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
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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
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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
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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.
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Supply
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Financial
crime
Direct
environmental
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Community
impact
GOVERNANCE
AND RISK
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Customer
service
Responsible
marketing
and selling
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Indirect
investment
impact
Our
employees
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EM P L O Y
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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.
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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.
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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.
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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.”
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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
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Annual Report and Accounts 2010
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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
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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
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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.
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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.
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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).
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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
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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
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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
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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
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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)
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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.
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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
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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.
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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.
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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
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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.
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Annual Report and Accounts 2010
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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
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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
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Annual Report and Accounts 2010
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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.
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(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
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Old Mutual plc 47
BUSINESS REVIEW
LONG-TERM SAVINGS
CONTINUED
Product development structure decisions
OM: Current
Risk Managed Model
OM: Aspiration
Leveraged Model
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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.
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(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.
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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
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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).
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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.
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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.
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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
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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%)
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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.
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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
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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
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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.
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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)
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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.
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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
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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.
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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.
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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.
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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
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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.
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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
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Old Mutual plc
Annual Report and Accounts 2010
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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.
Business profile
Commercial
Corporate
Personal
Risk Finance
Credit
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(cid:76)(cid:85)(cid:78)(cid:80)(cid:85)(cid:76)(cid:76)(cid:89)(cid:80)(cid:85)(cid:78)(cid:19)(cid:3)(cid:84)(cid:72)(cid:89)(cid:80)(cid:85)(cid:76)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:74)(cid:89)(cid:86)(cid:87)(cid:3)(cid:80)(cid:85)(cid:90)(cid:92)(cid:89)(cid:72)(cid:85)(cid:74)(cid:76)(cid:3)(cid:89)(cid:80)(cid:90)(cid:82)(cid:90)(cid:21)
(cid:3)
The Corporate portfolio focuses on corporate clients, from mid-size companies to large
multi-nationals. 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.
(cid:59)(cid:79)(cid:76)(cid:3)(cid:55)(cid:76)(cid:89)(cid:90)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)(cid:87)(cid:86)(cid:89)(cid:91)(cid:77)(cid:86)(cid:83)(cid:80)(cid:86)(cid:3)(cid:87)(cid:89)(cid:86)(cid:93)(cid:80)(cid:75)(cid:76)(cid:90)(cid:3)(cid:75)(cid:86)(cid:84)(cid:76)(cid:90)(cid:91)(cid:80)(cid:74)(cid:3)(cid:79)(cid:86)(cid:92)(cid:90)(cid:76)(cid:79)(cid:86)(cid:83)(cid:75)(cid:19)(cid:3)(cid:84)(cid:86)(cid:91)(cid:86)(cid:89)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:72)(cid:83)(cid:83)(cid:20)(cid:89)(cid:80)(cid:90)(cid:82)(cid:3)(cid:90)(cid:79)(cid:86)(cid:89)(cid:91)(cid:20)(cid:91)(cid:76)(cid:89)(cid:84)(cid:3)
(cid:80)(cid:85)(cid:90)(cid:92)(cid:89)(cid:72)(cid:85)(cid:74)(cid:76)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:75)(cid:86)(cid:84)(cid:76)(cid:90)(cid:91)(cid:80)(cid:74)(cid:3)(cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:90)(cid:3)(cid:86)(cid:77)(cid:3)(cid:72)(cid:83)(cid:83)(cid:3)(cid:72)(cid:78)(cid:76)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:93)(cid:72)(cid:89)(cid:80)(cid:86)(cid:92)(cid:90)(cid:3)(cid:77)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:78)(cid:89)(cid:86)(cid:92)(cid:87)(cid:90)(cid:21)(cid:3)(cid:48)(cid:91)(cid:3)(cid:86)(cid:77)(cid:77)(cid:76)(cid:89)(cid:90)(cid:3)
(cid:94)(cid:79)(cid:80)(cid:91)(cid:76)(cid:20)(cid:83)(cid:72)(cid:73)(cid:76)(cid:83)(cid:83)(cid:76)(cid:75)(cid:3)(cid:80)(cid:85)(cid:91)(cid:76)(cid:89)(cid:84)(cid:76)(cid:75)(cid:80)(cid:72)(cid:89)(cid:96)(cid:20)(cid:73)(cid:89)(cid:72)(cid:85)(cid:75)(cid:76)(cid:75)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:72)(cid:85)(cid:3)(cid:80)(cid:85)(cid:79)(cid:86)(cid:92)(cid:90)(cid:76)(cid:3)(cid:73)(cid:89)(cid:72)(cid:85)(cid:75)(cid:76)(cid:75)(cid:3)(cid:87)(cid:89)(cid:86)(cid:75)(cid:92)(cid:74)(cid:91)(cid:19)(cid:3)(cid:40)(cid:83)(cid:83)(cid:90)(cid:92)(cid:89)(cid:76)(cid:19)(cid:3)
(cid:94)(cid:79)(cid:80)(cid:74)(cid:79)(cid:3)(cid:87)(cid:89)(cid:86)(cid:93)(cid:80)(cid:75)(cid:76)(cid:90)(cid:3)(cid:74)(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:74)(cid:86)(cid:93)(cid:76)(cid:89)(cid:21)(cid:3)(cid:48)(cid:91)(cid:3)(cid:72)(cid:83)(cid:90)(cid:86)(cid:3)(cid:80)(cid:85)(cid:74)(cid:83)(cid:92)(cid:75)(cid:76)(cid:90)(cid:3)(cid:72)(cid:3)(cid:79)(cid:86)(cid:90)(cid:87)(cid:80)(cid:91)(cid:72)(cid:83)(cid:3)(cid:74)(cid:72)(cid:90)(cid:79)(cid:3)(cid:87)(cid:83)(cid:72)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:87)(cid:76)(cid:89)(cid:90)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)
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(cid:72)(cid:3)(cid:79)(cid:80)(cid:78)(cid:79)(cid:83)(cid:96)(cid:3)(cid:74)(cid:72)(cid:87)(cid:72)(cid:73)(cid:83)(cid:76)(cid:3)(cid:91)(cid:76)(cid:72)(cid:84)(cid:3)(cid:94)(cid:79)(cid:80)(cid:74)(cid:79)(cid:3)(cid:80)(cid:90)(cid:3)(cid:94)(cid:76)(cid:83)(cid:83)(cid:3)(cid:89)(cid:76)(cid:78)(cid:72)(cid:89)(cid:75)(cid:76)(cid:75)(cid:3)(cid:80)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:80)(cid:85)(cid:75)(cid:92)(cid:90)(cid:91)(cid:89)(cid:96)(cid:3)(cid:72)(cid:90)(cid:3)(cid:86)(cid:85)(cid:76)(cid:3)(cid:86)(cid:77)(cid:3)(cid:58)(cid:86)(cid:92)(cid:91)(cid:79)(cid:3)(cid:40)(cid:77)(cid:89)(cid:80)(cid:74)(cid:72)(cid:187)(cid:90)(cid:3)(cid:83)(cid:72)(cid:89)(cid:78)(cid:76)(cid:90)(cid:91)(cid:3)
(cid:90)(cid:92)(cid:87)(cid:87)(cid:83)(cid:80)(cid:76)(cid:89)(cid:90)(cid:3)(cid:86)(cid:77)(cid:3)(cid:89)(cid:80)(cid:90)(cid:82)(cid:3)(cid:77)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:85)(cid:78)(cid:3)(cid:90)(cid:86)(cid:83)(cid:92)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90)(cid:19)(cid:3)(cid:87)(cid:89)(cid:80)(cid:84)(cid:72)(cid:89)(cid:80)(cid:83)(cid:96)(cid:3)(cid:91)(cid:86)(cid:3)(cid:84)(cid:76)(cid:75)(cid:80)(cid:92)(cid:84)(cid:20)(cid:90)(cid:80)(cid:97)(cid:76)(cid:75)(cid:3)(cid:74)(cid:86)(cid:84)(cid:84)(cid:76)(cid:89)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:90)(cid:21)
(cid:59)(cid:79)(cid:76)(cid:3)(cid:42)(cid:89)(cid:76)(cid:75)(cid:80)(cid:91)(cid:3)(cid:87)(cid:86)(cid:89)(cid:91)(cid:77)(cid:86)(cid:83)(cid:80)(cid:86)(cid:3)(cid:80)(cid:90)(cid:3)(cid:92)(cid:85)(cid:75)(cid:76)(cid:89)(cid:94)(cid:89)(cid:80)(cid:91)(cid:91)(cid:76)(cid:85)(cid:3)(cid:73)(cid:96)(cid:3)(cid:72)(cid:3)(cid:90)(cid:92)(cid:73)(cid:90)(cid:80)(cid:75)(cid:80)(cid:72)(cid:89)(cid:96)(cid:3)(cid:86)(cid:77)(cid:3)(cid:52)(cid:13)(cid:45)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:80)(cid:90)(cid:3)(cid:86)(cid:77)(cid:77)(cid:76)(cid:89)(cid:76)(cid:75)(cid:3)(cid:94)(cid:80)(cid:91)(cid:79)(cid:80)(cid:85)(cid:3)(cid:72)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:3)
(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
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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.
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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
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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.
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Peter Bain
President and Chief
Executive Officer
Appointed February 2011
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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
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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)
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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.
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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
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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
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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.
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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
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Annual Report and Accounts 2010
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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
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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
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M
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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
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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
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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
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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
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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)
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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)
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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
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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:
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(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
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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
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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.
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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%
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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.
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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.
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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
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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
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(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.
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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
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Group Human Resources Director
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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
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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
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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.
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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
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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
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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
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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.
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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.
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130 Old Mutual plc
Annual Report and Accounts 2010
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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
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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.
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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
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(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
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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
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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
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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.
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(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
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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
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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.
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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.
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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
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AND OTHER MATTERS
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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
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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
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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:
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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
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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
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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).
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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:
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(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.
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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.
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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
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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.
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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%
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* 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.
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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
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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.
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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)
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Total direct remuneration is made up of basic salary, short-term incentives and long-term incentives (excluding the value of benefits).
FTSE 26-75 by Market Capitalisation as supplied by PricewaterhouseCoopers.
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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
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Shares under
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31 December
2010
289,605
764,681
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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
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t
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t
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m
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s
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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
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r
n
a
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c
e
* The year ended 31 December 2009 has been restated to reflect US Life as discontinued (see note A1).
i
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n
a
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c
a
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l
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S
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o
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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
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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
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d
R
e
s
p
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n
s
b
i
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i
t
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G
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n
a
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F
n
a
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c
a
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l
i
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a
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r
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i
n
f
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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
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m
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m
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s
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s
s
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i
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a
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p
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s
b
i
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G
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a
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a
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h
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d
e
r
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i
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f
o
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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
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(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
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(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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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).
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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.
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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
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(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:
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(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.
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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.
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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.
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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.
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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.
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(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
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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.
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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).
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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
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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:
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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.
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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
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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
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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
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a
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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
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d
R
e
s
p
o
n
s
b
i
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l
i
t
y
G
o
v
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n
a
n
c
e
i
F
n
a
n
c
a
s
l
i
S
h
a
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e
h
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f
o
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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
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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
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s
s
r
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G
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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
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s
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v
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w
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s
p
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s
b
i
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G
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n
a
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i
F
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a
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c
a
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S
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a
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h
o
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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
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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
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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
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i
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o
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a
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c
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a
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c
a
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a
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o
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i
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f
o
r
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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
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* 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.
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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.
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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
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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
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a
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e
m
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n
t
s
t
a
t
e
m
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n
t
s
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s
s
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w
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a
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d
R
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s
p
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s
b
i
i
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t
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G
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r
n
a
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F
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a
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a
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S
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l
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o
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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
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n
a
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e
m
e
n
t
s
t
a
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e
m
e
n
t
s
i
B
u
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s
s
r
e
v
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w
i
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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
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e
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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
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a
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e
m
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t
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t
a
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s
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p
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s
b
i
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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
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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
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n
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c
a
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i
S
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i
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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
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G
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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
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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.
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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
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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
–
–
–
–
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Total financial liabilities measured at fair value
76,003
46,080
27,962
1,961
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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
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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.
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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.
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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.
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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.
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(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.
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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.
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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
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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
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i
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£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
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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
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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
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(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
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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)
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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.
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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.
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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
–
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£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
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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)
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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
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e
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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
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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.
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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:
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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
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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
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– 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.
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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.
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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).
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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
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£m
At
31 December
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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.
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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.
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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.
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(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
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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
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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
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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
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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.
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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
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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%.
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m
e
n
t
s
i
B
u
s
n
e
s
s
r
e
v
e
w
i
i
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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
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c
e
i
F
n
a
n
c
a
s
l
i
S
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l
i
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f
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r
m
a
t
i
o
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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
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k
a
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d
R
e
s
p
o
n
s
b
i
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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
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n
a
n
c
a
s
i
l
S
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a
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e
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o
d
e
r
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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
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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).
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(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
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£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
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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
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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
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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).
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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
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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
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i
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G
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n
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i
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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
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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
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S
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e
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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
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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
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13
7
20
21
–
35
7
42
19
–
G
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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
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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
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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.
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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
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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
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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:*
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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
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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.
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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
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£m
Year ended
31 December
2010
Year ended
31 December
2009
1,608
(1,557)
51
(827)
(776)
63
(713)
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1,208
(1,314)
(106)
–
(106)
35
(71)
£m
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S
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f
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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
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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
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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
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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
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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
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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).
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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
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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.
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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
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a
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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
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s
s
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v
e
w
i
£m
Total
100
58
£m
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a
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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.
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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
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£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
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a
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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
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f
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a
t
i
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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
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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.
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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
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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.
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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)
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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
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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
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**
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.
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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
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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.
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Asset mix
The time value of financial options and guarantees and PVFP (where relevant) are calculated with reference to assets that are
projected using the actual asset allocation of the policyholder funds at the reporting date. However, if the current asset mix is
materially different to the long-term strategic asset allocation as a result of market movements, projected assets are assumed to
revert to the long-term strategic asset allocation in the short- to medium-term as appropriate.
Defined benefit pension scheme
Where a defined benefit pension scheme within the covered business is in surplus or deficit on the liability basis that is used to
determine future employer contributions, the employer pension fund expense assumptions incorporated within the VIF allow
appropriately for the expected release of surplus or funding of the deficit.
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Look through principle
PVFP and value of new business cash flow projections look through and include the profits/losses of owned service companies, 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
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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
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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
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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.
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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
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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
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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
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**
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.
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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
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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
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n
a
g
e
m
e
n
t
s
t
a
t
e
m
e
n
t
s
i
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n
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s
s
r
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v
e
w
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k
a
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d
R
e
s
p
o
n
s
b
i
i
l
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t
y
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v
e
r
n
a
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c
e
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F
n
a
n
c
a
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i
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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
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n
a
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m
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t
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p
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b
i
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v
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r
n
a
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F
n
a
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a
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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
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n
a
g
e
m
e
n
t
s
t
a
t
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m
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s
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u
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s
s
r
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e
w
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k
a
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d
R
e
s
p
o
n
s
b
i
i
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t
y
G
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v
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n
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F
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c
a
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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
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a
g
e
m
e
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t
s
t
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m
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s
s
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w
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k
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R
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p
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s
b
i
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n
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F
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a
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c
a
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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
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m
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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.
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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
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p
o
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b
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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
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s
s
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w
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k
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s
p
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b
i
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t
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G
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n
a
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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
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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
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R
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s
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s
b
i
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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.
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c
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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
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n
t
s
t
a
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e
m
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n
t
s
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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
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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)
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t
i
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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
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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
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i
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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
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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
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i
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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
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f
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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
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m
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s
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m
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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
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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.
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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
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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.
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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
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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.
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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
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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
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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.
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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
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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:
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