pym as Chairman of the Group Audit Committee. Alan Gillespie was appointed as an independent non-executive director in November and will replace Rudi Bogni as our Senior Independent Director when Rudi retires at the 2011 AGM. Since the year end, we have been delighted to welcome Eva Castillo, the ﬁrst woman to join the Board, as a director and as a member of various Board Committees. Nigel Andrews will leave the Board when he, too, retires as planned at the forthcoming AGM. Further details of the new directors are contained in the Board of Directors section earlier in this Annual Report. As we implement our medium-term strategy, we have a newly invigorated view of our core businesses and market strengths and an increased commitment to strengthening our links with Government, regulators and other stakeholders, especially in South Africa. The Board has been actively engaged in monitoring and guiding progress against the various targets that the Company has set itself for delivery by the end of 2012. We remain committed to seeing these through to a successful conclusion and the effectiveness of our governance arrangements is a key foundation for achieving them. Patrick O’Sullivan Chairman 8 March 2011 132 Old Mutual plc Annual Report and Accounts 2010 Patrick O’Sulivan Chairman GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS In this section, we describe how the Company’s governance operated during 2010 Martin Murray Group Company Secretary 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. During 2010, the Group completed its transition from a highly decentralised federal model of group governance to a more centralised “strategic controller” model steered from our head ofﬁce, facilitated by the roll-out of our new Group Operating Model. The new Model establishes clear principles of delegation and escalation that are designed to provide appropriate levels of assurance about the control environment, while retaining ﬂexibility for our businesses to operate efﬁciently. Compliance with the UK Corporate Governance Code As the Company’s primary listing (now known in the UK as a premium listing) is on the London Stock Exchange, this report mainly addresses the matters covered by the UK Corporate Governance 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 III and, in the case of Nedbank Group Limited, the Listings Requirements of the JSE Limited. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Martin Murray Group Company Secretary Annual Report and Accounts 2010 Old Mutual plc 133 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED Throughout the year ended 31 December 2010 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 UK Corporate Governance Code as described in the following sections of this Report save in respect of the matter discussed below under the heading “rotation and re-election of directors”. The Company’s compliance with UK Corporate Governance 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. (cid:81) Monitoring and managing of the relationships between the Group and its regulators; (cid:81) Reviewing and implementing of effective systems of delegation and internal control, and the carrying out of an annual review of their effectiveness; (cid:81) Overall review and approval of Group strategy and the setting of long-term objectives and/or changes in strategic direction; and (cid:81) Monitoring of the overall performance of the Group in relation to its objectives, plans, targets and the implementation of projects and decisions. Board of Directors Membership The Old Mutual Board currently has 13 members, two of whom are executive and eleven of whom are non-executive directors. All of the current directors, except for Roger Marshall (who was appointed to the Board on 5 August 2010), Alan Gillespie (who was appointed to the Board on 3 November 2010) and Eva Castillo (who was appointed to the Board on 2 February 2011), served throughout the year ended 31 December 2010. Richard Pym resigned from the Board at the end of his ﬁrst three-year term in August 2010 because of the pressure of his other commitments. Responsibilities of the Board The Board’s role is to exercise stewardship of the Company within a framework of prudent and effective controls that enables 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: (cid:81) Approval of ﬁnancial reporting, such as interim and annual results, the Annual Report and Accounts of the Group, payment of dividends and accounting policies; 2010 operations Board meetings were held regularly during 2010. Scheduled meetings were coordinated with the Company’s reporting calendar to allow for detailed consideration of interim and ﬁnal results and 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, 19 Board meetings (of which eight were scheduled and 11 convened ad hoc) were held during 2010. 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. During 2010, the Board held meetings at the Group’s South African, Wealth Management and Nordic businesses’ premises. In addition to its normal agenda items, the Board also addressed the following matters, among others, during the year: (cid:81) Approval of the Group’s strategic targets for the end of 2012 that were announced in March 2010 and review of progress against those targets. The Board also held various follow-up discussions about strategy for the Group as a whole and for particular business units; (cid:81) Oversight of the sale process for the US Life business and of negotiations for a possible sale of the Group’s stake in Nedbank; (cid:81) Monitoring of the cash and capital resources, (cid:81) Approval of the introduction of a scrip dividend and overall liquidity, of the Group and authorising any signiﬁcant acquisitions, disposals of core businesses, investments, capital expenditure or other material projects or transactions; alternative scheme for future dividends; (cid:81) Monitoring progress of the iCRaFT project, which is designed to prepare the Group for the introduction of Solvency II; 134 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (cid:81) Updates on the embedding of the new Group Operating Model; and (cid:81) Consideration of scenario-planning for the Old Mutual Bermuda business. In addition, the Board received brieﬁngs on a number of topics from internal and external experts during the year, as part of its continuing training, including risk in the ﬁnancial services industry, compliance procedures required for the new UK Bribery Act 2010, and the role of models in bridging risk and capital. New directors received induction upon their appointment to the Board, including information about matters of immediate importance to the Group, such as the current strategy and operating performance. During 2010, these induction arrangements were put on to a more formal footing, with an extensive list of brieﬁng sessions about the Group’s businesses being made available to new appointees in conjunction with other directors, members of senior management and external advisers (such as the auditors). All directors have access to the Group Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. 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. 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 coordination 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 (Julian Roberts and Philip Broadley), the other current members of the Group Executive Committee are: Peter Bain (President and Chief Executive Ofﬁcer of US Asset Management), Andrew Birrell (Group Risk and Actuarial Director), Mike Brown (Chief Executive of Nedbank Group), Paul Hanratty (Chief Executive Ofﬁcer of the Long-Term Savings division), Don Hope (Head of Strategy Development) and Don Schneider (Group Human Resources Director). Additional details of members of the Group Executive Committee accompany their photographs on pages 42 and 43 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, Group Audit and Board Risk matters, subject to their respective terms of reference. The Board receives reports from these committees on the subjects that they have covered. The matters addressed by the principal Board committees in 2010 are outlined below under the heading ‘Board Committees’ and, for the Remuneration Committee, in the Remuneration Report. Group Operating Model The objectives of the Group Operating Model are: (cid:81) To establish a clear and comprehensive governance framework, with appropriate procedures, systems and controls, facilitating the satisfactory discharge of the duties and obligations of regulated ﬁrms, directors and employees within the Group; (cid:81) To provide a clear articulation of Old Mutual plc’s expectations (as shareholder) of business unit boards when exercising their powers as set out in their respective constitutions as in force from time to time; (cid:81) To take due account of the regulatory requirement that boards of regulated entities maintain proper controls over the affairs of their respective businesses; and (cid:81) To protect the interests of the Group’s various stakeholders including its shareholders, creditors, policyholders and customers. The governance relationship with the Group’s majority-owned subsidiary, Nedbank Group Limited, recognises the latter’s 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. Nedbank has also now adopted the Group Operating Model, subject to certain waivers in acknowledgement of its separately-listed and regulated status, which sits alongside that letter. 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 the Chairman, along with at least one third of the directors (excluding those appointed by the Board during the year), should retire by rotation each year. Annual Report and Accounts 2010 Old Mutual plc 135 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED Accordingly, at the Annual General Meeting (AGM) to be held on 12 May 2011, shareholders will be asked to approve the election of Eva Castillo, Alan Gillespie and Roger Marshall, and the re-election of Patrick O’Sullivan and Russell Edey. Nigel Andrews and Rudi Bogni, having completed nine years on the Board, will retire at the AGM and will not seek re-election. The Board, having reviewed the performance of the directors who are to be proposed for election or re-election and the contributions that they each respectively have made, recommends that they each be elected or re-elected as directors at the AGM. Biographical details of all of the directors are contained in the Board of Directors section of this Annual Report. The 2010 review was conducted through an internal survey and interview process under the auspices of the Group Human Resources Director, the results of which were then shared with the Chairman and the Senior Independent Director. The Board also received input during the year from an external consultancy, Engage for Change, who made various recommendations about how Board engagement could be improved and time at Board meetings used to maximum beneﬁt. A plan to address recommendations arising from the annual review and input received from Engage for Change over the coming year has been agreed by the Board. The Board’s performance review is now externally facilitated at least every three years in line with the UK Corporate Governance Code, with the last such externally facilitated review having taken place in 2009. 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 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. In view of the many changes that have taken place in the composition of the Board over the last two years, the fact that the Company is just over one year into a three-year strategic plan and the onerous clearance procedures which new directors of UK ﬁnancial institutions now have to undergo with the Financial Services Authority, the Company believes that it is not currently appropriate to instigate annual re-election of all directors as recommended by the UK Corporate Governance Code. The Company will, however, keep this matter under review as investors’ views and market practice on the subject become clearer and will reconsider its position annually. 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 scheduled retirements of non-executive directors 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). The results of the review are considered by the Board and appropriate actions taken, if necessary. 136 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 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 a formal annual one-to-one performance evaluation of each of the other non-executive directors, with any resulting action points being reported to the Nomination Committee. These procedures were 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 and other non-executive directors. The assignment of responsibilities between the Chairman, Patrick O’Sullivan, and the Group Chief Executive, Julian 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 Patrick O’Sullivan as Chairman include those contained in the Supporting Principle to paragraph A.3 of the UK Corporate Governance Code, namely leadership of the Board, ensuring its effectiveness in all aspects of its role and setting its agenda; ensuring that adequate time is available for discussion of all agenda items (in particular strategic issues), ensuring that the directors receive accurate, timely and clear information; ensuring effective communication with shareholders; promoting a culture of openness and debate by facilitating the effective contribution to the Board of non-executive directors in particular; and ensuring constructive relationships between the executive and non-executive directors. The Board has determined that, in the absence of exceptional circumstances, 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 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 Nine of the ten current non-executive directors other than the Chairman (Nigel Andrews, Mike Arnold, Rudi Bogni, Eva Castillo, Russell Edey, Alan Gillespie, Roger Marshall, Bongani Nqwababa and Lars Otterbeck) are considered by the Board to be independent within the meaning of, and having regard to the criteria set out in, paragraph B.1.1 of the UK Corporate Governance 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, Reuel Khoza, is not considered independent because of his chairmanship of the Group’s majority-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 Rudi Bogni is the Senior Independent Director and will be succeeded in this role after he retires at the 2011 AGM by Alan Gillespie. 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 not be appropriate. The Senior Independent Director’s contact details can be obtained from the Group Company Secretary (martin.murray@omg.co.uk). Directors’ interests Details of the directors’ interests (including interests of their connected persons) in the share capital of the Company and its quoted subsidiary, Nedbank Group Limited, at the beginning and end of the year under review are set out in the following tables, while their interests in share options and restricted share awards are described in the section of the Remuneration Report entitled ‘Directors’ interests under employee share plans’. There have been no changes to any of these interests between 31 December 2010 and 7 March 2011. Annual Report and Accounts 2010 Old Mutual plc 137 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED At 31 December 2010 Nigel Andrews Mike Arnold Rudi Bogni Philip Broadley Russell Edey Alan Gillespie Reuel Khoza Roger Marshall Bongani Nqwababa Patrick O’Sullivan Lars Otterbeck Julian Roberts Old Mutual plc Number of shares Nedbank Group Limited Number of shares 7,000 12,725 19,000 55,3531 25,000 – – 20,000 – 100,000 – 1,591,6441 – – – – 2,604 – 2,0622 – – – – – Old Mutual plc Number of shares Nedbank Group Limited Number of shares At 1 January 2010 (or date of appointment as a director, if later) Nigel Andrews Mike Arnold Rudi Bogni Philip Broadley Russell Edey Alan Gillespie (appointed 3 November 2010) Reuel Khoza Roger Marshall (appointed 5 August 2010) Bongani Nqwababa Patrick O’Sullivan Lars Otterbeck Julian Roberts 7,000 12,725 19,000 50,6251 25,000 – – – – – 1,500,8321 Former director (at 1 January 2010 and date of resignation) Richard Pym (ceased to be a director on 31 August 2010) 40,000 – – – – 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 2010. 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 Julian Roberts nor Philip Broadley currently holds any external non- executive directorships of other publicly quoted companies. 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 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 standing committees of the Board is set out below. 138 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Group Audit Committee Members and years of appointment to the committee (or its predecessor committee, the Group Audit and Risk Committee): Roger Marshall (Chairman) (2010), Mike Arnold (2009), Rudi Bogni (2002), Russell Edey (2004), Alan Gillespie (2010), Bongani Nqwababa (2007). Other member during part of the year: Richard Pym (2007). Secretary and year of appointment: Martin Murray (1999). All members of the Group Audit Committee are independent non-executive directors. The Chairman, Roger Marshall, is a chartered accountant with a wide range of recent and relevant ﬁnancial experience, having previously been an audit partner in PricewaterhouseCoopers, where he led the audit of a number of major groups including Zurich Financial Services and Lloyds TSB. All members of the committee are expected to be ﬁnancially literate and to have relevant ﬁnancial experience. The terms of reference of the committee, which specify its responsibilities, are available on the Company’s website. Roger Marshall has submitted the following report on behalf of the committee: “I took over from Richard Pym as Chairman of the Group Audit Committee (the Committee) at the end of August and I would like to thank Richard for all his hard work and dedication as the previous Chairman of the Committee. During our seven meetings in 2010, the Committee focused on: (cid:81) The signiﬁcant accounting and actuarial issues affecting the IFRS and MCEV ﬁnancial statements. The Committee has reviewed the accounting policies adopted by the Group and considered the approach to, and valuation of, assets and liabilities, including the key actuarial assumptions underpinning the insurance liabilities. The Committee considers the most signiﬁcant areas of judgement in preparing the 2010 accounts were: – the provision for Bermuda guarantees (see Note E8 to the Accounts). The Committee has reviewed, and is comfortable with, the process for determining the provision. Recommendations arising from an independent review by a leading ﬁrm of actuaries of the stochastic methodology underlying the process, which was carried out in 2009, were implemented during 2010 without material effect. The eventual liability under the guarantees will depend on future events, most signiﬁcantly market developments, policyholder behaviour and the level of hedging undertaken. Note E8 to the Accounts highlights the wide range of possible outcomes; – the carrying value of US Asset Management goodwill (see Note F1 to the Accounts). The Committee has reviewed the assumptions underlying the impairment testing and is comfortable with them. It noted that the cushion before an impairment provision will be necessary has reduced this year; – loan impairment provisions in Nedbank (see Note E2 to the Accounts). A number of reﬁnements to the detailed incurred loss methodologies were made this year by the Nedbank Board, resulting in strengthening of the provisions. The Committee noted that an independent review performed on behalf of Nedbank management supported management’s expectations of loan losses in the portfolio; – the treatment of US Life as held for sale (see Note H2 to the Accounts). The Committee continued to monitor the bond portfolio of this business, but this became of less signiﬁcance as its value moved to an unrealised proﬁt during the year; (cid:81) Reports received from the internal audit function, including the results of key audits and other signiﬁcant ﬁndings relating to the Group’s control environment, and the adequacy of management’s responses and the timeliness of resolution. The Committee was satisﬁed that management was taking sufﬁcient action to address the issues identiﬁed by internal audit within an appropriate timescale; (cid:81) The operation of the Group’s external audit, including: audit plans for the year, key audit risks identiﬁed by external audit, changes in key external audit staff, arrangements for day-to-day management of the audit relationship, the auditors’ arrangements to identify, report and manage any conﬂicts of interest, the nature and 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. As in prior years, the Committee received an evaluation of the auditors’ effectiveness after the audit for 2009 had been completed, with input from the business units as well as from stakeholders at Old Mutual plc itself; (cid:81) The Group’s preparations for Solvency II, including through the iCRaFT project; (cid:81) The potential impact on the Group of possible changes to IFRS accounting for insurance business and the Company’s proposed response to the consultations about these; (cid:81) Any signiﬁcant ﬁndings or control issues of which the Committee became aware, including progress with the Financial Controls Initiative; Annual Report and Accounts 2010 Old Mutual plc 139 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED (cid:81) Tax, litigation and contingent liabilities affecting the Group. We received and considered speciﬁc reports or presentations on: (cid:81) The activities of subsidiary audit committees on a regular basis. A number of audit or audit and risk committees operated during 2010 at subsidiary level, including at Old Mutual Life Assurance Company (South Africa) Limited, Old Mutual (US) Holdings, Inc., Old Mutual US Life Holdings Inc., Old Mutual Wealth Management, Skandia Nordic, Retail Europe, Nedbank Group Limited and Mutual & Federal Insurance Company Limited, with terms of reference broadly equivalent to those of the Committee. After Mutual & Federal Insurance Company Limited became wholly-owned by the Group, its Audit Committee’s reporting line changed to Old Mutual Life Assurance Company (South Africa) Limited; and (cid:81) A summary of any signiﬁcant 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 Governance and Control Planning meeting was held in December 2010 for the Group’s major businesses in the southern hemisphere to coordinate their audit and risk committees’ activities for 2011. A similar meeting for the Group’s northern hemisphere businesses will take place in March 2011. The December 2010 meeting was hosted jointly by the Chairmen of the Group Audit Committee and the Board Risk Committee. The Chairmen of the respective committees in Old Mutual Life Assurance (South Africa) Limited, Nedbank Group Limited and Mutual & Federal Insurance Company Limited participated, together with the Group Risk and Actuarial Director, the Group Internal Audit Director and representatives from the risk and internal audit functions of those three businesses, along with representatives from the external auditors. In addition, I sit on the Board Risk Committee, while the Chairman of that Committee also sits on the Group Audit Committee, so that the activities of the two committees can be closely coordinated. I also liaise as appropriate with the Chairman of the Remuneration Committee so as to ensure that I am able to draw to his attention any aspects of the Group’s results that the Group Audit Committee feels ought to be taken into account in setting levels of remuneration for the executive directors and other senior executives. The Committee also reviewed the Group’s 140 Old Mutual plc Annual Report and Accounts 2010 whistleblowing arrangements. These 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 made to educate staff around the Group about the existence of the whistleblowing facility and to help them detect the signs of possible fraudulent or improper activity. The section later in this Report headed ‘Auditors’ contains information on our policy on auditor independence and non-audit fees and the Committee’s recommendation that KPMG Audit Plc should be reappointed as the Company’s auditors for 2011. As a Committee, we hold private meetings with the external auditors once a year (or more often, if requested by the auditors) to review key issues. As Chairman of the Committee, I also have regular interaction with the external auditors and the Group Internal Audit Director, as well as with the Chairmen of subsidiary audit committees and the Group Finance Director, and I have a continuing programme of visits to the Group’s major subsidiaries arranged, so that I can remain abreast of issues as they arise during the year. The Committee can conﬁrm that it has received sufﬁcient, reliable and timely information from management during the year to enable it to fulﬁl its responsibilities.” Board Risk Committee Members and years of appointment to the committee: Mike Arnold (Chairman) (2010), Nigel Andrews (2010), Philip Broadley (2010), Reuel Khoza (2010), Roger Marshall (2010), Lars Otterbeck (2010). Other member during part of the year: Richard Pym (2010). Additional member appointed since the year end: Eva Castillo (2011). Secretary and year of appointment: Martin Murray (2010). The terms of reference of the committee, which specify its responsibilities, are available on the Company’s website. Mike Arnold has submitted the following report on behalf of the committee: “In April 2010, the Company implemented one of the main recommendations of the Walker Review by establishing a separate Board Risk Committee, splitting the terms of reference for the former Group Audit and Risk Committee between M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n the Group Audit Committee and the Board Risk Committee. In addition, during our ﬁve meetings in 2010 we focused on: Apart from myself as Chairman, four other non-executive director colleagues (including the Chairman of the Group Audit Committee), together with the Group Finance Director, served on the Board Risk Committee (the Committee) during 2010. The Group Risk and Actuarial Director attended each meeting, and the Group Compliance Ofﬁcer and Group Internal Audit Director attended as appropriate. The external auditors were invited to attend the December meeting. The Committee’s initial meeting focused on its terms of reference and its relationships with other Board committees and risk, or audit and risk, committees at subsidiary companies. Nedbank had already implemented a separate risk committee structure in accordance with the requirements of the Banks Act in South Africa. Several of the Group’s other major subsidiaries – Old Mutual Life Assurance Company (South Africa), Mutual & Federal Insurance Company, Old Mutual Wealth Management and Skandia Nordic – were asked to adopt a similar risk governance structure by separating their existing audit and risk committees into audit committees and risk committees. By the end of the year, all these companies had established a separate risk committee, with the exception of Mutual & Federal, where the risk committee met with a separate agenda for the ﬁrst time in February 2011. I am satisﬁed that, for the time being, Old Mutual Asset Managers (US), Old Mutual Financial Life Insurance (US Life), Old Mutual Bermuda and the Skandia Retail Europe operations should retain combined audit and risk committees. The Board Risk Committee received a report at each of its meetings during 2010 from the Group Risk and Actuarial Director in which any changes to the Group’s risk proﬁle were identiﬁed and discussed. We also reviewed the risk appetite metrics operated by the Group and recommended to the Board a revised set of criteria that were used by the business units for their business planning over the three-year period 2011-2013. (cid:81) The Group’s preparations for Solvency II, in particular through the integrated Capital, Risk and Financial Transformation (iCRaFT) programme. Under this programme, the Company is implementing: – A revised Group-wide internal capital model compliant with Solvency II requirements; – A Group-wide risk reporting system which facilitates easier aggregation and escalation of risks from business unit management to the Group Risk department; – Risk-adjusted performance metrics linked to incentive arrangements; – An own risk and solvency assessment; and – Suitable education and training activities to ensure that these disciplines are well embedded and used across the organisation; (cid:81) The management of risks in Old Mutual Bermuda, in particular through the hedging programme which it has established to manage the interplay between the Guaranteed Minimum Accumulation Beneﬁt liability under certain contracts with the asset allocations selected under those contracts, and the resulting market and liquidity risks that arise from various hedging strategies; (cid:81) The Company’s response to the FSA in relation to the risk mitigation programme it requested after its ARROW II visit in 2009; (cid:81) Regulatory risks arising as a result of business activities, in particular the Group’s regulatory environment and compliance status; (cid:81) Stress and scenario testing, in particular the consideration of particular economic and business scenarios and their potential impact on the Group’s ﬁnances; (cid:81) Any risks arising from material corporate transactions being considered by the Group. At the end of the year the Committee produced a report for the Remuneration Committee commenting on the compliance of the results of management actions in 2010 with the risk appetite metrics agreed by the Board. As Roger Marshall has indicated in his report on the activities of the Group Audit Committee, I also sit on the Group Audit Committee and am therefore able to raise matters at either committee as appropriate. Annual Report and Accounts 2010 Old Mutual plc 141 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED During 2011, in addition to its regular meetings, the Board Risk Committee will be holding two full-day workshops to enable discussions on a wide range of issues relating to the risk management of the Group. I shall continue to have regular interaction with the Group Risk and Actuarial Director and the Group Compliance Ofﬁcer and will attend some risk committee meetings of the Group’s major subsidiaries. In this way I will remain close to any major risk issues that may arise during the year.” 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 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. Remuneration Committee Members and years of appointment to the committee: Rudi Bogni (Chairman) (2005), Nigel Andrews (2002), Russell Edey (2007), Alan Gillespie (2010), Bongani Nqwababa (2010), Lars Otterbeck (2010). Other member for part of the year: Richard Pym (2008). Additional member appointed since the year end: Eva Castillo (2011). Secretary and year of appointment: Martin Murray (1999). Details of the role and activities of the Remuneration Committee and how it has applied the main and supporting principles and the Code Provisions in Section D of the UK Corporate Governance 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 the Company’s website. Nomination Committee Members and years of appointment to the committee: Patrick O’Sullivan (Chairman) (2010), Nigel Andrews (2005), Mike Arnold (2010), Rudi Bogni (2003), Russell Edey (2005), Alan Gillespie (2010), Reuel Khoza (2010), Roger Marshall (2010), Bongani Nqwababa (2010), Lars Otterbeck (2010), Julian Roberts (2008). Other member for part of the year: Richard Pym (2008). Additional member appointed since the year end: Eva Castillo (2011). Secretary and year of appointment: Martin 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 in line with the new Group Operating Model. It is chaired by the Chairman of the Board, Patrick O’Sullivan, and a majority of its members (nine out of twelve) are independent non-executive directors. The terms of reference of the Nomination Committee, which specify its responsibilities, are available on the Company’s website. 142 Old Mutual plc Annual Report and Accounts 2010 During 2010, the committee oversaw the process for identifying and recruiting, in conjunction with external recruitment consultants in each case, three new non-executive directors for the Board, ﬁrstly to replace Richard Pym as Chairman of the Group Audit Committee and then by way of advance planning to replace Nigel Andrews and Rudi Bogni, who are due to retire at the 2011 AGM. It also considered and approved proposed changes made to the membership of a number of subsidiary boards, oversaw the implementation of various recommendations about Board effectiveness that had arisen from the previous year’s Board effectiveness review, discussed succession plans for the executive directors of the Company and for various other senior positions around the Group, and supervised the process by which the Company appointed Business Performance Executives at Old Mutual plc level with oversight responsibilities for the Group’s businesses. 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 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 2010. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Board (scheduled and ad hoc) Group Audit & Remuneration Board Risk Group Audit Board Risk Committee Nomination Committee Number of meetings held: Nigel Andrews Mike Arnold Rudi Bogni Philip Broadley Russell Edey Alan Gillespie Reuel Khoza Roger Marshall Bongani Nqwababa Patrick O’Sullivan Lars Otterbeck Julian Roberts Former director Richard Pym 19 19/19 15/19 18/19 19/19 17/19 2/2 14/192 6/6 18/19 19/19 17/19 17/193 12/15 2 2/2 1/2 2/2 – 2/2 – – – 2/2 – – – 2/2 5 – 5/5 5/5 – 5/5 0/11 – 2/2 5/5 – – – 5 5/5 5/5 – 5/5 – – 3/52 2/2 – – 5/5 – 8 8/8 – 8/8 – 8/8 0/11 – – 5/6 – 6/6 – 3/3 3/3 2/2 6 6/6 4/4 6/6 – 6/6 1/1 3/4 2/2 4/4 6/6 4/4 6/6 4/4 1 The dates for these meetings had been set before Alan Gillespie joined the Board and he was unable to rearrange prior commitments to attend them. 2 Reuel Khoza did not participate in four Board meetings (and two associated meetings of the Board Risk Committee) during the year because of potential conﬂicts of interest arising from his position as Chairman of Nedbank Group Limited while the Company was in active negotiations about a possible sale of the Group’s stake in that company. Julian Roberts was prevented by illness from attending two Board meetings during the year. 3 4 A number of Board meetings were held ad hoc at short notice, which prevented some directors from being able to attend them. In such cases, the Chairman consulted those who could not attend about the business to be conducted at the meeting. The Chairman and the Group Finance Director attended all, and the Group Chief Executive attended all but two, of the Group Audit and Risk Committee, Group Audit Committee and Board Risk Committee meetings held during the year at the invitation of the Chairmen of those committees (but members of management were absent for the private session in March between members of the Group Audit and Risk Committee and the auditors). The Group Chief Executive also attended all but two and the Chairman attended all but three 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 2010, fees paid by the Group to KPMG Audit Plc, the Group’s auditors, and its associates totalled £13.6 million for statutory audit services (2009: £11.9 million), £0.5 million for other audit and assurance services relating to Old Mutual Market Consistent Embedded Value reporting (2009: £0.5 million), and £6.0 million for tax and other services (2009: £2.8 million). In addition to the above, Nedbank Group paid a further £4.3 million (2009: £2.9 million) to Deloitte in respect of joint audit arrangements. The following guidelines have been approved by the Group Audit 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: (cid:81) 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; (cid:81) (cid:81) Identify and assess the signiﬁcance of any related threats to the ﬁrm’s objectivity, including any perceived loss of independence; and 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 Annual Report and Accounts 2010 Old Mutual plc 143 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED indirectly solicit the employment of key senior staff and management of each other’s 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 any company in the 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. 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, Alastair Barbour, joined the audit team as a key audit director in 2005 and succeeded to his current role in 2008. During 2011, he will be succeeded in this position by Philip Smart. 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: (cid:81) 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; (cid:81) The safeguarding of assets from inappropriate use or from loss and fraud and ensuring that liabilities are identiﬁed and managed; (cid:81) The quality of internal and external reporting; and (cid:81) Compliance with applicable laws and regulations, and with internal policies on the conduct of business. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. Assessment of the system of internal control An ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group has been in place for the year ended 31 December 2010 and up to the date of approval of this Report. The process accords with the Turnbull guidance set out in ‘Internal Control: Revised Guidance for Directors on the Combined Code’ (the Combined Code being the previous version of the UK Corporate Governance Code) and is regularly reviewed by the Board. In addition, the following process governs the provision of non-audit services by the auditors: (cid:81) 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; (cid:81) 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 the business unit’s Chief Financial Ofﬁcer; (cid:81) 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; (cid:81) All non-audit work costing over £400,000 placed with the external auditors is to be subject to competitive tender and agreed by the Group Finance Director and the Group Chief Executive; (cid:81) All non-audit work costing over £1 million placed with external auditors is to be approved by the Group Audit Committee; (cid:81) Cumulative fees for non-audit services in any ﬁnancial quarter should not exceed £500,000 without approval of the Group Audit Committee or its Chairman; and (cid:81) Cumulative fees for non-audit work for the Group should not exceed total statutory audit and audit-related fees in any year without the approval of the Group Audit Committee. KPMG Audit Plc have expressed their willingness to continue in ofﬁce as auditors to the Company and, following a recommendation by the Group Audit Committee to the Board, a resolution proposing their 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. 144 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n The Group’s actions to review the effectiveness of the system of internal control include: (cid:81) 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; (cid:81) 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; and (cid:81) Regular reviews of the effectiveness of the system of internal control by the Group Audit Committee, which receives reports from Group Internal Audit. The Committee also receives reports from the 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) is responsible for providing independent, objective assurance on the adequacy and effectiveness of Old Mutual’s systems of governance, risk management and internal control to the Board and executive management and, in doing so, helps enhance the controls culture within the Group. The work of GIA is focused on the areas of greatest risk, both current and emerging, to Old Mutual as determined by a comprehensive, risk-based planning process. The Group Audit Committee 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 the Group’s wholly-owned subsidiaries report directly to the Group Internal Audit Director (GIAD). The GIAD reports functionally to the Chairman of the Group Audit Committee and administratively to the Group Finance Director. The GIAD attends all meetings of the Group Audit Committee, and has unrestricted access to the Group Chief Executive and to the Chairman of the Board, as well as open invitations to attend any meetings of the business unit Audit Committees, the Board Risk Committee and the Group Executive Risk Committee. Internal audit teams across Old Mutual use a single audit methodology which meets the standards set by the Institute of Internal Auditors. Issues raised by internal audit during the course of its work are discussed with management, who are responsible for implementing agreed actions to address the issues identiﬁed within an appropriate and agreed timeframe. Formal reports are submitted by the GIAD to each meeting of the Group Audit Committee, summarising the results of internal audit activity, management’s progress in addressing issues and other signiﬁcant matters. An assessment of the effectiveness of GIA is carried out periodically by external advisers. Other Directors’ Report matters Relations with shareholders and analysts The Company gives high priority to regular, clear and direct communication with its shareholders, institutional investors and sell-side analysts by means of a proactive Investor Relations (IR) programme. The programme aims to facilitate communication with the global investment community, both equity and debt, and to keep investors updated on the Company’s performance, within the constraints of the Listing, Prospectus and Disclosure and Transparency Rules. The Company has a dedicated IR team which runs its IR programme. Old Mutual continued to increase its communication and engagement with the investment community during 2010. A total of 244 meetings were held during the year with investors and analysts in the UK, South Africa, North America and continental Europe, comprising 193 individual institutions. This compared with a total of 227 meetings held in 2009. The majority of meetings involved the Group Chief Executive, the Group Finance Director or another member of the senior management team, although greater use Annual Report and Accounts 2010 Old Mutual plc 145 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED was made of group meetings in order to improve efﬁciency and provide more institutions with access to management and also to increase the efﬁcient use of management’s own time. The Company continued to target smaller institutional investors and those who manage funds for high net worth retail clients and charities in both Europe and South Africa with a view to diversifying its shareholder base. 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 receipt and adoption of the Report and Accounts. The Chairmen of the Group Audit, Board Risk, Remuneration and Nomination Committees are available at the AGM to answer any questions on the matters covered by those committees. All the directors in ofﬁce at the date of the meeting attended the AGM in 2010. In addition, the Company presented at a number of major investor conferences around the world and held a showcase for institutional investors and analysts on businesses within the Group’s Long-Term Savings division. The Company also hosted the South African Minister of Finance at its London ofﬁce for a meeting with investors and analysts to discuss 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 13 sell-side analysts from Europe 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 Chairman makes contact with major investors and meets them as required. The Senior Independent Director is also available for interaction with shareholders. The Board is updated regularly by the IR team on issues arising from communication with the investment community. In addition to this, an independent survey is commissioned regularly which provides the Board with the views of major investors on the Company’s management and performance. General Meetings The Board uses the AGM to comment on the Group’s trading performance during the ﬁrst quarter of the year. Shareholders also have the opportunity to ask questions of the Board. 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. 146 Old Mutual plc Annual Report and Accounts 2010 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 his annual base salary within ﬁve years of appointment; the equivalent ﬁgure for other executive directors is 100% of their 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 2010 amounted to £6,533,000, corresponding to 48 days’ payments when averaged over 2010. Charitable contributions The Group made a wide range of signiﬁcant donations to charitable causes and social development projects during 2010, 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 £191,000 during the year (2009: £195,000). Environmental matters A description of the Group’s environmental impact and management during 2010 is contained in the Responsible Business section of this document. Employment policy The Group’s employment policies reﬂect our belief that motivated and talented individuals are critical to our ability to achieve our business objectives. We recognise the value that a diverse workforce brings and believe that it should reﬂect the diversity of the markets in which we operate. We promote the fair and consistent treatment of all our employees and encourage equal opportunities and diversity across the Group. While local employment policies and procedures are developed by each business according to its own circumstances, employees are recruited, retained, developed and rewarded solely on the basis of their suitability for the job, without discrimination in terms of race, religion, national origin, colour, gender, age, marital status, sexual orientation or disability (whether in existence at the commencement of employment or developing subsequently), subject always to employment equity considerations in South Africa. Further information on employee matters is set out 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 2010 of 2.9p per share (or its equivalent in other relevant currencies). A scrip dividend alternative will also be available for eligible shareholders in relation to this dividend, details of which can be found on the Company’s website. The Board intends to pursue a progressive dividend policy consistent with the Group’s 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 2010 was £569,522,432.60 divided into 5,695,224,326 Ordinary Shares of 10 pence each (2009: £551,825,295 divided into 5,518,252,950 Ordinary Shares of 10 pence each). During the year ended 31 December 2010, 5,450,520 shares were issued under the Company’s employee share option schemes at an average price of 75.19 pence each, 13,674,225 shares were issued under the scrip dividend alternative for the ﬁnal dividend for the year ended 31 December 2009 at an effective price of £1.1338 (or its equivalent in other currencies) each, 10,533,182 shares were issued under the scrip dividend alternative for the interim dividend for the six months ended 30 June 2010 at an effective price of £1.3822 (or its equivalent in other currencies) each, and 147,313,449 shares were issued in February 2010 at an effective price of R12.6878 each, in connection with the acquisition of the minority shareholdings in Mutual & Federal Insurance Company Limited. At 31 December 2010, 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 542,733,000 shares. No shares were bought back by the Company during 2010. G o v e r n a n c e Out of the 5,695,224,326 shares in issue at 31 December 2010: (cid:81) 239,434,888 shares were held by the Company in treasury; and (cid:81) 200,880,214 shares were held by African life and asset management subsidiaries of the Company. Under UK company law, these shares cannot be voted while they are beneﬁcially owned by subsidiaries of Old Mutual plc. The total number of voting rights in the Company’s issued ordinary share capital at 31 December 2010 (which excludes the 239,434,888 shares held in treasury, but includes the shares held by the African life and asset management subsidiaries) was 5,455,789,438. In the period 1 January to 7 March 2011, 1,048,183 further shares were issued by the Company under its employee share schemes at an average price of 68.37p each. No shares were bought back during that period. As a result, the Company’s issued share capital at 7 March 2011 had increased to £569,627,250.90 divided into 5,696,272,509 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 5,456,837,621. Annual Report and Accounts 2010 Old Mutual plc 147 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED 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. A member who 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: (cid:81) 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; (cid:81) Is in respect of only one class of share; (cid:81) If to joint transferees, is in favour of not more than four such transferees. 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. Save for those shares issued pursuant to employee share schemes, no shares were issued for cash in 2010 on a non pre-emptive basis, and the total number of shares issued for cash on a non pre-emptive basis 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 2011 AGM. 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. 148 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 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 were repurchased by the Company during 2010 or 2011 up to 7 March 2011. Amendments to the Articles 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 company law changes, were adopted 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, 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 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: (cid:81) £1,250 million Revolving Credit Facility (the Facility) dated 2 September 2005 (of which £1,232 million remains available) 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). (cid:81) 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. Annual Report and Accounts 2010 Old Mutual plc 149 GOVERNANCE DIRECTORS’ REPORT ON CORPORATE GOVERNANCE AND OTHER MATTERS CONTINUED Substantial interests in voting rights At 7 March 2011, the following substantial interests in voting rights had been declared to the Company in accordance with the Disclosure and Transparency Rules: The Group continues to meet group and individual entity capital requirements and day-to-day liquidity needs through its available free cash and credit facilities. The Company’s primary existing revolving credit facility of £1,232 million does not mature until September 2012. Additionally, during December 2010, the Company put in place further committed facilities of £275 million to support the Group’s liquidity headroom target. These additional facilities mature in June 2012, but will fall away upon completion of the US Life sale. The Company also had signiﬁcant cash holdings, totalling £438 million, at the year end. A number of factors, including the levels of world equity markets, defaults in corporate bond portfolios, currency ﬂuctuations, demand for the Group’s products and other economic factors, are considered individually and in combination in the Group’s forecasts and projections, taking account of reasonably possible changes in trading performance and economic conditions in the markets in which the Group operates. The results show that the Group should be able to operate within the level of available credit facilities and with an adequate level of capital, both at a Group level and within each of its major regulated entities. To the extent that changes in trading performance and economic conditions prove to be more severe than thought reasonably possible, the Group has evaluated and concluded on feasible management actions that would be possible in such circumstances so as to ensure that adequate levels of liquid and capital resources are maintained. After making enquiries, the Board of Directors has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Number of voting rights % of voting rights Cevian Capital BlackRock Public Investment 317,789,951 309,952,983 Corporation of the Republic of South Africa 307,212,664 Alliance Bernstein/AXA 271,993,778 Sanlam Investment Management (Pty) Limited Legal & General Group Plc Old Mutual Life 264,235,775 192,471,495 Assurance Company (South Africa) Limited 186,205,999 5.82 5.68 5.62 4.98 4.84 3.53 3.41 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 Business Review also explains the basis on which the Group generates and preserves value over the longer term and the strategy for delivering the objectives of the Group. 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, Note E11 to the Accounts 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. 150 Old Mutual plc Annual Report and Accounts 2010 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, the Responsible Business Report and this Directors’ Report on Corporate Governance and Other Matters collectively comprise the ‘directors’ report’ for the purposes of section 463(1)(a) of the Companies Act 2006. The Remuneration Report set out in this Annual Report 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 8 March 2011 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 151 GOVERNANCE REMUNERATION REPORT In this section, we describe the Company’s remuneration practices during 2010 and its policies for 2011 and future years. The following introduction is by Rudi Bogni, Chairman of the Remuneration Committee (the Committee). shareholders. The Committee continues to welcome such feedback from institutional investors. This is my last year as a member and Chairman of the Committee as, after nine years on the Board and six years as Chairman of the Committee, I will be retiring at the Company’s Annual General Meeting in May. I wish my successor, Russell Edey, well in taking over responsibility for chairing the Committee. Rudi Bogni Chairman of the Remuneration Committee 8 March 2011 I am pleased to present the annual Remuneration Report, and would like to comment brieﬂy on what is covered. 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. Since 2009, our strategic direction has been focused on a turnaround of the Group and in 2010 we communicated a number of transformational changes which management intend to execute by the end of 2012. To create a direct alignment between the executive directors and our strategy, we introduced a new long-term strategic incentive plan (OMSIP) for 2010 and 2011, which was approved by shareholders at the AGM in May 2010. This was done after consultation with a number of major shareholders, whose views were taken into account to ensure that the plan, in conjunction with other aspects of remuneration, was clearly aligned with the strategy and delivery of long-term value to 152 Old Mutual plc Annual Report and Accounts 2010 Rudi Bogni Chairman of the Remuneration Committee 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 2009 and 2010’ on page 159 and ‘Directors’ interests under employee share plans’ on page 166 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 171. 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: (cid:81) Determining the remuneration, incentive arrangements, beneﬁts and any compensation payments of the executive directors; (cid:81) Determining the remuneration of the Chairman of the Board; (cid:81) 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) and 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 in accordance with the policy; and (cid:81) Reviewing, monitoring and approving, or recommending for approval, the Company’s share incentive arrangements and awards. Membership and meetings of the Committee during 2010 The Committee Chairman has access to and regular contact with Group HR independently of the executive directors. During 2010, the Committee met eight times. The Board accepted the recommendations made by the Committee during the year without amendment. The Group Company Secretary, Martin Murray, acted as Secretary to the Committee. The following, all of whom are or were at the relevant time independent non-executive directors of the Company, served as members of the Committee during the year: M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Name of non-executive director Rudi Bogni Nigel Andrews Russell Edey Alan Gillespie Bongani Nqwababa Lars Otterbeck Richard Pym Position Chairman Member Member Member Member Member Member Period on the Committee May 2005 to date November 2002 to date June 2007 to date November 2010 to date April 2010 to date April 2010 to date May 2008 to August 2010 Attendance at meetings G o v e r n a n c e 8/8 8/8 8/8 0/1* 5/6 6/6 2/2 * The date for this meeting had been set before Alan Gillespie joined the Board and he was unable to rearrange prior commitments to attend it. Other attendees at Committee meetings to which they were respectively invited during 2010 were as follows: Name Philip Broadley* Tom Gosling Alan Judes Patrick O’Sullivan* Julian Roberts* Don Schneider* Kevin Stacey Position Group Finance Director PricewaterhouseCoopers Independent Adviser Chairman of the Board Group Chief Executive Group HR Director Head of Remuneration * Other than when their own remuneration was being discussed. Attendance at meetings 1/1 2/2 7/7 5/7 6/7 7/7 7/7 i F n a n c a s l i The Committee renewed the appointment of Alan Judes as its independent adviser for 2010, through his consultancy Strategic Remuneration, and has also done so for 2011. 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 by Alan Judes for the Committee included attending meetings of the Committee and advising the Committee in connection with benchmarking of the total reward packages for the executive directors and other senior members of staff, the design of short-term incentive and long-term incentive arrangements, advising on issues arising from changes to UK pensions legislation, updating the Committee on trends in compensation and governance matters and accompanying the Chairman of the Committee to meetings with shareholder representatives to discuss proposed remuneration structures. No work was performed by Alan Judes for the Company, as distinct from the Committee, during 2010. His consultancy company’s fees for 2010 totalled £84,000, excluding VAT (2009 £72,000, excluding VAT). S h a r e h o d e r l i n f o r m a t i o n Don Schneider and Kevin Stacey of Group HR assisted the Committee during the year. Group HR provided supporting materials for matters that came before the Committee, including comparative data and justiﬁcations for proposed salary, beneﬁt, annual incentive plan and share awards and criteria for performance targets and appraisals against those targets. It used the services of external advisers (including PricewaterhouseCoopers) as necessary. Annual Report and Accounts 2010 Old Mutual plc 153 GOVERNANCE REMUNERATION REPORT CONTINUED The Management Remuneration Committee (MRC) The MRC oversees governance of executive remuneration 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 reviews and approves, as appropriate, remuneration arrangements and pay review decisions recommended by subsidiary remuneration committees. It is chaired by the Group Chief Executive and includes the Group Finance Director and two other members of the Group Executive Committee. 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 policies to ensure that the policies agreed by the Committee are properly implemented at the Group’s main subsidiaries: (cid:81) Remuneration must be viewed in conjunction with wider people-management practices to support a consistent approach to achieving desired culture and behaviour; (cid:81) Remuneration must support the business drivers, corporate vision, strategy and strategic priorities; (cid:81) Incentives should align the interests of employees with shareholders; Incentives should be performance-related and effectively linked to success in delivering the chosen strategy; (cid:81) (cid:81) Pay should be set at levels that are both competitive and sustainably affordable; (cid:81) Remuneration should not encourage risk that exceeds the Company’s risk tolerance; (cid:81) All pay must be compliant with local legislation; and (cid:81) Underperformance should be dealt with formally according to local policies. Terms of engagement of the executive directors The terms of engagement of the executive directors are considered by the Committee to provide a proper balance of responsibilities and security between the parties. The following is a summary of the main provisions: Provision Contract dates Service contract Julian Roberts – 23 January 2009 (cid:81) (cid:81) Philip Broadley – 10 November 2008 Retirement Age* (cid:81) 65 Date current appointment terminates* Julian Roberts – 7 June 2022 (cid:81) (cid:81) Philip Broadley – 31 January 2026 Notice Period Compensation for loss of ofﬁce (cid:81) (cid:81) 12 months by either the Company or the director Tailored to reﬂect the Company’s contractual obligations and the obligation on the part of the employee to mitigate loss Compensation payable on early termination (cid:81) No contractual provision Remuneration (cid:81) Salary (cid:81) Cash beneﬁt allowance (cid:81) Short-term incentive (50% cash and 50% deferred into Company shares) (cid:81) (cid:81) Other beneﬁts – Life cover of £1,000,000 and disability cover capped at £140,000 per Long-term incentive annum * The retirement age provision is in the process of being removed from the service contracts of the executive directors to reﬂect the removal of the default retirement age under UK law with effect from 1 October 2011. Alignment with strategy and shareholders The graph on the next page shows the total shareholder return to 31 December 2010 on £100 invested in shares in Old Mutual plc on 31 December 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 Committee also considers a variety of other sector-speciﬁc comparators. 154 Old Mutual plc Annual Report and Accounts 2010 Old Mutual plc TSR Performance: ﬁve-year performance to 31 December 2010 Old Mutual FTSE100 140 120 100 80 60 40 20 0 31 Dec 2005 31 Dec 2006 31 Dec 2007 31 Dec 2008 31 Dec 2009 31 Dec 2010 Remuneration policy for executive directors The Company embraces the principles of the UK Corporate Governance Code relating to directors’ remuneration and complies with its provisions. These are the guiding principles that the Committee has applied during 2010 and intends to apply during 2011: M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) 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 in order 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; and To design remuneration arrangements that will attract, retain and motivate individuals of the exceptional calibre needed to lead the Group’s development. G o v e r n a n c e The Committee has regard to risk-related metrics in reviewing the executive directors’ short-term performance and it received and considered a report from the Group Risk and Actuarial Director, which had been approved by the Board Risk Committee, in evaluating the short-term performance outcome for 2010. It also has discretion to consider corporate performance on environmental, social and governance (ESG) issues when setting their remuneration. It aims to ensure that the incentive structures for executive directors do not raise ESG risks by inadvertently motivating irresponsible behaviour. It ensures regulatory requirements relating to remuneration matters are met and that remuneration policies are consistent with, and promote, effective risk management. 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 reviews this policy regularly and continues to consider it to be appropriate. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 155 GOVERNANCE REMUNERATION REPORT CONTINUED Executive directors’ remuneration during 2010 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 2010 was as follows: Julian Roberts, Group Chief Executive Element Quantum Basic salary Beneﬁt allowance Pension contribution £830,000 £280,640 £9,860 Short-term incentive £1,220,100 Long-term incentive £1,660,000 Other beneﬁts £1,933 Restricted share release £110,473, based on the market value of the shares at date of release Philip Broadley, Group Finance Director Element Quantum Basic salary Beneﬁt allowance Short-term incentive £550,000 £192,500 £775,500 Long-term incentive £1,100,000 Additional information Paid monthly in cash. Reviewed with effect from 1 January each year, taking into account market benchmarks. Paid monthly in cash – 35% of basic salary less pension contributions. Paid in lieu of a monthly cash payment under the beneﬁt allowance (now ceased). 147% of a maximum of 150% of basic salary, to be paid half in cash and half deferred for three years under the Old Mutual plc Share Reward Plan. The short-term incentive for 2010 was based on achievement of Group ﬁnancial targets, as well as delivery of individually agreed objectives. Annualised expected value of the 2010 award after discounting by 40% for the impact of performance targets, as described in the section of this report titled ‘Performance targets applicable to share incentives’. This includes the value of one third of the one-off award granted under the OMSIP in 2010. Life cover of £1,000,000 and disability cover capped at £140,000 a year. On 30 March 2010, Julian Roberts received a release of 90,812 shares held under the deferred short-term incentive restricted share award originally granted in 2007. He retained all of the shares, paying the associated income tax and employee’s National Insurance costs. Additional information Paid monthly in cash. Reviewed with effect from 1 January each year, taking into account market benchmarks. Paid monthly in cash – 35% of basic salary. 141% of a maximum of 150% of basic salary to be paid half in cash and half deferred for three years under the Old Mutual plc Share Reward Plan. The short-term incentive for 2010 was based on achievement of Group ﬁnancial targets, as well as delivery of individually agreed objectives. Annualised expected value of the 2010 award after discounting by 40% for the impact of performance targets, as described in the section of this report titled ‘Performance targets applicable to share incentives’. This includes the value of one third of the one-off award granted under the OMSIP in 2010. Other beneﬁts £1,933 Life cover of £1,000,000 and disability cover capped at £140,000 a year. The following diagrams show the breakdown of the executive directors’ total remuneration arrangements during 2010 (excluding restricted share award releases): (cid:12) (cid:49)(cid:92)(cid:83)(cid:80)(cid:72)(cid:85)(cid:3)(cid:57)(cid:86)(cid:73)(cid:76)(cid:89)(cid:91)(cid:90) (cid:55)(cid:79)(cid:80)(cid:83)(cid:80)(cid:87)(cid:3)(cid:41)(cid:89)(cid:86)(cid:72)(cid:75)(cid:83)(cid:76)(cid:96) (cid:23) (cid:24)(cid:23) (cid:25)(cid:23) (cid:26)(cid:23) (cid:27)(cid:23) (cid:28)(cid:23) (cid:29)(cid:23) (cid:30)(cid:23) (cid:31)(cid:23) (cid:32)(cid:23) (cid:24)(cid:23)(cid:23) (cid:81) (cid:41)(cid:72)(cid:90)(cid:80)(cid:74)(cid:3)(cid:90)(cid:72)(cid:83)(cid:72)(cid:89)(cid:96) (cid:81) (cid:41)(cid:76)(cid:85)(cid:76)(cid:77)(cid:80)(cid:91)(cid:90) (cid:81) (cid:42)(cid:72)(cid:90)(cid:79)(cid:3)(cid:58)(cid:59)(cid:48) (cid:81) (cid:43)(cid:76)(cid:77)(cid:76)(cid:89)(cid:89)(cid:76)(cid:75)(cid:3)(cid:58)(cid:59)(cid:48) (cid:81) (cid:51)(cid:59)(cid:48)(cid:55) 156 Old Mutual plc Annual Report and Accounts 2010 Short-term incentive targets for performance year 2010 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’s short-term incentives for 2010 are set out in the following table: 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 1,245 112.5 34.5 147 1,220 98 75 75 150 825 75 66 141 775 94 Performance targets applicable to share incentives 2008 – Share Options and Bonus-Matching Restricted Share Awards 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) 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 least 15% over the three-year vesting period M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y The IFRS EPS-based targets attached to the share options and the bonus-matching restricted share awards granted in 2008 were not met and the options and restricted share awards therefore lapsed on 8 March 2011. 2009 – Bonus-Matching and Joining Restricted Share Awards One third of each award vests on attainment of the Return on Average Equity (RoAE) and real growth in adjusted operating proﬁt IFRS earnings per share (EPS) targets at each tier as set out below, 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. G o v e r n a n c e The targets are set out in the table below: RoAE RoAE required EPS Stock Market growth* 50% + 0% Tier 1 10% Tier 1 9% 0% Tier 2 11% Tier 3 12% Growth Factor above UK RPI Tier 2 12% 3% Tier 3 15% 6% i F n a n c a s l i * Growth will be calculated by the value of £100 invested as follows: (cid:81) (cid:81) £33.33 in the FTSE100 index – average price over Q4 2008 £66.67 in the JSE ALSI index – average price over Q4 2008 against the value of that investment in £ calculated by reference to the average price (converted into £, in the case of the JSE ALSI component, by reference to the average daily exchange rates for the period) on the respective indices over Q4 2011. The choice of criteria was intended to reﬂect the principal stock markets with which the Group’s results are substantially correlated. 2010 – OMSIP OMSIP replaced the long-term incentive awards for the executive directors and certain other senior members of management in 2010, following its approval by shareholders at the 2010 AGM. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 157 GOVERNANCE REMUNERATION REPORT CONTINUED Accordingly, the 2010 OMSIP award was made in two parts. The ﬁrst part is based on rationalising objectives and the second on key ﬁnancial objectives in relation to the restructuring of the Group. The targets for these awards are set out below: Rationalising Objectives Component Objective Signiﬁcant rationalising initiatives Rationalise the Group by achieving strategic initiatives in accordance with the Group’s strategy statement to streamline the Group, unlock value and reduce debt Measurements 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 rationalisation 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 its 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. 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 Committee also believes that these measures give it the time and discretion to judge performance with the beneﬁt of additional information emerging during the whole of the performance period. Following the sale of the US Life business, which is currently expected to take place shortly after the date of this report, the Committee will carry out a full review and calculation of the impact of that transaction for the purposes of the related OMSIP rationalising objective and details of its conclusions will be disclosed in next year’s Remuneration Report. Financial Objectives This part of the award relates to key ﬁnancial goals of restructuring, split equally between the ﬁnancial performance of the Company’s Long-Term Savings business post-restructuring and absolute Total Shareholder Return (TSR) targets, as set out below: Long-Term Savings business (50%) Weighting Below Threshold Threshold Threshold to Maximum Maximum Vesting % Nil 20% Cumulative growth in IFRS AOP1 40% Below 30% 30% Return on Equity2 Ratio of NCCF/ AUM3 40% Below 15% 15% 20% Below 2% pa 2% pa |–––––––––––––––––––––––––––––Interpolated–––––––––––––––––––––––––––––| 100% 70% 18% 6% pa 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 Absolute TSR (50%) TSR will be measured on an absolute basis, 50% in Rand and 50% in £, and will be averaged at the start (Q4 2009) and end (Q4 2012) 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 outcome: Below threshold Threshold Threshold to Maximum Maximum Vesting percentage 0% 20% Interpolated 100% Absolute TSR growth p.a. 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. 158 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l The Committee obtains external audit sign-off as part of its oversight procedures. The Company undertakes the performance measurement for each speciﬁc award and obtains agreement to the calculations from KPMG Audit Plc. 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 was closed to new members in June 2010. The total membership of the OMSPF, including active, deferred and pensioner members (both sections) across the Group, reported in the most recent Annual Report and Accounts of the scheme at 31 December 2009 was 1,389. Julian Roberts is a deferred member of the deﬁned contribution section of the OMSPF and, during 2010, the Company contributed a total of £9,860 to the scheme in lieu of an equivalent cash payment under his beneﬁt allowance. The accumulated value of Julian Roberts’ funds in the OMSPF was £294,700 at 31 December 2010 (£247,400 at 31 December 2009). From 1 July 2010, the Company ceased making contributions on behalf of Julian Roberts to any employer-provided pension scheme. Philip Broadley does not participate in any employer-provided pension scheme of the Group. Directors’ emoluments for 2009 and 2010 Remuneration for the year ended 31 December 2010 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. (US Life), Nedbank Group Limited (Nedbank), Skandia Insurance Company Limited, Skandia Liv and SkandiaBanken (Skandia), and Old Mutual Life Assurance Company (South Africa) Limited where relevant, was as follows: Salary and Fees Short-term Incentive1 Beneﬁts and beneﬁt allowance2 Pension Total £000 2010 £000 2009 £000 2010 £000 2009 £000 2010 £000 2009 £000 2010 £000 2009 £000 2010 £000 2009 350 – – – – – – – 350 – 550 830 1134 86 94 73 12 3675 38 72 2276 62 550 830 775 1,220 660 952 193 319 193 303 – 103 – 203 1,518 2,379 1,403 2,105 1114 22 80 69 – 3055 – 65 1766 89 2,297 – – – – – – – – – – – – – – – – – – – – 1,995 1,612 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 113 86 94 73 12 367 38 72 227 111 22 80 69 – 305 – 65 176 – 512 – 496 – 10 – 20 62 5,3917 89 4,425 Chairman Patrick O’Sullivan Executive directors Philip Broadley Julian Roberts Non-executive directors Nigel Andrews Mike Arnold Rudi Bogni Russell Edey Alan Gillespie Reuel Khoza Roger Marshall Bongani Nqwababa Lars Otterbeck Former non- executive director Richard Pym Total emoluments 2,874 1 The total short-term incentives for the 2009 and 2010 performance years were payable half in cash and half in the form of forfeitable shares awards. 2 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. Includes fees of £42,000 (2010) and £41,000 (2009) from OMUSH and US Life. 3 The Company made pension contributions in lieu of an equivalent cash payment under Julian Roberts’ beneﬁt allowance. 4 5 Includes fees of £304,000 (2010) and £250,000 (2009) from Nedbank. 6 Includes fees of £159,000 (2010) and £121,000 (2009) from Skandia. 7 The prior-year comparative number as published in the Remuneration Report for 2009 was £4,722,000, which included £297,000 paid to the former Chairman, Chris Collins. S h a r e h o d e r l i n f o r m a t i o n The executive directors were required to waive fees for non-executive directorships held in subsidiary companies totalling £30,400 during the year ended 31 December 2010 (2009: £2,000) in favour of the Company or its subsidiaries. These waivers are expected to remain in force in the future. Annual Report and Accounts 2010 Old Mutual plc 159 GOVERNANCE REMUNERATION REPORT CONTINUED Executive directors’ remuneration in 2011 With effect from 1 January 2011, Julian Roberts’ basic salary was increased by 2.4%, from £830,000 to £850,000, and Philip Broadley’s basic salary was increased by 2.7%, from £550,000 to £565,000. This was in line with the expected inﬂationary rise of 3% for senior executives of other companies in the FTSE100 index and compares with similar inﬂationary increases for other employees across the Group, ranging from 3% for staff in the UK, Europe and the US to in excess of 5% in South Africa, in line with the local market. Before making the decision on the increase for executive directors, the Committee reviewed the salary increases for the Group as set out above, and had regard to those increases. The overall make-up of the remuneration packages of the executive directors for 2011 is as follows: Julian Roberts, Group Chief Executive Element Basic salary Beneﬁt allowance Short-term incentive Basic salary Beneﬁt allowance Short-term incentive Quantum Additional information £850,000 p.a. Paid monthly in cash. £297,500 p.a. £1,275,000 (maximum) 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 under the Old Mutual plc Share Reward Plan. The short-term incentive for 2011 will be based on the achievement of Group ﬁnancial targets as well as delivery of individually agreed objectives. Expected value of the maximum OMSIP award, after discounting by 40% for the impact of performance targets, as set out in the section of this report titled ‘Performance targets applicable to share incentives’. Long-term incentive £1,275,000* Philip Broadley, Group Finance Director Element Quantum Additional information £565,000 p.a. Paid monthly in cash. Long-term incentive £847,500* £197,750 p.a. £847,500 (maximum) 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 under the Old Mutual plc Share Reward Plan. The short-term incentive for 2011 will be based on the achievement of Group ﬁnancial targets as well as delivery of individually agreed objectives. Expected value of the maximum OMSIP award, after discounting by 40% for the impact of performance targets, as set out in the section of this report titled ‘Performance targets applicable to share incentives’. * Excludes annualised value of a one-off award granted under the OMSIP in 2010. Short-term incentive targets for performance year 2011 The respective weightings attached to the Group metrics and personal objectives, shown as a percentage of basic salary, for the executive directors’ short-term incentives for 2011 are as follows: Metric IFRS earnings (Adjusted Operating Proﬁt) per share Return on Equity Subtotal Personal objectives Julian Roberts Group % Philip Broadley Group % 56.25 56.25 112.5 37.5 37.5 37.5 75 75 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, group compliance and risk functions. The ﬁnancial elements of his annual incentive therefore have a lower weighting than line management executives as more emphasis is placed on personal objectives. 160 Old Mutual plc Annual Report and Accounts 2010 2011 – OMSIP The awards to be made to the executive directors under the OMSIP in 2011 will have a face value of 250% of basic salary. The awards will be subject to the achievement of key ﬁnancial goals of restructuring, split equally between the ﬁnancial performance of the Company’s Long-Term Savings business post-restructuring and absolute TSR targets. The basis for these targets was determined in 2010 (as set out in the section of this report titled ‘Performance targets applicable to share incentives’), with the ﬁnancial performance of the Company’s Long-Term Savings business being measured over a three-year performance period between 2011 and 2013 and with TSR being measured on an absolute basis, 50% in Rand and 50% in £, averaged at the start (Q4 2010) and end (Q4 2013) of the three-year performance period. 2011 Executive directors’ remuneration split The following chart depicts the overall make-up of the executive directors’ respective remuneration packages for 2011, assuming on-target (rather than maximum) delivery on short-term incentives and an expected value for long-term incentives: (cid:12) (cid:49)(cid:92)(cid:83)(cid:80)(cid:72)(cid:85)(cid:3)(cid:57)(cid:86)(cid:73)(cid:76)(cid:89)(cid:91)(cid:90) (cid:55)(cid:79)(cid:80)(cid:83)(cid:80)(cid:87)(cid:3)(cid:41)(cid:89)(cid:86)(cid:72)(cid:75)(cid:83)(cid:76)(cid:96) (cid:23) (cid:24)(cid:23) (cid:25)(cid:23) (cid:26)(cid:23) (cid:27)(cid:23) (cid:28)(cid:23) (cid:29)(cid:23) (cid:30)(cid:23) (cid:31)(cid:23) (cid:32)(cid:23) (cid:24)(cid:23)(cid:23) (cid:81) (cid:41)(cid:72)(cid:90)(cid:80)(cid:74)(cid:3)(cid:90)(cid:72)(cid:83)(cid:72)(cid:89)(cid:96) (cid:81) (cid:41)(cid:76)(cid:85)(cid:76)(cid:77)(cid:80)(cid:91)(cid:90) (cid:81) (cid:42)(cid:72)(cid:90)(cid:79)(cid:3)(cid:58)(cid:59)(cid:48) (cid:81) (cid:43)(cid:76)(cid:77)(cid:76)(cid:89)(cid:89)(cid:76)(cid:75)(cid:3)(cid:58)(cid:59)(cid:48) (cid:81) (cid:51)(cid:59)(cid:48)(cid:55) 2011 Executive directors’ market benchmarks The following charts depict the comparison of Julian Roberts’ and Philip Broadley’s respective remuneration packages for 2011, based on the total value of guaranteed remuneration and the maximum face value of short-term and long-term incentive awards for the year, against a similar analysis of the FTSE 26-75 companies by market capitalisation: (cid:15)(cid:137)(cid:23)(cid:23)(cid:23)(cid:16) 16000 14000 12000 10000 (cid:83) (cid:3) (cid:74) (cid:87) (cid:52) (cid:54) 8000 6000 4000 2000 0 (cid:15)(cid:137)(cid:23)(cid:23)(cid:23)(cid:16) 6000 5000 4000 3000 2000 1000 0 (cid:83) (cid:3) (cid:74) (cid:87) (cid:52) (cid:54) (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) (cid:52)(cid:72)(cid:91)(cid:74)(cid:79)(cid:80)(cid:85)(cid:78)(cid:3)(cid:40)(cid:94)(cid:72)(cid:89)(cid:75)(cid:90) (cid:51)(cid:59)(cid:48)(cid:3)(cid:40)(cid:94)(cid:72)(cid:89)(cid:75)(cid:90) (cid:40)(cid:85)(cid:85)(cid:92)(cid:72)(cid:83)(cid:3)(cid:73)(cid:86)(cid:85)(cid:92)(cid:90)(cid:3)(cid:75)(cid:76)(cid:77)(cid:76)(cid:89)(cid:89)(cid:76)(cid:75)(cid:3) (cid:90)(cid:79)(cid:72)(cid:89)(cid:76)(cid:90)(cid:22)(cid:74)(cid:86)(cid:20)(cid:80)(cid:85)(cid:93)(cid:76)(cid:90)(cid:91)(cid:84)(cid:76)(cid:85)(cid:91) (cid:40)(cid:85)(cid:85)(cid:92)(cid:72)(cid:83)(cid:3)(cid:74)(cid:72)(cid:90)(cid:79)(cid:3)(cid:73)(cid:86)(cid:85)(cid:92)(cid:90) (cid:41)(cid:72)(cid:90)(cid:80)(cid:74)(cid:3)(cid:90)(cid:72)(cid:83)(cid:72)(cid:89)(cid:96) M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i 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 PricewaterhouseCoopers. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 161 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)1 Share Reward Plan – Share Options and Restricted Shares (SRP)1, 2 2008 Sharesave Plan (SAYE)1 The PSP was originally used to grant long-term incentive (LTI) awards to qualifying senior employees under a bonus-matching arrangement, under which the awards would lapse on a pro-rata basis if an employee disposed of any of the personal shares to which the matching award related. The PSP is currently being used to grant OMSIP awards and other LTI awards, which can take the form of market value share options, nil-cost options, forfeitable shares or conditional shares. The SRP is used to grant deferred short-term incentive (DSTI) awards or joining awards to qualifying senior employees. Awards can take the form of market value share options, nil-cost options, forfeitable shares or conditional shares. DSTI awards are phased annually so that no undue incentive arises in any year of maturity. SAYE provides a savings and investment opportunity for employees of the Group’s participating businesses in the UK, Guernsey, Jersey and the Isle of Man, encouraging share ownership at all levels. Options are granted for three- or ﬁve-year periods at a discount of 20% of the average market price of Old Mutual plc shares over a three-day reference period shortly before the date of grant. Shares under award or option at 31 December 2010 27,941,716 23,558,460 29,886,479 Share Option and Deferred Delivery Plan (SOP)1 The SOP (which is now closed to new awards) was used to make annual grants of share options with performance targets as DSTI or LTI or as joining awards to qualifying senior employees. 13,891,357 Restricted Share Plan (RSP)1, 2 UK Sharesave Plan (Sharesave)1 The OMSA Broad-Based Employee Share Plan2, 3 The OMSA Senior Black Management Share Plan (SBP)2, 3, 4 The RSP (which is now closed to new awards) was used to make annual grants of restricted shares, with or without performance targets, as DSTI or LTI or as joining awards to qualifying senior employees. DSTI and LTI awards were phased annually so that no undue incentive arose in relation to any year of maturity. Sharesave (which is now closed to new awards) was the predecessor to the SAYE described above and operated in the same way. The OMSA Broad-Based Employee Share 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 plc shares for all permanent staff of those businesses that were not in any of the Company’s other share schemes, through a one-off award of shares. Restricted share awards were granted in October 2005 in connection with the South African BEE transactions and in April 2007 in connection with the Namibian BEE transactions. There is currently no intention for further awards to be made under this plan. The purpose of the SBP is to help Old Mutual South Africa and Old Mutual Namibia to attract and retain qualifying senior black managers in light of the increased competition for talented and experienced black management. It provides for the award of restricted shares or share options and awards are made in addition to the normal annual allocations under the OMSA Management Incentive Share Plan described below. Participants may only take delivery of the shares after four years (one third), ﬁve years (one third) and six years (one third). 3,694,808 457,662 1,699,698 18,185,126 The OMSA Management Incentive Share Plan (MISP)2, 3, 4 The purpose of the MISP is to attract, retain and reward qualifying senior employees at Old Mutual South Africa and Old Mutual Namibia. It provides for DSTI or LTI or joining or promotion awards in the form of either restricted shares or share options, on similar terms to the SRP, SOP and RSP. 105,530,014 162 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Shares under award or option at 31 December 2010 289,605 764,681 i R s k a n d R e s p o n s b i i l i t y 4,412,817 842,510 G o v e r n a n c e Name of Plan Description The Mutual & Federal Broad-Based Scheme and the Mutual & Federal Namibia Broad-Based Scheme2, 3 The Mutual & Federal Senior Black Management Scheme and the Mutual & Federal Namibia Senior Black Management Scheme2, 3, 4 The Mutual & Federal Management Incentive Share Scheme and the Mutual & Federal Namibia Management Incentive Share Scheme2, 3, 4 The Mutual & Federal Share Option Plan and the Mutual & Federal Namibia Share Option Plan1 The Mutual & Federal Broad-Based Scheme and the Mutual & Federal Namibia Broad-Based Scheme operate in the context of plans to promote BEE for the beneﬁt of employees of Mutual & Federal and Mutual & Federal Namibia who do not participate in the Mutual & Federal Management Incentive Share Scheme, the Mutual & Federal Senior Black Management Scheme, the Mutual & Federal Namibia Management Incentive Scheme or the Mutual & Federal Namibia Senior Black Management Scheme. Restricted share awards were granted in 2005 in connection with the South African BEE transactions and in 2006 in connection with the Namibian BEE transactions. The Mutual & Federal Senior Black Management Scheme and the Mutual & Federal Namibia Senior Black Management Scheme operate for the beneﬁt of qualifying senior black management of Mutual & Federal and Mutual & Federal Namibia. Allocations are made in addition to the normal annual allocations under the Mutual & Federal Management Incentive Share Scheme and the Mutual & Federal Namibia Management Incentive Share Scheme described below. The trustees allocate restricted shares for retention and attraction purposes that are not subject to corporate performance targets and vest immediately, subject to the condition that the participant remains in employment for a period of time. Participants may only take delivery of the shares after four years (one third), ﬁve years (one third) and six years (one third). The purpose of the Mutual & Federal Management Incentive Share Scheme and the Mutual & Federal Namibia Management Incentive Share Scheme is to attract, reward and retain qualifying senior employees of Mutual & Federal and Mutual & Federal Namibia. Existing allocations are a combination of restricted shares and share options with future allocations limited to restricted shares. The restricted shares are not subject to performance targets and vest immediately, subject to the condition that the employee remains in employment for a period of time. The purpose of the Mutual & Federal Share Option Plan and the Mutual & Federal Namibia Share Option Plan (which are now closed to new awards) was to grant share options as an incentive to qualifying senior employees of Mutual & Federal and Mutual & Federal Namibia. All share options relating to this scheme have vested and the exercise period was extended following the acquisition of the Mutual & Federal minority shareholding by Old Mutual plc. Total shares held under award or option at 31 December 2010 231,154,933 The following conditions apply, as indicated by the respective superscript notes above, to awards under the above employee share plans: 1. Shares held under option or award cannot be transferred, assigned, charged or otherwise disposed of prior to exercise or vesting except on death, and the options and awards would lapse on any attempt to do so. 2. Participants holding restricted share or forfeitable shares awards without performance targets are paid dividends and are entitled to exercise the voting rights in respect of the underlying Old Mutual plc shares. 3. During the restricted period, a participant may not dispose of or transfer any of his restricted shares or any interest in them. 4. 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. i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 163 GOVERNANCE REMUNERATION REPORT CONTINUED Change of control Under the rules of the respective schemes, in the event of a change of control of Old Mutual plc: (cid:81) Restricted shares and options granted under the SRP would vest in full; (cid:81) 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; (cid:81) Options granted under the SOP, the Mutual & Federal Share Option Plan and the Mutual & Federal Namibia Share Option Plan, and awards granted under the RSP would vest in full; (cid:81) Options granted under the MISP, the Mutual & Federal Management Incentive Share Plan and the Mutual & Federal Namibia Management Incentive Share Plan 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; (cid:81) Restricted share awards granted under the MISP, the Mutual & Federal Mangement Incentive Share Plan, the Mutual & Federal Namibia Management Incentive Share Plan, the OMSA Broad-Based Employee Share Plan, the Mutual & Federal Broad-Based Scheme and the Mutual & Federal Namibia Broad-Based Scheme would vest in full; (cid:81) Options and restricted share awards granted under the SBP, the Mutual & Federal Senior Black Managment Scheme and the Mutual & Federal Namibia Senior Black Management Scheme would vest in full; and (cid:81) 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 share incentive schemes, including how discretion is exercised and the grant levels currently applicable, and considers these to be appropriate to the Company’s circumstances and prospects. 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 2010, the following shares in the Company were held in ESOTs: Trust Capital Growth Investment Trust1 Mutual & Federal Broad-Based Trust2 Mutual & Federal Management Incentive Trust2 Mutual & Federal Senior Black Management Trust2 Mutual & Federal Namibia Broad-Based Trust3 Mutual & Federal Namibia Management Incentive Trust3 Mutual & Federal Namibia Senior Black Management Trust3 Old Mutual plc Employee Share Trust4 OMN Broad-Based Employee Share Trust5 OMN Management Incentive Trust5 OMSA Broad-Based Employee Share Trust6 OMSA Management Incentive Trust6 OMSA Share Trust6 Total Country Zimbabwe South Africa South Africa South Africa Namibia Namibia Namibia Guernsey Namibia Namibia South Africa South Africa South Africa Old Mutual plc shares held in trust 1,414,930 248,267 26,045,139 5,019,860 41,391 311,875 173,221 31,469,665 904,223 2,234,800 22,169,975 81,258,520 31,249,063 202,540,929 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 Mutual & Federal Broad-Based Trust, the Mutual & Federal Management Incentive Trust and the Mutual & Federal Senior Black Management Trust were established during 2005 to subscribe for and hold shares in connection with its South African BEE ownership transactions. The strategy has historically been to ensure that sufﬁcient shares were acquired to match future obligations. 3 The Mutual & Federal Namibia Broad-Based Trust, the Mutual & Federal Namibia Management Incentive Trust and the Mutual & Federal Namibia Senior Black Management Trust were established during 2006 to subscribe for and hold shares in connection with its Namibian BEE ownership transactions. The strategy has historically been to ensure that sufﬁcient shares were acquired to match future obligations. 4 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. 5 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 SBP, while the OMN Management Incentive Trust holds shares for Namibian awards under the MISP. Awards to white employees in Namibia under the MISP are settled by the OMSA Share Trust. 6 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 SBP, while the OMSA Management Incentive Trust holds shares for the MISP. Awards to white employees under the MISP and all awards that have been granted to South African and Namibian employees under the RSP and SOP 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. 164 Old Mutual plc Annual Report and Accounts 2010 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, the OMN Management Incentive Trust, the Mutual & Federal Management Incentive Trust, the Mutual & Federal Senior Black Management Trust, the Mutual & Federal Broad-Based Trust, the Mutual & Federal Namibia Management Incentive Trust, the Mutual & Federal Namibia Senior Black Management Trust and the Mutual & Federal Namibia Broad-Based 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 (excluding nil-cost 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 2010, the Company had 2.41% of share capital available under the 5%-in-ﬁve-years limit applicable to discretionary share incentive schemes and 6.56% of share capital available under the 10%-in-10-years limit applicable to all share incentive schemes. The issued share capital ﬁgures used for these calculations have not been reduced to reﬂect shares bought back into treasury by the Company. Listed subsidiary’s share incentive schemes The Company’s separately-listed subsidiary, Nedbank Group Limited, has its own share incentive schemes, which are under the control of the Remuneration Committee of its board and are not further addressed in this report. Neither of the executive directors of the Company has any interest under any such subsidiary share incentive schemes. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 165 GOVERNANCE REMUNERATION REPORT CONTINUED Directors’ interests under employee share plans The following options and rights over shares in the Company were outstanding at 1 January and 31 December 2010 in favour of the executive directors under the employee share schemes described in the ‘Employee share plans’ section above. Those granted during 2010 are highlighted in bold and those vested, released, exercised or lapsed during 2010 are shown in italics: Award type and plan Reason for award Philip Broadley Performance targets to be met Grant Date At 1 Jan 10 Excercised, Released, Lapsed Notes At 31 Dec 10 Exercise price per share (p) Granted 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 Option (SRP) Joining No 10-Nov-08 1,315,789 Total Shares (SRP) Total DSTI DSTI No No 1,315,789 08-Apr-09 44,235 23-Mar-10 – 262,530 44,235 262,530 – – – Option (PSP) Match Yes 08-Apr-09 442,357 Total Shares (PSP) Match Joining Total 442,357 Yes Yes 08-Apr-09 85,805 08-Apr-09 739,372 825,177 – – – – – Nil cost options OMSIP (PSP) Rationalising objectives Yes 13-May-10 – 577,732 13-May-10 – 577,731 – – – – – – – – 1,315,789 57.0 1,315,789 1, 3 44,235 2, 3, 4 262,530 306,765 – – 1, 5 442,357 54.1 442,357 85,805 739,372 825,177 577,732 577,731 5, 6 1, 5 4 ,7, 8 4, 7, 8 Rationalising objectives Yes Financial Objectives Yes Financial Objectives Yes 13-May-10 – 577,732 – 4,7, 9 577,732 13-May-10 – 577,731 – 4,7,9 577,731 – 2,310,926 2,310,926 DSTI No 08-Apr-09 301,594 – – 1, 3 301,594 DSTI No 23-Mar-10 – 378,849 301,594 378,849 Match Yes 08-Apr-09 4,436,229 – – 2, 3 , 4 378,849 680,443 1, 5 4,436,229 54.1 Match Yes 08-Apr-09 860,508 – 5, 6 860,508 4,436,229 4,436,229 Nil cost options OMSIP (PSP) Rationalising objectives Yes 13-May-10 – 871,849 13-May-10 – 871,849 860,508 860,508 4, 7, 8 871,849 4, 7, 8 871,849 – – 13-May-10 – 871,849 – 4, 7,9 871,849 13-May-10 – 871,849 – 4, 7, 9 871,849 – 3,487,396 – 3,487,396 26-Apr-05 304,348 – – 304,348 126.5 30-Mar-07 307,504 – 307,504 10 – 162.6 03-Apr-08 426,137 1,037,989 30-Mar-07 90,812 30-Mar-07 143,766 03-Apr-08 93,104 03-Apr-08 186,661 514,343 09-Apr-09 48,906 – – – – – – – – – 11 426,137 123.2 307,504 90,812 143,766 – – 234,578 3,12 10 3 11 730,485 – – 93,104 186,661 279,765 – – – – – 13 48,906 32.0 48,906 48,906 Total Julian Roberts Shares (SRP) Total Option (PSP) Total Shares (PSP) Total Rationalising objectives Yes Financial Objectives Yes Financial Objectives Yes Total (SOP) LTI LTI LTI Total Shares (RSP) DSTI Match DSTI Match Total Option SAYE Total Yes Yes Yes No Yes No Yes No 166 Old Mutual plc Annual Report and Accounts 2010 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 10-Nov-11 10-Nov-14 – 08-Apr-12 08-Apr-12 – 23-Mar-13 23-Mar-13 – 08-Apr-12 08-Apr-15 – – 08-Apr-12 08-Apr-12 08-Apr-12 08-Apr-12 – 13-May-13 12-May-20 – 13-May-14 12-May-20 – 13-May-13 12-May-20 – 13-May-14 12-May-20 – 08-Apr-12 08-Apr-12 – 23-Mar-13 23-Mar-13 – 08-Apr-12 08-Apr-15 – 08-Apr-12 08-Apr-12 – 13-May-13 12-May-20 – 13-May-14 12-May-20 – 13-May-13 12-May-20 – 13-May-14 12-May-20 – 26-Apr-08 26-Apr-11 – – 03-Apr-11 03-Apr-14 121.65 110,473 30-Mar-10 – – – – – – – 110,473 03-Apr-11 03-Apr-11 03-Apr-11 03-Apr-11 – 01-Jun-14 30-Nov-14 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 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 Awards under the SRP granted on 23 March 2010 were based on the closing middle-market price of the Company’s shares on the London Stock Exchange on 22 March 2010, namely 125.7p. 3 Dividends are paid and the directors can vote the shares during the vesting period. 4 Awards are subject to a claw-back provision under which the Committee may reduce the number of shares under option or award if ﬁnancial results or business performance for which the director is responsible is found to have been materially incorrect or misleading or if undue risk was taken, resulting in ﬁnancial loss to the Company. 5 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. 6 The number of shares awarded under the bonus match on 8 April 2009 was calculated by reference to a price of 55.781p per share, being the price at which the matching shares were acquired by the Old Mutual plc Employee Share Trust. 7 Nil-cost options under the PSP granted on 13 May 2010 were based on the closing middle-market price of the Company’s shares on the London Stock Exchange on 12 May 2010, namely 119p. 8 Subject to the achievement of certain initiatives relating to the restructuring of the Group. 9 Subject to the fulﬁlment of performance targets prescribed by the Committee, under which 50% of the award would be subject to the ﬁnancial performance of the Company’s Long-Term Savings business post restructuring and 50% of the award would be subject to absolute total shareholder return. 10 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. 11 As a result of the IFRS EPS-based performance targets not being met, the options and bonus-matching restricted share awards granted on 3 April 2008 lapsed on 8 March 2011. 12 On 30 March 2010, 90,812 shares were released to Mr Roberts in respect of the 2007 deferred short-term incentive restricted share award. Mr Roberts retained all of these shares. 13 The SAYE option price was determined as 20 percent 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. Company share price performance The market price of the Company’s shares was 123.1p at 31 December 2010 and ranged from a low of 97.3p to a high of 145.2p during 2010. Executive directors’ shareholding requirements The Committee has established guidelines on shareholdings by the executive directors of the Company. Under these, the Group Chief Executive is expected to build up a holding of shares in the Company equal in value to at least 150 percent of his annual basic salary within ﬁve years of appointment and the equivalent ﬁgure for other executive directors is 100 percent of their annual basic salary. For the purposes of the calculations, unvested options and restricted share awards are excluded. The following table shows Old Mutual plc shares held by the executive directors at 31 December 2010 (including holdings by their 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 2010 Personal shares held at 31 December 2010 as a percentage of base salary Date by which holding must be achieved 1,011,373 446,791 1,591,644 55,353 236% September 2013 12% 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 2010, namely 123.1p and the basic salaries of the executive directors at 31 December 2010. 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 2010, as well as restricted share awards that are subject to performance targets. Total value of personal shares £ Total restricted shares held (not subject to performance targets) Total value of restricted shares £ Personal shares held Julian Roberts 1,591,644 1,959,314 Philip Broadley 55,353 68,140 773,547 306,765 952,236 377,628 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) £ – 1,315,789 869,737 Total exposure £ 2,911,550 1,315,504 Total exposure as a percentage of base salary 351% 239% The Board has considered whether to adopt a shareholding requirement for non-executive directors, but does not consider this to be appropriate. Annual Report and Accounts 2010 Old Mutual plc 167 GOVERNANCE REMUNERATION REPORT CONTINUED Terms of engagement – Chairman and non-executive directors 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 at any time given by either the Company or Patrick O’Sullivan, (b) his being duly re-elected at Annual General Meetings, and (c) the provisions of the Company’s Articles of Association relating to the removal of directors, his appointment may continue until his 70th birthday, namely 15 April 2019. The other 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: Nigel Andrews Mike Arnold Rudi Bogni Eva Castillo Russell Edey Alan Gillespie Reuel Khoza Roger Marshall Bongani Nqwababa Lars Otterbeck Date of original appointment Date of current appointment Current term as director 1 Jun 2002 1 Sep 2009 1 Feb 2002 2 Feb 2011 24 Jun 2004 3 Nov 2010 27 Jan 2006 5 Aug 2010 1 Apr 2007 14 Nov 2006 1 Jun 2008 1 Sep 2009 1 Feb 2008 2 Feb 2011 24 Jun 2010 3 Nov 2010 27 Jan 2009 5 Aug 2010 1 Apr 2010 14 Nov 2009 3rd 1st 3rd 1st 3rd 1st 2nd 1st 2nd 2nd Date current appointment terminates 12 May 2011 1 Sep 2012 12 May 2011 2 Feb 2014 24 Jun 2013 3 Nov 2013 27 Jan 2012 5 Aug 2013 1 Apr 2013 14 Nov 2012 168 Old Mutual plc Annual Report and Accounts 2010 Remuneration – Chairman and non-executive directors The Company’s policy on remuneration for non-executive directors is that this should be: Fee-based; (cid:81) (cid:81) Market-related (having regard to fees paid and time commitments of non-executive directors of other members of the FTSE100 Index); and (cid:81) Not linked to share price or Company performance. The annual fees for the Chairman and for other non-executive roles for both 2010 (effective from 1 April 2010) and 2011 are set out below. Neither the Chairman nor the other non-executive directors received a fee increase for 2011. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Chairman Non-executive directors - Base Fee - Senior independent director additional fee Additional fees payable for Committees Board Risk Committee - Chairman - Member Group Audit Committee - Chairman - Member Nomination Committee - Member Remuneration Committee - Chairman - Member £ 350,000 55,000 10,000 25,000 8,000 30,000 10,000 3,000 20,000 6,000 None of the non-executive directors of the Company (including the Chairman) contributed to any Group pension fund during 2010 or had any accrued pension fund beneﬁts in any Group pension fund at 31 December 2010. Shareholder approval of the Remuneration Report An advisory vote on the Remuneration Report will be put to shareholders at the AGM on 12 May 2011. Rudi Bogni Chairman of the Remuneration Committee, On behalf of the Board 8 March 2011 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 169 FINANCIALS STATEMENT OF DIRECTORS’ RESPONSIBILITIES in respect of the Annual Report and the ﬁnancial statements The directors are responsible for preparing the Annual Report and the Group and Parent Company 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: (cid:81) Select suitable accounting policies and then apply them consistently; (cid:81) Make judgements and estimates that are reasonable and prudent; (cid:81) State whether they have been prepared in accordance with IFRSs as adopted by the EU; and (cid:81) 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 comply 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: (cid:81) (cid:81) 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 8 March 2011 Philip Broadley Group Finance Director 170 Old Mutual plc Annual Report and Accounts 2010 FINANCIALS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF OLD MUTUAL PLC For the year ended 31 December 2010 We have audited the ﬁnancial statements of Old Mutual plc for the year ended 31 December 2010 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 which include the Reconciliation of adjusted operating proﬁt to proﬁt after tax. 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. 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 170, 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, and express an opinion on, 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 website at www.frc.org.uk/apb/scope/private.cfm. Opinion on ﬁnancial statements In our opinion: (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) 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 2010 and of the Group’s loss 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: (cid:81) 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: (cid:81) Adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been (cid:81) 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 (cid:81) Certain disclosures of directors’ remuneration speciﬁed by law are not made; or (cid:81) We have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: (cid:81) (cid:81) The directors’ statement, set out on page 170, in relation to going concern; The part of the Corporate Governance Statement on pages 133 to 134 relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code speciﬁed for our review; and (cid:81) Certain elements of the report to shareholders by the Board on directors’ remuneration. Alastair W S Barbour (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 8 March 2011 Annual Report and Accounts 2010 Old Mutual plc 171 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIALS CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2010 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’ and joint ventures’ proﬁt/(loss) after tax Loss on disposal of subsidiaries, associated undertakings and strategic investments Proﬁt before tax Income tax expense Proﬁt/(loss) from continuing operations after tax Discontinued operations Loss from discontinued operations after tax Loss after tax for the ﬁnancial year Attributable to Equity holders of the parent Non-controlling interests Ordinary shares Preferred securities Loss after tax for the ﬁnancial year Earnings per share Basic earnings per share based on proﬁt/(loss) from continuing operations (pence) Basic earnings per share based on loss from discontinued operations (pence) Basic earnings per ordinary share (pence) Diluted earnings per share based on proﬁt/(loss) from continuing operations (pence) Diluted earnings per share based on loss from discontinued operations (pence) Diluted earnings per ordinary share (pence) Weighted average number of shares – millions * The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued (see note A1). 172 Old Mutual plc Annual Report and Accounts 2010 £m Year ended 31 December 2010 Year ended 31 December 2009* Notes B3 D2 D3 D4 D5 D6 D7 D8 D9 C1(b) C1(b) G5(b) C1(c) D1(a) H1 F11(a) F11(a) C3(a) C3(a) C3(a) 3,582 (305) 3,277 10,791 4,082 204 3,061 159 21,574 (5,039) 227 (4,812) (6,899) (552) (269) (2,519) (963) (3,714) (1) (388) (297) 3,020 (267) 2,753 11,112 3,989 168 2,422 196 20,640 (3,786) 200 (3,586) (8,345) (511) (322) (2,627) (728) (3,072) (266) (470) (312) (20,414) (20,239) 7 (22) 1,145 (456) 689 (713) (24) 2 (50) 353 (400) (47) (71) (118) (282) (340) 196 62 (24) 8.2 (14.7) (6.5) 7.4 (13.5) (6.1) 158 64 (118) (6.3) (1.5) (7.8) (6.3) (1.5) (7.8) 4,859 4,758 FINANCIALS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2010 Loss after tax for the ﬁnancial year Other comprehensive income for the ﬁnancial year Fair value gains/(losses) 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 from continuing operations Total other comprehensive income for the ﬁnancial year from discontinued operations Total other comprehensive income for the ﬁnancial year Total comprehensive income for the ﬁnancial year D1(c) Attributable to Equity holders of the parent Non-controlling interests Ordinary shares Preferred securities Total comprehensive income for the ﬁnancial year * The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued (see note A1). £m Year ended 31 December 2010 Year ended 31 December 2009* Notes (24) (118) 26 (87) 32 – (15) 1,039 31 13 1,039 112 1,151 1,127 594 428 105 1,127 (10) (41) 112 13 36 334 21 13 478 750 1,228 1,110 709 334 67 1,110 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 173 FINANCIALS RECONCILIATION OF ADJUSTED OPERATING PROFIT TO PROFIT AFTER TAX For the year ended 31 December 2010 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 Interest receivable from non-core operations – US Life Other shareholders’ expenses Adjusted operating proﬁt Adjusting items Non-core operations Proﬁt before tax (net of policyholder tax) Income tax attributable to policyholder returns Proﬁt before tax Total income tax expense Proﬁt/(loss) from continuing operations after tax Loss from discontinued operations after tax Loss after tax for the ﬁnancial year Adjusted operating proﬁt after tax attributable to ordinary equity holders of the parent Adjusted operating proﬁt Tax on adjusted operating proﬁt Adjusted operating proﬁt after tax Non-controlling interests – ordinary shares Non-controlling interests – preferred securities Adjusted operating proﬁt after tax attributable to ordinary equity holders of the parent Adjusted weighted average number of shares – (millions) Adjusted operating earnings per share – (pence) * The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued (see note A1). £m Year ended 31 December 2010 Year ended 31 December 2009* Notes B2 B2 B2 B2 C1(a) B2 B2 D1(a) H1 Notes D1(d) F11(a) F11(a) C3(a) C3(b) 897 601 103 87 1,688 (128) 31 (55) 16 (71) 1,481 (482) (3) 996 149 1,145 (456) 689 (713) (24) 636 470 70 83 1,259 (104) 91 (40) 12 (85) 1,133 (973) 1 161 192 353 (400) (47) (71) (118) £m Year ended 31 December 2010 Year ended 31 December 2009* 1,481 (347) 1,134 (217) (62) 855 5,359 16.0 1,133 (283) 850 (181) (64) 605 5,229 11.6 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, 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 and US Life, which are non-core, are 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. 174 Old Mutual plc Annual Report and Accounts 2010 FINANCIALS CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2010 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 £m At 31 December 2010 At 31 December 2009 Notes F1 F2 F3 F8 (a) G5 F4 E8 E8 E8 E3 E4 F5 E6 H2 E8 E8 E9 F6 F7 F8 (b) F9 E10 E6 H2 4,965 1,079 1,015 2,040 416 162 1,534 982 122 2 51,778 106,153 156 190 3,932 2,503 4,132 12,391 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 1 193,552 163,806 98,631 397 3,584 4,204 260 730 858 238 5,661 190 53,236 1,870 12,219 93,876 372 2,906 3,309 263 654 905 210 4,305 170 44,135 1,990 – 182,078 11,474 153,095 10,711 F10 8,951 8,464 F11(b) F11(b) 1,763 760 2,523 11,474 1,537 710 2,247 10,711 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 175 FINANCIALS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2010 Cash ﬂows from operating activities – continuing operations Proﬁt before tax Capital (gains)/losses included in investment income (Proﬁt)/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 – continuing operations 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 Capital funding of discontinued operations Disposal of interests in subsidiaries, associated undertakings and strategic investments Net cash outﬂow from investing activities – continuing operations Cash ﬂows from ﬁnancing activities Dividends paid to Ordinary 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 (acquisition)/sale of treasury shares Issue of subordinated and other debt Subordinated and other debt repaid Net cash (outﬂow)/inﬂow from ﬁnancing activities – continuing operations * The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued (see note A1). £m Year ended 31 December 2010 Year ended 31 December 2009* 1,145 353 (8,837) (2) 103 378 552 13 (7) 22 380 (7,398) (155) 17 (11) (3,484) 374 10,326 2,345 817 10,229 (413) 3,563 (2,222) (162) 272 (152) – (78) (75) – (16) (2,433) (102) (196) (79) 5 (25) 492 (104) (9) (9,988) 1 85 628 770 21 (2) 50 (408) (8,843) (129) (5) 31 (6,590) (277) 13,200 5,964 (2,069) 10,125 (367) 1,268 (2,821) (82) 57 (138) 29 (43) (5) (136) 40 (3,099) – (190) (57) 100 38 1,049 (441) 499 176 Old Mutual plc Annual Report and Accounts 2010 Net increase/(decrease) in cash and cash equivalents – continuing operations Net increase/(decrease) in cash and cash equivalents – discontinued operations 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 policyholder funds Cash and cash equivalents included in assets held for sale Total Other supplementary cash ﬂow disclosures Interest income received (including banking interest) Dividend income received Interest paid (including banking interest) £m Year ended 31 December 2010 Year ended 31 December 2009* 1,121 (104) 376 4,761 6,154 328 3,526 278 4,132 1,079 522 421 6,154 5,391 383 2,262 (1,332) (47) 160 5,980 4,761 263 2,412 307 2,982 882 897 – 4,761 5,394 335 2,544 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 of £1,079 million (2009: £882 million), short-term cash business held in policyholder funds of £522 million (2009: £897 million) and cash and cash equivalents subject to consolidation of funds of £689 million (2009: £717 million), 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. G o v e r n a n c e * The year ended 31 December 2009 has been restated to reﬂect US Life as discontinued (see note A1). i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 177 FINANCIALS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2010 Year ended 31 December 2010 Millions Number of shares issued and fully paid Notes Attributable to equity holders of the parent Total non- controlling interests Shareholders’ equity at beginning of the year 5,518 8,464 2,247 £m Total equity 10,711 (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 acquisition of treasury shares Acquisition of non-controlling interest in Mutual & Federal Change in participation in other subsidiaries Shares issued in lieu of cash dividend Exercise of share options Other issues of ordinary share capital by the Company Change in share-based payments reserve Transactions with shareholders Shareholders’ equity at end of the year – – – – – – – – – – – – 147 – 24 6 – – 177 (282) 258 (24) 21 (87) 562 (12) (349) 794 1 (54) 594 (175) (25) 51 – 30 5 3 4 (107) 5 – – – – 274 (4) – 533 (152) – (51) (57) – – – 3 (257) 26 (87) 562 (12) (349) 1,068 (3) (54) 1,127 (327) (25) – (57) 30 5 3 7 (364) 5,695 8,951 2,523 11,474 D1(c) C4 F11 F11 178 Old Mutual plc Annual Report and Accounts 2010 Notes Share capital Share premium Other reserves Translation reserve Retained earnings Perpetual preferred callable securities £m Total 552 771 3,087 469 2,897 688 8,464 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i – (314) 32 (282) Year ended 31 December 2010 Attributable to equity holders of the parent at beginning of the year Proﬁt/(loss) 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 acquisition of treasury shares Acquisition of non-controlling interest in Mutual & Federal Shares issued in lieu of cash dividends Exercise of share options Other issues of ordinary share capital by the Company Change in share-based payments reserve Transactions with shareholders Attributable to equity holders of the – – – – – – – – – – – – 15 2 1 – – 18 – – – – – – – – – – – – – 17 4 3 – 24 C4 F11 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 Acquisition of non-controlling interest in M&F Change in share-based payments reserve At end of the year Notes Merger reserve 2,716 – – – – – F11 – 129 – 2,845 – 21 – 562 (12) (349) – 15 (66) 82 – 562 (12) (343) 2 (66) – – 225 – (87) – – – 794 – – – – – – – – (14) – 171 707 (328) – – 129 – – – 4 133 – – – – – – – – (131) (25) (93) 11 – – – – – – – – – – 12 44 (44) – – – – – – 21 (87) 562 (12) (349) 794 1 (54) 594 (175) (25) 51 30 5 3 4 (238) (44) (107) Share- based payments reserve 191 – – – – 20 – – 4 87 21 – – (6) (1) – – – 101 215 £m Total 3,087 21 562 (12) (349) 15 (66) 129 4 3,391 Other reserves 11 – – – – (6) – – – 5 Available- for-sale reserve Property revaluation reserve i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n parent at end of the year F10 570 795 3,391 1,176 2,331 688 8,951 Retained earnings were reduced by £478 million at 31 December 2010 in respect of own shares held in policyholders’ funds, ESOP trusts, Black Economic Empowerment trusts and other related undertakings. Annual Report and Accounts 2010 Old Mutual plc 179 FINANCIALS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2010 continued 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 7,737 1,840 £m Total equity 9,577 (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 Shareholders’ equity at end of the year – – – – – – – – – – – – – – 2 – 2 (340) 222 (118) (12) (41) 1,087 239 27 124 22 (397) 709 (45) 39 2 – 3 19 18 2 – – – – 178 (1) – 401 (145) – – 150 – 1 6 (10) (41) 1,087 239 27 302 21 (397) 1,110 (190) 39 2 150 3 20 24 5,518 8,464 2,247 10,711 D1(c) C4 180 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Year ended 31 December 2009 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 Notes Share capital Share premium Other reserves Translation reserve Retained earnings Perpetual preferred callable securities £m Total 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 – – – – – – – 13 45 (45) – – – – (45) (12) (41) 1,087 239 27 124 22 (397) 709 (45) 39 2 3 19 18 C4 parent at end of the year 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 Merger reserve Available-for- sale reserve 2,716 (844) – – – – – – – – 1,087 239 9 1 (410) – 82 Property revaluation reserve Share-based payments reserve Other reserves 85 (12) – – 18 (4) – – 87 171 – – – – 1 – 19 191 2 – – – – 9 – – 11 £m Total 2,130 (12) 1,087 239 27 7 (410) 19 3,087 At end of the year 2,716 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. Annual Report and Accounts 2010 Old Mutual plc 181 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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 which are accounted for as investments). 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 2010 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 instruments, ﬁnancial assets and liabilities 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 A6(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. Judgements 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 A3. At 31 December 2010 the Group was in advanced stage negotiations for the disposal of its life assurance operations in the United States, which represent almost the entirety of the US Life operating segment. As a result of this, the assets and liabilities of the US Life disposal group have been classiﬁed as held for sale in the statement of ﬁnancial position for the current year in accordance with IFRS 5. This sale will present the Group’s exit from the life assurance market in the United States and therefore meets the criteria of a discontinued operation. Consequently the comparative information in the income statement, statement of comprehensive income, statement of cash ﬂows and the related notes has been restated where applicable to reﬂect this. For the purposes of adjusted operating proﬁt, US Life has been reclassiﬁed as a non-core operation for the year ended 31 December 2010 with the comparative information restated accordingly. The disposal is expected to be completed in the ﬁrst half of 2011 and further details of the impact are provided in notes H1 and H2. 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 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. 182 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (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 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: Critical accounting estimates and judgements In the preparation of the ﬁnancial statements the Group is required to make estimates and judgements that affect items reported in the consolidated income statement, statement of ﬁnancial position, other primary statements and related supporting notes. Critical accounting estimates and judgements are those which involve the most complex or subjective judgements or assessments, with estimates based on knowledge of the current situation and circumstances and assumptions based on that knowledge and predictions of future events and actions. The areas of the Group’s business that typically require such estimates and the relevant accounting policies and notes are as follows: Area Life insurance contract provisions Deferred acquisition costs Fair value for ﬁnancial assets and liabilities Deferred taxes Intangible assets Bermuda guarantees Classiﬁcation of US Life as held for sale Non consolidation of wholly owned mutual life insurance undertaking Accounting policy Note A5 A5 A6 A7 A8 See below A1 A4(a) E8 F4 E1 F8 F1 H1 and H2 G4 Bermuda guarantees Old Mutual Bermuda, which is closed to new business, previously offered variable annuity products with a number of these remaining in place. For variable annuity contracts with guaranteed minimum accumulation beneﬁts (GMABs) there are risks to the Group, with signiﬁcant volatility in ﬁnancial results possible due to changes in key market and economic variables, as well as unexpected policyholder behaviour. The variable annuity guarantee reserve, including allowance for minimum death beneﬁt guarantees (GMDBs) was £433 million at 31 December 2010 (2009: £474 million). Bermuda is continuing its run-off strategy, with attention to the adequacy of the hedging strategy, focusing on market segments that are considered vulnerable, whilst conserving liquidity by removing hedges on stronger market segments. A number of adjustments to the hedging programme were made over the course of 2010 as a result of turbulent market conditions. The hedging programme is dynamically managed and this strategy meant the business ended the year approximately 57% hedged against adverse equity and foreign exchange market movements. The hedging team continues to evaluate the hedging strategy, including the most appropriate level of hedges on a continuing basis, with any proposed changes to the strategy subject to strict oversight. The stop-loss protocol established in September 2009 remains in place, and continues to be monitored daily by Group and local management to ensure that a common understanding of the resultant impact on capital, cash and proﬁt and loss on a timely basis. GMAB and GMDB reserve calculations rely on the mapping of policyholder investment funds to hedgeable indices to determine market-consistent assumptions. Regular fund mapping updates are performed at least quarterly, and better allocate exposures to Asian and other emerging markets (which require higher levels of reserving given their higher inherent volatility) thereby improving the accuracy of the reserves. Overall, this market-consistent valuation methodology is guided by the fund mapping process. Throughout the year, the business continued to maintain a very signiﬁcant statutory capital surplus against its minimum required capital. Liquidity risk is a key area of management focus. Liquidity risk arises in relation to the GMABs, product top-ups will be required in 2012 and 2013. The top-ups relate to an ‘automatic exercise’ feature of the product whereby Bermuda needs to top-up universal guarantee option (UGO) contracts on the ﬁfth anniversary if they have an account value of less than 105% of the original premium. Surrender behaviour is a signiﬁcant determinant of the Group’s potential exposure to liquidity risk. Bermuda’s current estimate of future guarantee claim costs, calculated as the average of 5,000 scenarios as at 31 December 2010, is £681 million which has been provided, with this to be partially met with liquid assets, future fee income and derivative ﬂows and the balance covered through a loan agreement with Group. In the 25% best case scenarios, average claims reduce to £292 million (including losses from the hedging programme). In the 10% worst case scenarios, average claims rise to £1,416 million. Surrender behaviour with respect to variable annuity contracts with GMABs is directly inﬂuenced by the differential between the value of the underlying funds and the nominal level of the guarantee, as well as the ﬁnancial circumstances of the policyholder. The recovery Annual Report and Accounts 2010 Old Mutual plc 183 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued across global equity markets, particularly in the fourth-quarter in 2010, resulted in an increase in the number of contracts where the underlying fund values were greater than the level of guarantees. This resulted in a sharp increase in the levels of contracts with UGO riders surrendering in the fourth quarter of 2010, with overall surrender activity across GMAB contracts for the year at close to double 2009 levels. Ultimately, surrender activity will determine the speed of the run-off and the extent and timing of any associated capital, or cash release for this business. Group and local management actively monitor and manage surrender behaviour and liquidity risk. A4: 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: (cid:81) Deferred tax assets or liabilities are recognised and measured in accordance with IAS 12 ‘Income Taxes’. (cid:81) Assets and liabilities related to employee beneﬁt arrangements are recognised and measured in accordance with IAS 19 ‘Employee Beneﬁts’. 184 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n (cid:81) 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’. (cid:81) 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. Annual Report and Accounts 2010 Old Mutual plc 185 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A5: 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 186 Old Mutual plc Annual Report and Accounts 2010 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. 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l 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. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 187 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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. 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. 188 Old Mutual plc Annual Report and Accounts 2010 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y The net amounts paid to a reinsurer at the inception of a contract may be less than the reinsurance assets recognised by the Group in respect of its rights under such contracts. Any difference between the premium due to the reinsurer and the reinsurance asset recognised is included in the income statement in the period in which the reinsurance premium is due. The amounts recognised as reinsurance assets are measured on a basis that is consistent with the measurement of the provisions held in respect of the related insurance contracts. Reinsurance assets include recoveries due from reinsurance companies in respect of claims paid. G o v e r n a n c e 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. i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 189 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A6: 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: (cid:81) (cid:81) (cid:81) 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 timeframe 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 of 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. 190 Old Mutual plc Annual Report and Accounts 2010 The Group’s criteria for a qualifying hedging instrument to be accounted for as a hedge include: (cid:81) (cid:81) 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. 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. 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. (cid:81) (cid:81) (cid:81) 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 191 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (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 and 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. 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’s 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 such price information is not available for these instruments, the Group uses other valuation techniques, including internal models, 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. 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. Fair values of certain ﬁnancial instruments, such as 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. 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. 192 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n 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 counterparties 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. Annual Report and Accounts 2010 Old Mutual plc 193 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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: (cid:81) Signiﬁcant ﬁnancial difﬁculty of the counterparty. (cid:81) A breach of contract, such as a default or delinquency in interest or principal payments. (cid:81) The Group, for economic or legal reasons relating to the counterparty’s ﬁnancial difﬁculty, grants to the counterparty a concession that the Group would not otherwise consider. It becoming probable that the counterparty will enter bankruptcy or other ﬁnancial reorganisation. (cid:81) (cid:81) 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 counterparties 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. In estimating expected cash ﬂows the Group looks at the contractual cash ﬂows of the assets and adjusts these contractual cash ﬂows for historical loss experience of assets with similar credit risks, with this adjusted to reﬂect any additional conditions that are expected to arise or to account for those which no longer exist. 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. 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. 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. 194 Old Mutual plc Annual Report and Accounts 2010 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. 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. 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 under exceptional circumstances 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 under exceptional circumstances 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. G o v e r n a n c e 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 A9). i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 195 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A7: 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. A8: 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 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 segmental 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. 196 Old Mutual plc Annual Report and Accounts 2010 (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: (cid:81) Distribution channels (cid:81) Customer relationships (cid:81) 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 197 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A9: 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. A10: 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. 198 Old Mutual plc Annual Report and Accounts 2010 (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: M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i (cid:81) Computer equipment (cid:81) Computer software (cid:81) Motor vehicles (cid:81) Fixtures and furniture Leasehold property Freehold property (cid:81) (cid:81) 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. i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e 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. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 199 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A11: 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 12 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. 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. 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. A12: 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. A13: 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: (cid:81) Represents a separate major line of business or geographical area of operations; (cid:81) 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. (cid:81) 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. A14: 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 200 Old Mutual plc Annual Report and Accounts 2010 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. A15: 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e (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. A16: 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. Annual Report and Accounts 2010 Old Mutual plc 201 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued A17: 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: (cid:81) 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. (cid:81) 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. (cid:81) No provision is made for future operating costs or losses. 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, covering both core and non-core operations. The core operating segments are Emerging Markets, Nordic, Retail Europe and Wealth Management (collectively being Long-Term Savings) plus Nedbank, Mutual & Federal (M&F), US Asset Management and Other operations (which includes the Group head ofﬁce functions). The non-core operating segment includes US Life and the Bermuda segments. The above reported segments have been revised during the year to reﬂect the reclassiﬁcation of US Life as non-core and discontinued, with the comparative information having been revised to report on a consistent basis to the amended structure. There are four principal business activities from which the Group generates revenues. These are life assurance (premium income), asset management business (fee and commission income), banking (banking interest receivable) and general insurance (premium income). The revenues generated in each reported segment can be seen in the analysis of proﬁts and losses in note B. The information reﬂected in note B reﬂects the measures of proﬁt and loss, assets and liabilities for each operating segment as regularly provided to management and the Board of Directors. There are no differences between the measurement of the assets and liabilities reﬂected in the primary statements and that reported for the segments. A reconciliation between the segment revenues and expenses and the Group’s revenues and expenses is shown in note B. In line with internal reporting, assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. Given the nature of the operations, there are no major customers within any of the segments. Reclassiﬁcations of comparative segment information have been made to align segment information to the Group’s revised management reporting structure described above. There was no impact on net proﬁt or net assets. 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. 202 Old Mutual plc Annual Report and Accounts 2010 A20: Share capital Ordinary and preference share capital (including perpetual preferred callable securities) is classiﬁed as equity if it is 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 of 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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). G o v e r n a n c e 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: (cid:81) 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 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. (cid:81) 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 on the Group’s balance sheet 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 212 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 2010 annual ﬁnancial statements The following standards, amendments to standards and interpretations, which are relevant to the Group, have been adopted in these ﬁnancial statements: (cid:81) 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. Annual Report and Accounts 2010 Old Mutual plc 203 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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. (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) IFRS 2 ‘Share-based payment’ (amendments effective 1 January 2010). The Group 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 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. 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 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. 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 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 39 ‘Financial Instruments: Recognition and Measurement’ (effective 1 July 2009). The Group 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. A26: Future standards, amendments to standards, and interpretations not early-adopted in the 2010 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. (cid:81) (cid:81) (cid:81) (cid:81) (cid:81) IAS 24 Related Party Disclosures (Amendment). The amended standard is effective for annual periods beginning on or after 1 January 2011. It clariﬁes the deﬁnition of a related party to simplify the identiﬁcation of such relationships and to eliminate inconsistencies in its application. The revised standard introduced a partial exemption of disclosure requirements for government-related entities. The Group does not expect any impact on its ﬁnancial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard. 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 Bermuda 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 July 2010). 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 been endorsed by the EU, is not expected to have any impact on the Group’s annual ﬁnancial statements. IFRIC 14 Prepayments of a minimum funding requirement. The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the ﬁnancial statements of the Group. IFRS 7 Disclosures – Transfers of Financial Assets (Amendments to IFRS 7) was issued in October 2010. The amendments to IFRS 7 ‘Financial Instruments: Disclosures’ require enhancements to the existing disclosures where an asset is transferred but is not derecognised and introduce new disclosures for assets that are derecognised but the entity continues to have a continuing exposure to the asset after the sale. These amendments are effective for annual periods beginning on or after 1 July 2011. Early application of the amendments is permitted. The Group is currently assessing the full impacts of these disclosure requirements on its ﬁnancial statements. The standard has not yet been endorsed by the EU. 204 Old Mutual plc Annual Report and Accounts 2010 B: Segment information B1: Basis of segmentation The Group’s core operations are Emerging Markets, Nordic, Retail Europe and Wealth Management (collectively Long-Term Savings), Nedbank, Mutual & Federal, US Asset Management and Other (including the Group head ofﬁce functions). The Bermuda operating segment is regarded as non-core. This 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, being in line with that reported in the previous ﬁnancial year. This information is presented to the Board in local currency however this note is presented in pounds sterling, the presentation currency of the Group. As detailed above US Life has been reclassiﬁed as discontinued and as a result also non-core with the comparative segment information restated accordingly, with this resulting in a reduction in adjusted operating proﬁt before tax and non-controlling interest of £49 million for the year ended 31 December 2009. 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: M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i 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 Nedbank – banking and asset management Mutual & Federal – general insurance US Asset Management – asset management Other – other operating segments and business activities Non-core operations Bermuda – life assurance US Life – life assurance Adjusted operating proﬁt is one of the key measures reported to the Group’s management and Board of Directors for their consideration in the allocation of resources to and the review of performance of the segments. The Group utilises additional measures to assess the performance of each of the segments, in particular the level of net client cash ﬂows and 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 Market Consistent Embedded Value basis supplementary information presented on pages 332 to 383. 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. i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 205 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B2: Adjusted operating proﬁt statement – segment information year ended 31 December 2010 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 (including interest and similar expenses) Banking interest payable and similar expenses Fee and commission expenses, and other acquisition costs Other operating and administrative expenses Goodwill impairment Change in third–party interest in consolidated funds Amortisation of PVIF and other acquired intangibles Income tax attributable to policyholder returns Inter-segment expenses Total expenses Share of associated undertakings’ and joint ventures’ proﬁt/(loss) after tax Loss 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 from continuing operations Loss from discontinued operations after tax Proﬁt/(loss) after tax attributable to equity holders of the parent Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Total Long-Term Savings 2,353 (72) 2,281 4,072 – – 372 72 54 6,851 (3,943) 83 (3,860) (1,261) – – – (219) (941) – – – (32) (2) (6,315) 3 – 539 (146) (1) 392 (1) 391 – 391 122 (5) 117 1,144 169 5 238 8 20 1,701 (83) 5 (78) (1,066) (4) – (78) (62) (255) – – – (48) (2) (1,593) 2 – 110 (20) – 90 (87) 3 – 3 28 (8) 20 392 – – 198 – 5 615 (25) 5 (20) (382) (1) – – (75) (84) – – – – (2) (564) – – 51 (13) – 38 (25) 13 – 13 351 (79) 272 4,409 – – 912 11 12 5,616 (303) 75 (228) (4,190) – – – (500) (390) – – – (69) (43) 2,854 (164) 2,690 10,017 169 5 1,720 91 91 14,783 (4,354) 168 (4,186) (6,899) (5) – (78) (856) (1,670) – – – (149) (49) (5,420) (13,892) 1 – 197 (44) – 153 (140) 13 – 13 6 – 897 (223) (1) 673 (253) 420 – 420 Of the total revenues, excluding intercompany revenues, £5,143 million was generated in the UK (2009: £5,544 million), £2,937 million in rest of Europe (2009: £3,938 million), £12,575 million in South Africa (2009: £10,084 million), £829 million in United States (2009: £993 million) and £90 million relates to other operating segments (2009: £81 million). 206 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Nedbank M&F USAM Other Consolidation adjustments Adjusted operating proﬁt Adjusting items (Note C1) Non-core operations* IFRS Income statement £m – – – – 3,913 199 946 35 20 5,113 – – – – (548) – (2,422) (3) (1,485) – – – – (54) (4,512) – – 601 (128) (232) 241 10 251 – 251 728 (140) 588 56 – – 28 – 20 692 (436) 58 (378) – – – – (109) (83) – – – – (20) (590) 1 – 103 (24) (5) 74 (11) 63 – 63 – – – 16 – – 465 9 4 494 – – – – – – – (23) (384) – – – – – (407) – – 87 (17) – 70 (20) 50 – 50 – – – 61 – – 1 (1) 29 90 – – – – 1 (128) – – (93) – – – – (77) (297) – – (207) 45 (41) (203) (151) (354) – (354) – – – 435 – – – 3 (207) 231 – – – – – – – (36) (14) – (388) – – 207 (231) – – – – – – – – – – 3,582 (304) 3,278 10,585 4,082 204 3,160 137 (43) 21,403 (4,790) 226 (4,564) (6,899) (552) (128) (2,500) (1,027) (3,729) – (388) – (149) 7 (19,929) 7 – 1,481 (347) (279) 855 (425) 430 – 430 – – – (93) – – (99) – – (192) – – – – – (141) (19) 149 41 (1) – (297) 149 – (119) – (22) (333) (113) 21 (425) 425 – – – – (1) (1) 299 – – – 22 43 363 (249) 1 (248) – – – – (85) (26) – – – – (7) (366) – – (3) 4 – 1 – 1 (713) (712) 3,582 (305) 3,277 10,791 4,082 204 3,061 159 – 21,574 (5,039) 227 (4,812) (6,899) (552) (269) (2,519) (963) (3,714) (1) (388) (297) – – (20,414) 7 (22) 1,145 (456) (258) 431 – 431 (713) (282) * Non-core operations relates to Bermuda with the exception of £(21) million of Inter-segment revenue and expenses and the Loss from discontinued operations after tax, with these reﬂecting the results of US Life which has been classiﬁed as a discontinued operation as detailed in notes A1 and B1. Bermuda proﬁt after tax for 2010 was £22 million. Further detail on the results of discontinued operations is provided in note H1. Annual Report and Accounts 2010 Old Mutual plc 207 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B2: Adjusted operating proﬁt statement – segment information year ended 31 December 2009 (restated) Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Total Long-Term Savings 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 (including interest and similar expenses) Banking interest payable and similar expenses Fee and commission expenses, and other acquisition costs Other operating and administrative expenses Goodwill impairment Change in third-party interest in consolidated funds Amortisation of PVIF and other acquired intangibles Income tax attributable to policyholder returns Inter-segment expenses Total expenses Share of associated undertakings’ and joint ventures’ 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 from continuing operations Loss from discontinued operations after tax Proﬁt/(loss) after tax attributable to equity holders of the parent 1,946 (56) 1,890 2,636 – – 305 65 55 4,951 (2,551) 76 (2,475) (1,040) – – – (184) (768) – – – (37) (5) (4,509) 4 – 446 (130) (2) 314 (200) 114 – 114 109 (5) 104 2,035 157 – 190 6 32 2,524 (72) 2 (70) (1,972) (5) – (70) (53) (215) – – – (39) (38) (2,462) – – 62 9 – 71 (4) 67 – 67 31 (8) 23 564 – – 189 – 10 786 (37) 5 (32) (554) (1) – – (79) (96) – – – – (2) (764) – – 22 (8) – 14 (228) (214) – (214) 315 (81) 234 4,997 – – 746 24 27 6,028 (255) 46 (209) (4,775) – – – (394) (380) – – – (116) (48) 2,401 (150) 2,251 10,232 157 – 1,430 95 124 14,289 (2,915) 129 (2,786) (8,341) (6) – (70) (710) (1,459) – – – (192) (93) (5,922) (13,657) – – 106 (20) – 86 (225) (139) – (139) 4 – 636 (149) (2) 485 (657) (172) – (172) 208 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Nedbank M&F USAM Other Consolidation adjustments Adjusted operating proﬁt Adjusting items (Note C1) Non-core operations* IFRS Income statement £m – – – – 3,832 168 663 70 31 4,764 – – – – (505) – (2,557) (2) (1,167) – – – – (65) (4,296) 2 – 470 (96) (193) 181 15 196 – 196 612 (117) 495 58 – – 22 1 29 605 (412) 72 (340) – – – – (106) (64) – – – – (25) (535) – – 70 (15) (16) 39 – 39 – 39 – – – 13 – – 429 7 6 455 – – – – – – – (18) (354) – – – – – (372) – – 83 (19) – 64 (3) 61 – 61 – – – 91 – – – – 30 121 – – – – – (104) – – (84) – – – – (55) (243) (4) – (126) (4) (34) (164) (241) (405) – (405) – – – 509 – – (6) 1 (251) 253 – – – – – – – (12) (22) – (470) – – 251 (253) – – – – – – – – – – 3,013 (267) 2,746 10,903 3,989 168 2,538 174 (31) 20,487 (3,327) 201 (3,126) (8,341) (511) (104) (2,627) (848) (3,150) – (470) – (192) 13 (19,356) 2 – 1,133 (283) (245) 605 (886) (281) – (281) – – – (275) – – (116) – – (391) – – – – – (218) – 167 97 (266) – (312) 192 – (340) – (50) (781) (128) 23 (886) 886 – – – 7 – 7 484 – – – 22 31 544 (459) (1) (460) (4) – – – (47) (19) – – – – (13) (543) – – 1 11 – 12 – 12 (71) (59) 3,020 (267) 2,753 11,112 3,989 168 2,422 196 – 20,640 (3,786) 200 (3,586) (8,345) (511) (322) (2,627) (728) (3,072) (266) (470) (312) – – (20,239) 2 (50) 353 (400) (222) (269) – (269) (71) (340) * Non-core operations relates to Bermuda with the exception of £(21) million of Inter-segment revenue and expenses and the Loss from discontinued operations after tax, with these reﬂecting the results of US Life which has been classiﬁed as a discontinued operation as detailed in notes A1 and B1. Bermuda proﬁt after tax for 2009 was £33 million. Further detail on the results of discontinued operations is provided in note H1. Annual Report and Accounts 2010 Old Mutual plc 209 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B3: Gross earned premiums Year ended 31 December 2010 Life assurance – insurance contracts Life assurance – investment contracts with discretionary participation features General insurance Gross earned premiums Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Total Long-Term Savings 1,498 855 – 2,353 122 – – 122 28 – – 28 351 – – 351 1,999 855 – 2,854 Life assurance – other investment contracts recognised as deposits 1,829 1,040 656 6,287 9,812 Year ended 31 December 2009 Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Total Long-Term Savings Life assurance – insurance contracts Life assurance – investment contracts with discretionary participation features General insurance Gross earned premiums 1,287 659 – 1,946 109 – – 109 31 – – 31 315 – – 315 1,742 659 – 2,401 Life assurance – other investment contracts recognised as deposits 2,726 1,199 733 4,906 9,564 B4: Impairments of ﬁnancial assets Nordic Total Long-Term Savings Nedbank Bermuda Total £m Year ended 31 December 2010 Year ended 31 December 2009 4 4 547 – 551 5 5 504 13 522 210 Old Mutual plc Annual Report and Accounts 2010 Nedbank – – – – – Nedbank – – – – – M&F – – 728 728 – M&F – – 612 612 – M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i £m Total 1,999 855 728 3,582 9,812 USAM Total core operations Non-core operations – – – – – 1,999 855 728 3,582 9,812 – – – – – USAM Total core operations Non-core operations Total Restated – – – – – 1,742 659 612 3,013 9,564 7 – – 7 8 1,749 659 612 3,020 9,572 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 211 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B5: Funds under management As at 31 December 2010 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 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 Emerging Markets 31,750 10,613 11,732 54,095 2,882 56,977 Emerging Markets 25,454 7,686 8,229 41,369 2,130 43,499 Long-Term Savings Nordic 11,722 1,800 – 13,522 431 13,953 Nordic 9,221 1,428 – 10,649 360 11,009 Retail Europe Wealth Management 4,317 398 – 4,715 245 4,960 40,401 14,525 – 54,926 958 55,884 Long-Term Savings Retail Europe Wealth Management 3,569 391 – 3,960 210 4,170 34,721 11,308 – 46,029 830 46,859 Total Long-Term Savings 88,190 27,336 11,732 127,258 4,516 131,774 Total Long-Term Savings 72,965 20,813 8,229 102,007 3,530 105,537 212 Old Mutual plc Annual Report and Accounts 2010 Nedbank 846 5,713 4,164 10,723 – 10,723 Nedbank 658 3,775 3,800 8,233 – 8,233 M&F – – – – 210 210 M&F – – – – 162 162 USAM 3,846 4,974 157,555 166,375 226 166,601 USAM 6,789 4,095 150,423 161,307 169 161,476 Total core operations Non-core operations 92,882 38,023 173,451 304,356 4,952 309,308 Total core operations 80,412 28,683 162,452 271,547 3,861 275,408 13,489 – – 13,489 – 13,489 Non-core operations 9,602 – – 9,602 – 9,602 £m Total 106,371 38,023 173,451 317,845 4,952 322,797 Total 90,014 28,683 162,452 281,149 3,861 285,010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 213 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B6: Statement of ﬁnancial position – segment information year ended 31 December 2010 At 31 December 2010 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 Total assets Notes F1 F2 F3 F8 (a) G5 F4 E8 E8 E8 E3 E4 F5 E6 H2 Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Total Long-Term Savings 120 101 – 11 8 – 396 1,679 96 26 139 1 118 20 24 24 – – – – 343 63 280 34,519 4,704 995 243 568 4 180 – 12 – 78 4 66 14 52 – 12 1 8 3 – – 5,216 – 5,216 13,392 167 522 198 246 3 75 – 3 – 27 – 316 7 306 3 8 2 – 6 – – 1 1 – 4,466 74 1,463 655 593 20 195 – 16 – 27 1 855 47 711 97 907 83 813 11 – – 185 185 – 40,856 272 3,100 1,197 1,407 38 458 – 427 1,679 228 31 1,376 69 1,187 120 951 110 821 20 – – 5,745 249 5,496 93,233 5,217 2,324 2,798 46 – 5,168 4,209 10,991 1,945 672 7,936 1,704 34 4 – 854 557 1,141 – 947 – – 4 408 10,015 – – 1 – 191 10 198 – 58 20 7 – 3 4,316 – – 9 – 58 – 93 – 56 140 – – 1,779 37,671 994 – 95 – 274 – 336 6 294 4,369 10,998 1,949 2,862 59,938 2,698 34 109 – 1,377 567 1,768 6 1,355 40,845 20,233 5,559 45,315 111,952 214 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Nedbank M&F USAM Other Bermuda US Life Consolidation adjustments 637 453 – 184 – 1,079 546 19 28 96 1 – – 1 31 31 – – – – 46,032 – 46,032 6,886 1,997 3,730 – 52 241 866 – – – 47 190 943 1,350 841 1 202 33 13 – 20 – – 25 – 12 2 19 19 – – – – – – 122 2 1 – 1 553 – 2 4 119 8 43 – 377 – – – 82 – 131 – 23 1,181 1,155 – – 26 – 16 – 148 8 14 – – 14 – – – – – – – – – 218 – – – – – 179 39 – – – – 138 – 171 – 4 14 13 – 1 – – 1 1 – 25 – – – – – – – – – – – – – 109 – 52 – – – 1 3 19 34 – – 62 109 458 – 975 58,929 1,005 1,898 1,754 – – – – – – – – – – 124 124 – – – – – – – – – – – 2,567 17 323 201 – 5 1,919 – 102 – – – 1,038 1 74 – 874 4,678 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 12,384 47 12,431 – – – – – – – 341 – – – – – – – – – – – – – – – 2,587 2,044 2,081 – 12,033 48 2,721 (16,528) 156 32 – – 292 476 689 – (3,480) 905 £m Total 4,965 2,831 1,407 243 484 1,079 1,015 2,040 416 162 1,534 212 1,187 135 982 141 821 20 122 2 51,778 249 51,529 106,153 9,275 11,356 4,574 23,202 2,251 8,591 43,452 3,352 100 156 190 3,932 2,503 4,132 12,391 – 193,552 Annual Report and Accounts 2010 Old Mutual plc 215 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B6: Statement of ﬁnancial position – segment information year ended 31 December 2010 continued Long-Term Savings At 31 December 2010 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 E8 E8 E9 F6 F7 F8 F9 E10 E6 Emerging Markets 35,676 14,122 12,789 137 8,249 379 – – 291 – – 291 158 22 17 5 – 225 123 2,246 – – 135 – 123 38,999 1,846 Nordic 12,248 45 12,094 – – 109 – – 2 2 – – (38) 1 1 – – 98 12 259 – 5,957 10 – 1 18,550 1,683 Retail Europe Wealth Management Total Long-Term Savings 4,460 130 4,308 – – 22 – – – – – – 4 197 194 3 – 124 4 94 – – – – 4 4,887 672 41,468 1,109 40,347 – – 12 – – 1 – – 1 50 498 408 90 – 224 65 544 – – – – 99 42,949 2,366 93,852 15,406 69,538 137 8,249 522 – – 294 2 – 292 174 718 620 98 – 671 204 3,143 – 5,957 145 – 227 105,385 6,567 F10 1,847 1,683 672 2,366 6,568 F11(b) F11(b) (1) (1) – – – – – – – – – – (1) (1) – Total equity 1,846 1,683 672 2,366 6,567 The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £399 million (2009: £340 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. 216 Old Mutual plc Annual Report and Accounts 2010 Nedbank M&F USAM Other Bermuda US Life Consolidation adjustments 846 136 – 710 – – – – 2,456 1,186 112 1,158 (4) 1 1 – – 158 12 1,717 190 47,279 1,172 – 431 54,258 4,671 2,643 2,028 1,714 314 4,671 – – – – – – 397 – – – – – 40 11 – – 11 13 1 114 – – – – 2 578 427 409 18 18 – 427 – – – – – – – – 11 11 – – 3 – – – – – 7 210 – – – – 803 1,034 864 832 32 32 – 864 – – – – – – – – 1,443 537 – 906 47 – – – – 16 13 120 – – 102 – 1,860 3,601 (1,847) 3,933 3,635 – 298 – – – – – – – – – – – – – – 1 7 – – – – – 3,941 737 (2,293) 737 446 – 446 – – – (1,847) 737 – – – – – – – – – – – – – – – – – – – – – – 12,219 157 12,376 55 55 – – – 55 – – – – – – – 3,584 – – – – – – – – – – – 350 – – 451 – (3,480) 905 – – – – – – £m Total 98,631 19,177 69,538 1,145 8,249 522 397 3,584 4,204 1,736 112 2,356 260 730 621 98 11 858 238 5,661 190 53,236 1,870 12,219 – 182,078 11,474 8,951 2,523 1,763 760 11,474 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 217 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B6: Statement of ﬁnancial position – segment information year ended 31 December 2009 Notes F1 F2 F3 F8(a) G5 F4 E8 E8 E8 E3 E4 F5 E6 H2 Emerging Markets 106 91 – 6 9 – 336 1,518 54 20 123 – 107 16 11 11 – – – – 340 58 282 27,603 Nordic 1,035 219 624 1 191 – 7 – 108 2 49 2 47 – 10 7 – 3 – 108 4,209 2 4,207 10,836 3,586 150 1,825 1,453 2,989 8,854 1,223 457 6,123 2,543 3 4 – 630 327 189 – 1,352 – 1 15 547 8,670 – – 4 – 155 9 344 – 59 Long-Term Savings Retail Europe Wealth Management Total Long-Term Savings 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 – 35,120 251 – 104 – – 437 34,327 1 – 86 – 232 – 278 – 277 3,306 1,170 1,560 45 531 – 366 1,520 202 22 1,225 52 1,079 94 799 67 717 15 – 108 4,699 210 4,489 77,252 4,047 3,331 3,095 8,865 1,238 1,441 52,688 2,544 3 110 – 1,075 336 892 – 1,711 32,613 16,935 4,738 39,337 93,623 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 Total assets 218 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Nedbank M&F USAM Other Bermuda US Life Consolidation adjustments 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 47,658 849 1,835 13 13 – – – – 2 – 8 24 – – – – – – – – – – – – – 43 – – – – – – – – 43 8 – 111 154 425 – 1,363 2,151 2 – – 2 – – – – – – 194 194 – – – – – – – – – – – 2,942 – 461 167 – 37 2,059 – 218 – – – 878 – 32 – 564 94 – 89 5 – – 1 – 183 – 1,671 1,671 – – 475 450 – 25 – 35 54 53 1 10,045 302 6,766 2,439 – – 3 16 519 – – – 213 187 4 – 74 4,612 13,036 – – – – – – – 221 – – – – – – – – – – – – – – – 2,091 1,775 1,729 – 9,503 – 1,400 (12,678) 293 69 – – 120 802 717 – (3,909) 42 £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 – 163,806 Annual Report and Accounts 2010 Old Mutual plc 219 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued B: Segment information continued B6: Statement of ﬁnancial position – segment information year ended 31 December 2009 continued Notes E8 Emerging Markets 28,655 11,783 Long-Term Savings Nordic Retail Europe Wealth Management Total Long-Term Savings 9,514 74 9,335 – – 105 – – 26 26 – – 11 5 5 – – 113 20 203 – 5,448 22 – 37 3,689 121 3,560 – – 35,554 901 34,639 – – 8 – – – – – – 8 160 155 5 – 124 2 79 – – – – – 14 – – – – – – 33 456 379 77 – 167 37 550 – – – – 181 77,412 12,879 57,372 115 6,639 407 – – 298 26 – 272 199 644 555 89 – 604 129 2,344 – 5,448 163 – 269 9,838 115 6,639 280 – – 272 – – 272 147 23 16 7 – 200 70 1,512 – – 141 – 51 31,071 1,542 15,399 1,536 4,062 676 36,978 2,359 87,510 6,113 1,540 2 2 – 1,536 – – – 1,542 1,536 676 – – – 676 2,359 – – – 6,111 2 2 – 2,359 6,113 E8 E9 F6 F7 F8(b) F9 E10 E6 F10 F11(b) F11(b) 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 Total equity 220 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Nedbank M&F USAM Other Bermuda US Life Consolidation adjustments 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 – – – – – – – – 1,397 636 – 761 40 – – – – 25 45 120 – – 59 – 1,571 3,257 (1,106) (1,552) 446 – 446 (1,106) 4,178 3,788 – 390 – – – – – – – – – – – – – – 5 (9) – – – – – 4,174 438 438 – – – 438 11,625 10,787 – 788 – 50 – – – – – – – – – – – 126 – 359 – – 9 – 170 12,289 747 747 – – – 747 – – – – – – – 2,906 – – – – – – – – – – – 255 – – 790 – (3,909) 42 – – – – – – £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 – – 153,095 10,711 8,464 2,247 1,537 710 10,711 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 221 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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. Year ended 31 December 2010 Income/(expense) Goodwill impairment and impact of acquisition accounting Loss 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 Year ended 31 December 2009* 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 Total adjusting items after tax and non- controlling interests Notes Emerging Markets Nordic Retail Europe Wealth Management Long-Term Savings Long-Term Savings C1(b) C1(c) C1(d) C1(e) C1(f) C1(g) C1(h) D1(d) F11(a)(iii) (2) – 1 (10) – – – (11) 10 – (1) (89) (41) – (1) – – – – (90) 3 – (87) – 1 – – – – (40) 15 – (25) (74) – (71) – – – – (145) 5 – (206) – (70) (10) – – – (286) 33 – (140) (253) Notes Emerging Markets Nordic Retail Europe Wealth Management Long-Term Savings Long-Term Savings C1(b) C1(c) C1(d) C1(e) C1(f) C1(g) C1(h) D1(d) F11(a)(iii) (1) (51) (38) (109) – – – (199) (1) – (200) (12) – (1) – – – – (13) 9 – (4) (243) (167) – 1 – – – – (242) 14 – (228) (7) (88) – – – – (262) 37 – (225) (423) (58) (126) (109) – – – (716) 59 – (657) * The year ended 31 December 2009 has been restated to reﬂect US Life as non-core and discontinued. 222 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Nedbank M&F USAM Other (6) (1) – – – – (20) (27) 7 30 10 – – (7) – – – – (7) (4) – (11) (2) (21) – – – 6 – (17) 6 (9) (20) – – (6) – 44 – (183) (145) (6) – (151) Nedbank M&F USAM Other (4) – – – – – – (4) – 19 15 – – (10) – – – – (10) 3 7 – (2) 1 – – – (1) – (2) 2 (3) (3) – 7 (30) – 45 – (263) (241) – – (241) £m Total (214) (22) (83) (10) 44 6 (203) (482) 36 21 (425) £m Total (429) (50) (166) (109) 45 (1) (263) (973) 64 23 (886) Annual Report and Accounts 2010 Old Mutual plc 223 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued C: Other key performance information continued C1: Operating proﬁt adjusting items 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: Year ended 31 December 2010 Amortisation of acquired PVIF Amortisation of acquired deferred costs and revenue Amortisation of other acquired intangible assets Change in acquisition date provisions Goodwill impairment Emerging Markets Nordic Retail Europe Wealth Management Nedbank USAM – – (1) – (1) (2) (116) 23 (26) 30 – (89) (21) (7) (13) – – (41) (77) 34 (35) 4 – (74) – – (6) – – (6) – – (2) – – (2) Year ended 31 December 2009* Amortisation of acquired PVIF Amortisation of acquired deferred costs and revenue Amortisation of other acquired intangible assets Change in acquisition date provisions Goodwill impairment Emerging Markets Nordic Retail Europe Wealth Management Nedbank USAM – 1 (2) – – (1) (106) 21 (25) 98 – (12) (37) (5) (14) – (187) (243) (86) 34 (36) – (79) (167) – – (4) – – (4) – – (2) – – (2) * The year ended 31 December 2009 has been restated to reﬂect US Life as non-core and discontinued. (c) (Loss)/proﬁt on disposal of subsidiaries, associated undertakings and strategic investments On 27 August 2010 USAM disposed of a subsidiary at a loss of £21 million. £m Total (214) 50 (83) 34 (1) (214) £m Total Restated (229) 51 (83) 98 (266) (429) 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 held 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. (Loss)/proﬁts on the disposal of subsidiaries, associated undertakings and strategic investments are analysed below: Emerging Markets Wealth Management Total Long-Term Savings Nedbank USAM Other (Loss)/proﬁt on disposal of subsidiaries, associated undertakings and strategic investments £m Year ended 31 December 2010 Year ended 31 December 2009 – – – (1) (21) – (22) (51) (7) (58) – 1 7 (50) 224 Old Mutual plc Annual Report and Accounts 2010 (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 and Wealth Management, 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. Long-term investment rates Emerging Markets Nordic Retail Europe Wealth Management M&F Analysis of short-term ﬂuctuations in investment return Year ended 31 December 2010 Long-term investment return Less: Actual shareholder investment return Short-term ﬂuctuations in investment return Year ended 31 December 2009** Long-term investment return Less: Actual shareholder investment return Short-term ﬂuctuations in investment return Emerging Markets Nordic Retail Europe Wealth Management* Total Long-Term Savings 108 109 (1) Emerging Markets 126 88 38 2 1 1 1 2 (1) 132 61 71 243 173 70 Nordic Retail Europe Wealth Management Total Long-Term Savings 1 – 1 1 2 (1) 109 21 88 237 111 126 M&F 56 49 7 M&F 60 50 10 % Year ended 31 December 2010 Year ended 31 December 2009 9.4 1.8 2.5 2.0 9.4 Other 31 25 6 13.3 1.8 2.8 5.0 13.3 £m Total 330 247 83 £m Other Total Restated 91 61 30 388 222 166 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i * Wealth Management long-term investment return includes £121 million (2009: £96m) in respect of income tax attributable to policyholder returns. ** The year ended 31 December 2009 has been restated to reﬂect US Life as non-core and discontinued. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 225 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued C: Other key performance information continued C1: Operating proﬁt adjusting items continued (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 2010 the investment return adjustment increased adjusted operating proﬁt by £10 million (2009: increase of £109 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 £44 million in the year ended 31 December 2010 (2009: £45 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 loss recognised in 2010 was £9 million (2009: loss £3 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 2010 these instruments were revalued, the impact of which was £3 million (2009: £4 million). (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 £183 million (2009: losses due to narrowing of £263 million) on Other operating segments and £20 million (2009: £nil) in Nedbank being recorded in the Group’s income statement for those instruments that are recorded at fair value. In the directors’ view, such movements are not reﬂective of the underlying performance of the Group and will reverse over time. They have therefore been excluded from adjusted operating proﬁt. C2: Foreign currencies The principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are: Income statement (average rate) Statement of ﬁnancial position (closing rate) 11.3095 1.5459 11.1364 1.1650 13.1746 1.5655 11.9743 1.1227 10.2796 1.5530 10.4227 1.1614 11.9172 1.6148 11.5562 1.1268 31 December 2010 Rand US dollars Swedish kronor Euro 31 December 2009 Rand US dollars Swedish kronor Euro 226 Old Mutual plc Annual Report and Accounts 2010 C3: Earning 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. Proﬁt/(loss) for the ﬁnancial year attributable to equity holders of the parent from continuing operations Loss for the ﬁnancial year attributable to equity holders of the parent from discontinued operations Loss for the ﬁnancial year attributable to equity holders of the parent Dividends declared to holders of perpetual preferred callable securities Loss attributable to ordinary equity holders Year ended 31 December 2010 431 (713) (282) (32) (314) £m Year ended 31 December 2009 (269) (71) (340) (32) (372) Total dividends declared to holders of perpetual preferred callable securities of £44 million in 2010 (2009: £45 million) are stated net of tax credits of £12 million (2009: £13 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) Millions Year ended 31 December 2010 Year ended 31 December 2009 5,422 (7) (56) 5,359 (205) (295) 4,859 (6.5) 5,277 (7) (41) 5,229 (236) (235) 4,758 (7.8) 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) Millions Year ended 31 December 2010 Year ended 31 December 2009 4,859 137 295 5,291 (6.1) 4,758 – – 4,758 (7.8) 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 227 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued C: Other key performance information continued C3: Earning and earnings per share continued (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 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 businesses, adjusted operating proﬁt excludes goodwill impairment, the impact of acquisition accounting, revaluations of put options related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, proﬁt/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, income/(expense) from closure of unclaimed shares trusts and fair value gains/(losses) on Group debt instruments. The reconciliation of proﬁt for the ﬁnancial year to adjusted operating proﬁt after tax attributable to ordinary equity holders is as follows: Loss for the ﬁnancial year attributable to equity holders of the parent Adjusting items Tax on adjusting items Non-core operations Loss from discontinued operations – US Life 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) £m Year ended 31 December 2009 Restated Year ended 31 December 2010 (282) 482 (36) (1) 713 (21) 855 5,359 16.0 (340) 973 (64) (12) 71 (23) 605 5,229 11.6 (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 2010 £m Year ended 31 December 2009 Restated Gross (282) (32) (314) 20 827 22 (12) 543 4,859 5,291 11.2 10.1 Net (282) (32) (314) 20 827 17 (12) 538 4,859 5,291 11.1 10.0 Gross (340) (32) (372) 266 – 50 239 183 4,758 5,109 3.8 3.6 Net (340) (32) (372) 266 – 53 239 186 4,758 5,109 3.9 3.6 Loss for the ﬁnancial year attributable to equity holders of the parent Dividends declared to holders of perpetual preferred callable securities Loss attributable to ordinary equity holders Adjustments: Impairments of goodwill and intangible assets Impairment of discontinued operations 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) 228 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n C4: Dividends Dividends paid were as follows: 2009 Final dividend paid – 1.5p per 10p share 2010 Interim dividend paid – 1.1p per 10p share Dividends to ordinary equity holders Dividends declared to holders of perpetual preferred callable securities Dividend payments for the year £m Year ended 31 December 2010 Year ended 31 December 2009 Note 77 54 131 44 175 – – – 45 45 F10(b) 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 2010, £22 million and £22 million respectively were declared and paid to holders of perpetual preferred callable securities (March 2009: £22 million and November 2009: £23 million). A ﬁnal dividend of 2.9 pence per 10p share has been recommended by the directors. Subject to shareholders’ approval, the dividend will be paid on 31 May 2011 to shareholders on the register at the close of business on 15 April 2011. The dividend will absorb an estimated £142 million of shareholders’ funds before taking into account any election for the scrip dividend alternative. The Company is planning to offer a scrip dividend alternative for eligible shareholders. 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 £m Year ended 31 December 2009 restated Year ended 31 December 2010 23 46 346 (4) 61 4 (1) 429 (10) (4) 41 27 456 257 (7) 49 13 14 372 105 – (77) 28 400 Annual Report and Accounts 2010 Old Mutual plc 229 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued D: Other income statement notes continued D1: Income tax expense/(credit) continued (b) Reconciliation of total income tax expense/(credit) Proﬁt before tax Tax at standard rate of 28% (2009: 28%) 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 (c) Income tax relating to components of other comprehensive income Preferred perpetual callable securities Other Income tax credit – continuing operations Fair value gains Shadow accounting Income tax expense – discontinued operations Income tax expense 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 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 2010 1,145 321 (22) (171) 124 92 (7) (3) 134 (12) 456 £m Year ended 31 December 2009 Restated 353 99 (2) (83) 180 69 (2) 19 142 (22) 400 £m Year ended 31 December 2009 Restated Year ended 31 December 2010 (12) (1) (13) 181 (114) 67 54 (13) – (13) 428 (18) 410 397 £m Year ended 31 December 2010 Year ended 31 December 2009 Restated 456 35 5 3 (149) (12) 5 4 347 400 40 (2) 39 (192) (13) – 11 283 230 Old Mutual plc Annual Report and Accounts 2010 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 (losses)/gains 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 £m Year ended 31 December 2009 Restated Year ended 31 December 2010 52 1,249 380 397 271 184 17 100 1,401 362 336 26 8,875 8,615 (87) 347 166 30 (43) 10,791 12 1,095 303 422 80 285 5 57 1,164 373 310 63 9,530 9,070 (449) 909 136 (99) 8 11,112 Year ended 31 December 2010 £m Year ended 31 December 2009 Restated 97 74 (87) 8,962 – 8,875 (449) 9,992 (13) 9,530 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 £nil (2009: £13 million which related to debt securities held by the Group’s Bermuda businesses). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 231 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued D: Other income statement notes 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 Rental income from investment property Exchange and other non-interest income Derivative income Exchange Securities dealing Fair value (losses)/gains Net trading income Foreign exchange Debt securities Equities Other Total banking trading, investment and similar income 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 232 Old Mutual plc Annual Report and Accounts 2010 £m Year ended 31 December 2010 Year ended 31 December 2009 3,730 1,853 650 102 2 128 995 352 259 93 – 4,082 3,586 151 3,635 1,852 581 92 3 120 987 346 261 85 8 3,989 3,518 218 £m Year ended 31 December 2010 Year ended 31 December 2009 22 22 4 (4) 65 2 (68) (3) 182 92 63 24 3 204 (96) 93 (3) 4 4 4 4 21 61 (1) (42) 3 139 88 58 (8) 1 168 35 (32) 3 4 D5: Fee and commission income, and income from service activities Year ended 31 December 2010 Fee and commission income Transaction and performance fees Change in deferred revenue Year ended 31 December 2009 Fee and commission income Transaction and performance fees Change in deferred revenue Long-term business Asset management Banking General insurance 1,129 – (73) 1,056 1,099 22 (9) 1,112 863 – 1 864 29 – – 29 Long-term business Asset management Banking General insurance 947 – (73) 874 855 27 11 893 632 – 1 633 23 – (1) 22 £m Total 3,120 22 (81) 3,061 £m Total 2,457 27 (62) 2,422 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. D6: Finance costs £m Year ended 31 December 2010 Year ended 31 December 2009 Note 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 D7: Banking interest payable and similar expense 79 44 68 (33) 189 166 23 2 (1) 269 202 25 23 166 189 57 18 64 (25) 268 274 (6) (3) – 322 117 21 (6) 274 268 £m M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i Amounts owed to bank depositors Deposits and loan accounts Current and savings accounts Negotiable certiﬁcates of deposit Banking non interest credit spreads 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 Year ended 31 December 2010 Year ended 31 December 2009 2,305 1,237 111 736 19 202 214 2,519 2,141 2,458 1,489 119 733 – 117 169 2,627 2,202 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 233 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued D: Other income statement notes continued D8: Fee and commission expenses, and other acquisition costs Year ended 31 December 2010 Fees and commission expenses Changes in deferred acquisition costs Other acquisition costs Year ended 31 December 2009 Fees and commission expenses Changes in deferred acquisition costs Other acquisition costs D9: Other operating and administrative expenses (a) Other operating and administrative expenses include: Staff costs Depreciation Software costs Operating lease rentals – banking Operating lease rentals – non-banking Amortisation of intangibles – software Impairment of goodwill and other intangible assets Long-term business Asset management General insurance 649 (31) 56 674 177 (4) 7 180 109 – – 109 Long-term business Asset management General insurance £m Total 935 (35) 63 963 £m Total Restated 853 (181) 56 728 106 – – 106 621 (178) 52 495 126 (3) 4 127 Note D9(b) F2 £m Year ended 31 December 2009 Restated Year ended 31 December 2010 1,958 103 11 63 31 61 20 1,685 86 14 55 57 49 266 Included within the loss from discontinued operations is an additional amortisation of intangibles charge of £nil (2009: £20 million) (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 234 Old Mutual plc Annual Report and Accounts 2010 Year ended 31 December 2010 Note £m Year ended 31 December 2009 Restated 1,286 68 1,183 56 G2(h) G2(h) 112 (5) 12 337 7 13 1 1 126 50 2 4 265 7 35 2 1 80 1,958 1,685 (b) Staff costs continued The average number of persons employed by the Group during the year was: Life assurance Banking Asset management General insurance Other Discontinued US Life operations Number Year ended 31 December 2010 Year ended 31 December 2009 21,073 28,134 3,937 2,223 209 55,576 154 55,730 18,897 27,180 4,832 2,331 304 53,544 162 53,706 (c) Fees to Group’s auditors Included in other operating expenses and loss from discontinued operations are fees paid to the Group’s auditors. These can be categorised as follows: £m Year ended 31 December 2010 Year ended 31 December 2009 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 1.5 12.3 0.3 14.1 2.2 0.2 0.1 0.2 3.3 6.0 G o v e r n a n c e 1.4 10.7 0.3 12.4 1.1 0.1 0.1 0.1 1.4 2.8 20.1 15.2 In addition to the above, fees of £4.3 million (2009: £2.9 million) were payable to other auditors in respect of joint audit arrangements of Nedbank, the Group’s banking subsidiary in South Africa. Of the fees for audit services to subsidiaries, £1.1 million (2009: £1.6 million) was in respect of discontinued US Life operations. (d) Operating lease payments Payments under operating leases recognised as an expense in the year Banking Non-banking £m Year ended 31 December 2010 Year ended 31 December 2009 63 33 96 44 28 72 Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment. Annual Report and Accounts 2010 Old Mutual plc 235 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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, bond prices, and 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. Fair value through income statement Held-for- Total trading Designated Available- for-sale ﬁnancial assets Held-to- maturity investments Loans and receivables Financial liabilities amortised cost Non- ﬁnancial assets and liabilities £m At 31 December 2010 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 236 Old Mutual plc Annual Report and Accounts 2010 4,965 1,079 1,015 2,040 416 162 1,534 982 122 2 51,778 106,153 156 190 3,932 2,503 4,132 12,391 193,552 98,631 397 3,584 4,204 260 730 858 238 5,661 190 53,236 1,870 12,219 182,078 – – – – – – – – – – 1,914 1,370 – – 507 2,503 – – 6,294 – – – – – – – 816 – 2 4,223 100,898 – – 1,062 – – – – – – – – – – – – – – 2,459 – – – – – – – – – – – – – – – – – 1,070 – – – – – – – 1,079 – – – – – 38 – – 45,641 356 – – 2,044 – 4,132 – 107,001 2,459 1,070 53,290 – – 72,200 – – – – – – – 1,155 – 3,484 1,870 – 6,509 3,584 1,579 – – – – 576 – 8,703 – – 86,642 – – – – – – – – – – – – – – 26 – 160 – – – – – – – – – – – – – – – – – – – – – – – – 2,625 – – – – 2,960 – 41,049 – – 26 160 46,634 – – – – – – – – – – – – – – – – – – – – – 4,965 – 1,015 2,040 416 162 1,534 128 122 – – – 156 190 319 – – 12,391 23,438 26,245 397 – – 260 730 858 238 970 190 – – 12,219 42,107 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 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 5,159 882 828 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 93,876 372 2,906 3,309 263 654 905 210 4,305 170 44,135 1,990 – 153,095 – – – – – – – – – – 1,163 936 – – 70 2,546 – – 4,715 1,372 – – – – – – – 411 – 2,520 1,990 – 6,293 – – – – – – – 717 – 110 3,157 82,862 – – 909 – – – 87,755 58,582 – 2,906 1,344 – – – – 643 – 6,235 – – 69,710 – – – – – – – – – – – 11,677 – – – – – – 11,677 – – – – – – – – – – – – – – – – – – – – – – – – – 1,210 – – – – – – 1,210 – – – – – – – – – – – – – – – 882 – – – – – 88 – 36 38,073 1,758 – – 1,807 – 2,982 – 45,626 – – – – – – – – – – – – – – – – – – – 5,159 – 828 1,759 570 135 3,138 491 120 – – 18 169 170 265 – – 1 12,823 121 – 1,178 – 32,623 372 – – – – – – – – – – – 121 – 1,965 – – – – 2,545 – 35,380 – – 41,068 – – 263 654 905 210 706 170 – – – 35,903 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i (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. Old Mutual plc 237 Annual Report and Accounts 2010 S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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 re-price 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 2010 to 2012, 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. 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. 238 Old Mutual plc Annual Report and Accounts 2010 Fair value hierarchy Fair values are determined according to the following hierarchy. (cid:81) (cid:81) (cid:81) 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 239 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E1: Group statement of ﬁnancial position continued 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’. Fair value hierarchy Year ended 31 December 2010 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 Designated (fair value through income statement) 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 Total Level 1 Level 2 Level 3 £m 6,294 1,914 1,370 507 2,503 107,001 816 2 4,223 100,898 1,062 2,459 2,459 810 – 302 506 2 87,081 813 2 2 86,244 20 579 579 5,444 1,911 1,031 1 2,501 18,490 3 – 4,221 13,224 1,042 1,872 1,872 40 3 37 – – 1,430 – – – 1,430 – 8 8 Total ﬁnancial assets measured at fair value 115,754 88,470 25,806 1,478 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 6,509 – 1,155 3,484 1,870 86,642 72,200 3,584 1,579 576 8,703 1,132 – 1,123 – 9 47,678 46,099 – 1,579 – – 5,376 – 32 3,484 1,860 38,204 25,341 3,584 – 576 8,703 Total ﬁnancial liabilities measured at fair value 93,151 48,810 43,580 1 – – – 1 760 760 – – – – 761 240 Old Mutual plc Annual Report and Accounts 2010 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 Designated (fair value through income statement) 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 Total Level 1 Level 2 4,715 1,163 936 70 2,546 87,755 717 110 3,157 82,862 909 11,677 11,677 959 31 32 70 826 76,960 717 110 – 76,114 19 1,159 1,159 3,720 1,125 876 – 1,719 9,011 – – 3,157 4,964 890 10,070 10,070 £m Level 3 36 7 28 – 1 1,784 – – – 1,784 – 448 448 Total ﬁnancial assets measured at fair value 104,147 79,078 22,801 2,268 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 69,710 58,582 2,906 1,344 643 6,235 1,201 – 390 18 793 44,879 43,450 – 1,344 85 – 3,727 20 21 2,502 1,184 24,235 14,536 2,906 – 558 6,235 1,365 1,352 – – 13 596 596 – – – – G o v e r n a n c e Total ﬁnancial liabilities measured at fair value 76,003 46,080 27,962 1,961 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 241 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued Level 3 ﬁnancial assets Held-for-trading (fair value through income statement) Loans and advances Investments and securities Other assets Derivative ﬁnancial instruments – assets Designated (fair value through income statement) Investments and securities Available-for-sale ﬁnancial assets Investments and securities Total Level 3 ﬁnancial assets 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) Total Level 3 ﬁnancial liabilities Gains/losses recognised in income statement Gains/losses recognised in other comprehensive income At beginning of the year Purchases and issues Sales and Settlements 36 7 28 – 1 1,784 1,784 448 448 2,268 1,365 1,352 13 596 596 1,961 (10) (1) (9) – – 164 164 – – 154 (3) – (3) (31) (31) (34) – – – – – 6 6 – – 6 – – – – – – – – – – – 94 94 5 5 99 – – – 2 2 2 (5) (3) (1) – (1) (240) (240) (1) (1) (246) 1 – 1 (54) (54) (53) 242 Old Mutual plc Annual Report and Accounts 2010 Transfers in Transfers out Foreign exchange and other movements* At end of the year – – – – – 20 20 5 5 25 – – – 18 18 18 (1) – (1) – – (433) (433) (31) (31) (465) (3) – (3) (262) (262) (265) 20 – 20 – – 35 35 (418) (418) (363) (1,359) (1,352) (7) 491 491 (868) 40 3 37 – – 1,430 1,430 8 8 1,478 1 – 1 760 760 761 £m For assets and liabilities held at the year end Gains/losses recognised in income statement Gains/losses recognised in other comprehensive income – – – – – 12 12 – – 12 67 67 – 31 31 98 – – – – – – – (8) (8) (8) – – – – – – * Included within Foreign exchange and other movements are the ﬁnancial assets and liabilities of US Life which have been transferred to non-current assets and liabilities held for sale and are disclosed in note H2 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 243 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued The transfers into Level 3 largely relate to instances 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. There were no signiﬁcant transfers between Level 1 and Level 2 during the year. 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, principal 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. 244 Old Mutual plc Annual Report and Accounts 2010 Analysis of reasonably possible alternative assumptions Year ended 31 December 2010 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 Reﬂected in income statement Reﬂected in other comprehensive income Favourable changes Unfavourable changes Favourable changes Unfavourable changes £m 10 – 8 2 177 177 1 1 10 – 8 2 167 167 1 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total level 3 ﬁnancial assets 188 178 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) Total level 3 ﬁnancial liabilities – – – 7 7 7 – – – 27 27 27 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 245 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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 2010 Loans and advances Investments and securities Other assets At 31 December 2009 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 4,223 9,857 88 14,168 – (8) – (8) – 11 – 11 £m Change in fair value due to change in credit risk Maximum exposure to credit risk 3,157 8,842 56 12,055 Current ﬁnancial year Cumulative (1) (7) – (8) – (8) – (8) 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 2010 Borrowed funds Amounts owed to bank depositors At 31 December 2009 Borrowed funds Amounts owed to bank depositors Change in fair value due to change in credit risk Fair value Current ﬁnancial year Cumulative 1,579 8,769 10,348 (203) 11 (192) (74) (11) (85) Change in fair value due to change in credit risk Current ﬁnancial year Cumulative 263 (6) 257 (276) (18) (294) Fair value 1,344 6,235 7,579 £m Contractual maturity amount 1,686 8,734 10,420 £m Contractual maturity amount 1,679 6,290 7,969 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. 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 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 rise to changes in fair value of 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 as fair value through the income statement. The change in fair value due to credit risk of ﬁnancial liabilities designated as 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. 246 Old Mutual plc Annual Report and Accounts 2010 (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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e For the variable annuity business in Old Mutual Bermuda the guaranteed returns are no longer dynamically hedged, with instead the overall exposures to changes in markets monitored closely so that actions are taken to re-establish hedging at short notice as required. 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 audited Market Consistent Embedded Value supplementary basis information section of the Annual Report and Accounts on pages 374 to 383. i F n a n c a s i l (iii) Banking operations The principal market risks arising in the Group’s banking operations arise from: Trading risk in Nedbank Capital; and (cid:81) (cid:81) Banking book interest rate risk arises from re-pricing 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. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 247 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued Trading risk Market risk exposures from trading activities at Nedbank Capital are measured using Value-at-Risk (VaR), supplemented by sensitivity analysis, and stress-scenario analysis, and limit structures are set accordingly. The VaR risk measure 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. At 31 December 2010 Historical VaR (one-day, 99%) by risk type Foreign exchange Interest rate Equity products Other Diversiﬁcation Total VaR exposure At 31 December 2009 Historical VaR (one-day, 99%) by risk type Foreign exchange Interest rate Equity products Other Diversiﬁcation Total VaR exposure Banking book interest rate risk Banking book interest rate risk at Nedbank arises because: Average Minimum Maximum Year end £m 0.2 0.9 0.4 0.4 (0.7) 1.2 0.1 0.4 0.1 0.1 – 0.7 0.7 1.4 0.9 0.5 – 3.5 0.4 0.6 0.3 0.4 (0.6) 1.1 £m Average Minimum Maximum Year end 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 (cid:81) 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 re-price only on maturity. (cid:81) (cid:81) Short-term demand-funding products re-price to different short-end base rates. (cid:81) Certain ambiguous maturity accounts are non-rate-sensitive. (cid:81) The bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds, that do not re-price for interest rate changes. Nedbank uses standard analytical techniques to measure interest rate sensitivity within its banking book. This includes static re-price 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 2010 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 (2009: £44 million). 248 Old Mutual plc Annual Report and Accounts 2010 The table below shows the re-pricing proﬁle of Nedbank’s banking book, which highlights the fact that assets re-price quicker than liabilities following derivative hedging activities. At 31 December 2010 Interest rate re-pricing gap Total assets Total liabilities and shareholders’ funds Interest rate hedging activities Re-pricing proﬁle Cumulative re-pricing proﬁle Expressed as a % of total assets At 31 December 2009 Interest rate re-pricing gap Total assets Total liabilities and shareholders’ funds Interest rate hedging activities Re-pricing proﬁle Cumulative re-pricing 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 42,497 35,960 (2,707) 3,830 3,830 6.5 1,138 3,750 2,684 73 3,903 6.6 1,033 2,977 2,134 190 4,093 6.9 2,730 1,673 (333) 725 4,818 8.1 2,040 190 (1,778) 71 4,889 8.3 9,778 14,666 – (4,889) – – 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) – – £m Total 59,216 59,216 – – – – £m Total 47,889 47,889 – – – – 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 249 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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, with currency risk where these are not effectively matched. 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 dollar. 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 2010. At 31 December 2010 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 250 Old Mutual plc Annual Report and Accounts 2010 ZAR GBP USD EUR SEK Other £m Total 719 1,406 1,182 544 977 137 4,965 1,066 905 1,683 133 120 142 52 103 2 43,917 36,938 47 180 1,806 1,965 2,020 1 – 17 341 – 26 751 907 – – 377 29,797 95 – 399 209 838 6 91,799 35,169 35,599 362 29,011 – 672 2,758 185 29 382 101 3,969 180 44,226 1,273 – 89,736 1,857 792 74 457 124 83 762 – 565 134 – 33,859 2 18 – 147 8 143 – – – 1,232 14,734 – 9 1,276 228 478 12,384 31,841 10,536 – 161 43 5 – – 32 290 9 1,056 292 12,219 24,643 – 3 – 55 – 297 2 – – 240 9,579 6 – 174 88 262 – – 11 – 78 – 55 3 – – 5,233 11,373 1 – 230 10 211 – 11 61 16 3 8 146 18 19 – 779 3,732 7 1 47 3 323 – 1,079 1,015 2,040 416 162 1,534 982 122 2 51,778 106,153 156 190 3,932 2,503 4,132 12,391 11,250 18,182 5,311 193,552 10,241 – 9,306 – 3,938 35 98,631 397 – 611 23 184 228 9 180 – 407 72 – 894 – (38) – 95 7 257 – – – 11 60 29 6 203 1 3,584 4,204 260 730 858 238 5,661 190 5,965 1,017 53,236 99 – – – 1,870 12,219 11,955 16,585 5,300 182,078 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 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 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 ZAR 608 843 738 1,518 83 102 129 32 107 3 35,077 29,483 52 140 1,137 1,381 790 1 GBP USD 1,523 1,267 35 21 223 19 26 696 772 – – 533 30,685 93 – 223 100 844 – – 22 – 329 7 1,894 475 – 143 1,586 18,690 – 10 1,302 1,020 483 – EUR 661 – 5 – 30 – 347 7 – – 92 5,983 17 19 155 34 319 – SEK Other 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 – £m Total 5,159 882 828 1,759 570 135 3,138 1,296 120 146 42,393 98,461 170 169 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 71,137 30,204 – 18,920 – 1,507 750 63 421 162 85 100 – 778 206 31 17 – 126 16 742 10 1,572 7,171 – – 583 20 190 154 2 382 20 179 6,318 – 662 4 – – 109 15 229 – 2,803 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 – 34,070 815 22,455 7 8,708 76 10,216 – 1,990 6,509 153,095 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 £711 million (2009: £318 million), EUR increase of £8 million (2009: reduction of £42 million), SEK reduction of £124 million (2009: reduction of £352 million) and ZAR reduction of £192 million (2009: an increase in consolidated equity holders’ funds of £99 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 £90 million (2009: £48 million gain). Annual Report and Accounts 2010 Old Mutual plc 251 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E2: Credit risk Overall exposure to credit risk Credit risk refers to the risk that a 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 58.2% 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 Non-current assets held for sale £m At 31 December 2010 At 31 December 2009 1,079 982 122 2 51,778 28,657 9,275 15,930 3,352 100 3,842 2,503 4,132 3,915 8,330 11,750 882 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 – 117,092 93,739 (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 mortgage 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. 252 Old Mutual plc Annual Report and Accounts 2010 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 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y £m At 31 December 2010 At 31 December 2009 18,924 8,376 64 809 1,556 249 5,332 1,994 6,603 6,976 (373) 311 14 7,304 11 1,335 16,474 6,409 74 657 1,035 263 4,513 1,396 5,381 5,761 (380) 183 24 5,852 9 955 52,882 43,225 (886) (218) (660) (172) 51,778 42,393 G o v e r n a n c e Non-performing loans included above had a book value less impairment provisions of £1,729 million (2009: £1,616 million). Of the loans and advances shown above, £15,865 million (2009: £13,038 million) is receivable within one year of the reporting date and is regarded as current. £35,913 million (2009: £29,355 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 £m At 31 December 2010 At 31 December 2009 46,584 3,683 3,075 481 75 24 28 2,615 52,882 (1,104) 51,778 37,670 3,279 2,631 566 28 36 18 2,276 43,225 (832) 42,393 Annual Report and Accounts 2010 Old Mutual plc 253 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E3 Loans and advances continued The neither past due nor impaired loans and advances can be further analysed by credit rating as follows: At 31 December 2010 At 31 December 2009 Investment grade Sub- investment grade Not rated Total Investment grade Sub- investment grade Not rated Home loans Commercial mortgages 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 923 2,153 121 297 160 3,544 728 1,376 – 6 5,163 8 1,307 10,145 5,936 542 710 – 1,332 4,601 521 308 8 934 1 28 4,830 20 9 261 83 252 91 14 – – 171 1 15,898 8,109 672 1,268 243 5,128 5,420 1,911 308 14 6,268 10 – 1,335 Gross loans and advances 15,786 25,066 5,732 46,584 220 493 91 58 – 2,926 422 649 – 13 3,988 5 732 9,597 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 – £m Total 13,558 6,080 569 762 484 4,377 4,367 1,384 181 24 5,143 9 732 22,945 5,128 37,670 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/(credit) Recoveries of amounts previously written off Amounts written off against the provision Foreign exchange and other movements Balance at end of the year Year ended 31 December 2010 Year ended 31 December 2009 Speciﬁc impairment Portfolio impairment Total impairment Speciﬁc impairment Portfolio impairment Total impairment £m 660 598 (67) (484) 179 886 172 21 – – 25 218 832 619 (67) (484) 204 1,104 407 565 (35) (378) 101 660 172 (19) – – 19 172 579 546 (35) (378) 120 832 The majority of loans and advances are in respect of Nedbank, which believes it has continued to make good progress in improving asset quality. In local currency terms Nedbank experienced a reduction in the impairment charge for the year driven mostly by its retail division, particularly in the secured portfolios that had lagged the recovery in the unsecured portfolios. Lower interest rates and the stabilising of job losses contributed to the retail credit loss improving signiﬁcantly in the year. Nedbank further strengthened its provisioning by reducing certain security assumptions in speciﬁc impairments and lengthening the emergence periods. The credit portfolios in Nedbank’s corporate banking business and wealth divisions are believed to be of a high quality and credit loss ratios remained within or below the respective target levels. Impairments for the capital division increased in the higher risk private equity portfolio. During the year under review, the Group recognised collateral to the amount of £64 million (2009: £74 million) in the statement of ﬁnancial position. 254 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l (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 Present value of minimum lease payments receivable Minimum lease payments receivable Present value of minimum lease payments receivable At 31 December 2010 At 31 December 2009 At 31 December 2010 At 31 December 2009 £m 1,851 4,703 422 6,976 (373) 6,603 974 4,771 16 5,761 (380) 5,381 1,752 4,451 400 6,603 – 6,603 843 4,525 13 5,381 – 5,381 £m The accumulated allowance for uncollectable minimum lease payments receivable is £230 million (2009: £134 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 Total investments and securities At 31 December 2010 At 31 December 2009 9,275 15,930 11,356 4,574 25,453 23,202 2,251 52,043 8,591 43,452 3,352 100 106,153 8,168 20,526 14,821 5,705 19,986 18,496 1,490 45,807 5,741 40,066 3,859 115 98,461 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, £55,650 million (2009: £48,226 million) is regarded as current and £50,503 million (2009: £50,235 million) is 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 Past due but not impaired Impaired Total debt instruments and similar securities £m At 31 December 2010 At 31 December 2009 28,648 9 – 28,657 32,346 – 322 32,668 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 255 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities 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 2010 Investment grade (AAA to BBB) Sub-investment grade (BB and lower) Not rated At 31 December 2009 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 7,094 – 2,181 9,275 8,429 113 7,388 15,930 Government and government- related securities Other debt securities, preference shares and debentures 6,324 – 1,844 8,168 15,745 696 4,085 20,526 Short-term funds and securities 2,162 – 1,190 3,352 Short-term funds and securities 2,193 – 1,666 3,859 £m Other Total 6 – 94 100 Other – – 115 115 17,691 113 10,853 28,657 Total 24,262 696 7,710 32,668 In general, no collateral is taken in respect of the Group’s holdings of debt instruments and similar securities. 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 Debt securities Amounts received as collateral for securities lending Cash Debt securities £m At 31 December 2010 At 31 December 2009 700 447 1,147 1,131 16 1,147 626 230 856 782 74 856 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, £1,147 million (2009: £856 million) can be sold or repledged and £nil (2009: £nil) has been sold or repledged. In addition the Group has provided £164 million in cash collateral (2009: £1 million) and £nil in debt securities collateral (2009: £92 million) under repurchase arrangements. 256 Old Mutual plc Annual Report and Accounts 2010 E6: Derivative ﬁnancial instruments – assets and liabilities The Group utilises the following derivative instruments for both hedging and non-hedging purposes: (cid:81) (cid:81) (cid:81) Foreign currency, interest rate and equity, or equity index, futures are contractual obligations to receive or pay a net amount based on changes in currency rates or underlying equities, or indices or interest rates or buy or sell foreign currency or a 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. (cid:81) 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 (i.e. cross-currency interest rate swaps). Except for certain currency swaps, no exchange of principal takes place. The Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation. This risk is monitored continuously with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Group assesses counterparties using the same techniques as for its lending activities. Foreign currency, interest rate and equity, or equity index, options are contractual agreements under which the writer grants the holder the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a 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. (cid:81) M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e 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. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 257 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued At 31 December 2010 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 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 258 Old Mutual plc Annual Report and Accounts 2010 Notional principals Fair values Positive values Negative values Assets Liabilities £m – 612 152 764 6,983 1,383 334 1 – 8,701 18,950 10,973 300 – 566 72 30,861 172 321 493 365 539 – 598 1,137 6,558 877 – – 319 7,754 15,099 9,537 – 238 693 354 25,921 10 570 580 615 52 240 1 293 496 208 15 (127) – 592 716 17 128 – 99 9 969 168 5 173 476 41,184 36,007 2,503 82 70 8 160 218 161 – – 10 389 737 15 – – 96 9 857 10 2 12 452 1,870 £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 23,186 65 – 65 8 33,248 758 39 106 903 6,255 712 – 5 368 7,340 15,310 5,363 1,163 391 1,552 580 24,359 127 – 127 – 32,729 6 217 3 226 1,237 177 13 – – 1,427 555 5 167 – 81 11 819 73 – 73 1 2,546 166 12 1 179 1,013 88 – – 12 1,113 570 8 1 9 74 9 671 5 – 5 22 1,990 E: Financial assets and liabilities continued E6: Derivative ﬁnancial instruments – assets and liabilities continued The contractual maturities of the derivative liabilities held are as follows: At 31 December 2010 Derivative ﬁnancial liabilities Carrying amount 1,870 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 570 278 541 538 – At 31 December 2009 Derivative ﬁnancial liabilities Carrying amount 1,990 Less than 3 months 811 More than 3 months less than 1 year Between 1 and 5 years More than 5 years No contractual maturity date 421 388 344 – M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i £m Total 1,927 £m Total 1,964 E7: Hedge accounting Cash ﬂow hedges Cash ﬂow hedge accounting was applied in respect of the Group’s exposures to foreign currency risk. The Group hedged its foreign currency risk on one of its existing euro loan borrowings by entering into foreign currency swaps for USD. These swaps were separated, for accounting purposes, into a EUR/GBP swap and a GBP/USD swap. Cash ﬂow hedge accounting was applied to the EUR/GBP swap. At 31 December 2010 the EUR/GBP swaps had a notional principal of £nil (€nil) (2009: £27 million (€30 million)) and a fair value of £nil (2009: £5 million). At 31 December 2010 the cash ﬂow hedge reserve was £nil (2009: £2 million). The cash ﬂow hedge reserve is included in ‘Other reserves’ in the statement of changes in equity. There was no ineffectiveness in respect of either of the above cash ﬂow hedges during the ﬁnancial year (2009: nil). Net investment hedges The Group uses a combination of currency swaps, forward foreign exchange contracts and debt raised in the currency of the exposure to mitigate the translation effect of holding overseas companies. The following table summarises the Group’s open positions with respect to ﬁnancial instruments utilised for net investment hedging purposes. There was no ineffectivness in respect of the net investment hedges during the ﬁnancial year (2009: nil). At 31 December 2010 Open positions Forward contracts Currency swaps1 Debt2 At 31 December 2009 Open positions Forward contracts Currency swaps1 Debt2 EUR USD ZAR – – – – EUR 113 – – 113 – 313 32 345 USD – 321 31 352 164 – 10 174 ZAR 95 – 55 150 SEK – 391 – 391 SEK – 353 – 353 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l 1 Excludes $nil (2009: $35 million) of currency swaps that do not qualify for hedge accounting. 2 Excludes $750 million and €500 million (2009: $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: Fair value of ﬁnancial instruments designated as net investment hedges at the reporting date ZAR forward foreign exchange contracts £300 million cross currency swap €750 million cross currency swap £m At 31 December 2010 At 31 December 2009 (11) (89) (65) (165) (4) (53) (53) (110) S h a r e h o d e r l i n f o r m a t i o n The ZAR forwards are designated as hedges against the foreign currency risk in respect of the Group’s investment in its South African operations. 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 swap is used to hedge USD currency risk on the USD based assets in the Group’s net investment in US operations. Annual Report and Accounts 2010 Old Mutual plc 259 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities 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 2010 Net Gross Reinsurance £m At 31 December 2009 Net 19,177 (141) 19,036 27,549 (539) 27,010 69,538 1,145 8,249 522 98,631 61 109 227 397 (821) – – (20) (982) (12) (51) (59) (122) 68,717 1,145 8,249 502 97,649 49 58 168 275 57,372 1,859 6,639 457 93,876 49 94 229 372 (717) – – (40) (1,296) (10) (38) (72) (120) 56,655 1,859 6,639 417 92,580 39 56 157 252 Life assurance policyholder and general insurance liabilities 99,028 (1,104) 97,924 94,248 (1,416) 92,832 Of the £1,104 million (2009: £1,416 million) included in reinsurer’s share of life assurance policyholder and general insurance liabilities is an amount of £1,051 million (2009: £919 million) which is classiﬁed as current, the remainder being non-current. Of the £2 million (2009: £146 million) included in deposits held with reinsurers £2 million (2009: £110 million) is classiﬁed as current, with no non-current deposits in 2010. 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 Discontinued operations Balance at end of the year Gross Reinsurance Year ended 31 December 2010 Net Gross Reinsurance £m Year ended 31 December 2009 Net 27,549 (539) 27,010 28,106 (550) 27,556 1,999 1,989 3 (2,268) (472) 2,059 (601) (1) (293) (10,787) 19,177 (67) – – 70 – (6) (36) – (12) 449 (141) 1,932 1,989 3 (2,198) (472) 2,053 (637) (1) (305) (10,338) 19,036 2,549 1,623 5 (3,369) (372) (97) (594) (19) (283) – 27,549 (158) – – 165 – 44 (48) – 8 – (539) 2,391 1,623 5 (3,204) (372) (53) (642) (19) (275) – 27,010 260 Old Mutual plc Annual Report and Accounts 2010 (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 Discontinued operations Balance at end of the year M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Year ended 31 December 2010 59,231 10,250 (701) (6,788) 6,619 2,860 (788) 70,683 £m Year ended 31 December 2009 47,126 9,822 (656) (5,703) 8,345 297 – 59,231 Of the liabilities shown in the above table, £nil (2009: £1,178 million) are recorded at amortised cost with the remainder being designated as 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 Expenses Claims and policy beneﬁts Operating expenses Other charges and transfers Taxation Transfer to operating proﬁt Balance at end of the year £m Year ended 31 December 2010 Year ended 31 December 2009 6,639 855 895 1,107 2,857 (1,024) (85) (61) (7) (1,177) (70) 8,249 5,647 659 774 867 2,300 (1,050) (68) (145) (4) (1,267) (41) 6,639 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 261 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E8: Policyholder liabilities 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 2010 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 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 Carrying amount Less than 3 months More than 3 months less than 1 year Between 1 and 5 years More than 5 years £m Total 19,177 1,572 1,744 9,271 24,658 37,245 69,538 1,145 8,249 522 98,631 61 109 227 397 59,173 740 7,415 406 69,306 26 56 88 170 888 77 – 29 2,227 264 – 57 6,790 236 – 31 69,078 1,317 7,415 523 2,738 11,819 31,715 115,578 30 51 100 181 5 2 39 46 – – – – 61 109 227 397 99,028 69,476 2,919 11,865 31,715 115,975 Undiscounted cash ﬂows Carrying amount Less than 3 months More than 3 months less than 1 year Between 1 and 5 years More than 5 years £m Total 27,549 920 2,454 13,360 30,465 47,199 57,372 1,859 6,639 457 93,876 49 94 229 372 52,324 36 6,398 454 60,132 32 61 149 242 469 675 – 18 1,005 614 – 40 3,583 840 – 53 57,381 2,165 6,398 565 3,616 15,019 34,941 113,708 10 19 46 75 7 14 34 55 – – – – 49 94 229 372 94,248 60,374 3,691 15,074 34,941 114,080 (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. 262 Old Mutual plc Annual Report and Accounts 2010 South Africa In the calculation of liabilities, provision has been made for: (cid:81) The current best estimate of future experience, as described below. The compulsory margins as set out in the Actuarial Society professional guidance notes and FSB board notices. (cid:81) (cid:81) 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: (cid:81) 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. (cid:81) Mortality margins on Individual Business life policies, accidental death supplementary beneﬁts, and disability supplementary beneﬁts, due to uncertainty about future experience. (cid:81) 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, and to provide for longevity risk. (cid:81) Expense margins in the pricing basis for Employee Beneﬁts annuities. (cid:81) 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). (cid:81) Margins on the investment guarantee reserves to mitigate the sensitivity of the reserves calculated on a market-consistent basis to market swap yield curves 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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: G o v e r n a n c e Fixed interest securities Cash Equities Properties Future expense inﬂation* % At 31 December 2010 At 31 December 2009 8.5 6.5 12.0 10.0 5.5 9.5 7.5 13.0 11.0 6.5 * 7.5% (2009: 8.5%) for Individual Business administered on old platforms and 6.5% (2009: 7.5%) 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 or swap curve yield curves. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 263 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued Assumptions are based upon experience as analysed in the following investigations: Business unit Individual Business Group Schemes Employee Beneﬁts All Type of investigation Period of investigation Flexi business mortality Conventional business mortality Annuitant mortality Greenlight mortality Dread Disease Disability Persistency – Flexi and Conventional Persistency – Greenlight Mortality Persistency Annuitant Mortality PHI claim terminations Group Assurance mortality and disability experience Expenses 2003 to 2006 1999 to 2000 2005 to 2006 2001 to 2009 2000 to 2002 2000 to 2002 2008 2003 to 2009 2009 2009 to 2010 2005 to 2009 2006 to 2009 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 2010 analysis of proﬁt provides a measure of the aggregate experience in 2010. 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 largely offset each other. These let to a net increase in the value of liabilities of £1 million (2009: £61 million decrease in liabilities). The biggest assumption changes in 2010 were (1) higher retail annuitant mortality assumptions which reduced liabilities by £24 million, and (2) lower economic assumptions which increased liabilities by £19 million. 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. 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. Bermuda 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. For the variable annuity contracts, DAC balances, and additional reserves are held for items including death and living beneﬁt lapse guarantees, persistency bonuses and gains followed by losses, utilising a fair value method, are held using best estimate assumptions as of the valuation date. For ﬁxed annuities, reserves are held at amortised cost. Mortality rates vary by gender and issue age; lapse rates vary by issue age and duration with an additional variation by ‘moneyness’ level for variable annuity policies with living beneﬁt guarantees. 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 Scandinavia, together with death beneﬁt risk cover in respect of unit-linked assurance products across all of our European territories. There are also technical provisions for healthcare which is sold in Scandinavia. (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. 264 Old Mutual plc Annual Report and Accounts 2010 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. Uncertainty in persistency, expenses and mortality & morbidity claim rates, relative to the actuarial assumptions made in the pricing process, may prevent the ﬁrm from achieving its proﬁt objectives. 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. The Group has developed a risk policy which sets out the practices which are used to manage insurance risk and the management information and stress testing requirements. The policy is cascaded to all entities across the Group who each have their own risk policy suite aligned to the Group. As well as management of persistency, expense and claims experience, the risk policy sets requirements and standards on matters such as underwriting and claims management practices, and the use of reinsurance to mitigate insurance risk. 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 MCEV and IFRS sensitivities, 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y For unit-linked contracts a risk charge is applied to meet the expected cost of the insured beneﬁt (in excess of the unit value). 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 manage mortality risks through its underwriting policy and external reinsurance arrangements where its 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. G o v e r n a n c e Persistency Persistency risk is the risk that a policyholder surrenders, transfers or ceases premium payments for their contracts 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. 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 or withdrawal 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 is 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 Group’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. Annual Report and Accounts 2010 Old Mutual plc 265 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E8: Policyholder liabilities continued 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. Tax risk also represents potential changes in the interpretation or application of prevailing tax legislation as paid by either policyholders or shareholders, where the detrimental impact is reduced proﬁtability or additional shareholder tax burdens. 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. (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: (cid:81) OMLAC (SA) – long-term insurance in South Africa (cid:81) Old Mutual US Life – long-term insurance in the United States (cid:81) Old Mutual Bermuda – long-term insurance in Bermuda (cid:81) Mutual & Federal – general insurance in South Africa (cid:81) Skandia Nordic – life assurance in Scandinavia (cid:81) Skandia Wealth Management – life assurance in the UK The Group’s other insurance operations include: (cid:81) Life assurance in Skandia’s unit-linked assurance operations in Continental Europe and Latin America – These do not give rise to signiﬁcant insurance risks, as the unbundled insurance component of those products is insigniﬁcant in comparison to the rest of the Old Mutual Group. (cid:81) Other emerging markets entities in China and India and the rest of Africa (except South Africa) – These do not give rise to signiﬁcant insurance risks relative to the Group as a whole. The Group effectively manages its insurance risks through the following mechanisms: (cid:81) Having an agreed risk preference for all risk types including those related to insurance. (cid:81) 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 and quantiﬁcation of such risks. (cid:81) (cid:81) Actuarial models, which use the above information to calculate premiums and monitor claims patterns. Past experience and statistical methods are used. (cid:81) Guidelines for writing insurance contracts and assuming insurance risks. These include underwriting principles and product pricing procedures. (cid:81) Reinsurance, which is used to limit the Group’s exposure to large single claims and catastrophes. When selecting a reinsurer, (cid:81) 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. The matching 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. 266 Old Mutual plc Annual Report and Accounts 2010 (ii) Terms and conditions of long-term insurance business – Emerging Markets, Nordic, Wealth Management, US Life 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. Emerging Markets Category Essential terms Main risks Individual Life Flexi business with cover Mortality/morbidity rates may be repriced (regular premium contracts) Mortality, morbidity investment Conventional business with cover Charges ﬁxed at inception and cannot be changed Mortality, morbidity investment 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 267 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E8: Policyholder liabilities continued Nordic Category Essential terms Unit linked with death cover Mortality rates may be re-priced Main risks Mortality Unit linked with longevity risk Longevity rates may be re-priced Longevity Waiver of premium Risk premium rates may be re-priced Morbidity Policyholder guarantees Premiums for policies issued before 2002 are subject to pre-deﬁned limits Premiums for policies issued before 2002 are subject to pre-deﬁned limits Premiums for policies issued before 2002 are subject to pre-deﬁned limits Private Health Care One year contracts. Re-priced at renewal Personal Accident (Group) One year contracts. Re-priced at renewal Morbidity None Morbidity/ disability None Policyholder participation in investment return None None None None None Wealth Management Category Essential terms Main risks Unit linked life assurance Mortality rates may be Mortality re-priced Unit linked critical illness Morbidity rates may be re-priced Morbidity Policyholder participation in investment return None None Policyholder guarantees The initial premium is guaranteed to sustain the original cover for the ﬁrst 10 years The initial premium is guaranteed to sustain the original cover for the ﬁrst 10 years Non-linked life assurance and critical illness (ﬁxed term and whole of life) Premium rates ﬁxed at inception Mortality Rates ﬁxed for the life of the contract None Non-linked life assurance and critical illness (rolling term) Premium rates ﬁxed, but may be re-priced when the term is rolled Morbidity Rates ﬁxed for the ﬁrst 10 years if cover levels are not altered None 268 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Policyholder guarantees Policyholder participation in investment return Premium guarantees from 1 to 30 years, return of premium guarantees None No lapse guarantees (max of 15 years or to age 95); cost of insurance (mortality charge) guarantees Yes, through the crediting rate US Life Category Life term Universal life Fixed indexed annuities Fixed deferred annuities Equity indexed universal life Immediate (payout) Variable annuities Bermuda Category Variable annuities Fixed deferred annuities Fixed indexed annuities Essential terms Main risks Mortality, expense Mortality, expense, investment 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, investment, hedging Minimum caps, maximum spread guarantees, minimum interest guarantees Yes, through index credits Mortality, investment Mortality, investment, hedging Minimum guaranteed accumulation rates and annuitisation rates No-lapse guarantees; cost of insurance (mortality charge) guarantees; minimum caps; maximum spread guarantees Limited – crediting rates are reset at speciﬁed intervals Yes, through the index and crediting rates are reset at speciﬁed intervals Mortality, investment Beneﬁt payment schedule is guaranteed None Mortality, investment, hedging Minimum guaranteed death beneﬁt and minimum guaranteed accumulation beneﬁt which may include a minimum rate of return or waiver of surrender charges Yes, through separate accounts and crediting rates are reset at speciﬁed intervals Mortality, persistency, market, hedging, volatility, basis risk Persistency, investment Essential terms Main risks 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 Single premium accumulation annuities with upside potential of equity indexed returns on their account value Policyholder guarantees Policyholder participation in investment return Minimum guaranteed death beneﬁt and maturity beneﬁt; credited rate guarantee on ﬁxed account option Yes, through separate account and credited rates on ﬁxed account Credited rate over speciﬁed period Via credited rates and renewal rates on rate expiration Persistency, investment, hedging Market participation with no downside minimum interest guarantees Yes, through index credits All business in the Group is subject to the risk that policyholders discontinue the insurance policy, through lapse or surrender. Annual Report and Accounts 2010 Old Mutual plc 269 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (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. Deﬁnition Risk management Risk Underwriting HIV/AIDS Misalignment of policyholders to the appropriate pricing basis or impact of anti-selection, resulting in a loss Impact of HIV/AIDS on mortality rates and critical illness cover 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 Experience is closely monitored, and policyholder behaviour is allowed for in pricing and valuation Catastrophe stop loss/excess of loss reinsurance treaty in place which covers claims from one incident occurring within a speciﬁed period between a range of speciﬁed limits Experience is closely monitored, and policyholder behaviour is allowed for in pricing and valuation Longevity Possible increase in annuity costs due to policyholders living longer Policyholder behaviour Catastrophe Policy lapse/Surrender Selection of more expensive options, or lapse and re-entry when premium rates are falling, or termination of policy, which may cause the sale of assets at inopportune times Natural and non-natural disasters, including war/terrorism, could result in increased mortality risk and payouts on policies A policyholder option to terminate the policy, which may cause the loss of future earnings or sale of assets at inopportune times 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 section (i), in the preceding section, for illustration of this. 270 Old Mutual plc Annual Report and Accounts 2010 (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: (cid:81) Offset (partial or full) to the bonus stabilisation reserve in the case of smoothed bonus products in South Africa. (cid:81) Offset (partial or full) through DAC amortisation in the case of US business. The effect of locked-in assumptions under US GAAP accounting, where assumptions underlying the insurance contract provisions are not changed until liabilities are not adequate after reﬂecting current best estimates. (cid:81) The net increase or decrease to insurance contract provisions recorded as of 31 December 2010 has been estimated as follows: Assumption Mortality and morbidity rates – assurance Mortality rates – annuities Discontinuance rates Expenses (maintenance) % £m £m £m £m Change Emerging Markets Wealth Management US Life Bermuda 10% (10)% 10% 10% 284 61 (11) 68 3 – (3) 2 20 (6) 18 6 – – 18 (2) Emerging Markets 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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 £91 million (2009: £58 million). 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 (e.g. non-proﬁt annuity business), the net effect has been shown since the assets and liabilities move in parallel. G o v e r n a n c e Nordic The speciﬁed assumptions have an immaterial impact on the Skandia Nordic insurance IFRS contract technical provisions as these are relatively insensitive towards movements in mortality/longevity/morbidity or interest rates and mainly comprise of reserves that relate to claim reserves and incurred – but not reported provisions. Wealth Management The changes in insurance contract liabilities shown are calculated independently using the speciﬁed increase or decrease to the rates, with no change in premiums paid by policyholders. The assumption changes have no impact on the linked business within Skandia UK. Whole of Life is the main product group affected by the lapse assumption change. This is because the policies have the longest duration and represent close to 85% of the reserve. The main product groups impacted by the expense, mortality and morbidity sensitivities are Whole of Life and Accelerated Critical Illness. In the Wealth Management business, non-linked liabilities are fairly well matched by gilts so that the net impact of a valuation interest rate change taking asset and liability movement into account is negligible. US Life 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 could trigger a DAC unlocking. The assumption changes speciﬁed above do not approach the levels necessary to trigger a signiﬁcant change in liabilities or DAC. There is no impact for a change in the valuation discount rate for US Life as the valuation rate is locked-in. Annual Report and Accounts 2010 Old Mutual plc 271 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued Bermuda Assumption changes on Bermuda business have counterbalancing effects. Lapses and partial withdrawals have the largest impact where increased activity reduces 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 (e.g. business with little or no guarantees redeeming at a faster rate) presents the bigger challenge but it is accounted for in both the DAC and guarantee reserve calculations and conservation efforts are underway to retain the less risky business. Mortality plays a much smaller part in Bermuda 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). (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. Emerging Markets 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 Individual business Death, disability, point and/or maturity guarantees Guaranteed annuity options Group business Vested bonuses in respect of pre-retirement with-proﬁts business Wealth Management Product category Unit-linked life assurance and critical illness business Description of options and guarantees A closed block of unit-linked type and smoothed bonus business with an underlying minimum growth rate guarantee (4.28% 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 Retirement annuities sold prior to June 1997 contain guaranteed annuity options, whereby the policyholder has an option to exchange the full retirement proceeds for a minimum level of annuity income at maturity There is a 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 Description of options and guarantees Policyholder position/key drivers The initial premium is guaranteed to sustain the original cover for the ﬁrst 10 years even if the unit fund is depleted to zero. However, this guarantee only applies to the initial premium and cover, not to subsequent increments Wealth Management business is predominantly unit-linked life assurance and critical illness business where a measure of the policy being in-the-money is not applicable 272 Old Mutual plc Annual Report and Accounts 2010 US Life Product category Death, disability, surrender point and/or maturity guarantees Guaranteed annuity options No-Lapse Guarantees Bermuda Product category Index and Credited Rate Guarantees Death and Maturity Guarantees M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Description of options and guarantees Policyholder position/key drivers 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 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 16% of policies are currently in-the-money and being credited the minimum rate. A 300 basis points drop in interest rates would bring 98% of policies in-the-money The minimum surrender values of 18% of policies are currently in-the-money. A year of ﬂat equity markets with no equity credits would bring an additional 4% in-the-money. Two years of no equity credits would result in 28% 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 85% of the block 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 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 The extent to which the policies are currently in-the-money is negligible 25% of policies are currently in-the-money. This risk is reinsured Description of options and guarantees Policyholder position/key drivers Equity indexed annuities offer minimum guaranteed 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 and are guaranteed for speciﬁc durations. Upon expiration, renewal rates are set that reﬂect with updated expected earned yields and competing market rates 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 (e.g. 105% at year 5) with more elaborate versions offering dual guarantees (e.g. UGO guarantee promises at years 5/10 a 105%/120% minimum account value, respectively) with a highest anniversary in year 10 if elected For the index annuities’ approximately 5% of the contracts are out-of-the-money, it would require approximately a 3% increase in EuroStox and 6% increase in Topix to bring them in-the-money (ie, an index credit would then be made). It is important to note that static hedges are purchased to reﬂect the risk of in-the-money contracts. Approximately 25% of the contracts with a maturity beneﬁt are out-of-the-money requiring approximately a 9% decrease in account values on average to bring such policies in-the-money S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 273 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued E: Financial assets and liabilities continued E8: Policyholder liabilities continued (vi) General insurance risks and sensitivities Mutual & Federal The following types of business is written within the commercial, risk ﬁnance and personal divisions: Fire Accident Personal accident Motor Engineering Crop Marine Credit Commercial Risk ﬁnance Personal (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:26) (cid:26) (cid:26) (cid:26) (cid:22) (cid:22) (cid:22) (cid:22) (cid:26) (cid:26) (cid:22) (cid:22) 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 £7 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. General insurance risk includes the following risks: (cid:81) Occurrence risk – the possibility that the number of insured events will differ from those expected. (cid:81) Severity risk – the possibility that the costs of the events will differ from those expected. (cid:81) 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 £43 million. Similarly, an increase of 10% in the ultimate number of claims would result in an additional loss of £43 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 £144 million of unrated exposures (2009: £87 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 Total: Book value Nominal value of the above 274 Old Mutual plc Annual Report and Accounts 2010 Notes E9(a) E9(b) E9(c) F11(b) F10(b) F10(b) Group excluding Nedbank At 31 December 2010 Group excluding Nedbank Nedbank 1,186 112 1,158 2,456 1,736 112 2,356 4,204 550 – 1,198 1,748 458 338 350 2,894 3,045 662 – 1,034 1,696 458 338 350 2,842 3,162 £m At 31 December 2009 1,146 119 2,044 3,309 Nedbank 484 119 1,010 1,613 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 (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 loan comprise: 1. Floating rate notes Nedbank Group excluding Nedbank 498 921 880 2,299 Nedbank 323 2,164 722 3,209 At 31 December 2010 Group excluding Nedbank 821 3,085 1,602 5,508 219 1,413 899 2,531 £m At 31 December Nedbank 156 1,226 1,033 2,415 2009 375 2,639 1,932 4,946 Group excluding Nedbank At 31 December 2010 Group excluding Nedbank Nedbank Nedbank 86 462 – 2 550 720 466 – – 806 928 – 2 1,186 1,736 114 548 – – 662 265 219 – – 484 At 31 December 2009 379 767 – – 1,146 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y – R1,690 million unsecured senior debt repayable September 2012 at 3 month JIBAR + 1.5%. – R1,044 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). – R1,552 million unsecured senior debt repayable April 2013 JIBAR +1.48%. – R1,027 million unsecured senior debt repayable April 2015 JIBAR +1.75%. – R80 million unsecured senior debt repayable April 2020 JIBAR +2.15%. Group excluding Nedbank – R550 million repayable August 2010 at 3 month ZAR – JIBAR-SAFEX + 4.5% – repaid. – R100 million repayable February 2011 at 3 month ZAR – JIBAR-SAFEX + 4.5%. – US$50 million repayable September 2011 at 3 month LIBOR plus 0.50%. – €22 million repayable January 2010 at 3 month EURIBOR plus 0.35% – repaid – SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38% – repaid – £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% – repaid. G o v e r n a n c e 2. Fixed rate notes Nedbank – R130 million unsecured senior debt repayable October 2024 at zero coupon. – R3,244 million unsecured senior debt repayable September 2015 at 10.55%. – R762 million unsecured senior debt repayable September 2019 at 11.39%. – R478 million unsecured senior debt repayable April 2015 at R157 +1.75%. Group excluding Nedbank – £500 million euro bond repayable October 2016 at 7.125%. – US$16.5 million secured senior debt repayable August 2014 at 5.23%. – €30 million euro bond repayable July 2010, capital and interest swapped into ﬁxed rate US dollars at 5.28% – repaid. – €10 million euro bond repayable December 2010, capital and interest swapped into ﬂoating rate US dollars at 3 month LIBOR + 0.95% – repaid. – €20 million euro bond repayable August 2013, capital and interest swapped into ﬂoating rate US dollars at 3 month LIBOR + 1.30% – repaid. i F n a n c a s i l The total fair value of the swap derivatives associated with the senior notes is £nil (2009: £12 million). These are recognised as assets and are included within note E5. 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 2010 £499 million (2009: £480 million) of this facility was utilised, £nil (2009: £nil million) in the form of drawn debt and £499 million (2009: £480 million) in the form of irrevocable letters of credit. The Group has committed standby facilities totalling £275 million, which were put in place in December 2010 and have a latest maturity date of 29 June 2012. The Group has a SEK1,500 million revolving credit facility, which has a maturity date of 1 July 2011. At 31 December 2010 this facility was undrawn (2009: undrawn). S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 275 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (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%) (c) Subordinated debt securities Nedbank R1.5 billion repayable 24 April 2016 (7.85%)1 R1.8 billion repayable 20 September 2018 (9.84%)2 R500 million repayable on 30 December 2010 (8.38%)3 R650 million repayable 8 February 2017 (9.03%)4 R1.7 billion repayable 8 February 2019 (8.9%)5 R2.0 billion repayable 6 July 2022 (3 month JIBAR plus 0.47%)6 R500 million repayable 15 August 2012 (3 month JIBAR plus 0.45%)7 R1.0 billion repayable 17 September 2020 (10.54%)8 R500 million repayable 14 December 2017 (3 month JIBAR plus 0.70%)9 R120 million repayable 14 December 2017 (10.38%)10 R487 million repayable 20 November 2018 (15.05%)11 R1,265 million repayable 20 November 2018 (JIBAR plus 4.75%)12 R300 million repayable on 4 December 2013 (JIBAR + 2.5%)13 US$100 million repayable on 3 March 2022 (3 month USD LIBOR)14 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 2015 (8.9%)15 £300 million repayable 21 January 2016 (5.0%)16 R250 million preference shares repayable 9 June 201117 – repaid €750 million repayable 18 January 2017 (4.5%)18 Total subordinated liabilities £m At 31 December 2010 At 31 December 2009 4 96 7 5 112 25 84 6 4 119 £m At 31 December 2010 At 31 December 2009 148 186 – 67 171 198 49 105 49 12 51 125 15 65 1,241 (83) 1,158 293 296 – 609 1,198 2,356 126 149 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 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. Unsecured secondary callable note was issued 24 April 2006 with a call date of 24 April 2011. 2. 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. 3. Unsecured callable Bonds issued 30 March 2006. 4. Unsecured secondary callable note was issued 8 February 2007 with a call date of 8 February 2012. 5. Unsecured secondary callable note was issued 8 February 2007 at R1.0 billion. On 19 March 2007 an additional R0.7 billion was issued. 6. Unsecured secondary capital callable note issued 6 July 2007 and has a call date of 6 July 2017. 7. This bond issued on 15 August 2007 is an unsecured secondary capital callable ﬂoating rate note with a call date 15 August 2012. 8. This bond issued on 17 September 2007 is an unsecured ﬁxed rate note with a term of 13 years (non-call 8 year). 9. 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. 10. 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. 11. 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. 12. 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. 13. This bond issued on 4 December 2008 is a ﬂoating rate note with a call date of 4 December 2013. 14. Dated Tier 2 notes issued 3 March 2009 with call date 2 March 2017. 15. 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. 16. These bonds, issued on 20 January 2006, had a maturity date of 21 January 2016 and paid 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 had the option to repay the bonds at par on 21 January 2011 and at 6 monthly intervals thereafter. These bonds were redeemed after the balance sheet date, at the ﬁrst call date of 21 January 2011. 276 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i £m At 31 December 2010 At 31 December 2009 8,016 3,731 16,464 2,634 4,490 5,765 10,757 1,379 53,236 9,006 1,283 14,972 2,345 2,772 3,800 8,704 1,253 44,135 £m Total 8,016 3,731 29,876 11,459 1,379 54,461 £m Total 9,006 1,283 25,080 9,270 1,253 45,892 17. These preference shares were redeemable on 9 June 2011 and paid a variable cumulative coupon of 61.0% of the Prime Rate as quoted by Nedbank Limited. The Group had the option to redeem the shares at par at any time before the ﬁnal redemption date but after giving an agreed period of notice, with the Group electing to redeem in 2010. 18. 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. 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: Year ended 31 December 2010 Amounts owed to bank depositors Current accounts Savings deposits Other deposits and loan accounts Negotiable certiﬁcates of deposit Deposits received under repurchase agreements Amounts owed to bank depositors Carrying amount Less than 3 months More than 3 months less than 1 year Between 1 and 5 years More than 5 years 8,016 3,731 29,352 10,758 1,379 53,236 8,016 3,731 23,484 2,567 1,379 39,177 – – 4,313 6,553 – 10,866 – – 1,863 2,337 – 4,200 – – 216 2 – 218 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 Amounts owed to bank depositors 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 44,135 8,879 1,283 20,099 2,421 1,253 33,935 107 – 3,422 6,233 – 9,762 20 – 1,298 613 – 1,931 – – 261 3 – 264 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 its 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. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 277 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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 2010 and throughout the year. As at the date of issue of these ﬁnancial statements the unaudited pro-forma surplus was estimated to be £2.1 billion. The FGD position will be submitted to the FSA by 30 April 2011. 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 (including Group investment in operations) Total available capital resources Total capital requirements – local regulatory basis Overall excess of capital resources over (unaudited) £m At 31 December 2010 At 31 December 2009 South Africa 5,386 United States 2,292 Europe 5,562 (31) (16) (1,115) (561) 4,794 (1,214) (1,416) (2,407) 860 (445) 2,040 (301) South Africa 4,447 (19) (487) 3,941 (977) United States 1,064 (215) (449) 400 (303) Europe 5,132 (1,106) (2,684) 1,342 (242) requirements 3,580 415 1,739 2,964 97 1,100 Capital resources at beginning of year Earnings after tax Change in admissible assets and other adjustments and other movements in reserves Dividends Foreign exchange movements Capital resources at end of the year (unaudited) £m Year ended 31 December 2010 Year ended 31 December 2009 South Africa 3,941 310 (25) (80) 648 4,794 United States 400 187 257 – 16 860 Europe 1,342 254 510 (37) (29) South Africa 3,183 718 (182) (281) 503 2,040 3,941 United States 295 (184) 318 – (29) 400 Europe 1,267 376 (229) (55) (17) 1,342 South Africa The amounts disclosed above represent the capital position of OMLAC(SA) and the life business in Namibia and Medscheme Life. 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 2010, OMLAC(SA)’s excess assets was 3.9 times (2009: 4.1 times) the Statutory Capital Adequacy Requirement (SCAR), after allowing for estimates of statutory limitations on the value of certain assets. 278 Old Mutual plc Annual Report and Accounts 2010 OMLAC(SA)’s shareholders’ funds include its investments in Nedbank of £2,193 million (2009: £1,760 million) and M&F of £504 million (2009: £366 million). In addition, £530 million (2009: £690 million) is invested in the Group’s loan notes and £530 million (2009: £561 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 (£0.4 million) (2009: 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 OM Financial Life Insurance Company, OM 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 was 200% of Risk Based Capital). 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. The local regulators have ultimate approval for dividend payments. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e (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 shareholders’ funds Eligible subordinated debt Inadmissible assets Other adjustments Total capital resources Total capital requirement Excess of capital resources over capital requirement At 31 December 2010 At 31 December 2009 (unaudited) £m Africa 2,137 656 – (38) 2,755 (1,886) 869 Europe 254 115 (3) (1) 365 (203) 162 Africa 1,720 598 – (38) 2,280 (1,659) 621 Europe 224 104 (2) (1) 325 (197) 128 Year ended 31 December 2010 Year ended 31 December 2009 (unaudited) £m i F n a n c a s l i Capital resources 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 resources at end of the year 2,280 362 (37) – (49) (164) 363 2,755 325 144 (108) – – – 4 365 Africa Europe Africa 1,898 181 (28) – 50 (108) 287 2,280 Europe 321 71 (56) – – (9) (2) 325 S h a r e h o d e r l i n f o r m a t i o n The above amounts represent the capital positions of Nedbank Limited (including the London branch) 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. Annual Report and Accounts 2010 Old Mutual plc 279 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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 need for additional liquidity. Information on the nature of the investments and securities held is given in section E4. The Group’s existing revolving credit facility of £1.23 billion (2009: £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 Group’s and 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 Group and 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. 280 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y F: Other statement of ﬁnancial position notes F1: Goodwill and other intangible assets At 31 December Cost Balance at beginning of the year Acquisitions through business combinations Additions Foreign exchange and other movements Disposals or retirements Transfer to non-current assets held for sale Goodwill Present value of acquired in-force business Software development costs Other intangible assets Total 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 £m 3,241 3,316 3,029 3,129 649 548 880 916 7,799 7,909 4 – 143 (29) (73) 12 – (71) (16) – – – 10 – (335) – – (100) – – – 78 81 (2) (40) 51 20 52 (22) – 1 – 15 – – – 2 (35) (3) – 5 78 249 (31) (448) 63 22 (154) (41) – Balance at end of the year 3,286 3,241 2,704 3,029 766 649 896 880 7,652 7,799 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 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 (512) – (1) (15) – 73 (235) – (266) (12) 1 – (1,380) (214) – 27 – 270 (1,179) (244) – 43 – – (427) (61) (19) (56) 2 38 (361) (56) – (32) 22 – (321) (83) – (8) – – (252) (82) – 11 2 – (2,640) (358) (20) (52) 2 381 (2,027) (382) (266) 10 25 – (455) (512) (1,297) (1,380) (523) (427) (412) (321) (2,687) (2,640) 2,729 2,831 3,081 2,729 1,649 1,407 1,950 1,649 222 243 187 222 559 484 664 559 5,159 4,965 5,882 5,159 G o v e r n a n c e All of the present value of acquired in-force business at the year end of £1,407 million relates to the Skandia business acquired during 2006 (2009: £1,649 million) which is due to be amortised over a further 10 to 15 years. Of the other intangible assets £280 million (2009: £365 million) relates to distribution channels and £136 million (2009: £108 million) brands associated with the Skandia business. The remaining periods over which these are being amortised are 5 years and 10 years respectively. The acquisitions through business combinations comprises £1 million (2009: £5 million) in respect of various acquisitions by the Group’s US Asset Management business and £4 million (2009: £7 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. i F n a n c a s l i Nordic Retail Europe Wealth Management Nedbank US Asset Management Other Goodwill, net of impairment losses £m At 31 December 2010 At 31 December 2009 243 198 656 453 1,155 126 2,831 219 204 656 393 1,142 115 2,729 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 281 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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 2010, each CGU’s recoverable amount has been determined by reference to its value-in-use. Nordic, Retail Europe and 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 336 to 348. The differences between the key assumptions applied in the current year and in the prior year are disclosed on pages 353 to 366. 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. 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. An additional two years projections beyond the plan period are extrapolated using inﬂation based growth rates. The cash ﬂows are discounted at economic proﬁt rates applicable relevant to each individual CGU. The key assumptions used in the value-in-use calculations for the Nordic, Retail Europe and Wealth Management CGUs are as follows: (cid:81) (cid:81) 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 Swedish central bank 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 2.8% applied to its life assurance business and of 1.8% for its asset management business. Wealth Management applied 3.7% to both its life assurance business and asset management business in the UK, 1.8% in Italy and 1.7% in France. 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. Rates applied were 15.9% for Nordic, 14.5% for Retail Europe and 15.8% for Wealth Management. The directors are satisﬁed that any reasonable change in the assumptions would not cause the recoverable amounts of the Nordic, Retail Europe and Wealth Management CGUs to fall below their carrying amounts. 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 12.0% (2009: 12.9%). 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 (2009: £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: (cid:81) (cid:81) The three year business plan and two further years have growth rate assumptions based on management’s expectation of performance over this period. A terminal value, using a long-term growth rate of 6% (2009: 6%) is added for the value of cash ﬂows beyond ﬁve years. The assumed long-term growth rate was determined with reference to nominal historical GDP growth in the US. The risk-adjusted discount rate applied was 12.9% (2009: 13.3%). 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 0.9%) for that CGU would be absorbed before the recoverable amounts fall below the carrying amounts. The value-in-use exceeds the carrying amount by £165 million (2009: £290 million). 282 Old Mutual plc Annual Report and Accounts 2010 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 2010 Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Nedbank US Asset Management Other Total At 31 December 2009 Long-Term Savings Emerging Markets Nordic Retail Europe Wealth Management Nedbank US Asset Management Other Discontinued US Life operations Total * Goodwill and intangible assets discussed in the table above is net of amortisation and impairment losses. Goodwill and intangible assets* Amortisation £m Impairment loss 3,101 120 995 522 1,464 637 1,181 46 4,965 300 2 143 36 119 50 3 5 358 20 1 – – 19 – – – 20 £m Goodwill and intangible assets* Amortisation Impairment loss 3,306 106 1,035 563 1,602 543 1,171 45 5,065 94 5,159 317 3 133 54 127 37 2 6 362 20 382 266 – – 187 79 – – – 266 – 266 Following a re-evaluation of the prospects for the former ELAM operating segment as part of the reorganisation in 2009, 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 2009 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%. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 283 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued F2: Property, plant and equipment At 31 December Gross carrying amount Balance at beginning of the year Additions Additions from business combinations Increase/(decrease) arising from revaluation Disposals Foreign exchange and other movements Transfer to non-current assets 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 to non-current assets 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 2010 2009 2010 2009 2010 2009 2010 2009 £m 86 6 – 8 – 11 – 111 – – – – – – 86 111 76 – – (8) (1) 19 – 86 – – – – – – 76 86 558 31 – 18 (1) 85 (6) 685 (37) (16) – 3 – (50) 521 635 405 56 1 (5) (21) 122 – 558 (13) (12) 8 (20) – (37) 392 521 721 115 – – (56) 92 (7) 865 (500) (87) 55 (71) 7 (596) 221 269 660 82 2 – (76) 53 – 721 (446) (74) 61 (41) – (500) 1,365 152 – 26 (57) 188 (13) 1,141 138 3 (13) (98) 194 – 1,661 1,365 (537) (103) 55 (68) 7 (646) (459) (86) 69 (61) – (537) 682 828 214 221 828 1,015 The carrying value of property, plant and equipment leased to third parties under operating leases, included in the above is £130 million (2009: £82 million) and comprises land of £15 million (2009: £12 million) and buildings of £115 million (2009: £70 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 2010 Emerging Markets made revaluation gains of £1 million on land and £3 million on buildings (2009: losses of £10 million and £8 million respectively), while Nedbank made revaluation gains of £4 million on land and £12 million on buildings (2009: gains of £2 million and £3 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 £7 million (2009: £64 million) and £174 million (2009: £99 million) respectively for Emerging Markets and £27 million (2009: £21 million) and £167 million (2009: £97 million) for Nedbank respectively. Additions and depreciation by segment Long-Term Savings Nedbank M&F US Asset Management 26 26 119 63 Long-Term Savings 27 25 Nedbank 102 48 4 6 M&F 4 5 3 8 US Asset Management 5 8 £m Total 152 103 £m Total 138 86 Year ended 31 December 2010 Additions Depreciation Year ended 31 December 2009 Additions Depreciation 284 Old Mutual plc Annual Report and Accounts 2010 F3: Investment property Balance at beginning of the year Additions Additions from business combinations Disposals Net gain/(loss) from fair value adjustments Foreign exchange and other movements Transfer to non-current assets held for sale Balance at end of the year M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i £m Year ended 31 December 2010 Year ended 31 December 2009 1,759 162 – (272) 30 362 (1) 2,040 1,478 82 155 (57) (54) 155 – 1,759 In 2010 additions of £162 million (2009: £237 million) related to Emerging Markets. Of the net gain/(loss) arising from fair value adjustments on investment properties, a £30 million gain (2009: £105 million loss) related to Emerging Markets. 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 £m Year ended 31 December 2010 Year ended 31 December 2009 2,040 1,759 163 (19) 144 106 (19) 87 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 £2,040 million (2009: £1,759 million), £1,699 million (2009: £1,535 million) is attributable to South Africa, £341 million (2009: £223 million) to Europe and £nil (2009: £1 million) to other. F4: Deferred acquisition costs Year end 31 December 2010 Balance at beginning of the year New business Amortisation Impairment losses charged for the year Foreign exchange and other movements Transfer to non-current assets held for sale Balance at end of the year Year end 31 December 2009 Balance at beginning of the year New business Amortisation Impairment losses charged for the year Foreign exchange and other movements Transfer to non-current assets held for sale Balance at end of the year Insurance contracts Investment contracts Asset management 1,934 86 (308) – (186) (1,314) 212 1,079 276 (221) – 53 – 1,187 125 64 (48) (10) 4 – 135 Insurance contracts Investment contracts Asset management 2,107 89 (102) – (160) – 1,934 961 251 (130) – (3) – 1,079 131 56 (46) (5) (11) – 125 £m Total 3,138 426 (577) (10) (129) (1,314) 1,534 £m Total 3,199 396 (278) (5) (174) – 3,138 Annual Report and Accounts 2010 Old Mutual plc 285 i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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 direct insurance operations Debtors arising from reinsurance operations Outstanding settlements Reinsurance treaties Other receivables Accrued interest and rent Trading securities and spot positions Prepayments and accrued income Other assets £m At 31 December 2010 At 31 December 2009 85 89 85 259 39 461 974 840 400 506 145 308 89 86 23 198 94 252 847 751 433 63 134 279 Total trade, other receivables and other assets 3,932 3,051 Based on the maturity proﬁle of the above assets, £2,931 million (2009: £2,849 million) is regarded as current and £1,001 million (2009: £202 million) as non-current. All amounts outstanding are short-term in nature. No signiﬁcant balances are past due or impaired. F6: Provisions Surplus property Client compensation Warranties on sale of business Liability for long service leave Restructuring Provision for donations Other provisions Post employment beneﬁts Total £m At 31 December 2010 At 31 December 2009 16 39 3 57 15 89 92 311 (51) 260 20 30 17 49 5 84 90 295 (32) 263 £m Year ended 31 December 2010 Balance at beginning of the year Unused amounts reversed Unwind of discount Charge to income statement Utilised during the year Foreign exchange and other movements Balance at end of the year Surplus property Client compen- sation Warranties on sale of business Liability for long service leave Restructur- ing Provision for donations Other Total 20 – – – (4) – 16 30 – – 7 (9) 11 39 17 (10) – – – (4) 3 49 – – 28 (27) 7 57 5 – – 9 – 1 15 84 – – – – 5 89 90 (19) – 25 (5) 1 92 295 (29) – 69 (45) 21 311 286 Old Mutual plc Annual Report and Accounts 2010 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 Surplus property Client compen- sation Warranties on sale of business 23 – 1 3 (7) – 20 27 (2) – (3) (2) 10 30 111 (54) – – (26) (14) 17 Liability for long service leave 38 – – 24 (20) 7 49 Restru- cturing Provision for donations – – – 5 – – 5 80 – – – – 4 84 Other 201 (52) – 8 (65) (2) 90 £m Total 480 (108) 1 37 (120) 5 295 2010 provisions in relation to surplus property amounted to £16 million (2009: £20 million). These relate to the onerous costs of vacant properties leased by the Group of which £16 million (2009: £13 million) is estimated to be payable after more than one year. Provisions in relation to client compensation were £39 million (2009: £30 million), primarily relating to possible mis-selling of guarantee contracts in Wealth Management. £1 million (2009: £5 million) is estimated to be payable after more than one year. Provisions in relation to warranties on the sale of businesses amounted to £3 million (2009: £17 million). £3 million (2009: £9 million) is estimated to be payable after more than one year. The liability for long service leave of £57 million (2009: £49 million) relates to provision for staff payments for long serving employees, all of which estimated to be payable in less than one year. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Provisions in relation to restructuring were £15 million (2009: £5 million), primarily in respect of consolidation and related ofﬁce relocation for Wealth Management. £11 million (2009: £3 million) is estimated to be payable after more than one year. The provision for donations is held by Emerging Markets. It relates to the payment of charitable donations in future periods to which the Group is committed, out of the funds made available on the closure of the Group’s unclaimed shares trusts, which were set up as part of the demutualisation in 1999 and closed in 2006 of which £70 million (2009: £84 million) is estimated to be payable after more than one year. G o v e r n a n c e Other provisions includes provisions for tax on long-term staff beneﬁts, restructuring and legal fees. Where material, provisions are discounted at discount rates speciﬁc to the risks inherent in the liability. The timing and ﬁnal amounts of payments in respect of some of the provisions, particularly those in respect of litigation claims and similar actions against the Group, are uncertain and could be result in adjustments to the amounts recorded. Of the total provisions recorded above, £163 million (2009: £188 million) is estimated to be payable after more than one year. F7: Deferred revenue Year ended 31 December 2010 Balance at beginning of the year Fees and commission income deferred Amortisation Foreign exchange and other movements Transfer to non-current assets held for sale Balance at end of the year Year ended 31 December 2009 Balance at beginning of the year Fees and commission income deferred Amortisation Foreign exchange and other movements Transfer from/(to) non-current assets held for sale Balance at end of the year Long-term business Asset management General insurance 556 107 (39) 21 (24) 621 89 48 (39) 1 (1) 98 9 1 – 1 – 11 Long-term business Asset management General insurance 489 91 (15) (11) 2 556 101 34 (37) (7) (2) 89 8 – – 1 – 9 £m Total 654 156 (78) 23 (25) 730 £m Total 598 125 (52) (17) – 654 Annual Report and Accounts 2010 Old Mutual plc 287 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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: Year ended 31 December 2010 Insurance funds Tax losses carried forward Accelerated capital allowances Available-for-sale securities Other temporary differences Netted against liabilities Deferred fee income At beginning of the year Income statement (charge)/ credit (Charged)/ credited to equity Acquisition/ disposal of subsidiaries* Foreign exchange and other movements At end of the year £m 286 269 6 185 265 (624) 183 570 – (30) (4) – 27 5 7 5 – – – (182) 2 – (1) (181) (288) (42) – (7) (66) 399 – (4) – 12 – 4 6 6 (2) 26 (2) 209 2 – 234 (214) 187 416 £m * Includes the transfer of US Life into non-current assets held for sale. 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 At beginning of the year Income Statement (charge)/ credit (Charged)/ credited to equity Acquisition/ disposal of subsidiaries Foreign exchange and other movements At end of the year 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 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: Unrelieved tax losses Expiring in the second to ﬁfth years inclusive Expiring after ﬁve years Accelerated capital allowances Other timing differences 31 December 2010 31 December 2009 Gross amount Tax Gross amount – 2,473 117 296 2,886 – 459 31 79 569 248 2,492 84 20 2,844 £m Tax 79 415 24 6 524 288 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y i F n a n c a s l i (b) Deferred tax liabilities The movement on the deferred tax liabilities account is as follows: * Includes the transfer of US Life into non-current assets held for sale Year ended 31 December 2010 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 2009 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/ disposal of subsidiaries* Foreign exchange and other movements At end of the year £m 24 662 44 224 86 2 366 121 (624) 905 1 26 – (24) (19) 1 38 4 5 32 – (115) – – – – – – – (115) (1) (404) – – – – (5) – 399 (11) 5 28 9 (3) (2) 2 (18) 20 6 47 29 197 53 197 65 5 381 145 (214) 858 £m At beginning of the year Income statement charge/ (credit) Charged/ (credited) to equity Acquisition/ disposal 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 G o v e r n a n c e 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 (2009: £3.4 billion). 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 £m At 31 December 2010 At 31 December 2009 119 326 90 60 35 697 21 1,598 304 503 117 995 796 5,661 118 528 80 67 62 576 19 778 297 412 157 295 916 4,305 S h a r e h o d e r l i n f o r m a t i o n Included in the amounts shown above are £3,885 million (2009: £2,960 million) that are regarded as current, the remainder as non-current. Annual Report and Accounts 2010 Old Mutual plc 289 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued F10: Equity (a) Share capital Authorised and issued share capital Authorised ordinary shares of 10p each Issued ordinary shares of 10p each £m At 31 December 2010 At 31 December 2009 750 570 750 552 (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 (2009: £688 million) as at 31 December 2010. In accordance with IFRS accounting standards these instruments are classiﬁed as equity and disclosed within equity shareholders’ funds as shown on page 179. £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. 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 business in South Africa and, prior to the acquisition of the non-controlling interest in Mutual & Federal in February 2010 (see F11(b)), the general insurance business in South Africa. For the year ended 31 December 2010 the non-controlling interests attributable to ordinary shares was £196 million (2009: £158 million). (ii) Preferred securities R2,000 million non-cumulative preference shares R773 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 £m At 31 December 2010 At 31 December 2009 14 5 2 38 3 62 16 6 2 38 2 64 290 Old Mutual plc Annual Report and Accounts 2010 (iii) Non-controlling interests – adjusted operating proﬁt The following table reconciles non-controlling interests’ share of proﬁt for the ﬁnancial year to non-controlling interests’ share of adjusted operating proﬁt: 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 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 £m Year ended 31 December 2010 Year ended 31 December 2009 196 2 – 22 6 (9) 217 158 1 2 23 – (3) 181 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, prior to the acquisition of the non-controlling interest in February 2010, 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 2010 the increase in adjusted operating proﬁt attributable to non-controlling interests as a result of this was £22 million (2009: £23 million). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y (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 G o v e r n a n c e £m Year to 31 December 2010 Year to 31 December 2009 1,537 196 (88) (116) 234 1,763 1,147 158 (80) 63 249 1,537 Acquisition on non-controlling interest in Mutual & Federal On 5 February 2010, the Group completed the acquisition of the remaining non-controlling 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 issued in exchange for Mutual & Federal shares and listed on the London Stock Exchange, of which 68,378,851 were issues to Black Economic Empowerment trusts and 78,934,598 to other previous holders. Other acquisitions On 8 February 2010 Nedbank announced that it had obtained regulatory approval for the acquisition of the remaining 49.9% indirect interest in Imperial Bank Limited thereby satisfying all conditions precedent for the acquisition. The purchase consideration was approximately £162 million (£155 million plus a Johannesburg Interbank Agreed Rate (JIBAR) factor applied up to 5 February 2010) which is being settled in four instalments out of existing cash resources of Nedbank Limited. The total amount, which included interest at the three month JIBAR, amounted to £165 million. Annual Report and Accounts 2010 Old Mutual plc 291 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued F11: Non-controlling interests continued (b) Statement of ﬁnancial position continued (ii) Preferred securities R2,000 million non-cumulative preference shares1 R773 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 R92 million non-cumulative preference shares7 Unamortised issue costs Total in issue at 31 December £m At 31 December 2010 At 31 December 2009 140 71 12 458 25 17 50 773 (13) 760 140 71 12 458 25 17 – 723 (13) 710 Preferred securities are held at historic value of consideration received less unamortised issue costs. 1. 200 million R10 preference shares issued by Nedbank Limited (Nedbank), the Group’s banking subsidiary. These shares are non-redeemable and non-cumulative and pay a cash dividend equivalent to 75% of the prime overdraft interest rate of Nedbank. Preference shareholders are only entitled to vote during periods when a dividend or any part of it remains unpaid after the due date for payment or when resolutions are proposed that directly affect any rights attaching to the shares or the rights of the holders. Preference shareholders will be entitled to receive their dividends in priority to any payment of dividends made in respect of any other class of Nedbank’s shares. 2. 77.3 million R10 preference shares issued at R10.68 per share by Nedbank on the same terms as the securities described in (1) above. 3. 30 million R10 preference shares issued on 22 June 2006 by Imperial Bank Limited a subsidiary of Nedbank Limited, on the same terms as the securities described in (1) above. 4. US$750 million Guaranteed Cumulative Perpetual Preference Securities issued on 19 May 2003 by Old Mutual Capital Funding L.P., a subsidiary of the Group. Subject to certain limitations, holders of these securities are entitled to receive preferential cash distributions at a ﬁxed rate of 8.0% per annum payable in arrears on a quarterly basis. The Group may defer payment of distributions at its sole discretion, but such an act may restrict Old Mutual plc from paying dividends on its ordinary shares for a period of 12 months. Arrears of distributions are payable quarterly cumulatively only on redemption of the securities or at the Group’s option. The securities are perpetual, but may be redeemed at the discretion of the Group from 22 December 2008. The costs of issue have been amortised over the period to 22 December 2008. 5. 35 million R10 preference shares issued in 16 April 2007 at R10.27 per share by Nedbank on the same terms as the securities described in (1) above. 6. 36.3 million R10 preference shares issued by Nedbank in seven instalments between September 09 and December 09 on the same terms as the securities described in (1) above. 7. 9.2 million R10 preference shares issued by Nedbank on 11 March 2010 on the same terms as the securities in note 1 above. 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. 292 Old Mutual plc Annual Report and Accounts 2010 (a) Liability for deﬁned beneﬁt obligations 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 Other beneﬁt retirement plans Total (included in staff costs) Pension plans Other post-retirement beneﬁt schemes Year to 31 December 2010 Year to 31 December 2009 Year to 31 December 2010 Year to 31 December 2009 £m 815 9 50 53 (50) 100 977 953 90 12 1 (47) 110 1,119 (142) 12 1 23 (106) 778 8 41 25 (43) 6 815 828 99 14 1 (41) 52 953 (138) 8 1 61 (68) 211 6 19 (2) (3) 39 270 175 17 (5) – (3) 34 218 52 (10) 1 12 55 158 5 12 15 (5) 26 211 160 9 – – (4) 10 175 36 (4) – 4 36 £m Pension plans Other post-retirement beneﬁt schemes Year to 31 December 2010 Year to 31 December 2009 Year to 31 December 2010 Year to 31 December 2009 5 40 (59) 7 2 (5) 8 31 (42) 5 – 2 8 19 (15) – – 12 3 12 (11) – – 4 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 293 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued G: Other notes 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 Property 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 2010 Year to 31 December 2009 5.4 5.7-5.8 7.2 4.2-5.4 0.5 5.4 4.7 3.7-4.3 3.7 3.8-4.0 5.8-6.7 2.8-3.7 5.8-6.7 5.8-6.7 3.3-4.8 2.0-2.3 2.0-2.3 7.5-8.4 4.5-5.8 0.5-5.7 5.7-6.5 4.8 3.8-4.3 3.8 4.0 5.8 2.8 5.8 5.8 3.3 2.0 2.0 5.4-9.0 7.5-9.0 9.1-11.0 9.0-9.1 9.0-9.1 6.0-6.3 2.2-6.0 3.2-6.2 7.3-8.0 7.3-8.0 5.3-8.0 5.3-8.0 5.0-8.0 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 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 reporting date speciﬁc to the relevant locations. The effect to the Group’s obligation of a 1% increase and 1% decrease in the assumed health cost trend rates would be an increase of £22 million and decrease of £17 million (2009: increase of £13 million and decrease of £13 million) respectively. 294 Old Mutual plc Annual Report and Accounts 2010 (d) Plan asset allocation Equity securities Debt securities Property Cash Annuities and other M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Pension plans Other post-retirement beneﬁt schemes At 31 December 2010 At 31 December 2009 At 31 December 2010 At 31 December 2009 % 37.8 41.7 7.0 1.0 12.5 37.4 40.9 6.8 3.6 11.3 36.5 26.3 4.4 23.5 9.3 36.6 20.8 5.6 26.1 10.9 100.0 100.0 100.0 100.0 Pension and other retirement beneﬁt plan assets include ordinary shares issued by the Company with a fair value of £nil (2009: £nil). (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 2010 (977) 1,119 142 (4) 0.4% (11) (0.9)% Year to 31 December Year to 31 December Year to 31 December 2009 (815) 953 138 8 (1.0)% (8) (0.8)% 2008 (778) 828 50 2 0.0% (69) (8.3)% 2007 (675) 855 180 (5) 0.7% 39 4.3% £m Year to 31 December 2006 (758) 836 78 (12) 1.6% 50 6.0% Total contributions expected to be paid to the Group pension plans for the year ending 31 December 2011 are £12 million (subject to any reassessments to be completed in the year). i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 295 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued G: Other notes continued G2: Share-based payments (a) Share-based payment arrangements During the year ended 31 December 2010, the Group had the following share-based payment arrangements: 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 Old Mutual Namibia Discretionary Scheme Nedcor Group (1994) Share Option Scheme Nedbank Group (2005) Share Option Scheme Description of award Contractual life Vesting conditions Restricted shares Options Dividend entitlement Other Years Service (years) Performance (measure) Other – – (cid:22) – (cid:22) – (cid:22) – – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – – (cid:22) (cid:22) – (cid:22) – (cid:22) – (cid:22) (cid:22) – – – (cid:22) – – – (cid:22) – – – – – – – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) – (cid:22) – – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) (cid:22) (cid:22)2 3½- 5½ 3 & 5 – – – – – – 6 3-5 Up to 10 years Not less than 3 years Up to 10 years Not less than 3 years 3 3 & 5 3 – 3 Not less than 3 years (cid:22)2 3½-5½ 3 & 5 – Target growth in EPS – – – – Target growth in EPS and ROE – Target growth in EPS – – – Target growth in EPS5 – – – – – – – – – – – Target growth in headline earnings 3 – 6 5 5 3 3 – 4-6 4, 5 & 64 3-6 10 10 10 3-6 3 – – – 3 4-6 4, 5 & 64 – – – – – – 3 & 48 5 10 10 10 10 10 6 5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – (cid:22)3 – – (cid:22)6 (cid:22)7 (cid:22)7 – – (cid:22)6 (cid:22)6 (cid:22)6 (cid:22)6 (cid:22)6 (cid:22)6 – – 296 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n G: Other notes continued G2: Share-based payments continued Description of award Contractual life Vesting conditions Restricted shares Option Dividend entitlement Other Years Service (years) Performance (measure) Other Scheme1 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 (cid:22) – (cid:22) (cid:22) (cid:22) – (cid:22) – (cid:22) (cid:22) – – – – – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) (cid:22) (cid:22) – (cid:22) – (cid:22) (cid:22) – (cid:22) (cid:22) (cid:22) – (cid:22) – (cid:22) – – – – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22)9 – – – – – (cid:22)12 – – – – – – (cid:22)15 – – – – – – 5 6 7 7 5 10 3 6 7 5 10 10 10 4 6 7 6 Indeﬁnite Indeﬁnite 10 3 6 4, 5 & 64 4, 5 & 64 – – – – 4, 5 & 64 – – – – 3 3 4, 5 & 64 3 – – – Various10 – – – – – – – – – – – – Target growth in average RoE – – – – – – – (cid:22)(cid:3)11 – – (cid:22)(cid:3)3 (cid:22)(cid:3)6,11 (cid:22)(cid:3)13 (cid:22)(cid:3)14 – (cid:22)(cid:3)6 (cid:22)(cid:3)6,11 (cid:22)(cid:3)6,11 (cid:22)(cid:3)6,11 – – – – (cid:22)7 (cid:22)7 (cid:22)6 Annual Report and Accounts 2010 Old Mutual plc 297 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued G: Other notes continued G2: Share-based payments continued Description of award Contractual life Restricted shares Option Dividend entitlement Other Years Vesting conditions Service (years) Performance (measure) Scheme1 Mutual & Federal Broad-based Employee Scheme Mutual & Federal Namibia Share Option Scheme Mutual & Federal Namibia Senior Black Management Scheme Mutual & Federal Namibia Community Scheme Mutual & Federal Namibia Black Business Partners Scheme Mutual & Federal Namibia Management Incentive Scheme Mutual & Federal Namibia Broad-based Employee Scheme Mutual & Federal Discretionary Scheme (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) (cid:22) – – – – – (cid:22) – – (cid:22) (cid:22) (cid:22) (cid:22) – (cid:22) (cid:22) – – – – – – – – – 5 6 7 – 3 4, 5 & 64 Indeﬁnite 10 6 5 10 – – 3 – – – – – – – – – – Other (cid:22)6 – – (cid:22)7 (cid:22)6 – (cid:22)6 (cid:22)6 1 All share-based payment arrangements are equity settled with the exception of the South Africa Share Option, the Deferred Delivery Plan and the Mutual & Federal share schemes 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’, Mutual & Federal 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. 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. 298 Old Mutual plc Annual Report and Accounts 2010 (b) Reconciliation of movements in options The number and weighted average exercise prices of share options are as follows: 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 Year ended 31 December 2010 Year ended 31 December 2009 Number of options 77,490,352 4,720,010 (7,162,357) (5,362,778) (5,939,820) 63,745,407 1,767,384 Weighted average exercise price Number of options Weighted average exercise price £0.66 £1.12 £0.87 £0.76 £1.21 £0.61 £1.31 33,222,022 58,992,582 (12,451,662) (1,940,138) (332,452) 77,490,352 6,234,171 £1.20 £0.45 £1.05 £0.94 £1.63 £0.66 £1.06 The options outstanding at 31 December 2010 have an exercise price in the range of £0.35 to £1.63 (2009: £0.35 to £1.99) and a weighted average remaining contractual life of 1.7 years (2009: 2.7 years). The weighted average share price at date of exercise for options exercised during the year was £1.19 (2009: £1.12). Options over shares in Old Mutual plc (Johannesburg Stock Exchange) Outstanding at beginning of the year Conversion from options over shares in Mutual & Federal (see below) 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 2010 Year ended 31 December 2009 Number of options 63,770,329 9,060,754 15,736,775 (8,645,294) (3,443,611) (2,481,216) 73,997,737 10,673,737 Weighted average exercise price Number of options Weighted average exercise price R12.45 R9.48 R13.87 R18.94 R10.97 R14.43 42,623,552 – 34,996,407 (10,334,831) (1,015,674) (2,499,125) R11.57 63,770,329 R12.72 10,457,729 R18.30 – R 7.79 R19.85 R11.69 R13.68 R12.45 R14.10 The options outstanding at 31 December 2010 have an exercise price in the range of R1.45 to R19.10 (2009: R7.45 to R23.40) and a weighted average remaining contractual life of 3.9 years (2009: 4.3 years). The weighted average share price at date of exercise for options exercised during the year was R13.92 (2009: R13.63). 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 2010 Year ended 31 December 2009 Number of options Weighted average exercise price 36,950,389 1,486,893 (1,286,772) (5,943,004) (5,328,228) R124.86 R125.36 R105.23 R94.47 R140.67 Number of options 41,124,074 1,976,504 (1,577,822) (4,207,864) (364,503) 25,879,278 R126.71 36,950,389 1,890,932 R100.75 6,599,248 Weighted average exercise price R121.61 R 82.97 R115.88 R 78.78 R102.75 R124.86 R 96.86 The options outstanding at 31 December 2010 have an exercise price in the range of R78 to R282.58 (2009: R63.19 to R282.58) and a weighted average remaining contractual life of 2.5 years (2009: 3 years). The weighted average share price at date of exercise for options exercised during the year was R131.17 (2009: R113.21). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l Options over shares in Mutual & Federal Insurance Company Ltd Outstanding at beginning of the year Conversion to options over Old Mutual plc (see below) 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 2010 Year ended 31 December 2009 Number of options 5,268,370 (5,268,370) – – – – – Weighted average exercise price R16.40 – – – – – – – Number of options 5,291,160 – 1,614,690 (359,940) (489,570) (787,970) 5,268,370 2,483,650 Weighted average exercise price R17.33 – R14.00 R16.80 R10.60 R18.83 R16.40 R13.99 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 299 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued The options outstanding at 31 December 2009 had an exercise price in the range of R2.5 to R27.95 and a weighted average remaining contractual life of 3.3 years. The weighted average share price at the date of exercise for options exercised during 2009 was R16.15. In February 2010 the Group completed the acquisition of the remaining non-controlling interests in Mutual & Federal Insurance Company Ltd, with new Old Mutual plc shares issued in exchange for Mutual & Federal shares. In conjunction with the acquisition, options previously held over shares in Mutual & Federal were converted into options over shares in Old Mutual plc, being converted at a rate consistent with the acquisition terms. (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 2011 which will have an IFRS 2 grant date of 1 January 2010, 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: Options issued on buy-out of M&F minorities* Number of options granted Fair value at measurement date Exercise price Expected volatility Expected life Expected dividends Risk-free interest rate UK Sharesave Scheme UK Share Option and Deferred Delivery Plan Old Mutual plc Share Reward Plan – Share Options 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 IncentivePlan Mutual & Federal Share Option Scheme Mutual & Federal Management Incentive Scheme Mutual & Federal Namibia Share Option Scheme Mutual & Federal Namibia Management Incentive Scheme 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Share price £1.18 £0.44 – – £1.21 £0.47 – £0.54 £0.39 £0.16 – – £0.52 £0.26 – £0.26 R4.71 R13.87 R7.80 R7.11 R4.70 R7.21 R13.91 R7.52 £0.94 £0.35 55.7% 3.4 yrs 3.7yrs 54.7% – – – – – – £1.21 £0.58 55.7% 5.0 yrs 5.0yrs 52.2% – £0.60 R13.87 R7.80 R13.91 R7.52 – 49.9% – 4.7yrs 43.9% 5.3 yrs 5.3yrs 43.8% 43.8% 44.0% 5.4 yrs 5.3yrs 1,561,135 35,270,546 – – 3,158,875 12,367,231 – 11,354,805 15,428,501 34,254,956 308,274 741,451 164,285 93,715 R31.17 R125.00 R121.08 R116.19 R84.37 R23.88 24.5% 6.0 yrs 5.6yrs 45.5% 930,543 1,836,338 R30.43 R126.72 R126.11 R77.78 R100.50 R22.80 25.6% 6.0 yrs 6.0yrs 48.7% – – – – – – – – – – – – – – – – – – – – – – – – – 1,569,260 – R3.97 – R14.01 – R14.01 – 34.0% – 3.0yrs – – – – – – – – – – – – – 45,430 – R4.05 – R13.50 – R13.50 – 34.0% – 3.0yrs 346,750 – 3,318,789 – 21,900 – 104,945 – 2.1% – – – 2.1% 1.3% – – 3.5% 3.0% 3.5% 3.0% 4.8% 6.9% 4.9% 7.2% – – – – – 4.5% – – – 4.5% 2.0% 2.1% – – 2.8% 2.8% – 2.5% 7.9% 8.6% 7.9% 8.6% – 8.5% 8.1% 8.6% – – – – – 7.7% – – – 7.5% * In February 2010 the Group completed the acquisition of the remaining non-controlling interests in Mutual & Federal Insurance Company Ltd, with new Old Mutual plc shares issued in exchange for Mutual & Federal shares. In conjunction with the acquisition, options previously held over shares in Mutual & Federal were converted into options over shares in Old Mutual plc, being converted at a rate consistent with the acquisition terms. 300 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n 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 2010, 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 $120 million, and to a liquidation preference proportionate to their shareholding. In consideration for the equity acquired, the participating employees agreed to forego a portion of existing long-term incentive payments owed. The difference between the carrying amount of this consideration and the fair value of the interest acquired was treated as share-based compensation expense in 2007. Fair value was determined based on the discounted projected future cash ﬂows of AAM. OMAM Afﬁliate Equity Plan Equity granted during the year to employees of ﬁrms participating in the OMAM Afﬁliate Equity Plan vests 3-5 years from the date of grant, conditional upon continued employment over this period. Equity purchased vested immediately. Fair value was determined based on a multiple of prior year earnings. Under the terms of the arrangements, participating employees may sell their equity back to Old Mutual (which acts as a buyer of last resort) at a ﬁxed multiple of prior year earnings, subject to certain restrictions. Accordingly, the schemes are accounted for as cash-settled share-based payments, despite the fact the initial purchase and/or grants of equity are settled in equity instruments. The following summarises the fair value of instruments purchased from and granted by US Asset Management during the year: Fair value of instruments granted and purchased during the year AAM1 OMAM Afﬁliate Equity Plan Total fair value of instruments (US$m)2 Afﬁliate share purchases Afﬁliate share grants Afﬁliate shares forfeited/ bought back Total non-controlling interest in afﬁliate – – – 28.57% 1.64% 0.48% 3.9% 2.4% – – – $17m – – – – 2.89% 0.44% 2.5% 7.3% $18.1m $2.4m $6m $9m – – – – (0.14)% (0.22)% (0.4)% – – – – – – – – 28.57% 4.39% 0.70% 6.0% 9.7% $18.1m $2.4m $6m $26m 2010 2009 2008 2007 2010 2009 2008 2007 2010 2009 2008 2007 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 2011 in respect of the 2010 ﬁnancial year has been determined to commence from 1 January 2010. It is anticipated that instruments with a fair value of US$7.9 million (2009: US$8.7 million and 2008: US$3.5 million) will be granted during 2010 to ﬁrms participating in the OMAM Afﬁliate Equity Plan based on 2010 ﬁnancial performance. Annual Report and Accounts 2010 Old Mutual plc 301 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued G: Other notes continued G2: Share-based payments continued (f) Restricted share grants The following summarises the fair value of restricted shares granted by the Group during the year: 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 Broad-based Employee Scheme Mutual & Federal Distributor Scheme Mutual & Federal Community Scheme Mutual & Federal Black Business Partners Scheme Mutual & Federal Namibia Management Incentive Scheme Mutual & Federal Namibia Senior Black Management Scheme Mutual & Federal Namibia Broad-based Employee Scheme Mutual & Federal Namibia Black Business Partners Scheme Mutual & Federal Namibia Community Scheme Mutual & Federal Discretionary Scheme Restricted Shares issued on buy-out of M&F minorities* Number granted Weighted average fair value 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 329,256 – 2,090,273 – 545,748 – 1,017,832 – 1,017,832 – 13,909,976 – 104,945 – 10,577 – 17,443 – 207,275 – 76,768 – 90,772 – – – 5,221,865 8,713,091 12,278,472 3,091,695 2,913,437 7,737,889 11,224,113 27,739,043 221,435 643,089 147,110 85,457 – 194,248 – 31,791 – 168,313 – 5,080,170 136,695 101,880 7,168 1,599,220 – – – – – – 889,768 282,501 – 54,550 – 810 – – 10,491 – 3,886 – 4,593 – – – £1.22 £0.54 £1.19 £0.58 R14.24 R8.56 R13.80 R7.47 R13.80 R7.45 R14.46 R8.18 – R67.77 – R84.12 – R77.28 – R75.36 R12.14 R16.17 R13.93 R13.79 – – – – – – R10.55 R13.63 – R13.50 – R17.50 – – R12.63 – R12.63 – R12.64 – 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. * In February 2010 the Group completed the acquisition of the remaining non-controlling interests in Mutual & Federal Insurance Company Ltd, with new Old Mutual plc shares issued in exchange for Mutual & Federal shares. In conjunction with the acquisition, options previously held over shares in Mutual & Federal were converted into options over shares in Old Mutual plc, being converted at a rate consistent with the acquisition terms. 302 Old Mutual plc Annual Report and Accounts 2010 (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 21,954,975 options (2009: 12,523,680 options) and 18,612,145 restricted shares (2009: 12,643,027 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 R12.99 (2009: R13.18). 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i 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 2010 Year ended 31 December 2009 Total fair value, £m Vesting period Total fair value, £m Vesting period 6 3 4.2 years 4.2 years 9 7 4.2 years 4.2 years £m Year ended 31 December 2010 Year ended 31 December 2009 i R s k a n d R e s p o n s b i i l i t y 13 7 20 21 – 35 7 42 19 – G o v e r n a n c e 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 159 and Corporate Governance Statement on page 138 respectively. (b) Key management personnel remuneration and other compensation i F n a n c a s i l Directors’ fees Remuneration Cash remuneration Short-term employee beneﬁts Post employment beneﬁts Other long-term beneﬁts Share-based payments Year ended 31 December 2010 Year ended 31 December 2009 Number of personnel 12 18 18 10 7 17 Value £000s 1,510 22,819 6,675 7,660 451 14 8,019 24,329 Number of personnel 9 13 13 12 3 12 Value £000s 1,214 13,590 4,777 4,159 587 7 4,060 14,804 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 303 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued G: Other notes continued G3: Related parties continued 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 Year ended 31 December 2010 Year ended 31 December 2009 Number of personnel Number of options/ shares ’000s Number of personnel 11 2 4 13 15,613 (482) 704 425 (966) (795) 14,499 10 3 2 11 Number of options/ shares ’000s 7,393 (848) 410 10,803 (1,171) (974) 15,613 Year ended 31 December 2010 Year ended 31 December 2009 Number of personnel 10 2 6 14 Number of options/ shares ’000s 7,832 (1,565) 1,314 12,282 (151) (570) 19,142 Number of personnel 9 3 1 10 Number of options/ shares ’000s 4,020 (724) 60 5,376 (119) (781) 7,832 (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 304 Old Mutual plc Annual Report and Accounts 2010 Year ended 31 December 2010 Year ended 31 December 2009 Number of personnel Value £000s Number of personnel Value £000s 7 8 4 5 5 5 3 1 13 13 265 407 672 22 7 29 3,028 (1,125) 86 (334) 136 1,791 18 1 23,501 6,714 6 7 4 4 4 5 5 2 12 11 (11) 276 265 12 10 22 1,896 1,509 190 (863) 296 3,028 33 3 11,550 5,648 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. (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 12 months ended 31 December 2010 were as follows: (cid:81) 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 £88 million (2009: £73 million) for services rendered under this agreement. (cid:81) Premises – the Group rents ofﬁce premises from Skandia Liv. The Group paid market rents of £16 million (2009: £15 million) for these premises. (cid:81) Occupational pensions – Skandia Liv provides occupational pensions for the employees of the Group, for which the Group paid £15 million (2009: £19 million). (cid:81) Agreement on IT services – the Group provides IT services to Skandia Liv. The amount charged to Skandia Liv was £7 million (2009: £7 million). (cid:81) Settlement with Skandia Liv regarding the arbitration settlement – In a ruling issues 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. On 21 July 2009, an agreement was 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 less than the reserve provision booked as per July 2009 with the difference resolved in 2009, the effect being a release of £10 million. The remaining provision of £18 million has been reclassiﬁed and is shown as a liability to Skandia Liv in the statement of ﬁnancial position. (cid:81) Currency derivatives – Skandia Liv hedge their currency position with forward contracts with Skandia Group at the prices prevailing on the foreign exchange market. Skandia Liv paid £27 million (2009: £2 million) for forward contracts during the year. The balance outstanding at 31 December 2009 due from Skandia Liv is £13 million (2009: £2 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 2009 a Group subsidiary, Nedbank Limited, provided funding to the Group. The funding was made through two loans of €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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 305 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 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 Old Mutual Wealth Management 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 59 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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% (2009: 84%) 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). 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. 306 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l 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: £m (unaudited) At 31 December 2010 At 31 December 2009 Capital and reserves Proﬁt/(loss) after tax 31 2 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: 27 5 £m At 31 December 2010 Clidet No. 638 (Pty) Ltd Visigro Investments (Pty) Ltd Odyssey Developments (Pty) Ltd Old Mutual Finance (Pty) Ltd Kotak Mahindra Old Mutual Life Insurance Ltd Old Mutual–Guodian Life Insurance Company Ltd All other associated undertakings Country of operation interest held % Carrying value Group share of proﬁt/ (loss) Republic of South Africa Republic of South Africa Republic of South Africa Republic of South Africa India China 49% 30% 49% 50% 26% 50% 29 8 10 5 13 12 85 162 – – – 4 2 (4) 5 7 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 2010. At 31 December 2009 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 Country of operation Republic of South Africa Republic of South Africa Republic of South Africa India China % interest held Carrying value Group share of proﬁt/(loss) £m 49% 30% 49% 26% 50% 23 9 10 16 8 69 135 – – – 3 (2) 1 2 £m (b) Aggregate ﬁnancial information of investments in associated undertakings and joint ventures The aggregate ﬁnancial information for all investments in associated undertakings and joint ventures is as follows: Total assets Total liabilities Total revenues Net proﬁt/(loss) after tax Year ended 31 December 2010 Year ended 31 December 2009 2,032 1,857 653 7 1,426 1,002 603 2 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 307 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (c) Aggregate Group investment in associated undertakings and joint ventures The aggregate amounts for the Group’s investment in associated undertakings and joint ventures are as follows: Balance at beginning of the year Net additions of investment in associated undertakings and joint ventures Share of proﬁt/(loss) after tax Dividends paid Foreign exchange and other movements Balance at end of the year £m Year ended 31 December 2010 Year ended 31 December 2009 135 11 7 – 9 162 111 4 2 (6) 24 135 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 (2009: £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. G6: Contingent liabilities Guarantees and assets pledged as collateral security Irrevocable letters of credit Secured lending Other contingent liabilities £m At 31 December 2010 At 31 December 2009 2,883 207 775 55 2,375 605 555 49 The Group has pledged debt securities amounting to £1,379 million (2009: £1,253 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 African banking businesses entered into structured ﬁnance transactions with third parties using the tax base of these companies. Pursuant to the terms of the majority of these transactions, the underlying third-party has contractually agreed to accept the risk of any tax being imposed by the South African Revenue Service (SARS), although the obligation to pay in the ﬁrst instance rests with the Group’s companies. It is only in limited cases where, for example, the credit quality of a client becomes doubtful, or where the client has speciﬁcally contracted out of the re-pricing of additional taxes, that the recovery from a client could be less than the liability that could arise on assessment, in which case provisions are made. SARS has examined the tax aspects of some of these types of structures and SARS could assess these structures in a manner different to that initially envisaged by the contracting parties. As a result Group companies could be obliged to pay additional amounts to SARS and recover these from clients under the applicable contractual arrangements. Nedbank litigation There are a number of legal or potential claims against Nedbank and its subsidiary companies, the outcome of which cannot at present be foreseen. The largest of these potential actions is a claim in the High Court for R1.3 billion against Nedbank by certain shareholders in Pinnacle Point Group Limited, alleging that Nedbank had a legal duty of care to them arising from a share swap transaction. Nedbank and its legal advisers are of the opinion that the claim is without merit and will be defended vigorously. Nedbank Securitisations The Group through Nedbank is party to securitisation transactions involving GreenHouse Funding (Pty) Limited (‘GreenHouse’), a residential mortgage backed securitisation programme, Octane ABS 1 (Pty) Limited (‘Octane’), a securitisation programme of auto loans advanced by a subsidiary of Nedbank, and Synthesis Funding Limited (‘Synthesis’), an asset backed commercial paper mortgage programme. 308 Old Mutual plc Annual Report and Accounts 2010 Synthesis primarily invests in long-term rated bonds and offers capital market funding to South African corporates. These assets are funded through the issuance of short-dated investment-grade commercial paper to institutional investors. All the commercial paper issued by Synthesis Funding Limited is assigned the highest short-term RSA local-currency credit rating by both Fitch and Moody’s, and is listed on the Bond Exchange of South Africa (BESA). Under GreenHouse Series 1, R2 billion of residential mortgages originated by Nedbank Retail was securitised. The commercial paper issued by GreenHouse has been assigned credit ratings by both Fitch and Moody’s and is listed on the JSE. The homeloans of GreenHouse continue to be recognised in the statement of ﬁnancial position of the Group, due to the signiﬁcant risks and rewards associated with the homeloans not being transferred to the external investors. In January 2010 the arrears levels in GreenHouse breached the Arrear Trigger level. As a result, the Stop Purchase Event remains in effect resulting in no further home loans (other than servicing redraws – i.e. access facilities on existing GreenHouse loans) being acquired for as long as the arrears level remains above the Arrear Trigger level. As a consequence, all capital repayments were directed to noteholders. Octane is a securitisation programme of auto loans originated by a subsidiary of Nedbank. The inaugural transaction entailed the securitisation of R2 billion of motor vehicle loans under Octane Series 1. The commercial paper issued by Octane Series 1 has been assigned credit ratings by Fitch and is listed on the JSE. The auto loans of Octane continue to be recognised on the statement of ﬁnancial position of the Group due to the signiﬁcant risks and rewards associated with the auto loans not being transferred to the external investors. During 2010 the transaction continued to repay investors in the normal course, as envisaged in the transaction documents. The following table shows the carrying amount of securitised assets, stated at the amount of the Group’s continuing involvement where appropriate, together with the associated liabilities, for each category of asset in the statement of ﬁnancial position:* M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Loans and advances to customers Residential mortgage loans Motor vehicle ﬁnancing ** Other ﬁnancial assets Corporate and bank paper Other securities Commercial paper Total Carrying amount of assets Associated liabilities At 31 December 2010 At 31 December 2009 At 31 December 2010 At 31 December 2009 £m 165 59 155 327 – 706 166 122 145 338 – 771 171 78 – – 484 733 169 134 – – 484 787 G o v e r n a n c e This table presents the gross balances within the securitisation schemes and does not reﬂect any eliminations of intercompany and cash balances held by the various securitisation vehicles. * The value of any derivative instruments taken out to hedge any ﬁnancial asset or liability, is adjusted against such instrument in this disclosure. ** Comparative information relating to motor vehicle ﬁnancing has been restated to only disclose auto loans relating to the Octane transaction. This approach ensures consistency with the disclosure provided for GreenHouse and Synthesis. The effect of this restatement is a £21 million decrease in the carrying amount of motor vehicle ﬁnancing assets. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 309 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued 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. Investment property Property, plant and equipment £m At 31 December 2010 At 31 December 2009 118 95 – 104 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 £m At 31 December 2010 At 31 December 2009 4,294 1,885 1,367 1,983 1,002 63 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 Group’s day-to-day operations. Commitments under the Group’s operating lease arrangements are described in note G8. G8: Operating lease arrangements (a) The Group as lessee Outstanding commitments under non-cancellable operating leases, fall due as follows: 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 310 Old Mutual plc Annual Report and Accounts 2010 Year ended 31 December 2010 Year ended 31 December 2009 Banking Non- banking 68 233 292 593 35 97 70 202 Total 103 330 362 795 Banking Non- banking 117 212 240 569 35 115 72 222 £m Total 152 327 312 791 £m At 31 December 2010 At 31 December 2009 15 115 2,040 2,170 12 70 1,759 1,841 £m At 31 December 2010 At 31 December 2009 59 142 76 277 62 149 21 232 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 21 January 2011 the Group redeemed the £300 million Tier 2 bond repayable 21 January, taking the option to redeem at the ﬁrst call date. H: Discontinued operations and held for sale operations H1: Discontinued operations The results of the Group’s United States life business, US Life, are shown as a discontinued operation in these ﬁnancial statements. At 31 December 2010 the Group had entered into an agreement to dispose of the controlling interest in US Life to Harbinger OM LLC, an afﬁliate of Harbinger Capital Partners, and is seeking to gain regulatory approval for the sale. The disposal is expected to be completed at or around the end of the ﬁrst quarter of 2011. US Life has been classiﬁed as a discontinued operation in these ﬁnancial statements. Analysis of the results of discontinued operations is given below. (a) Income statement from discontinued operations Revenue Expenses Proﬁt/(loss) before tax from discontinued operations Loss on remeasurement to fair value less costs to sell Loss before tax Tax credit Loss from discontinued operations after tax (b) Statement of comprehensive income from discontinued operations Loss after tax for the ﬁnancial year Other comprehensive income for the ﬁnancial year Fair value gains/(losses) 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 other comprehensive income for the ﬁnancial year Total comprehensive (loss)/income for the ﬁnancial year Attributable to Equity holders of the parent Total comprehensive (loss)/income for the ﬁnancial year M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y £m Year ended 31 December 2010 Year ended 31 December 2009 1,608 (1,557) 51 (827) (776) 63 (713) G o v e r n a n c e 1,208 (1,314) (106) – (106) 35 (71) £m i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Year ended 31 December 2010 Year ended 31 December 2009 (713) (71) 530 (12) (334) 29 (34) (67) 112 (601) (601) (601) 975 227 (9) (68) – (410) 715 644 644 644 Annual Report and Accounts 2010 Old Mutual plc 311 FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (c) Net cash ﬂows from discontinued operations Operating activities Investing activities Net cash ﬂows £m Year ended 31 December 2010 Year ended 31 December 2009 (167) 63 (104) (191) 144 (47) H2: Disposal group held for sale The assets and liabilities of the Group’s United States life business, US Life, are shown as held for sale in these ﬁnancial statements. The Group has entered into an agreement to dispose of the controlling interest in US Life to Harbinger OM LLC, an afﬁliate of Harbinger Capital Partners, and is seeking to gain regulatory approval for the sale. On reclassiﬁcation of the assets and liabilities of US Life to held for sale the fair value based on agreed terms with Harbinger less expected costs to sell was assessed and an impairment charge was taken to write down the net assets to this amount. (a) Statement of ﬁnancial position Assets directly associated with disposal group held for sale Deferred tax assets Deferred acquisition costs Reinsurers’ share of long-term business policyholder liabilities Deposits held with reinsurers Loans and advances Investments and securities Trade, other receivables and other assets Derivative ﬁnancial instruments – assets Cash and cash equivalents Liabilities directly associated with disposal group held for sale Long-term business policyholder liabilities Deferred tax liabilities Trade, other payables and other liabilities £m At 31 December 2010 78 551 506 36 57 10,794 209 127 26 12,384 £m At 31 December 2010 11,975 22 222 12,219 Included within Investments and securities is £395 million of short term cash balances. In addition to the disposal group held for sale, namely US Life, the Group had additional non-current assets held for sale of £7 million (2009: £1 million). (b) Equity attributable to equity holders of the parent directly associated with disposal group held for sale Retained earnings Available-for-sale reserve Share-based payments reserve 312 Old Mutual plc Annual Report and Accounts 2010 £m At 31 December 2010 36 18 1 55 (c) Fair value hierarchy Fair values of ﬁnancial assets and liabilities Fair value hierarchy Year ended 31 December 2010 Financial assets measured at fair value Held-for-trading (fair value through income statement) Derivative ﬁnancial instruments – assets Available-for-sale ﬁnancial assets Investments and securities Total ﬁnancial assets measured at fair value Financial liabilities measured at fair value Held-for-trading (fair value through income statement) Life assurance policyholder liabilities Total ﬁnancial liabilities measured at fair value Total Level 1 Level 2 Level 3 £m 127 127 10,046 10,046 10,173 960 960 960 – – 525 525 525 – – – 127 127 9,186 9,186 9,313 17 17 17 – – 335 335 335 943 943 943 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 313 Level 3 ﬁnancial assets Available-for-sale ﬁnancial assets Investments and securities Total Level 3 ﬁnancial assets Level 3 ﬁnancial liabilities Held-for-trading (fair value through income statement) Life assurance policyholder liabilities Derivative ﬁnancial instruments – liabilities Total Level 3 ﬁnancial liabilities FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 continued (c) Fair value hierarchy 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 settlements Transfers in Transfers out Foreign exchange and other movements At end of the year £m For assets and liabilities held at the year end Gains/ losses recognised in other compre- hensive income Gains/ losses recognised in income statement 419 419 (1) (1) 12 12 116 116 (211) (211) 21 21 (38) (38) 17 17 335 335 419 (1) 12 116 (211) 21 (38) 17 335 888 880 71 67 8 4 888 71 – – – – 57 (108) 57 – – (108) 57 (108) – – – – – – – – 35 943 35 1,039 – (96) – 35 943 67 Analysis of reasonably possible alternative assumptions Year ended 31 December 2010 Available-for-sale ﬁnancial assets Investments and securities Total Level 3 ﬁnancial assets Level 3 ﬁnancial liabilities Held-for-trading (fair value through income statement) Life assurance policyholder liabilities Total Level 3 ﬁnancial liabilities Reﬂected in Reﬂected in other income statement comprehensive income Favourable changes Unfavourable changes Favourable changes Unfavourable changes – – – 28 28 28 – – – 11 11 11 14 14 14 – – – 11 11 11 – – – 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. 314 Old Mutual plc Annual Report and Accounts 2010 – – – 67 67 8 8 8 – – – – £m FINANCIAL STATEMENTS OF THE COMPANY COMPANY STATEMENT OF FINANCIAL POSITION At 31 December 2010 Assets Investments in Group subsidiaries Investments in associated undertakings 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 £m At 31 December 2010 At 31 December 2009 Notes 8 9 4 2 3 6 5 2 9,373 26 1,299 109 438 8,993 26 1,644 176 414 11,245 11,253 1,451 15 4,317 100 5,883 1,406 17 4,628 58 6,109 5,362 5,144 5,362 5,144 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y The Company’s ﬁnancial statements on pages 315 to 329 were approved by the Board of Directors on 8th March 2011. Julian Roberts Group Chief Executive Philip Broadley Group Finance Director G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 315 FINANCIAL STATEMENTS OF THE COMPANY COMPANY STATEMENT OF CASH FLOWS At 31 December 2010 continued 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 Acquisition of interests in subsidiaries Proceeds from sale and maturity of other investments Other investing cash ﬂow 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 £m Year ended 31 December 2010 Year ended 31 December 2009 152 – 270 30 – 300 (52) (52) 400 (17) – 22 5 58 (112) – (39) (95) (44) 9 (20) – – (104) (35) (382) 23 1 414 438 139 4 230 (56) – 178 87 87 404 – 11 – 11 90 (129) – (38) – (45) 4 (6) 1 542 (404) (16) (1) 414 (3) 3 414 At 31 December 2010 and 2009 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 £650 million (2009: £658 million), of which only cash dividends from Försäkringsaktiebolaget Skandia (publ) of £38 million were received during the year ended 31 December 2010 (2009: £55 million). 316 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s l i FINANCIAL STATEMENTS OF THE COMPANY COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2010 Millions Number of shares issued and fully paid Share capital Share premium Other reserves Retained earnings* 5,518 552 770 2,571 – – – 15 2 – – 1 – – – – – 17 – 4 4 – – – – 129 – – – – 8 563 142 142 (95) – 11 (20) – – – 570 795 2,708 601 688 Share capital Share premium Other reserves Retained earnings* 5,516 552 766 2,561 – – – – – – 2 – – – – – – – – – – – – – – 2 2 – – – – – – – – 10 409 156 156 – 1 (3) – – – Perpetual Preferred callable securities 688 44 44 (44) – – – – – – Perpetual preferred callable securities 688 45 45 (45) – – – – – £m Total 5,144 186 186 (139) 144 30 (20) 4 5 8 5,362 £m Total 4,976 201 201 (45) 1 (3) 2 2 10 – – – 147 24 – – 6 – 5,695 Millions Number of shares issued and fully paid Year ended 31 December 2010 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 Acquisition of non-controlling interest in Mutual & Federal Shares issued in lieu of cash dividends 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 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 5,518 552 770 2,571 563 688 5,144 * Included within retained earnings of £601 million (2009: £563 million) are distributable reserves of £598 million (2009: £514 million). Other reserves Merger reserve Share-based payment reserve Attributable to equity holders of Company at end of the year £m At 31 December 2010 At 31 December 2009 2,661 47 2,708 2,532 39 2,571 S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 317 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 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 Total Held-for- trading Designated Loans and receivables £m Financial liabilities amortised cost Non-ﬁnancial assets and liabilities 9,373 26 1,299 109 438 11,245 1,451 15 4,317 100 5,883 – – – 109 – 109 – – – 100 100 – – – – – – 906 – – – 906 – – 1,146 – 438 1,584 – – – – – – – – – – – 545 – 4,258 – 4,803 9,373 26 153 – – 9,552 – 15 59 – 74 £m Fair value through income statement Total Held-for-trading Designated Loans and receivables Financial liabilities amortised cost Non-ﬁnancial assets and liabilities 8,993 26 1,644 176 414 11,253 1,406 17 4,628 58 6,109 – – – 176 – 176 – – – 58 58 – – – – – – 761 – – – 761 – – 1,501 – 414 1,915 – – – – – – – – – – – 645 – 4,569 – 5,214 8,993 26 143 – – 9,162 – 17 59 – 76 At 31 December 2010 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 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 318 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 (b) Fair values of ﬁnancial assets and liabilities 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. Details of the different fair value hierarchy classiﬁcations are shown in the Group Accounts note E1(b). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i Analysis of instruments at fair value At 31 December 2010 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 measured at fair value 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 At 31 December 2009 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 measured at fair value 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 Total Level 1 Level 2 Level 3 £m 109 – 109 109 100 100 906 906 1,006 – – – – – – 906 906 906 109 – 109 109 100 100 – – 100 – – – – – – – – – Total Level 1 Level 2 £m Level 3 176 – 176 176 58 58 761 761 819 – – – – – – 761 761 761 176 – 176 176 58 58 – – 58 – – – – – – – – – i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 319 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 Financial instruments designated as fair value through the 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 the income statement. The maximum exposure to credit risk on investments and securities during 2010 was £nil (2009: £nil). 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 the 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 2010 Borrowed funds At 31 December 2009 Borrowed funds Change in fair value due to change in credit risk £m Fair value 906 Current ﬁnancial year 184 Cumulative (68) Contractual maturity amount 946 £m Change in fair value due to change in credit risk Current ﬁnancial year 264 Cumulative Contractual maturity amount (252) 966 Fair value 761 (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. The table below summarises the Company’s exposure to foreign currency exchange rate risk: At 31 December 2010 GBP ZAR USD EUR SEK Other Reclassiﬁcation – – – 11 11 10 11 – 21 – – 93 681 774 325 – 1,331 1,656 – 19 18 141 178 – – 457 457 – – 38 1,727 1,765 386 – 22 408 – – – 10 10 – – – – – 89 – – 89 – 89 – 89 Assets Investments in associated undertakings Derivative ﬁnancial instruments – assets1 Cash and cash equivalents Other assets Total assets Liabilities Borrowed funds2 Derivative ﬁnancial instruments – liabilities3 Other liabilities Total liabilities 26 1 289 8,102 8,418 730 – 2,522 3,252 320 Old Mutual plc Annual Report and Accounts 2010 £m Total 26 109 438 10,672 11,245 1,451 100 4,332 5,883 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 At 31 December 2009 Assets Investments in associated undertakings Derivative ﬁnancial instruments – assets1 Cash and cash equivalents Other assets Total assets Liabilities Borrowed funds2 Derivative ﬁnancial instruments – liabilities3 Other liabilities Total liabilities GBP ZAR USD EUR SEK Other Reclassiﬁcation 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 – – – – – 129 – – 129 75 54 – 129 £m Total 26 176 414 10,637 11,253 1,406 58 4,645 6,109 1. The reclassiﬁed derivative ﬁnancial instruments of £89 million (2009: £129 million) represent currency hedges for borrowed funds and so have been reclassiﬁed and netted against GBP and USD borrowed funds. 2. The totals of £730 million (GBP) (2009: £672 million), £325 million (USD) (2009: £244 million) and £386 million (SEK) (2009: £306 million) of borrowed funds have been disclosed as net of hedges in derivative ﬁnancial instruments of £77 million (2009: £88 million), £12 million (2009: £41 million) and £89 million (2009: £54 million) respectively. 3. The derivative ﬁnancial instrument of £89 million (2009: £54 million) represents a currency hedge for borrowed funds and so have been reclassiﬁed and netted against SEK borrowed funds. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y A 10% deterioration in the values of the major currencies shown above in relation to GBP would result in a decrease in the Company’s equity holders’ funds of £17 million (2009: increase of £2 million). (e) Credit risk The Company is principally exposed to credit risk through cash at bank and the ability of the subsidiaries to repay amounts due to the Company, 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 or the ﬁnancial position of companies within the Group. The following table analyses the credit rating (Standard & Poor’s or equivalent) of ﬁnancial assets bearing credit risk: G o v e r n a n c e At 31 December 2010 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 2009 Investments in associated undertakings Derivative ﬁnancial instruments – assets Other assets (including inter-company) Cash and cash equivalents Financial assets bearing credit risk Investment Grade (AAA to BBB) – 109 – 438 547 Investment Grade (AAA to BBB) – 176 – 414 590 Not rated 26 – 1,299 – 1,325 Not rated 26 – 1,644 – 1,670 £m Total 26 109 1,299 438 1,872 Total 26 176 1,644 414 2,260 (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). Annual Report and Accounts 2010 Old Mutual plc 321 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 (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 £1,441 million (2009: £1,142 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. 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 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. Notional principals Positive values Negative values £m Fair values Assets Liabilities 559 – 559 946 1,505 391 164 555 – 555 90 – 90 19 109 89 11 100 – 100 £m Notional principals Positive values Negative values Fair values Assets Liabilities 567 113 680 987 1,667 353 95 448 – 448 129 – 129 47 176 54 4 58 – 58 At 31 December 2010 Exchange rate contracts Swaps Forwards Interest rate contracts Swaps Total At 31 December 2009 Exchange rate contracts Swaps Forwards Interest rate contracts Swaps Total 322 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 The contractual maturities of the derivatives/liabilities held are as follows: 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 100 58 100 4 – – – 54 – – – – At 31 December 2010 Derivative ﬁnancial liabilities At 31 December 2009 Derivative ﬁnancial liabilities 3 Borrowed funds Senior debt securities and term loans Subordinated debt securities Total borrowed funds Fair valued through income statement Amortised cost Total borrowed funds M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i £m Total 100 58 £m i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s l i Notes 3(i) 3(ii) At 31 December 2010 At 31 December 2009 546 905 1,451 645 761 1,406 £m At 31 December 2010 At 31 December 2009 905 546 1,451 761 645 1,406 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 Total senior debt securities and term loans £m At 31 December 2010 At 31 December 2009 462 817 536 1,815 171 1,279 536 1,986 £m At 31 December 2010 At 31 December 2009 43 503 546 89 556 645 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 2010, £499 million (2009: £480 million) of this facility was utilised, all in the form of irrevocable letters of credit (2009: £480 million). In the current year there was no form of drawn debt (2009: £nil). During the year, the Company repaid €60 million bonds (€30 million, €20 million and €10 million) swapped into USD on inception. In addition, R550 million ﬂoating rate note was repaid, along with Sterling loan note. S h a r e h o d e r l i n f o r m a t i o n In the current year the Company issued no new debt. Annual Report and Accounts 2010 Old Mutual plc 323 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 (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 £m At 31 December 2010 At 31 December 2009 296 609 905 252 509 761 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. This bond was redeemed after the end of the reporting period, at the ﬁrst call date of 21 January 2011. 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 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 5 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 6 Provisions Post employment beneﬁts Other Total provisions £m At 31 December 2010 At 31 December 2009 11 101 41 - 157 989 1,299 10 89 43 1 162 1,339 1,644 £m At 31 December 2010 At 31 December 2009 59 1,692 2,566 – 4,317 59 1,388 3,181 – 4,628 £m Note 7 At 31 December 2010 At 31 December 2009 14 1 15 17 – 17 7 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 (2009: 2) were directly employed by the Company. The costs for these Directors and ex-Directors are disclosed within the Remuneration Report on page 159. 324 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 Liability for deﬁned beneﬁt obligations Change in projected beneﬁt obligation Projected beneﬁt obligation at beginning of the year Interest cost on beneﬁt obligation Beneﬁts paid 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 Beneﬁts paid Company contributions Plan assets at fair value at end of the year Net liability recognised in balance sheet Funded status of plan Recognised actuarial loss Net amount recognised in balance sheet Expense recognised in the income statement Expected return on plan assets Interest costs Total 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 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y £m Pension plans Year to 31 December 2010 Year to 31 December 2009 61 3 (1) (1) 62 41 4 (2) 4 47 15 (1) 14 55 3 – 3 61 35 2 – 4 41 20 (3) 17 £m G o v e r n a n c e Pension plans Year to 31 December 2010 Year to 31 December 2009 2 (3) (1) 2 (3) (1) % Pension plans Year to 31 December 2010 Year to 31 December 2009 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n 5.4 7.2 4.2 0.5 5.4 4.7 3.7 3.7 5.7 7.5 4.5 5.7 5.7 4.8 3.8 3.8 % Pension plans Year to 31 December 2010 Year to 31 December 2009 39% 60% 1% 37% 60% 3% Annual Report and Accounts 2010 Old Mutual plc 325 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 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 8 Principal subsidiaries Balance at beginning of the year Acquisitions Additions Impairments Balance at end of the year Year to 31 December Year to 31 December 2010 (62) 47 (15) – 0.0% 2 5.0% 2009 (61) 41 (20) – 0.0% 1 3.0% Year to 31 December 2008 Year to 31 December 2007 Year to 31 December 2006 £m (55) 35 (20) (1) 2.0% (7) (18.5)% (56) 37 (19) – – (1) (1.8)% (56) 32 (24) – (0.4)% – – £m At 31 December 2010 At 31 December 2009 8,993 22 358 – 9,373 7,595 – 1,417 (19) 8,993 On 24 December 2010, the Company increased its investment in the Ordinary share capital of Commsale 2000 Limited by £2.5 million. On 14 December 2010, the Company increased its investment in the Ordinary share capital of OM Group (UK) Limited by £330 million via a reduction in loan ﬁnancing. On 29 June 2010, the Company increased its investment in the ordinary ‘B’ share capital of Millpencil Limited by $25.3 million. Also included within additions is the Company’s investment in subsidiary undertakings in respect of movements on the share based payments (£8 million). On 17 December 2010, the Company received 9% share (SEK232.7 million) in Skandia Leben Holding Gmbh as payment of a dividend in specie from Försäkringsaktiebolaget Skandia (publ). On 7 December 2010, the Company sold its entire holding in Skandia Investment Group Holdings to Skandia Life Assurance Holdings Limited for consideration of £1,000. No companies were dissolved during the year. 326 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 The Company holds the following interests in Group companies: At 31 December 2010 Country of incorporation Class of shares % interest held England & Wales Commsale 2000 Ltd Constantia Insurance Company (Guernsey) Limited Guernsey 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 Sandlord Ltd Selestia Holdings Limited Skandia (London) Ltd Skandia Europe and Latin America Sweden England & Wales England & Wales England & Wales Jersey England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales (Holdings) Limited Skandia UK Holdings Limited Skandia Leben Holdings Gmbh England & Wales England & Wales Germany 9 Investments in associated undertakings The Company holds the following interest in associated undertakings: 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% 9% Country of operation % interest held At 31 December 2010 At 31 December 2009 £m Kotak Mahindra Old Mutual Life Insurance Limited India 26% 26 10 Commitments and guarantees Commitments 26 £m At 31 December 2010 At 31 December 2009 499 480 The commitments relate to letters of credit issued in support of the operations of a subsidiary company. Any liability arising from these letters of credit would be recovered from the subsidiary company. In February 2008, the Company issued a guarantee to a third party over a subsidiary’s (Old Mutual Bermuda) obligations under the reinsurance contracts relating to the offshore investment products sold by a third party. The maximum payment under this guarantee is $250 million. This guarantee is accounted for as an insurance contract and payments will only arise should Old Mutual Bermuda be unable to meet its obligations under the relevant reinsurance contracts as they fall due. 11 Related parties Old Mutual plc enters into transactions with its subsidiaries in the normal course of business. These are principally related to funding of the Group’s businesses and head 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. On 5 February 2010, the Company completed the acquisition of the remaining non-controlling shareholding in Mutual & Federal Insurance Company Limited. As part of the transaction, the Company sold its shares in Mutual & Federal Insurance Company Limited to OMLAC(SA) in a non cash transaction in return for novating Old Mutual plc loan notes totalling $234 million and it assumed the obligation for the discharge in 2015 of the unsettled share-based payment transaction with Mutual & Federal Black Business Partners for nil consideration. There are no transactions entered into by the Company with associated undertakings. Annual Report and Accounts 2010 Old Mutual plc 327 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 Statement of Financial Position information At 31 December 2010 Subsidiaries: OM Group (UK) Limited1 Primemajor 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 GGP II14 Other related parties: Fairbairn Trust Company Limited11 £m Balance due from/(to) 962 4 1 4 2 (274) (2,460) (530) (51) (56) (471) (2) (4) (28) (122) (10) (79) 53 1. The loan with OM Group (UK) Limited includes loan advances of $845 million, £68 million and AUD$7 million (2009: $1,518 million, £22 million and A$7 million). The dollar facility expires on 30 September 2015, whilst the Sterling facility expires on 28 June 2013 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 (2009: £350 million), with a term agreement of 6.75%, switching to ﬂoating rate (LIBOR +2.48%) after 12 years and a balance of £22 million which is deferred interest on the £350 million, with a term agreement of 12 month LIBOR plus 1.8% margin. 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. Also with Skandia UK is a balance of £49 million which is the deferred interest of the two loan notes and interest is charged at 12 month LIBOR and 0.30% margin. The Company has a term loan agreement with Skandia Insurance Company Ltd where 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 £30 million, Skandia Germany €57 million, Skandia Leben Holdings Gmbh €6.8 million, Skandia Holdings Ltd £79.8 million, SkandiaLink (Spain) €357 million and Skandia Europe and Latin America (Holdings) Limited of £18 million. There is also a discount note with Skandia Financial Holdings BV of €1.9 million with a maturity date of 4 March 2011. 3. The balance with Old Mutual International companies includes one contingent loan facility of £4 million (2009: £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 (2009: 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 a ﬂoating rate note of $82 million, and £0.2 million and £0.35 million ﬂoating rate notes. Interest charged is USD LIBOR + 0.45% margin on the $82 million and GBP LIBOR + 0.45% on the latter two. All mature on 28 April 2013 . In addition there are various discount notes. 6. The balance with Old Mutual (SA) companies includes one ﬂoating rate note $814 million (2009: $1,097 million). Interest charged is USD LIBOR + 0.45% margin and matures on 28 April 2013. 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, interest free facility and an uncommitted money market deposit facility of £0.1 million, interest charged at a 12 month LIBOR, with a current balance £10 million. 8. The loan with Old Mutual Business Limited represents a long-term loan advance with no maturity date of £56 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 two loans, €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 GGP II are 2 discount notes, $5 million maturing on 18 February 2011 and £74 million maturing on 17 March 2011. 328 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL STATEMENTS OF THE COMPANY NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2010 Outstanding amounts At 31 December 2009 Subsidiaries: OM Group (UK) Limited Primemajor Old Mutual Holdings (Kenya) Global Edge Technologies Pty Limited Old Mutual International companies Fairbairn Trust Company Limited Bermuda Holdings companies Skandia 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 Nedbank Millpencil Other related parties: Fairbairn Trust Company Limited Income statement information At 31 December 2010 Subsidiaries At 31 December 2009 Subsidiaries £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 £m Interest received/ (paid) Ordinary dividends received/ (paid) Other amounts received/ (paid) (76) 650 (86) £m Interest received/ (paid) 88 Ordinary dividends received/ (paid) 658 Other amounts received/ (paid) (122) 12 Events after the reporting date On 21 January 2011 the Company redeemed the £300 million Tier 2 bond repayable 21 January (5%), exercising its option to redeem at the ﬁrst call date. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 329 MCEV STATEMENT OF DIRECTORS’ RESPONSIBILITIES in relation to the Market Consistent Embedded Value basis supplementary information The directors of Old Mutual plc have chosen to prepare supplementary information on a Market Consistent Embedded Value (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 2010 for all businesses. In preparing the MCEV supplementary information, the directors have: (cid:81) prepared the supplementary information in accordance with the methodology described above and the basis of preparation (cid:81) as set out on page 336; identiﬁed and described the business covered by the MCEV methodology; applied the MCEV methodology consistently to the covered business; (cid:81) (cid:81) 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 (cid:81) where relevant, made estimates that are reasonable and consistent. 330 Old Mutual plc Annual Report and Accounts 2010 MCEV INDEPENDENT AUDITORS’ REPORT to Old Mutual plc on the Market Consistent Embedded Value basis supplementary information We have audited the Market Consistent Embedded Value (MCEV) basis supplementary information (‘the supplementary information’) of Old Mutual plc (‘the Company’) on pages 332 to 383 in respect of the year ended 31 December 2010. The ﬁnancial reporting framework that has been applied in the preparation of the supplementary information is the Market Consistent Embedded Value Principles issued in October 2009 by the European CFO Forum (‘the MCEV Principles’). The supplementary information should be read in conjunction with the Group ﬁnancial statements which are on pages 172 to 314. 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 330, 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, and express an opinion on, 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. In view of the purpose for which the supplementary information has been prepared, however, we did not assess the overall presentation of the supplementary information which would have been required if we were to express an audit opinion under International Standards on Auditing (UK and Ireland). Opinion on supplementary information In our opinion, the MCEV basis supplementary information of the Company for the year ended 31 December 2010 has been properly prepared, in all material respects, in accordance with the MCEV Principles using the methodology and assumptions as detailed in the basis of preparation of the supplementary information on page 336. Alastair W S Barbour (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 8 March 2011 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 331 MCEV GROUP MARKET CONSISTENT EMBEDDED VALUE STATEMENT OF EARNINGS For the year ended 31 December 2010 £m Year ended 31 December 2010 Year ended 31 December 2009 Notes Long-Term Savings Covered business Asset management and other business Banking Nedbank Banking Mutual and Federal General insurance US Asset Management Asset management Other operating segments Finance costs* Other shareholders’ expenses Adjusted operating Group MCEV earnings before tax from core operations Adjusted operating Group MCEV earnings before tax from Bermuda non-core operations Adjusted operating Group MCEV earnings before tax from continuing operations** Adjusting items from continuing operations C3 Total Group MCEV earnings before tax from continuing operations Income tax attributable to shareholders Total Group MCEV earnings after tax from continuing operations Total Group MCEV earnings after tax from US Life discontinued operations*** Total Group MCEV earnings after tax for the ﬁnancial period Total Group MCEV earnings for the ﬁnancial period attributable to: Equity holders of the parent Non-controlling interests Ordinary shares Preferred securities Total Group MCEV earnings after tax for the ﬁnancial period Basic total Group MCEV earnings per ordinary share (pence) Weighted average number of shares – millions 705 127 16 848 601 103 87 (183) (57) 1,399 (28) 1,371 499 1,870 (410) 1,460 227 1,687 252 26 16 294 470 70 83 (144) (69) 704 8 712 478 1,190 (108) 1,082 700 1,782 1,429 1,562 196 62 1,687 28.2 5,064 156 64 1,782 31.3 4,994 * This includes interest payable from Old Mutual plc to non-core operations of £55 million for the year ended 31 December 2010 (£40 million for the year ended 31 December 2009). ** For long-term business and general insurance businesses, adjusted operating MCEV earnings are based on short-term and long-term investment returns respectively, include investment returns on life funds’ investments in Group equity and debt instruments, and are stated net of income tax attributable to policyholder returns. For the US Asset Management business it includes compensation costs in respect of certain long-term incentive schemes deﬁned as non-controlling interests in accordance with IFRS. For all businesses, adjusted operating MCEV earnings exclude goodwill impairment, the impact of acquisition accounting, put revaluations related to long-term incentive schemes, the impact of closure of unclaimed shares trusts, proﬁt/(loss) on disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to holders of perpetual preferred callable securities, and fair value (proﬁts)/losses on certain Group debt movements. *** This is composed of earnings before tax of £48 million, adjusting items of £180 million and tax of £(1) million for the year ended 31 December 2010 (earnings before tax of £302 million, adjusting items of £435 million and tax of £(36) million for the year ended 31 December 2009). Further detail relating to adjusting items can be found in section C3. 332 Old Mutual plc Annual Report and Accounts 2010 MCEV ADJUSTED OPERATING GROUP MCEV EARNINGS PER SHARE For the year ended 31 December 2010 Year ended 31 December 2010 Adjusted operating Group MCEV earnings before tax Tax on adjusted operating Group MCEV earnings Adjusted operating Group MCEV earnings after tax Notes B2 Non-controlling interests Ordinary shares Preferred securities Adjusted operating MCEV earnings after tax attributable to equity holders Adjusted operating Group MCEV earnings per share* Adjusted weighted average number of shares – millions Core continuing operations Non-core continuing operations Discontinued operations 1,399 (313) 1,086 (217) (62) 807 15.0 (28) 4 (24) – – (24) (0.4) 48 (1) 47 – – 47 0.9 £m Total 1,419 (310) 1,109 (217) (62) 830 15.5 5,359 * 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. Year ended 31 December 2009 Adjusted operating Group MCEV earnings before tax Tax on adjusted operating Group MCEV earnings Adjusted operating Group MCEV earnings after tax Notes B2 Non-controlling interests Ordinary shares Preferred securities Adjusted operating MCEV earnings after tax attributable to equity holders Adjusted operating Group MCEV earnings per share* Adjusted weighted average number of shares – millions Core continuing operations Non-core continuing operations Discontinued operations 704 (146) 558 (179) (64) 315 6.0 8 (27) (19) – – (19) (0.4) 302 (36) 266 – – 266 5.1 £m Total 1,014 (209) 805 (179) (64) 562 10.7 5,229 * 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 333 MCEV COMPONENTS OF GROUP MCEV AND ADJUSTED GROUP MCEV At 31 December 2010 Components of Group MCEV At 31 December 2010 At 31 December 2009 Notes £m 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 US Life 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 C5 C5 C5 C5 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 continuing core operations Return on Group MCEV (RoEV) per annum from continuing non-core operations Return on Group MCEV (RoEV) per annum from discontinued operations Return on Group MCEV (RoEV) per annum Number of shares in issue at the end of the ﬁnancial period less treasury shares – millions 5,737 8,951 (2,053) (29) 260 306 (688) (1,010) 4,164 5,256 (433) (276) (383) 9,901 181.5 10.6% (0.3)% 0.6% 10.9% 5,456 4,417 8,464 (2,238) (6) (388) 268 (688) (995) 3,212 4,255 (416) (221) (406) 7,629 144.5 6.0% (0.4)% 5.1% 10.7% 5,279 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, and inter-company loans). For some European countries the value reﬂected in the adjustment to include long-term business on a statutory solvency basis includes the value of the deferred acquisition cost asset which is part of the equity. The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £830 million (year ended 31 December 2009: £562 million) divided by the opening Group MCEV. 334 Old Mutual plc Annual Report and Accounts 2010 MCEV COMPONENTS OF GROUP MCEV AND ADJUSTED GROUP MCEV For the year ended 31 December 2010 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 period less treasury shares – millions £m At 31 December 2010 At 31 December 2009 Notes 9,901 7,629 715 715 – 85 266 63 11,030 202.2 5,456 B1 805 623 182 71 221 302 9,028 171.0 5,279 * Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2009 and 31 December 2010 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 2010 and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the ﬁnancial period. Reconciliation of movements in Group MCEV (after tax) M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Opening Group MCEV Adjusted operating MCEV earnings Non-operating MCEV earnings Total Group MCEV earnings Other movements in IFRS net equity Closing Group MCEV £m Year ended 31 December 2010 Year ended 31 December 2009 Covered business MCEV Non-covered business IFRS Total Group MCEV Covered business MCEV Notes Non-covered business IFRS Total Group MCEV 6,027 590 786 1,376 112 7,515 1,602 240 (187) 53 731 2,386 7,629 830 599 1,429 843 9,901 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 C4 G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 335 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 A: MCEV policies A1: Basis of preparation The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 332 to 383 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 2010. 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’: (cid:81) 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. (cid:81) Group MCEV is a measure of the consolidated value of shareholders’ interests in covered and non-covered business. Non- (cid:81) 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 subsidiary, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to market, as well as including the market value of excess own shares held in ESOP schemes. 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: (cid:81) 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. (cid:81) Value of in-force covered business (VIF) The adjusted net worth of the covered business is the market value of shareholders’ assets held in respect of the covered business after allowance for the liabilities of the in-force covered business which are dictated by local regulatory reserving requirements. MCEV is calculated net of non-controlling shareholder interests and excludes the value of future new business. Coverage Covered business includes, where material, any contracts that are regarded by local insurance supervisors as long-term life assurance business, and other business, where material, directly related to such long-term life assurance business where the proﬁts are included in the IFRS long-term business proﬁts in the primary ﬁnancial statements. The covered business does not include any business written in Skandia Liv. Skandia Liv is a mutual life insurance company wholly owned by Old Mutual plc. All assets and liabilities are wholly attributable to the policyholders of the mutual company. 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: (cid:81) New institutional investment platform pensions business written in the United Kingdom as it is more appropriately classiﬁed as unit trust business; and 336 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued (cid:81) 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 subsidiary, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa (‘the BEE schemes’) to market, as well as including the market value of excess own shares held in ESOP schemes. Free surplus 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: (cid:81) Economic capital; (cid:81) Regulatory capital (i.e. the level of solvency capital which the local regulators require); (cid:81) Capital required by rating agencies in respect of the North American business in order to maintain the desired credit rating; and (cid:81) 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, Retail Europe and Wealth Management capital determined with reference to internal management objectives is the most onerous and is the capital measure used, whilst for Nordic the regulatory capital requirement is the most onerous. For US Life the required capital is based on the amount that management deems necessary to maintain the desired credit rating for the Company, whilst for Bermuda the required capital is set with reference to internal management objectives. The required capital in respect of OMSA’s covered business is partially covered by the market value of the Group’s investments in banking and general insurance in South Africa. On consolidation these investments are shown separately. The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements. Emerging Markets Nordic* Retail Europe** Wealth Management*** US Life Bermuda**** Total £m At 31 December 2010 At 31 December 2009 Required capital (a) Regulatory capital (b) Ratio (a/b) Required capital (a) Regulatory capital (b) Ratio (a/b) 1,498 135 62 278 468 403 2,844 1,153 135 85 162 196 – 1,731 1.3 1.0 0.7 1.7 2.4 n/a 1.6 1,225 104 32 213 462 363 2,399 930 92 52 143 193 – 1,410 1.3 1.1 0.6 1.5 2.4 n/a 1.7 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l * ** The regulatory capital for Nordic has increased from 31 December 2009 to 31 December 2010 as a result of an increase in funds under management. 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. The required capital has increased due to a legislative change in Germany which has impacted the factoring business; receivables from factoring are required to be covered by share capital. *** The required capital for Wealth Management has increased from 31 December 2009 to 31 December 2010 as a result of modelling reﬁnements. The regulatory capital requirement for Wealth Management has been restated at 31 December 2009 to exclude the impact of a policyholder tax credit in Italy, which may be used to offset the capital requirement. **** The Bermudan regulator allows intangible assets to be included as admissible regulatory capital. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 337 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Value of in-force covered business Under the MCEV methodology, VIF consists of the following components: (cid:81) Present value of future proﬁts (PVFP) from in-force covered business; less (cid:81) Time value of ﬁnancial options and guarantees; less Frictional costs of required capital; less (cid:81) (cid:81) 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 (i.e. asymmetric impact) on future shareholder cash ﬂows of policyholder ﬁnancial options and guarantees within the in-force covered business. The time value of ﬁnancial options and guarantees describes that part of the value of ﬁnancial options and guarantees that arises from the variability of future investment returns on assets to the extent that it is not already included in the 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, i.e. the extent to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal capital management requirements or the extent to which reserves are inadequate to cover severely adverse experience. In the generated economic scenarios allowance is made, where appropriate, for the effect of dynamic management and/or policyholder actions in different circumstances: (cid:81) 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 (e.g. 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. (cid:81) 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. (cid:81) 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. 338 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued 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 2010 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 and equity market 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 (e.g. to the extent that expected operational losses are incorporated in the maintenance expense assumptions) or the time value of ﬁnancial options and guarantees (e.g. dynamic policyholder behaviour such as the interaction of the investment scenario and the persistency rates). Residual non-ﬁnancial risks include, for example, liability risks such as mortality, longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk. All such risks for which no or insufﬁcient allowance is made in the PVFP or time value of ﬁnancial options and guarantees, together with some allowance for hedge risk and credit spread risk in the US Life and Bermudan businesses, are considered within the allowance for the CNHR. An allowance is made in the CNHR to reﬂect uncertainty in the best estimate of shareholder cash ﬂows as a result of both symmetric and asymmetric non-hedgeable risks since these risks cannot 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. Annual Report and Accounts 2010 Old Mutual plc 339 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The CNHR is calculated using a cost of capital approach, i.e. it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until the liabilities have run off. The capital charge in each year is the product of the projected expected non-hedgeable risk capital held after allowance for some diversiﬁcation beneﬁts and the cost of capital charge. The cost of capital charge therefore represents the return above the risk free reference rates that the market is deemed to demand for providing this capital. The residual non-hedgeable risk capital measure is determined using an internal 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: (cid:81) Diversiﬁcation beneﬁts within the non-hedgeable risks of the covered business are allowed for. (cid:81) No allowance is made for diversiﬁcation beneﬁts between hedgeable and non-hedgeable risks of the covered business. (cid:81) 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 £m At 31 December 2010 At 31 December 2009 751 362 115 622 678 274 606 333 143 563 661 619 2,802 2,925 * ** The capital held in respect of non-hedgeable risk for Emerging Markets has increased from 31 December 2009 to 31 December 2010 as a result of the strengthening of the South African Rand to Sterling. The capital held in respect of non-hedgeable risk for Wealth Management at 31 December 2009 has been restated from £640 million to £563 million due to calculation reﬁnements. *** The capital held in respect of non-hedgeable risks for Bermuda has reduced from 31 December 2009 to 31 December 2010 as a result of the change in the allowance for hedging basis risk that is now made in the determination of reserves for guaranteed beneﬁts, as well as other calculation reﬁnements. 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 2.9% 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. 340 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 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). For other business, 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y 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. G o v e r n a n c e Look through principle PVFP and value of new business cash ﬂow projections look through and include the proﬁts/losses of owned service companies, e.g. distribution and administration, related to the management of the covered business. Any proﬁt margins that are included in investment management fees payable by the life assurance companies to the asset management subsidiaries have not been included in the value of in-force business or the value of new business on the grounds of materiality and because a signiﬁcant proportion of these proﬁts arise from performance-based fees. Taxation In valuing shareholders’ cash ﬂows, allowance is made in the cash ﬂow projections for taxes in the relevant jurisdiction affecting the covered business. Tax assumptions are based on best estimate assumptions, applying current local corporate tax legislation and practice together with known future changes and taking credit for any deferred tax assets. No allowance is made for any further additional tax that would be incurred on the remittance of dividends from the life subsidiaries to Old Mutual plc, apart from the South African business where full allowance has been made for Secondary Tax on Companies (STC) that may be payable in South Africa at a rate of 10% and the impact of capital gains tax. Furthermore, for the South African business it has been assumed that a reasonable proportion of the shareholder fund equity portfolio (excluding Group subsidiaries) will be traded each year. Annual Report and Accounts 2010 Old Mutual plc 341 i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued 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. There is currently uncertainty around both the basis and effective date for possible taxation of fee income earned from fund managers by Swedish insurance companies and the expenses that can be relieved against such income. At present we continue to treat fee income from our Swedish unit-linked business as being exempt from corporation tax within our MCEV. An allowance for adverse taxation treatment is included as an operational risk within our CNHR. The Emergency Budget of 22 June 2010 announced a reduction in the UK corporation tax rate by 1% per year for four years from the ﬁnancial year beginning April 2011, ultimately bringing the corporation tax rate down to 24%. The MCEV results at 31 December 2010 have been calculated using an ongoing UK corporation tax rate of 27% and each reduction in the tax rate will be included in future results as and when they are enacted. The estimated positive impact on the VIF in respect of Wealth Management at 31 December 2010, assuming that all the annual reductions in the tax rate will be enacted, is £18 million. However, only £4 million is allowed for at 31 December 2010 as an assumption change relating to the ﬁrst tax rate reduction to 27%. Further allowance will be made once future annual reductions are enacted. 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 (e.g. where premiums are expected to increase in line with salary or price inﬂation). Any variations in premiums on renewal of in-force business from that previously anticipated including deviations in non-contractual increases, deviations in recurrent single premiums and re-pricing of premiums for in-force business are treated as experience variances or economic variances on in-force business and not as new business. VNB is calculated as follows: (cid:81) 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). (cid:81) Demographic and operating assumptions at the end of the reporting period are used. (cid:81) At point of sale and rolled forward to the end of the reporting period. (cid:81) 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. (cid:81) Expense allowances include all acquisition expenses, including any acquisition expense overruns. (cid:81) Net of tax, reinsurance and non-controlling interests. (cid:81) No attribution of any investment and operating variances to VNB. New business margins are disclosed as: (cid:81) (cid:81) 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 annualised recurring premiums plus 10% of single premiums. PVNBP is calculated at point of sale using premiums before reinsurance and applying a valuation approach that is consistent with the calculation of VNB. 342 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Analysis of MCEV earnings An analysis of MCEV earnings provides a reconciliation of the MCEV for covered business at the beginning of the reporting period and the MCEV for covered business at the end of the reporting period on a net of taxation basis. Operating MCEV earnings are generated by the value of new business sold during the reporting period, the expected existing business contribution, operating experience variances, operating assumption changes and other operating variances: (cid:81) (cid:81) 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 as well as the deterministic release of the time value of options and guarantees, frictional costs and CNHR; and – Additional expected earnings on free surplus and required capital and the additional expected change in VIF as a result of real-world expected earned rates of return on assets in excess of beginning of period risk free reference rates. (cid:81) 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. (cid:81) Operating experience variances reﬂect the impact of deviations of the actual operational experience during the reporting period from the expected operational experience. It is analysed before operating assumption changes, i.e. such variances are assessed against opening operating assumptions, and reﬂects the total impact of in-force and new business variances. (cid:81) 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. (cid:81) 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: (cid:81) Economic variances incorporate the impact of changes in economic assumptions from the beginning of the reporting period to the end of the reporting period (e.g. different opening and closing interest rates and equity volatility, increases in equity market values during the 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. (cid:81) Other non-operating variances include the impact of changes in mandatory local regulations and legislative changes in taxation. 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 2010 (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 2011 may differ from these results. Analysis of Group MCEV earnings Presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the unadjusted IFRS net asset value. A mark to market adjustment is therefore not performed for external borrowings and other items not on a mark to market basis under IFRS relating to non-covered business. Annual Report and Accounts 2010 Old Mutual plc 343 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued A3: Assumptions Non-economic assumptions The appropriate non-economic projection assumptions for future experience (e.g. mortality, persistency and expenses) are determined using best estimate assumptions of each component of future cash ﬂows, are speciﬁc to the entity concerned and have regard to past, current and expected future experience where sufﬁcient evidence exists (e.g. 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. (cid:81) All expected maintenance expense overruns affecting the covered business are allowed for in the calculations. (cid:81) 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. (cid:81) Unallocated Group holding company expenses have been included to the extent that they relate to the covered business. The table below shows the future expenses attributable to the long-term business. The allocation of these expenses aligns to the proportion that the management expenses incurred by the covered businesses to the total management expenses incurred in the Group. Group holding Company expenses attributable to long-term business Emerging Markets Nordic Retail Europe Wealth Management US Life Bermuda Total % At 31 December 2010 At 31 December 2009 17 4 3 6 2 – 32 16 4 3 8 2 – 33 344 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued In line with legislation in Germany, a speciﬁed proportion of miscellaneous proﬁts is shared with policyholders. 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. Skandia Leben in Germany therefore sets the best estimate assumptions for the amount to be shared with policyholders in future years after making an allowance for the acquisition expenses in relation to the new business expected to be written over the next three years. However note that, as previously mentioned, MCEV excludes the value of future new business. Economic assumptions An active basis is applied to set pre-tax investment and economic assumptions to reﬂect the economic conditions prevailing on the reporting date. Economic assumptions are set consistently, for example future bonus or crediting rates are set at levels consistent with the investment return assumptions. Under a market consistent valuation, economic assumptions are determined such that projected cash ﬂows are valued in line with the prices of similar cash ﬂows that are traded on the capital markets. Thus, risk free cash ﬂows are discounted at a risk free reference rate and equity cash ﬂows at an equity rate. In practice for the PVFP, where cash ﬂows do not depend on or vary linearly with market movements, a certainty equivalent method is used which assumes that actual assets held earn, before tax and investment management expenses, risk free reference rates (including any liquidity adjustment) and all the cash ﬂows are discounted using risk free reference rates (including any liquidity adjustment) which are gross of tax and investment management expenses. The deterministic certainty equivalent method is purely a valuation technique and over time the expectation is still that risk premiums will be earned on assets such as equities and corporate bonds. Risk free reference rates and inﬂation The risk free reference rates, reinvestment rates and discount rates are determined with reference to the swap yield curve appropriate to the currency of the cash ﬂows. For Europe the swap yield curve is obtained from a number of sources including Bloomberg, Nordea Bank and Reuters. For the Emerging Markets and United States businesses, the swap yield curve is sourced from a third party market consistent asset model that is used to generate the economic scenarios that are required to value the time value of ﬁnancial options and guarantees. At 31 December 2010, 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 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 2010. This included the CRO/CFO Forum formula which derives the liquidity premium based on corporate bond spreads, with 100% of the liquidity premium applied to immediate annuity business and 75% applied to participating business and ﬁxed deferred annuities to allow for differences in the predictability of cash ﬂows on these products. The review also included 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 issued by state-owned enterprises. It is the directors’ view that a proportion of corporate bond spreads at 31 December 2010 is attributable to a liquidity premium rather than only to credit and default allowances and that returns in excess of swap rates can be achieved, rather than entire corporate bond spreads being lost to worsening default experience. For the US Life business and OMSA’s 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 2010 by adding 75bps of liquidity premium for the US Life business (31 December 2009: 100bps) and adding 45bps of liquidity premium for OMSA’s Immediate Annuity business (31 December 2009: 50bps) 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 bond portfolios and the adjusted risk free reference rates still provide substantial implied margins for default. At those durations where swap yields are not available, e.g. 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 (e.g. 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. Annual Report and Accounts 2010 Old Mutual plc 345 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Risk free reference spot yields (excluding any applicable liquidity adjustments) At 31 December 2010 1 year 5 years 10 years 20 years At 31 December 2009 1 year 5 years 10 years 20 years GBP* EUR USD ZAR 0.9 2.7 3.6 4.0 0.9 3.4 4.1 4.3 1.3 2.5 3.3 3.7 1.3 2.8 3.6 4.1 0.4 2.2 3.4 4.0 0.7 3.0 4.0 4.5 5.6 7.4 8.2 8.1 7.3 8.9 9.2 8.2 % SEK 2.3 3.3 3.7 4.0 0.8 2.9 3.7 4.1 * In prior reporting periods, the risk free spot yields disclosed for GBP were on a 1-year forward basis. The assumptions as at 31 December 2010, as well as 31 December 2009, are now shown as annualised spot yields, consistent with other regions. Expense inﬂation At 31 December 2010 1 year 5 years 10 years 20 years At 31 December 2009 1 year 5 years 10 years 20 years GBP EUR USD ZAR 3.0 4.3 5.3 5.1 3.3 3.8 4.4 4.8 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 5.0 6.4 7.2 7.0 6.4 7.5 7.7 6.7 % SEK 2.2 3.0 3.2 3.3 1.1 2.6 2.8 3.0 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, e.g. volatilities for property returns. Where strict adherence to the above is not possible, for example where markets only exist at short durations such as the equity option market in South Africa, interpolation or extrapolation techniques are used to derive volatility assumptions for the full term structure of the liabilities. Correlation assumptions between asset classes that are used in stochastic models are based on an assessment of historic relationships. Where historic data is used in setting volatility or correlation assumptions, a suitable time period is considered for analysing historic data including consideration of the appropriateness of historical data where economic conditions were materially different to current conditions. For the 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. 346 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 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 2010 Option term 1 year 5 years 10 years 20 years At 31 December 2009 1 year 5 years 10 years 20 years 1 year swap 5 year swap 10 year swap 20 year swap % Property (total return index) Equity (total return index) 18.7 16.4 15.6 13.8 18.3 16.9 15.7 14.5 16.9 15.5 15.0 13.3 16.2 15.8 15.2 13.8 15.8 14.9 14.5 12.8 15.1 15.3 14.7 13.1 15.1 14.4 13.9 11.9 14.8 15.1 14.1 12.0 23.4 25.5 27.0 27.8 27.4 25.5 26.2 27.0 16.0 15.7 15.9 15.4 17.1 14.8 14.1 14.2 * 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y USD volatilities* At 31 December 2010 Option term 1 year 5 years 10 years 20 years At 31 December 2009 1 year 5 years 10 years 20 years 1 year swap 5 year swap 10 year swap 20 year swap % 37.8 26.2 20.0 16.8 39.0 27.1 19.4 16.8 34.3 24.7 18.8 15.7 36.5 25.0 18.9 16.1 31.2 23.0 17.7 14.7 33.2 23.5 17.6 14.2 G o v e r n a n c e 27.7 20.9 16.1 13.1 29.6 21.1 16.2 12.7 * In prior reporting periods USD volatilities were based on market quoted information. The assumptions for 31 December 2010 as well as 31 December 2009 are now shown as modelled volatilities, consistent with the disclosure of interest rate volatilities in South Africa. Market volatilities for 1-year option terms and 1-year swap tenors are signiﬁcantly different to modelled volatilities, with the calibration ensuring a reasonable ﬁt across the entire spectrum of modelled option terms and swap tenors instead of focusing the calibration in this area. International equity volatilities (applicable to Old Mutual Bermuda)* SPX RTY TPX HSCEI TWY KOSP12 NIFTY SX5E UKX At 31 December 2010 Option term 1 year 5 years 10 years At 31 December 2009 1 year 5 years 10 years 21.5 23.6 23.6 22.1 24.4 25.0 28.1 32.6 32.6 28.6 32.9 32.6 26.7 28.3 28.3 28.3 29.4 29.0 27.8 32.3 32.3 33.5 34.2 37.4 21.5 25.5 25.5 22.9 26.4 27.5 21.4 24.0 24.0 23.3 24.2 30.0 22.0 26.6 26.6 26.5 26.4 31.2 24.3 25.2 25.2 24.7 25.4 27.4 21.5 24.2 24.2 23.1 24.1 25.9 Annual Report and Accounts 2010 Old Mutual plc 347 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued International equity volatilities (applicable to Old Mutual Bermuda)* % EEM USAgg EUAgg APAgg At 31 December 2010 Option term 1 year 5 years 10 years At 31 December 2009 1 year 5 years 10 years 27.4 27.7 27.7 31.6 30.8 36.7 5.5 5.5 5.5 4.5 4.5 4.5 13.0 13.0 13.0 12.0 12.0 12.0 12.6 12.6 12.6 11.6 11.6 11.6 * Long-term option implied volatility has been calibrated assuming a ﬂat volatility term structure beyond 5 years due to limited data availability for some indices. In prior reporting periods, the volatilities disclosed for Bermuda were on a 1-year forward basis for most indices. The assumptions at 31 December 2010, as well as the comparatives for prior periods, are now shown as the annualised volatilities applicable over the entire option term speciﬁed, consistent with the disclosure of volatilities for other regions. These volatilities, as represented by their Bloomberg codes, refer to the price indices. Due to ongoing enhancements in the fund mapping process, the indices referenced may 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: (cid:81) (cid:81) (cid:81) The equity risk premium is 3.5% for Africa and 3% 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 2010 are set out below: (cid:81) OMSA – 33% (31 December 2009: 33%) (cid:81) Namibia – 0% (31 December 2009: 0%) (cid:81) Nordic – 4% (31 December 2009: 4%) (cid:81) Retail Europe – 27% (31 December 2009: 28%) (cid:81) Wealth Management –11% (31 December 2009: 13%) (cid:81) US Life – 0% (31 December 2009: 0%) (cid:81) Bermuda – 0% (31 December 2009: 0%) 348 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B: Segment information B1: Adjusted Group MCEV presented per business line MCEV of the core covered business Adjusted net worth* Value of in-force business MCEV of the Bermuda non-core covered business Adjusted net worth* Value of in-force business MCEV of the US Life discontinued covered business Adjusted net worth* Value of in-force business Adjusted net worth of asset management and other business Emerging Markets Nordic** Retail Europe Wealth Management US Asset Management Value of the banking business Nordic (adjusted net worth) Nedbank (market value) 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 (USD denominated) Perpetual preferred callable securities GBP denominated Euro denominated Debt Rand denominated USD denominated GBP denominated SEK denominated Euro denominated Adjusted Group MCEV £m At 31 December 2010 At 31 December 2009 7,417 2,414 5,003 287 403 (116) (189) 534 (723) 1,950 289 4 14 171 1,472 3,603 328 3,275 409 31 266 85 (449) (598) (270) (328) 6,147 1,954 4,193 198 363 (165) (318) 498 (816) 1,716 216 (75) 12 152 1,411 2,948 314 2,634 448 123 221 71 (385) (477) (224) (253) (1,782) (1,664) (304) (337) (842) (297) (2) (290) (338) (759) (256) (21) 11,030 9,028 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l * ** 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. *** Reﬂected at IFRS net asset value at 31 December 2010 and at market value for 31 December 2009 as a result of the acquisition of the remaining non-controlling interest in Mutual & Federal. **** Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2009 and 31 December 2010 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 2010 and the reduction in overall shares held due to exercises of rights to take delivery of, or net settle, share grants during the year. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 349 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 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 350 Old Mutual plc Annual Report and Accounts 2010 £m Year ended 31 December 2010 Year ended 31 December 2009 705 443 65 68 129 48 (28) 725 (138) (99) (20) (2) (17) (1) 4 (135) 567 344 45 66 112 47 (24) 590 (135) (175) (310) 252 272 78 (58) (40) 302 8 562 (7) (60) 3 14 36 (36) (27) (70) 245 212 81 (44) (4) 266 (19) 492 (70) (139) (209) MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 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 Consisting of : 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 £m At 31 December 2010 At 31 December 2009 7,515 3,351 4,164 2,414 441 1,973 5,003 5,557 (12) (267) (275) 1,804 306 1,498 1,509 1,849 – (240) (100) 186 51 135 1,318 1,397 – (6) (73) 103 41 62 520 573 (10) (11) (32) 6,027 2,815 3,212 1,954 380 1,574 4,193 4,667 (7) (211) (256) 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) Annual Report and Accounts 2010 Old Mutual plc 351 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 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 (Discontinued) 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 (Non-core) 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 £m At 31 December 2010 At 31 December 2009 321 43 278 1,656 1,738 (2) (10) (70) 534 66 468 (723) (446) (186) (7) (84) 403 – 403 (116) 145 (235) (2) (24) 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) * 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. 352 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) The Long-Term Savings segment consists of Emerging Markets, Nordic, Retail Europe and Wealth Management. Long-Term Savings (LTS) 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 Year ended 31 December 2010 Year ended 31 December 2009 Free surplus Required capital Adjusted net worth Value of in-force 380 (419) 1,574 160 1,954 (259) 4,193 459 MCEV 6,147 200 Free surplus Required capital 101 (438) 1,441 129 Adjusted net worth 1,542 (309) Value of in-force 3,950 462 £m MCEV 5,492 153 8 7 802 (16) 23 (93) 312 100 (7) 405 (344) (383) 39 – 77 (3) (184) 28 2 37 117 41 25 183 216 – 216 – 85 4 618 12 25 (56) 429 141 18 588 (128) (383) 255 – 168 253 59 (618) 43 (25) 52 138 342 – 480 330 – 330 – 63 – 55 – (4) 567 483 18 1,068 202 (383) 585 – 191 288 59 63 5 (1) 766 (11) 33 154 508 50 39 597 (318) (335) 4 13 380 92 5 (186) (8) (22) (44) (34) 34 (20) (20) 153 (1) 151 3 97 4 580 (19) 11 110 474 84 19 577 (165) (336) 155 16 (580) (64) (242) (55) (229) 217 168 156 87 0 111 (24) 1,574 1,954 4,193 Closing MCEV 441 1,973 2,414 5,003 7,417 Return on MCEV (RoEV)% per annum 9.2% Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 12 18 22 (54) 26 25 – 17 (2) 10 43 20 8 5 10 (25) (4) 14 (20) (15) 55 38 30 (49) 36 – (4) 31 (22) (5) Year ended 31 December 2009 Adjusted net worth Value of in-force (19) (18) 31 (56) 24 11 (29) 30 10 (1) (64) (80) – 13 2 (242) (164) 53 (161) 31 Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling. Long-Term Savings (LTS) Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) Year ended 31 December 2011 Free surplus Required capital 16 6 65 (4) Adjusted net worth 81 2 Value of in-force 173 67 – (83) (231) 55 245 301 187 733 (78) (336) 266 (8) 6,147 4.5% £m MCEV (83) (98) 31 (43) 26 (231) (193) 83 (151) 30 £m MCEV 254 69 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 353 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Emerging Markets* 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 Year ended 31 December 2010 Year ended 31 December 2009 Free surplus Required capital Adjusted net worth Value of in-force 80 (159) 1,225 134 1,305 (25) 1,158 111 MCEV 2,463 86 Free surplus Required capital Adjusted net worth (92) (136) 1,075 110 983 (26) Value of in-force 1,090 91 £m MCEV 2,073 65 129 207 16 21 6 – 356 11 19 (6) 227 57 4 288 (62) (93) 31 – 73 (3) (166) 14 – (2) 50 21 – 71 202 – 202 – 79 124 203 (3) 16 13 190 25 19 (8) 277 78 4 359 140 (93) 233 – (190) 10 18 (22) 67 84 1 152 199 – 199 – – 35 37 (30) 344 162 5 511 339 (93) 432 – (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 (168) (35) (90) 32 (25) (39) – (64) 132 – 156 (24) Closing MCEV 306 1,498 1,804 1,509 3,313 80 1,225 1,305 1,158 Return on MCEV (RoEV)% per annum 13.2% Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 25 29 11 (15) – 19 – 17 2 – 10 5 7 4 (6) 18 2 (1) 15 2 35 34 18 (11) (6) 37 2 16 17 2 Year ended 31 December 2009 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) – Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Emerging Markets Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) 12 – 60 (4) 72 (4) 106 16 * The MCEV for Emerging Markets is presented after the adjustment for market value of life fund investments in Group equity and debt instruments. 354 Old Mutual plc Annual Report and Accounts 2010 – (53) (79) 51 212 16 – 228 162 (149) 319 (8) 2,463 9.8% £m (53) (53) 16 (19) 3 (79) (84) 50 (45) – £m MCEV 178 12 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The marginal decrease in ‘expected existing business contribution (reference rate)’ from 2009 to 2010 is mainly attributable to a lower one-year swap rate at 31 December 2009 (7.3%) compared to 31 December 2008 (9.3%) offset by a higher opening MCEV. The ‘expected existing business contribution (in excess of reference rate)’ on the ANW has reduced from 2009 to 2010 due to a higher cash allocation assumed for shareholder funds. The positive experience variances are mainly attributable to favourable persistency experience, as well as a small positive contribution from risk experience. Operating assumption changes are positive in 2010 consisting mainly of an improvement in fees relative to maintenance expenses in the Corporate Segment due to economies of scale from an increasing fund membership; and an increase in annuitant mortality rates in Retail Afﬂuent, following a recent mortality investigation which is supported by positive annuitant mortality experience variances. The negative other operating variance was caused by various methodology changes and error corrections. In addition to the effects above, other signiﬁcant movements affecting the closing MCEV include a large positive impact from economic variances due to a combination of better than assumed equity returns and the effect of the changes in the shape of the swap yield curve. This was partially offset by modelling enhancements to the economic scenario generator used to calculate the investment guarantee reserve, which caused a decrease in the margin (buffer) held to protect against future market volatility, resulting in less value being released as proﬁt in the future. The capital and dividend ﬂows mainly consist of the purchase of additional Nedbank shares. The strengthening of the rand relative to sterling had a signiﬁcant positive effect on the increase in MCEV. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in rand (including conversion of results for Mexico to rand). M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 355 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Year ended 31 December 2010 Year ended 31 December 2009 Nordic 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 Free surplus Required capital Adjusted net worth Value of in-force 91 (49) 104 6 195 (43) 1,114 84 MCEV 1,309 41 – – 103 30 – (44) 40 (4) 17 53 (93) (100) 7 51 1 – – (5) – 4 6 12 – 18 13 – 13 1 – 103 25 – (40) 46 8 17 71 (80) (100) 20 14 26 (103) (1) (55) 34 (1) 86 – 85 119 – 119 15 26 – 24 (55) (6) 45 94 17 156 39 (100) 139 135 186 1,318 1,504 Return on MCEV (RoEV)% per annum 3.3% Free surplus Required capital Adjusted net worth Value of in-force 58 (57) 105 6 163 (51) 882 95 18 14 (64) 10 (30) (3) 40 192 1 233 (1) – (1) – – (17) (7) – – (18) 17 – (1) – – – 4 – 64 21 3 – 41 12 18 71 (39) (37) (2) 4 – 81 28 3 – 59 (5) 18 72 (39) (37) (2) 91 Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 25 (2) 5 2 20 – – – – – (1) (6) – – 5 (55) (7) – (18) (30) 24 (8) 5 2 25 (55) (7) – (18) (30) 104 195 1,114 1,309 8.1% £m Year ended 31 December 2009 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) Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Nordic Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) 3 – 2 – 5 – 34 30 356 Old Mutual plc Annual Report and Accounts 2010 £m MCEV 1,045 44 22 14 – 31 (27) (3) 81 204 19 304 (40) (37) (3) 31 3 5 2 21 (27) (29) 19 (18) 1 £m MCEV 39 30 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The ‘expected existing business contribution (in excess of reference rate)’ is not signiﬁcant on the adjusted net worth portion of the business. This is because shareholder assets backing capital requirements are typically invested in highly secure government paper and other short-term instruments. Expected existing business contributions in 2011 are signiﬁcantly higher than in 2010 due to higher one-year swap rates at 31 December 2010 relative to those at 31 December 2009 and a higher opening value of in-force. The positive experience variances were largely caused by proﬁt made on the sale of a private equity investment, higher than expected fee income and increased take-ups of drawdown products. There were no one-off expense variances. Operating assumption changes were made to recognise higher expected commission payments, anticipated pricing pressure in the corporate segment, expectations of adverse persistency and adjustments to pricing of the Waiver of Premium business. The other operating variance was mainly due to modelling reﬁnements to deferred tax assets and more accurate valuation of tendered business. The economic variances were mainly due to the positive effect of market movements on funds under management. The capital and dividend ﬂows mainly represent dividends, repayment of loans, internal re-classiﬁcation and capital injections. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in Swedish krona. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 357 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Year ended 31 December 2010 Year ended 31 December 2009 Free surplus Required capital Adjusted net worth Value of in-force 46 (69) 1 – 97 5 – (9) 25 1 (26) – (5) (6) 1 41 32 1 – – 2 (1) – – 2 2 25 29 1 – 1 62 78 (68) 453 75 1 – 99 4 – (9) 27 3 (1) 29 (4) (6) 2 8 3 (99) 1 11 40 39 19 (5) 53 14 – 14 MCEV 531 7 9 3 – 5 11 31 66 22 (6) 82 10 (6) 16 103 520 623 12.8% Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 4 (2) 3 (3) 6 – – – – – 1 3 – – (2) 11 9 – (4) 6 5 1 3 (3) 4 11 9 – (4) 6 Retail Europe 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 Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Retail Europe Free surplus Required capital Adjusted net worth Value of in-force 15 (74) 1 – 97 (20) – 18 22 (1) 20 41 (10) (10) – 46 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) 78 517 68 10 3 (104) (4) (26) (3) (56) 26 3 (27) (37) – (37) 453 £m MCEV 596 (5) 11 3 – (23) (26) (4) (44) 29 3 (12) (53) (13) (40) 531 (7.9)% £m (23) (2) 4 (5) (20) (26) 2 1 (22) (7) £m MCEV 10 4 Year ended 31 December 2009 Adjusted net worth Value of in-force MCEV (19) (1) 3 (5) (16) – – – – – (4) (1) 1 – (4) (26) 2 1 (22) (7) Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) – – 1 – 1 – 9 4 358 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The ‘expected existing business contribution (in excess of reference rate)’ is not signiﬁcant on the adjusted net worth portion of the business. This is because shareholder assets backing capital requirements are typically invested in highly secure government paper and other short-term instruments. Expected existing business contributions in 2011 are higher than in 2010 due to a higher opening asset-base. Experience variances are mainly due to higher than anticipated proﬁt sharing on participating contracts in Germany, as well as higher than expected fee income. In addition, there was a one-off expense variance in respect of project costs. Mortality and morbidity experience continues to be positive across all Retail Europe countries. Operating assumption changes were made to recognise higher expected fee income in Germany and Poland following sustained favourable fee income experience. Future proﬁt sharing assumptions for the German business were revised upwards in line with expected new business levels. Further operating assumption changes were made to recognise positive persistency experience and maintenance expense experience in Switzerland, and to reﬂect the capitalisation of Retail Europe overhead expenses. The other operating variances are mainly due to improvements in the modelling of disability business in Switzerland and a reduction in the cost of non-hedgeable risk due to lower non-hedgeable risk capital. The economic variances are mainly due to the positive effect of market movements on funds under management as well as the beneﬁcial impact of lower swap rates across the region. The capital and dividend ﬂows mainly represent dividends. Return on MCEV is the operating MCEV earnings after tax divided by opening MCEV in euro. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 359 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Wealth Management 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 Year ended 31 December 2010 Year ended 31 December 2009 Free surplus Required capital Adjusted net worth Value of in-force 163 (142) 213 19 376 (123) 1,468 189 MCEV 1,844 66 Free surplus Required capital Adjusted net worth 120 (171) 197 12 317 (159) Value of In-force 1,461 208 MCEV 1,778 49 £m 1 7 246 (62) 4 (34) 20 46 (2) 64 (184) (184) – 43 3 – (20) 20 2 35 59 6 – 65 – – – 4 7 226 (42) 6 1 79 52 (2) 129 (184) (184) – 22 14 (226) 33 1 – 33 153 4 190 (2) – (2) 278 321 1,656 26 21 – (9) 7 1 112 205 2 319 (186) (184) (2) 1,977 6.1% 7 (1) 274 (10) (10) 90 179 2 1 182 (139) (142) 3 163 7 – (30) 7 7 2 5 12 – 17 (1) 5 (6) 213 14 (1) 244 (3) (3) 92 184 14 1 199 (140) (137) (3) 376 34 26 (244) (35) (96) (81) (188) 38 164 14 (7) – (7) 48 25 – (38) (99) 11 (4) 52 165 213 (147) (137) (10) 1,468 1,844 (0.3)% £m Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Wealth Management Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV (42) (7) 3 (38) – 6 – – (4) 10 33 18 1 1 13 1 (8) 15 (13) 7 (9) 11 4 (37) 13 7 (8) 15 (17) 17 Year ended 31 December 2009 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 £m MCEV 27 23 Free surplus Required capital Adjusted net worth Value of in-force Year ended 31 December 2011 Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) 1 6 2 – 3 6 24 17 360 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The ‘expected existing business contribution (in excess of reference rate)’ is not signiﬁcant on the required capital portion of the business. This is because shareholder assets backing capital requirements are typically invested in highly secure government paper and other short-term instruments. Adverse expense variances were predominately one-off variances of £(38) million relating to software development and restructuring costs. The ‘other’ variances are predominantly fee income being higher than expected. Positive persistency variance is driven by positive experience in International and Continental Europe business. Positive operating assumption changes were made to ‘other’ and risk assumptions. The ‘other’ assumption change relates to fee income, consistent with positive experience in 2010. The risk assumption change relates to positive experience in Skandia UK. Expense and persistency assumptions were strengthened. The expense assumption change is largely due to changes to reﬂect the new expense allocation review in UK and International, and a new provision to streamline existing expense provisions relating to development projects. The persistency assumption change is driven by a reduction in persistency to allow for the potential impact of the Retail Distribution Review (RDR) in the UK offset by increasing persistency assumptions due to positive experience in International. Economic variances are due to positive market movements, exchange rate movements and tax deductions on income and gains as a result of the current tax position of the UK tax group. The other non-operating variance is driven by the effect from changes in the United Kingdom corporation tax rate from 28% to 27%. 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. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 361 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Year ended 31 December 2010 Year ended 31 December 2009 £m US Life 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 Free surplus Required capital Adjusted net worth Value of in-force 36 (66) 462 66 498 – (816) (28) MCEV (318) (28) 1 – 81 33 (6) – 43 71 – 114 (84) (85) 1 66 9 – (47) (23) – – 5 (18) – (13) 19 – 19 468 10 – 34 10 (6) – 48 53 – 101 (65) (85) 20 534 15 80 (34) 30 (57) (7) (1) 127 – 126 (33) – (33) 25 80 – 40 (63) (7) 47 180 – 227 (98) (85) (13) (723) (189) 14.1% Free surplus Required capital (85) (35) (3) – 52 137 – – 151 (181) – (30) 151 146 5 36 550 41 21 1 (54) (103) – – (94) 59 – (35) (53) – (53) 462 Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 10 4 – 25 (19) (6) (6) – – – 30 38 (10) – 2 (57) (58) (1) 2 – 40 42 (10) 25 (17) (63) (64) (1) 2 – Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other US Life Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) 1 – 6 – 7 – 18 62 362 Old Mutual plc Annual Report and Accounts 2010 Adjusted net worth 465 6 Value of in-force (1,725) 8 MCEV (1,260) 14 18 1 (2) 34 – – 57 (122) – (65) 98 146 (48) 498 (45) (27) 257 258 2 (35) 30 (8) 209 556 – 765 144 – 144 – (1) 30 (8) 266 434 – 700 242 146 96 (816) (318) 22.7% £m Year ended 31 December 2009 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 – – £m MCEV 25 62 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The results for US Life include allowance for Old Mutual Reassurance (Ireland) Limited (OMRe), which provides reinsurance to the United States Life Companies. The ‘expected existing business contribution (in excess of reference rate)’ is calculated using 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 main reason for the signiﬁcantly negative VNB result is due to very low swap yields compressing potential earnings on spread-based annuity business, resulting in signiﬁcant future losses anticipated on an MCEV basis. The experience variances were largely caused by positive persistency experience due to higher surrenders of Fixed Indexed Annuity contracts, which make future losses on an MCEV basis. Expense variances beneﬁted from tight cost controls in this business. There were no material experience variance items that were one-off in nature. Operating assumption changes include the increasing of premium persistency assumptions on certain unproﬁtable Universal Life and Term Assurance products. The other operating variance was mainly due to modelling changes and error corrections. The economic variances were mainly due to gains in the underlying investment portfolio and lower swap yields, partially offset by a reduction in the assumed liquidity premium from 100bps to 75bps. The capital and dividend ﬂows include the payment of dividends to Old Mutual plc. Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollars. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 363 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued B4: Analysis of covered business MCEV earnings (after tax) continued Year ended 31 December 2010 Year ended 31 December 2009 £m Free surplus Required Capital Adjusted net worth Value of in-force Free surplus Required capital Adjusted net worth Bermuda 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 – – – – 16 (18) (19) (32) (53) 53 – – – – – – 363 – 3 30 (45) 1 – 37 26 – – 26 14 – 14 363 – 3 30 (29) (17) (19) 5 (27) 53 – 26 14 – 14 (165) – 9 35 29 (2) (16) (52) 3 52 – 55 (6) – (6) MCEV 198 – 12 65 – (19) (35) (47) (24) 105 – 81 8 – 8 342 – 5 33 (5) (72) (36) (345) (420) 102 – (318) (24) – (24) – 34 – 1 – (4) – – 345 342 – – 342 (13) – (13) 363 Return on MCEV (RoEV)% per annum (11.4)% 403 403 (116) 287 363 (165) Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV (17) (15) – (8) 6 (19) (16) 2 – (5) (2) (1) – – (1) (16) 9 (1) (26) 2 (19) (16) – (8) 5 (35) (7) 1 (26) (3) Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Bermuda Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) – – 2 24 2 24 6 16 364 Old Mutual plc Annual Report and Accounts 2010 376 – 6 33 (9) (72) (36) – (78) 102 – 24 (37) – (37) Value of in-force (425) – MCEV (49) – (4) 39 9 (21) (46) 82 59 167 – 226 34 – 34 2 72 – (93) (82) 82 (19) 269 – 250 (3) – (3) 198 (41.0)% £m Year ended 31 December 2009 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 £m MCEV 8 40 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued The ‘expected existing business contribution (in excess of reference rate)’ is calculated using 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), while the adjusted net worth component includes interest received from Old Mutual plc. The experience variances include adverse persistency experience on Variable Annuity contracts and expense losses as a result of higher than anticipated expenditure on projects £(4) million and an increased head-count. Other experience variances include a one-off tax variance of £5 million due to the release of a tax contingency reserve. There were no other material experience variance items that were one-off in nature. Operating assumption changes include the strengthening of expense assumptions consistent with 2010 experience and reﬁnements to surrender assumptions as a result of the most recent experience investigation. The other operating variance was mainly due to modelling changes and error corrections. Economic variances were driven by good equity market performance and gains on the corporate bond portfolio, partially offset by increased Variable Annuity Guarantee costs due to declining interest rates. Return on MCEV was calculated as the operating MCEV earnings after tax divided by the absolute value of the opening MCEV in US dollars. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 365 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Total covered business 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 Year ended 31 December 2010 Year ended 31 December 2009 Free surplus Required capital Adjusted net worth Value of in-force 416 (485) 2,399 226 2,815 (259) 3,212 431 MCEV 6,027 172 Free surplus Required capital Adjusted net worth 358 (473) 2,025 170 2,383 (303) Value of in-force 1,800 470 £m MCEV 4,183 167 9 7 899 (1) (2) (125) 302 224 (7) 519 (428) (468) 40 – 89 27 (276) 6 2 74 148 23 25 196 249 – 249 – 98 34 623 5 – (51) 450 247 18 715 (179) (468) 289 – 192 290 174 208 (623) 71 (98) (7) 140 521 – 661 291 – 291 – – 76 (98) (58) 590 768 18 1,376 112 (468) 580 – 7,515 9.8% 7 32 813 54 (3) (191) 239 (29) 39 249 (191) (189) (15) 13 416 114 121 142 263 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) 2,399 2,815 3,212 6,027 11.8% £m Year ended 31 December 2009 Closing MCEV 507 2,844 3,351 4,164 Return on MCEV (RoEV)% per annum Experience variances Persistency Risk Expenses Other Assumption changes Persistency Risk Expenses Other Total covered business Year ended 31 December 2010 Adjusted net worth Value of in-force MCEV 5 7 22 (37) 13 – (22) 19 (2) 5 71 57 (2) 5 11 (98) (53) 12 (44) (13) 76 64 20 (32) 24 (98) (75) 31 (46) (8) Adjusted net worth (57) (87) 31 (49) 48 (25) (29) 30 10 (36) Value of in-force (120) (72) 17 13 (78) (258) (210) 64 (190) 78 MCEV (177) (159) 48 (36) (30) (283) (239) 94 (180) 42 £m MCEV 287 171 Expected existing business contribution (reference rate) Expected existing business contribution (in excess of reference rate) 17 6 73 20 90 26 197 145 Year ended 31 December 2011 Free surplus Required capital Adjusted net worth Value of in-force Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling. 366 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued C: Other key performance information C1: Value of new business (after tax) The tables below set out the regional analysis of the value of new business (VNB) after tax. New business proﬁtability is measured by both the ratio of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under PVNBP margin and APE margin below. APE is calculated as annualised recurring premiums plus 10% of single premiums. 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 £m Year ended 31 December 2010 Year ended 31 December 2009 698 325 144 63 166 10 – 708 7,932 1,611 573 63 5,685 824 – 8,756 11,266 3,269 1,104 513 6,380 889 – 685 249 183 62 191 14 – 699 6,257 1,437 527 53 4,240 549 15 6,821 9,563 2,834 1,150 537 5,042 639 15 12,155 10,217 4.8 5.1 3.7 7.2 4.2 6.6 n/a 4.8 5.6 3.4 7.8 4.2 6.6 n/a M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l * The PVNBP capitalisation factors are calculated as follows: (PVNBP – single premiums)/annualised recurring premiums. S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 367 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued C1: Value of new business (after tax) 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 Bermuda APE margin Long-Term Savings (LTS) Emerging Markets Nordic Retail Europe Wealth Management US Life Bermuda £m Year ended 31 December 2010 Year ended 31 December 2009 1,491 487 201 69 734 92 – 1,583 200 86 41 7 66 (28) – 172 1.8% 2.6% 3.7% 1.4% 1.0% (3.2)% n/a 1.4% 13% 18% 21% 11% 9% (31)% n/a 11% 1,312 393 235 67 617 68 1 1,381 153 65 44 (5) 49 14 0 167 1.6% 2.3% 3.8% (1.0)% 1.0% 2.2% n/a 1.6% 12% 16% 19% (8)% 8% 20% n/a 12% * The US Life VNB is negative when calculated on an MCEV basis, due to the reliance on spread in the pricing basis, and the current low risk free swap curve. 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 £m Year ended 31 December 2010 Year ended 31 December 2009 723 304 1,658 153 ** New business premiums not valued have reduced compared to 2009, mainly because single premium new business ﬁgures for 2009 include inﬂows relating to in-force business following OMSA’s acquisition of Futuregrowth and Acsis Life. The results for the year ended 31 December 2009 have also been restated to include Namibia’s contribution to new business premiums not valued (£1,625 million excluding Namibia). 368 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued C2: Product analysis of new covered premiums Emerging Markets Total business Individual business Savings Protection Annuity Mass foundation cluster* Group business Savings Protection Annuity * Previously described as Retail Mass. Nordic Unit-linked and life assurance Retail Europe Unit-linked and life assurance M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y Year ended 31 December 2010 Year ended 31 December 2009 £m Recurring 325 284 69 70 – 145 41 20 21 – Single 1,611 889 713 – 176 – 722 585 1 136 Recurring 249 220 50 56 – 114 29 13 16 – Single 1,437 716 539 21 155 1 721 564 – 157 £m Year ended 31 December 2010 Year ended 31 December 2009 Recurring 144 Single 573 Recurring 183 Single 527 £m Year ended 31 December 2010 Year ended 31 December 2009 Recurring Single Recurring Single 63 63 62 53 £m Year ended 31 December 2010 Year ended 31 December 2009 G o v e r n a n c e Wealth Management Unit-linked and life assurance Recurring 166 Single 5,685 Recurring 191 Single 4,240 £m US Life Total business Fixed deferred annuity Fixed indexed annuity Variable annuity Life Immediate annuity Year ended 31 December 2010 Year ended 31 December 2009 Recurring Single Recurring Single 10 – – – 10 – 824 163 502 – 1 158 14 – – – 14 – 549 30 383 – 13 123 The table above does not include the contribution from the mutual fund business. This is detailed in the Business Review section. i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 369 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued C3: 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 Adjusting items from continuing operations Adjusting items from discontinued operations Total MCEV adjusting items Year ended 31 December 2010 Year ended 31 December 2009 Covered business MCEV Non-covered business IFRS Total Group MCEV Covered business MCEV Non-covered business IFRS Total Group MCEV £m – 864 17 – – – – – 881 701 180 881 (20) (7) – (22) – 44 6 (203) (202) (202) – (202) (20) 857 17 (22) – 44 6 (203) 679 499 180 679 – 1,108 18 – – – – – 1,126 691 435 1,126 65 (10) – (48) – 45 (1) (264) (213) (213) – (213) 65 1,098 18 (48) – 45 (1) (264) 913 478 435 913 £m C4: Other movements in IFRS net equity impacting Group MCEV Year ended 31 December 2010 Year ended 31 December 2009 Covered business MCEV Non-covered business IFRS Total Group MCEV Covered business MCEV 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 Net sale of treasury shares Share buy back Net issues of ordinary share capital by the Company Acquisition of non-controlling interest in Mutual & Federal Exercise of share options Change in share based payment reserve Other movements in net equity – – 580 – – – 580 (468) – – – – – 112 8 (86) 448 14 – (24) 360 322 (28) – 162 (93) 4 4 731 8 (86) – – 1,028 359 14 – (24) 940 (146) (28) – 162 (93) 4 4 843 – – (8) 351 (190) – – – – – – 161 * Reﬁnement arising from the allocation of assets between covered and non-covered business at 31 December 2008. Non-covered business IFRS 2 (41) 197 13 316 (7) 480 145 – – 2 – 3 14 644 Total Group MCEV 2 (41) 556 13 316 (15) 831 (45) – – 2 – 3 14 805 370 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued C5: 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 2010 IFRS net asset value* Adjustment to include long-term business Total 5,794 Long-Term Savings Emerging Markets 5,088 1,216 Nordic 1,243 Retail Europe Wealth Management 632 1,997 on a statutory solvency basis (1,822) (2,053) 207 (851) (331) (1,078) 389 (1,010) 389 (1,010) 389 (8) – (206) – (198) – (598) £m US Life Bermuda 274 260 – – 432 (29) – – 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 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 3,351 2,414 1,804 186 103 321 534 403 Long-Term Savings Emerging Markets Total 6,103 4,848 (2,632) (2,238) 339 (995) 339 (995) 821 153 339 (8) £m Nordic 1,222 Retail Europe Wealth Management US Life Bermuda 664 2,141 886 369 (841) (382) (1,168) (388) – (186) – (204) – (597) – – (6) – – G o v e r n a n c e 2,815 1,954 1,305 195 78 376 498 363 * 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: (cid:81) 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. (cid:81) 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. For the US Life business, the reversal of the IFRS impairment for discontinued operations which is included in the IFRS net asset value, as this is not recognised on a statutory solvency basis. (cid:81) i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 371 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued D: Other income statement notes D1: Drivers of new business value for covered business PVNBP Margin 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 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 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 372 Old Mutual plc Annual Report and Accounts 2010 % Year ended 31 December 2010 Year ended 31 December 2009 1.6 (0.1) 0.2 – 0.1 (0.1) – 0.1 1.8 2.3 0.1 0.4 – (0.1) (0.1) 2.6 3.8 (0.1) 0.6 – (0.4) (0.2) 3.7 (1.0) 1.6 (0.2) – 0.9 0.1 1.4 1.0 (0.1) (0.1) – 0.2 – – 1.0 1.5 (0.1) – – 0.1 – 0.1 – 1.6 2.2 (0.1) (0.2) – 0.4 – 2.3 3.3 (0.1) – – 0.4 0.2 3.8 1.8 (2.1) (0.8) (0.1) 0.5 (0.3) (1.0) 1.2 (0.2) – – (0.2) – 0.2 1.0 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued D1: Drivers of new business value for covered business continued 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 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 The PVNBP margin changes are calculated in sterling. The PVNBP margin changes are calculated in rand. The PVNBP margin changes are calculated in krona. * ** *** **** The PVNBP margin changes are calculated in euro. ***** The PVNBP margin changes are calculated in dollars. Year ended 31 December 2010 Year ended 31 December 2009 2.2 (0.1) (0.9) – (0.6) (3.8) (3.2) 1.6 (0.1) 0.1 – 0.1 (0.4) – 0.1 1.4 (0.9) – 1.5 – – 1.6 2.2 0.8 0.8 – – 0.1 – 0.1 (0.2) 1.6 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 373 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued E1: Sensitivity tests The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2010 and the value of new business for the year ended 31 December 2010 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 for non-linked business (including non-linked reserves for linked business) whilst only varying future experience assumptions with similar considerations applying to required capital. However, the sensitivities for South Africa in respect of an increase/decrease of all pre–tax investment and economic assumptions, an increase/decrease in equity and property market values and increases in equity, property and swaption implied volatilities allow for the change in the time value of ﬁnancial options and guarantees that form part of the 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. 374 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Long-Term Savings (LTS) At 31 December 2010 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 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 Value of in-force business 5,003 MCEV 7,417 7,474 5,060 7,289 4,887 7,553 5,125 7,425 5,011 7,736 5,274 7,107 7,437 7,395 7,408 7,606 4,741 5,003 4,981 4,994 5,193 7,653 5,239 7,536 5,122 7,392 4,979 n/a n/a n/a n/a 7,462 5,049 7,365 4,952 £m Value of new business 200 204 185 216 202 208 193 200 200 200 238 220 212 199 185 219 203 196 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 375 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Emerging Markets At 31 December 2010 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 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 * No impact on with-proﬁt annuities as the mortality risk is borne by policyholders. MCEV 3,313 Value of in-force business 1,509 3,366 1,562 3,285 1,479 3,342 1,540 3,321 1,517 3,446 1,594 3,180 3,333 3,292 3,306 3,369 1,422 1,509 1,488 1,502 1,566 3,446 1,641 3,414 1,609 3,290 1,487 n/a n/a n/a n/a 3,330 1,526 3,290 1,486 £m Value of new business 86 90 80 91 88 86 86 86 86 86 105 98 97 85 79 100 87 85 376 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Nordic At 31 December 2010 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 MCEV 1,504 Value of in-force business 1,318 1,504 1,318 1,480 1,294 1,532 1,346 1,610 1,424 1,398 1,504 1,504 1,504 1,544 1,213 1,318 1,318 1,318 1,358 1,545 1,360 1,506 1,320 1,502 1,316 n/a n/a n/a n/a 1,522 1,337 1,504 1,318 £m Value of new business 41 41 41 42 45 37 41 41 41 49 43 41 41 40 41 43 41 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 377 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Retail Europe At 31 December 2010 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 MCEV 623 626 606 637 636 610 623 623 621 638 648 627 623 n/a n/a 624 615 £m Value of in-force business Value of new business 520 523 505 533 533 508 520 520 518 535 546 525 520 n/a n/a 521 513 7 7 5 10 7 7 7 7 7 9 9 8 7 6 8 6 7 378 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Wealth Management At 31 December 2010 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 MCEV 1,977 Value of in-force business 1,656 1,978 1,657 1,918 1,609 2,042 1,706 2,044 1,723 1,919 1,977 1,976 1,977 2,055 1,598 1,656 1,655 1,656 1,734 2,014 1,692 1,989 1,668 1,977 1,656 n/a n/a n/a n/a 1,986 1,665 1,956 1,635 £m Value of new business 66 66 59 73 70 63 66 66 66 75 70 66 66 60 70 67 63 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 379 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued US Life At 31 December 2010 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 Value of in-force business (723) (719) (914) MCEV (189) (185) (380) Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately (18) (552) £m Value of new business (28) (28) (5) (60) 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 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 (145) (679) (26) (34) (568) (189) (189) 80 (270) (137) (173) (169) (215) n/a n/a (187) (209) (723) (723) (454) (804) (671) (707) (703) (749) n/a n/a (721) (743) (18) (28) (28) (28) (53) (27) (28) (27) (28) (31) (30) (28) (30) * At 31 December 2010 the size of the base liquidity premium adjustment for US Life business of 75bps is greater than the base liquidity premium adjustment for OMSA’s Retail Afﬂuent Immediate Annuity business of 45bps. 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. 380 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Bermuda At 31 December 2010 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 £m Value of in-force business Value of new business (116) (114) (126) (105) (110) (123) (105) (120) (118) (107) (106) (115) (116) n/a n/a (113) (122) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a MCEV 287 289 350 226 339 229 298 190 285 278 297 287 287 n/a n/a 290 281 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l i t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 381 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued Total covered business Total covered business includes the MCEV contribution from the US Life and Bermuda business segments. At 31 December 2010 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 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 Value of in-force business 4,164 MCEV 7,515 7,578 4,227 7,259 3,847 7,761 4,468 7,567 4,216 7,886 4,441 7,147 7,815 7,396 7,423 7,747 3,895 4,444 4,138 4,072 4,415 7,777 4,426 7,654 4,304 7,464 4,114 n/a n/a n/a n/a 7,565 4,215 7,437 4,087 £m Value of new business 172 176 180 156 176 180 165 172 172 147 211 192 185 171 154 189 175 166 382 Old Mutual plc Annual Report and Accounts 2010 MCEV NOTES TO THE MCEV BASIS SUPPLEMENTARY INFORMATION For the year ended 31 December 2010 continued At 31 December 2009 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 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 Value of in-force business 3,212 MCEV 6,027 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 2,996 3,530 3,190 3,092 3,492 6,269 3,454 6,166 3,351 5,989 3,175 n/a n/a n/a n/a 6,160 3,345 5,932 3,118 £m Value of new business 167 172 161 167 169 179 157 167 167 161 209 188 185 167 150 153 173 161 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 383 FINANCIAL HISTORY Year ended 31 December 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 income2 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 2010 20091 2008 2007 3,582 (305) 3,277 10,791 4,082 204 3,061 159 21,574 (5,039) 227 (4,812) (6,899) (552) (269) (2,519) (963) (3,714) (1) (388) (297) 3,020 (267) 2,753 11,112 3,989 168 2,422 196 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 20,640 47 17,671 (3,786) 200 (3,586) (8,345) (511) (322) (2,627) (728) (3,072) (266) (470) (312) (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) £m 2006 4,713 (267) 4,446 10,439 2,441 – 2,262 324 19,912 (7,999) 245 (7,754) (4,655) (123) (91) (1,461) (714) (2,826) (8) (278) (379) Total expenses (20,414) (20,239) 496 (15,945) (18,289) Share of associated undertakings’ and joint ventures’ proﬁt/(loss) after tax (Loss)/proﬁt on disposal of subsidiaries, associated undertakings and strategic investments Proﬁt before tax Income tax (expense)/credit Proﬁt/(loss) from continuing operations after tax1 Discontinued operations Loss from discontinued operations after tax1 (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 on proﬁt/(loss) from continuing operations (pence)1 Basic earnings per ordinary share on proﬁt/(loss) from discontinuing operations (pence)1 Basic earnings per ordinary share (pence) Diluted earnings per ordinary share on proﬁt/(loss) from continuing operations (pence)1 Diluted earnings per ordinary share on proﬁt/(loss) from discontinuing operations (pence)1 Diluted earnings per ordinary share (pence) Weighted average number of shares – millions 7 (22) 1,145 (456) 689 (713) (24) (282) 196 62 (24) 8.2 (14.7) (6.5) 7.4 (13.5) (6.1) 4,859 2 (50) 353 (400) (47) (71) (118) (340) 158 64 (118) (6.3) (1.5) (7.8) (6.3) (1.5) (7.8) 4,758 (1) 53 595 88 683 441 188 54 683 (1) 25 1,750 (504) 6 85 1,714 (621) 1,246 1,093 972 224 50 836 207 50 1,246 1,093 8.6 19.2 17.0 8.1 4,755 18.1 4,894 16.1 4,705 1 2009 has been restated to reﬂect US Life as discontinued. No restatement has been made for 2008, 2007 or 2006. 2 2006 included in Banking interest and similar income. 384 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL HISTORY Year ended 31 December 2010 20091 2008 2007 £m 2006 Consolidated Statement of Comprehensive Income (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/(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 from continuing operations1 Total other comprehensive income for the ﬁnancial year from discontinued operations1 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 Year ended 31 December Adjusted Operating Proﬁt Adjusted Operating Proﬁt Earnings per share Adjusted operating earnings per ordinary share (pence) – H1 Adjusted operating earnings per ordinary share (pence) – H22 Adjusted operating earnings per ordinary share (pence) Adjusted weighted average number of shares – H1 Adjusted weighted average number of shares – H2 Adjusted weighted average number of shares (24) 26 (87) 32 – (15) 1,039 31 13 1,039 112 1,151 1,127 594 428 105 1,127 2010 1,481 8.3 7.7 16.0 5,342 5,376 5,359 (118) 683 1,246 1,093 (10) (41) 112 13 36 334 21 13 478 750 1,228 1,110 709 334 67 1,110 2009 1,133 4.9 6.7 11.6 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) 34 110 1,356 1,077 229 50 1,356 2007 1,624 8.2 8.7 16.9 5,407 5,415 5,411 28 75 (111) 17 28 (1,060) (4) 14 (1,013) 80 73 (43) 50 80 2006 1,459 8.5 6.6 15.1 5,063 5,379 5,222 1 2009 has been restated to reﬂect US Life as discontinued. No restatement has been made for 2008, 2007 or 2006. 2 Calculated based on full year less 1st half year. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 385 FINANCIAL HISTORY Year ended 31 December 2010 2009 2008 2007 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 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 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 £m 2006 5,367 665 499 804 511 83 1,578 763 – – 22,804 86,452 60 – 3,635 1,238 2,951 1,165 4,965 1,079 1,015 2,040 416 162 1,534 982 122 2 51,778 106,153 156 190 3,932 2,503 4,132 12,391 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 1,623 193,552 163,806 144,283 142,740 128,575 98,631 397 3,584 4,204 260 730 858 238 5,661 190 53,236 1,870 12,219 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 1,716 420 182,078 11,474 153,095 10,711 134,706 9,577 133,143 9,597 80,081 – 3,041 1,676 542 311 1,393 283 5,266 – 25,052 1,060 1,107 119,812 8,763 8,951 8,464 7,737 7,961 7,237 1,763 760 2,523 11,474 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 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 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. 386 Old Mutual plc Annual Report and Accounts 2010 FINANCIAL HISTORY Year ended 31 December Additional Information Equity attributable to equity holders of the parent Less: Perpetual preferred callable securities Shares issued and fully paid Less: Treasury shares in issue IFRS Book value per Share (pence) Funds under management Earnings after tax attributable to ordinary equity holders Adjusted operating Group MCEV Adjusted operating Group EEV Adjusted operating Group MCEV earnings per share (pence) Adjusted operating Group EEV earnings per share (pence) Market consistent embedded value European embedded value MCEV per share (pence) EEV per share (pence) 2010 2009 2008 2007 8,951 (688) 8,263 5,695 (239) 5,456 151 8,464 (688) 7,776 5,518 (239) 5,279 147 7,737 (688) 7,049 5,516 (239) 5,277 134 7,961 (688) 7,273 5,510 (105) 5,405 135 £m 2006 7,237 (688) 6,549 5,501 – 5,501 119 322,797 285,010 264,814 278,878 239,433 830 – 15.5 – 9,901 – 181.5 – 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 Rates used to translate the operating results, assets and liabilities of key foreign business segments to Sterling are: Year ended 31 December Exchange Rates Income statement (average rate) Rand US Dollars Swedish Kronor Euro Statement of ﬁnancial position (closing rate) Rand US Dollars Swedish Kronor Euro 2010 2009 2008 2007 20061 11.3095 1.5459 11.1364 1.1650 10.2796 1.5530 10.4227 1.1614 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 1 The 2006 Income Statement rate applied in respect of Skandia is an eleven month average rate, reﬂecting the acquisition date of 1 February 2006. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 387 FINANCIAL HISTORY 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 2010 and 2009 were as follows: London Stock Exchange JSE High 145.2p R15.84 2010 Low 97.3p R11.64 High 121.3p R14.86 2009 Low 30.8p R4.80 At 31 December 2010, 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 2,601,210,517 2,770,918,189 62,918,550 15,482,874 5,259,308 239,434,888 5,695,224,326 45.68 48.65 1.11 0.27 0.09 4.20 100 Total shares % of whole 23,345,374 27,184,585 31,334,013 30,571,108 5,343,354,358 239,434,888 5,695,224,326 0.41 0.48 0.55 0.54 93.82 4.20 100 Number of holders 11,144 30,5931 31,3141 5581 4,7111 1 78,321 Number of holders 66,480 10,131 1,072 190 447 1 78,321 Note 1. The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 2,360,989,530 shares, including 366,659,261 shares held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the beneﬁt of 437,510 underlying beneﬁcial owners. The registered shareholdings on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 786,516 shares as nominee for 3,509 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 7,905,389 shares as nominee for 7,105 underlying beneﬁcial owners. The registered shareholdings on the Malawi branch register included Old Mutual (Blantyre) Nominees Limited, which held a total of 46,664 shares as nominee for 137 underlying beneﬁcial owners. 388 Old Mutual plc Annual Report and Accounts 2010 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 6ZZ 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) Tel: 0861 100 940 +27 (0)11 870 8211 Email: omsa@computershare.co.za Malawi National Bank of Malawi Financial Management Services Department Cnr Victoria Avenue/Henderson Street Blantyre (PO Box 1438, Blantyre, Malawi) Tel: +265 182 3483/0900 Email: nbminvestment@natbankmw.com Namibia Transfer Secretaries (Pty) Limited Shop 8 Kaiser Krone Centre Post Street Mall Windhoek (PO Box 2401, Windhoek) Tel: +264 (0)61 227647 Fax: +264 (0)61 248531 Email: ts@nsx.com.na Sweden Euroclear Sweden AB Box 7822 SE-103 97 Stockholm Tel: +46 8 402 9000 Zimbabwe Corpserve (Private) Limited 2nd Floor, ZB Centre Cnr First Street/Kwame Nkrumah Avenue Harare (PO Box 2208, Harare, Zimbabwe) Tel: +263 (0)4 751559/61 Fax: +263 (0)4 752629 Email: enquiries@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 and dividend cheques/tax statements. Payment by cheque 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%, subject to a minimum charge of £25. 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. Detailed terms and conditions are available on request. Shareholders should have their Shareholder Reference Number (SRN) ready when calling about sales. The SRN appears on share certiﬁcates and dividend cheques / tax statements. Payment by cheque will be required for purchases. At present, this service is only available to shareholders in certain jurisdictions outside the UK, which Computershare will conﬁrm upon request. For general enquiries about the dealing service shareholders can call 0870 873 5836. 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. Annual Report and Accounts 2010 Old Mutual plc 389 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n SHAREHOLDER INFORMATION Scrip dividend scheme The Company offers eligible shareholders the option to receive dividends in the form of shares through participation in the Company’s scrip dividend scheme. Shareholders who are eligible to make an ‘evergreen’ election will receive dividends in the form of shares for each dividend for which a scrip alternative is offered while the election remains in place. Details about eligibility to participate in the scrip dividend scheme are contained in the scrip dividend scheme booklet. This booklet and the accompanying mandate forms can be obtained from the Company’s website (www.oldmutual.com) or from the relevant registrars (please refer to the contact details on the preceding page). Details of when elections to join the scrip dividend scheme must be received in order to receive the scrip dividend alternative for the ﬁnal dividend for the year ended 31 December 2010 are set out under the heading ‘Financial calendar’ below. 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 on their holdings in the Company should contact Computershare Investor Services in Johannesburg on 0861 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) reported that the average amount lost by investors is around £20,000. 390 Old Mutual plc Annual Report and Accounts 2010 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: (cid:81) Make sure you get the correct name of the person and organisation; (cid:81) Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register/; (cid:81) Report the matter to the FSA either by calling 0300 500 5000 or visiting www.moneymadeclear.org.uk; (cid:81) 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/ form.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.org.uk Financial calendar The Company’s ﬁnancial calendar for the forthcoming year is as follows: Scrip dividend alternative calculation price determined Last ﬁve dealing days up to 31 March 2011 Currency conversion date for the ﬁnal dividend 31 March 2011 Local currency equivalents and scrip dividend alternative calculation announced Scrip dividend alternative closes for shareholders on the African exchanges 1 April 2011 12 noon on 15 April 2011 Record date for the ﬁnal dividend 15 April 2011 Scrip dividend alternative closes for shareholders on the principal UK register 12 noon on 3 May 2011 Annual General Meeting and First Quarter Interim Management Statement 12 May 2011 Final dividend payment date and issue of shares under the scrip dividend alternative Interim results 31 May 2011 5 August 2011 Third Quarter Interim Management Statement 3 November 2011 Interim dividend payment date 30 November 2011 Final results for 2011 March 2012 SHAREHOLDER INFORMATION 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. 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/voting instructions If you would like to receive future communications from the Company by email, please log on to our website, www.oldmutual.com/ir/index.jsp, select the “Shareholder centre” section, click on “Electronic Communication” 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 for the Annual General Meeting. Before you register, you will be asked to agree to the Terms and Conditions for Electronic Communications with Shareholders. It is important that you read these Terms and Conditions carefully, as they set out the basis on which electronic communications will be sent to you. You should bear in mind that, in accessing documents electronically, you will incur the cost of online time. Any election to receive documents electronically will generally remain in force until you contact the Company’s Registrars (via the online address set out earlier in this section of the Report or otherwise) to terminate or change such election. The use of the electronic communications facility described above is entirely voluntary. If you wish to continue to receive communications from the Company by post, then you do not need to take any action. Electronic proxy appointment is available for this year’s Annual General Meeting. This enables proxy votes to be submitted electronically, as an alternative to ﬁlling out and posting a form of proxy. Further details are set out on the form of proxy. Electronic submission is also available for voting instruction forms. M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s l i S h a r e h o d e r l i n f o r m a t i o n Annual Report and Accounts 2010 Old Mutual plc 391 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. Afﬁliate An investment ﬁrm specialising in offering speciﬁc services to a select number of individuals (term interchangeable with boutique). 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. Assumptions Variables applied to data used to project expected outcomes. In the life insurance business, this might include assumptions on average life expectancy and policy surrender rates. Bancassurance An arrangement whereby banks and building societies sell life, pension and savings products on behalf of other ﬁnancial providers. Boutique A small investment ﬁrm specialising in offering speciﬁc services to a select number of individuals (term interchangeable with afﬁliate). 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). Carbon Disclosure Project The Carbon Disclosure Project (CDP) is an independent not-for-proﬁt organisation holding the largest database of primary corporate climate change information in the world. Thousands of organisations from across the world’s major economies measure and disclose their greenhouse gas emissions, water use and climate-change strategies through CDP. Corporations are rated and the information helps investors, corporations and regulators to make more informed decisions. Correlation Correlation is a statistical measurement of the relationship between two variables. Possible correlations range from +1 to -1. A zero correlation indicates that there is no relationship between the variables. A correlation of -1 indicates a perfect negative correlation, meaning that as one variable goes up, the other goes down. A correlation of +1 indicates a perfect positive correlation, meaning that both variables move in the same direction together. 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. Deferred acquisition costs (DAC) A method of accounting whereby the acquisition costs on long-term business (eg sales commissions) are recognised over the life of the contracts rather than up front at the time of sale. The costs are deferred on the balance sheet as an asset and amortised over the contract life. Deferred annuity An annuity due to be paid from a future date or when the policyholder reaches a speciﬁed age. A deferred annuity may be funded by the policyholder by payment of a series of regular contributions or by a capital sum. Earnings per share (EPS) Earnings per Share (EPS) is calculated as post-tax adjusted operating proﬁt divided by the adjusted weighted average number of shares (WANS) held by our investors. EPS is an indicator of our proﬁtability that measures how much we earn for each share held. Economic capital Market value of assets minus fair value of liabilities. Used in practice as a risk-adjusted capital measure; speciﬁcally, the amount of capital required to meet an explicit solvency constraint (eg a certain probability of ruin). 392 Old Mutual plc Annual Report and Accounts 2010 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y GLOSSARY 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. 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. International ﬁnancial reporting standards (IFRS) Accounting regulations that all publicly listed companies in the EU are required to use. They are designed to ensure companies prepare their accounts in a similar way so that there is a common basis for comparison. Key risk indicator (KRI) A metric that is indicative of the trend of risk exposures for a particular risk or group of risks. 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. FGD surplus This represents the amount of capital in the Company which is surplus to the statutory solvency requirement for insurance groups as laid down by the Financial Groups Directive. Financial Services Authority (FSA) The 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. 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. 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. G o v e r n a n c e 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. Loss data Data regarding direct losses experienced by the organisation as a result of events caused by a failure of people, process, systems and/or external events. Management action plan An action or actions developed by management that are usually triggered by one or more of the following: (cid:81) Risk exposure greater than risk appetite (cid:81) Control breakdowns or weaknesses (cid:81) Key risk indicator threshold breaches Loss events (cid:81) (cid:81) Audit ﬁndings Annual Report and Accounts 2010 Old Mutual plc 393 i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n GLOSSARY 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. 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 (ISAs), Self-Invested Personal Pensions (SIPPs) and life insurance) and for viewing an individual’s entire portfolio to assess asset allocation and risk exposure. Minority interests A percentage of ownership in a company that is signiﬁcant, but does not give the owner the ability to control the company. In accounting, includes only the dividends from a minority interest on a balance sheet, unless the owner has enough ownership to exert inﬂuence (but not outright control) over the company’s direction. In that case, one includes both dividends and ordinary income on the balance sheet. 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. 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. Net risk (also known as ‘Residual Risk’) A net risk is deﬁned as the result of an assessment of the potential impact and likelihood of a risk after taking account of the design adequacy and operating effectiveness of the controls put in place to manage the risk. 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. 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. Operational risk scenarios Foreseeable, hypothetical events relating to failure of people, processes, systems and/or external events that potentially could have a signiﬁcant impact on an organisation’s risk proﬁle or capital. 394 Old Mutual plc Annual Report and Accounts 2010 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. Probability distribution A mathematical description of a range of possible values for a certain variable, identifying the likelihood of each possible value occurring. Quantitative impact studies (QIS) The QIS exercises test the ﬁnancial impact and suitability of proposed Solvency II requirements on ﬁrms before the implementation of the regulations. Return on equity (RoE) A measure calculated by dividing proﬁt after tax by the average amount of equity in the business. Equity indicates how much capital is tied up in the business. Risk The threat of an event that will limit the organisation’s ability to achieve its business objectives. Risk is often expressed in terms of a combination of the consequences of an event or a change in circumstances and the associated likelihood of occurrence. Risk adjusted performance measures A metric that measures returns based on the quantum of risk taken to generate those returns. We use it to level the playing ﬁelds between different business units all competing for the same capital. Risk appetite The level of risk an organisation is willing to take in the pursuit of proﬁt. Risk assessment This is a forward-looking and subjective process whereby risks are identiﬁed and exposure to risk is assessed or measured in the context of the business objectives. There are typically two aspects to the assessment of risk, one being the likelihood of risk occurring and the second being the impact of the risk. GLOSSARY Risk-based capital Risk-based capital is the minimum amount of capital that an organisation needs to support its overall business operations. Risk-based capital is used to set capital requirements considering the nature, scale and complexity of the organisation. Statistical distribution An arrangement of values of a variable showing their observed or theoretical frequency of occurrence, eg frequency distribution – a distribution of observed frequencies of occurrence of the values of a variable. Risk categorisation A process for classifying risks possessing common qualities or quantities. Risk categorisation is used to collate information in a concise proﬁle. 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. Risk exposure Means the capital required to meet the business’s current exposure to risk. Technical provisions Amounts set aside on the basis of actuarial calculations to meet forecast future obligations to policyholders. Risk identiﬁcation The qualitative determination of risks that are material, ie those that potentially can impact the organisation’s achievement of its ﬁnancial and/or strategic objectives. Risk management framework A set of components that provide the foundations and organisational arrangements for designing, implementing, monitoring, reviewing and continually improving risk management processes throughout the organisation. Risk policies Policies that set out the minimum, mandatory requirements that businesses must follow to mitigate key Group risks. Risk proﬁle The entire portfolio of risks organised by risk category that are found within a particular organisation. Risk quantiﬁcation Attaching a probability or impact to the happening of a negative event. If it is certain that an event cannot occur, it is given a probability of 0; if it is certain that it will occur, it is given a probability of 1. Risks are assigned a probability between 0 and 1. Scenario A predicted sequence of events. Scenario analysis Scenario analysis is a process of analysing possible future events by considering possible outcomes (scenarios). Solvency II Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency Capital Requirement (SCR) The SCR is the capital required to ensure that the (re)insurance company will be able to meet its obligations over the next 12 months with a probability of at least 99.5%. Standard formula A non-entity-speciﬁc risk-based mathematical formula used by insurers to calculate their Solvency Capital Requirement under Solvency II, if the company is not using an internal model. 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. 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 usually 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. Annual Report and Accounts 2010 Old Mutual plc 395 M a n a g e m e n t s t a t e m e n t s i B u s n e s s r e v e w i i R s k a n d R e s p o n s b i i l t y G o v e r n a n c e i F n a n c a s i l S h a r e h o d e r l i n f o r m a t i o n NOTES 396 Old Mutual plc Annual Report and Accounts 2010 (cid:3) 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 Printed by The Colourhouse This Report has been printed on Symbol Freelife Satin and Arcoprint – they are both elemental chlorine free and are certiﬁed according to the requirements of the Forest Stewardship Council (FSC) .The Symbol Freelife has a high content of recycled material (guaranteed 25%). Both products are completely biodegradable and recyclable. This year we have reduced the number of printed copies of this Report, saving a total of three tonnes of paper. This Report is printed by an FSC, ISO 14001, and carbon neutral certiﬁed printer using vegetable oil based inks. 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

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