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Annual Report 2019

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ANNUAL REPORT 2019 DO GREAT THINGS EVERY DAY Contents ABOUT OUR ANNUAL REPORT 2019 01 WHO WE ARE Our foundations Approach to value-creation Tracing our roots Our brand Company values Old Mutual Insure today People and culture Old Mutual Insure Group structure 6 6 6 7 8 9 10 11 05 OUR VALUE OUTCOMES Financial Director’s report 34 Commercial, Personal and Distribution Specialty iWYZE Credit Guarantee Insurance Corporation (CGIC) People and Brand 37 38 39 40 41 03 OUR VALUE CUSTODIANS Executive leadership Board of Directors 22 24 02 WE CULTIVATE VALUE Chairman’s report 14 Managing Director's report 16 Business model 18 04 HOW WE PROTECT VALUE 06 ANNUAL FINANCIAL STATEMENTS About our annual report Introduction This annual report to our stakeholders covers the core activities of the business for the period 1 January 2019 to 31 December 2019. It focuses on our strategy and how our material operating segments and key enabling functions create value over the short, medium and long-term. Forward-looking statements This report may contain forward-looking statements with respect to some of Old Mutual Insure’s plans or current goals and expectations relating to its future financial condition, performance and results, and in particular, estimates of future cash flows and costs. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Old Mutual Insure’s control. These include economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the risk of higher than expected claims, the impact of adverse weather conditions, the policies and actions of regulatory authorities, the impact of competition, inflation, and deflation, the timing and impact of other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and regulations in the jurisdictions in which Old Mutual Insure and its subsidiaries operate. As a result, Old Mutual Insure’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the forward-looking statements. Old Mutual Insure undertakes no obligation to update the forward-looking statements contained in this report or any other forward-looking statements it may make. DEFINING CONCEPTS Materiality The principle of materiality was applied in assessing what information to include in the report, which focuses particularly on those issues, opportunities and challenges that impact materially on Old Mutual Insure and its ability to be a business that consistently delivers value to its stakeholders in a sustainable manner. Value Value-creation is the consequence of how Old Mutual Insure applies and leverages its resources and strategy in delivering financial performance and value for all stakeholders. Its focus is on improving both the quantum of value delivered for each of its stakeholders and the quality of their experience. Design rationale At Old Mutual Insure we believe that our commitment to the "six that matter" will culminate in a satisfied and happy client. These six include diversity, communication, working together, trust, protection and value; and are represented by various recognisable African symbols. Our front cover reflects the symbiotic relationship of these six elements in our daily lives and those of our customers to achieve the correct balance in a world where all stakeholders thrive. OLD MUTUAL INSURE LIMITED Annual Report 2019 1 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsThe six that matter WHO WE ARE WE CULTIVATE VALUE OUR VALUE CUSTODIANS 1. BEAD WORK 2. MBIRA 3. LINKS DIVERSITY COMMUNICATION WORKING TOGETHER The bead work symbolises diversity and reflects how we collaborate and engage to craft quality solutions that add value to our customers. This musical instrument represents a form of communication and links with our commitment to create impact, prickle interest and encourage conversation. The links symbolise partnership and how working together towards a common goal makes us stronger. 2 OLD MUTUAL INSURE LIMITED Annual Report 2019 HOW WE PROTECT VALUE OUR VALUE OUTCOMES ANNUAL FINANCIAL STATEMENTS 5. SHIELD 4. BAOBAB 6. TRADITIONAL POT PROTECTION TRUST VALUE The shield is representative of our commitment to protect what's important to our customers. They are at the heart of everything we do. The baobab tree is also known as the tree of life; an icon in the history of Africa where important meetings were held and significant decisions made. It symbolises our vision to be our customers' first choice to sustain and grow their prosperity. The pot, a symbol of holding, gathering and collecting to keep investments and finances secure. It reflects our role to sustain and grow the prosperity of the customers, families and communities we serve. OLD MUTUAL INSURE LIMITED Annual Report 2019 3 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements01 WHO WE ARE Diversity We are inclusive of different types of people and cultures in our organisation. We encourage diversity in thought, mind and body throughout our business. Our employees represent different cultures and bring to the organisation varied skills and experience which offer our clients a broader depth of knowledge and understanding and allows for continuous innovation and improvement in the products and services we take to market for our continued sustainability. The beadwork represents our collaboration and working together to craft a quality product and service for all our stakeholders. WHO WE ARE OLD MUTUAL INSURE LIMITED OLD MUTUAL INSURE LIMITED Annual Report 2019 Annual Report 2019 5 5 Our foundations Approach to value-creation As an independently listed entity, Old Mutual Limited is now a stronger business, with a clearer strategic focus and greater opportunities for sustainable growth. The philosophy in creating beneficial outcomes for Old Mutual Insure and for customers and stakeholders is firmly grounded in a customer-led approach to short-term insurance. This also forms the basis of the strategy and business model. As the Property & Casualty business of Old Mutual Limited in South Africa, Old Mutual Insure is steadily unlocking the value that lies within the Old Mutual customer base, while remaining true to its core capability of providing short- term insurance expertise. This enables Old Mutual Insure to continue to focus on making a significant difference to customers, communities and society as a whole. The commitment to being a leader in responsible business is demonstrated by embedding responsible business principles in all areas of the business, from core operations to day-to-day decisions. Tracing our roots • The Old Mutual Insure story originates in 1831. • In 1965, three major UK insurance companies merged into the Royal Group. The Royal Group then merged with the SA Mutual Fire & General Insurance company in 1970 to form Mutual & Federal. • Old Mutual acquired a major shareholding in the newly formed Mutual & Federal, and later, in 2009, acquired the remaining shares. • In February 2010, Mutual & Federal became a wholly- owned subsidiary of the Old Mutual Group and in June 2017 rebranded to Old Mutual Insure. • Managed separation: In March 2016, Old Mutual plc announced that the long-term interests of Old Mutual plc shareholders and other stakeholders would be best served by separating the four businesses, then owned by the Old Mutual plc Group, to operate as fully independent stand-alone companies. These were Old Mutual Emerging Markets (including Old Mutual Insure), Brightsphere Investment Group, Nedbank and Quilter plc. • Old Mutual Limited listed on the JSE Limited (JSE) on 26 June 2018, along with listings on the London Stock Exchange (LSE) and secondary listings on the stock exchanges of Malawi, Namibia and Zimbabwe. • On 1 August 2018, Old Mutual Insure launched Elite. • On 4 October 2018, Old Mutual Insure announced the acquisition of the Underwriting Management Agency, Sintelum. • In 2019, Old Mutual Insure moved to its new corporate head office at Wanooka Place, St Andrews Road, Parktown, Johannesburg. These new premises are far more conducive to staff contentment and productivity. The Old Mutual Insure story forms part of the fabric of the South African economy. It reflects the determination and passion of various executives, who skilfully negotiated many mergers and acquisitions. The golden thread, still visible today, is their thoughtful management of resources that played a vital role in the development of our local economy. More than 18 companies have contributed to Old Mutual Insure’s DNA. Each evolution brought with it a new set of skills that helped the business grow in an increasingly competitive environment. Adaptability will remain part of who we are, as we are entering a new era where diversity, openness and agility are the must-have tools for success. Old Mutual Insure pioneered general insurance in South Africa over 188 years ago. 6 OLD MUTUAL INSURE LIMITED Annual Report 2019 Our brand OUR PROMISE OUR PURPOSE BRAND CHARACTER We champion individuals and businesses to be their exceptional best. Championing mutually positive futures every day. The imagineer, resourceful, in-touch, vibrant and sincere Group. WHAT WE DO HOW WE DO IT WHY WE DO IT We champion individuals and businesses to be their exceptional best by doing great things, every day. Through genuine understanding and support we coach, motivate and enable people to become their exceptional best and provide customers with the advantage of world-class products. So that our customers have the determination, conviction and financial means to become their exceptional best. COACH | MOTIVATE | ENABLE CONSUMER TRUTH OUR POINT OF VIEW The pursuit of dreams is hard and most have no idea where to start. We believe that whatever point you are at, being exceptional starts right NOW. OLD MUTUAL INSURE LIMITED Annual Report 2019 7 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsThe values that ground us OUR VALUES RADICAL • Respect for each other and the communities we serve • Trust and Accountability • The power of Diversity and inclusion • Agile Innovation that makes a difference • Championing the customer • Always Act with integrity • Leadership (change needs to be led) OUR VISION To be our customers’ most-trusted insurance partner, passionate about helping them achieve their lifetime financial goals. We will be our customers first choice to sustain and grow their prosperity THE PULSE OF OLD MUTUAL Championing mutually positive futures everyday R A Trust and Accountability Respect for each other and the communities we work D I The power of Diversity and inclusion Agile Innovation that makes a difference C L A Championing the customer Leadership Always ACT with integrity 8 OLD MUTUAL INSURE LIMITED Annual Report 2019 LEADINGTHE CHANGEOld Mutual Insure today As one of the leading role players in South Africa’s short- term insurance landscape, Old Mutual Insure is proud of having a tradition of service and quality, as well as a range of products, which remain among the best in South Africa. As part of Old Mutual Limited, the Old Mutual Insure purpose is to champion mutually positive futures, every day. Quick facts: • Financial Sector Charter Level 4 Broad–Based Black Economic Empowerment (B-BBEE) contributor. • Employer of more than 2 500 employees – over 74% black and over 57% women. Comprehensive short-term insurance offerings Our comprehensive short-term insurance offerings Old Mutual Insure partners with brokers and advisers to offer an extensive range of short-term insurance products and solutions designed to meet personal, commercial and corporate insurance needs. These include the agricultural, engineering and marine sectors. Since 2010, our direct channel, iWYZE, has opened and tapped into new markets with great success. This alternative distribution channel does not detract from the intermediary channel, but rather complements it by offering customers more options to access insurance products and services. COMMERCIAL PERSONAL AGRICULTURE SPECIALTY CREDIT GUARANTEE RISK FINANCING • Insurance for small- businesses • Solutions include cover for: – assets such as buildings, stock, plant and machinery against perils such as fire, storm and burglary – vehicles, including sedans, light delivery vehicles and heavy commercial vehicles – legal liability for business activities • Comprehensive cover for valuables, homes, contents and vehicles • Travel insurance • Insurance catering for farmers’ agricultural risks • Solutions include cover for: – assets, such as buildings, stock, plant and machinery against perils such as fire, storm and burglary – vehicles, including sedans, light delivery vehicles and tractors – legal liability for farming activities – crop • Domestic and international trade credit insurance • Bonds • Guarantees • Our partner- ships with specialist underwriters provide a variety of insurance solutions for specialist areas, such as engineering, marine, corporate travel, financial lines and corporate property • Mutual & Federal Risk Financing (MFRF) provides large commercial and industrial organisations with a world- class risk financing facility • MFRF follows a multi- disciplined approach to risk management, giving customers access to a full range of bespoke MFRF- underwritten risk financing products OLD MUTUAL INSURE LIMITED Annual Report 2019 9 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsOld Mutual Insure today (continues) People and culture Old Mutual Insure currently employs more than 2 500 employees in South Africa. We have a talented and diverse workforce spanning across a mix of actuarial, finance, operational, legal, risk management and technology skills. We embrace all generations and the Old Mutual Insure employee profile features a good combination of experience and youth. Our people are at the heart of fulfilling our promise to customers. We will continue to build a workforce for the future that is transformed, energised and able to deliver the exciting upcoming growth phase. Our human capital mission is threefold: • To source the right people, with the right skills, for the right roles to support and grow our organisation into Africa’s short-term insurer of choice. • To provide the right support and training to ensure the continuous development of our employees. • To promote and maintain a culture of high performance, accountability, respect, integrity and pushing beyond boundaries. A corporate culture that supports our values At Old Mutual Insure, we understand that an increasingly volatile, uncertain, complex and ambiguous world creates opportunities. The more risk we have in the environment, the more opportunity there is for us to help people manage those risks. Insurance enables people to keep going – their lifestyles are maintained; despite the losses they endure. It is a way of protecting capital, investments and businesses. Therefore, we aim to enable positive futures by partnering with brokers and advisers to do great things for customers every day. In 2018, Old Mutual Insure embarked on ‘Pulse’, a cultural transformation journey for building teams that are delivery orientated, customer centric, and externally competitive. We engaged our leaders and our people both face-to-face and via digital channels to gather feedback on our culture. The results were used to define our culture shifts and identify key behaviours that need to underpin our RADICAL values. It also gave us a better understanding of what issues need to be addressed to transform Old Mutual Insure. We are driving business performance by transforming our culture. Making a difference As a responsible business, we are proud of our initiatives to support and uplift the communities in which we operate. Old Mutual Insure actively participates in industry and other related initiatives to reduce youth unemployment, poverty and social ills. We also encourage and support our employees to take part in these initiatives. 10 OLD MUTUAL INSURE LIMITED Annual Report 2019 The Group structure Simplified Old Mutual Group structure OLD MUTUAL LIMITED 100% Old Mutual Group Holdings (SA) (Pty) Ltd 100% Old Mutual Emerging Markets (Pty) Ltd 100% Mutual & Federal Investments (Pty) Ltd 100% OLD MUTUAL INSURE LIMITED 75% 100% Credit Guarantee Insurance Corporation of Africa Limited Mutual & Federal Risk Financing Limited OLD MUTUAL INSURE LIMITED Annual Report 2019 11 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsWE CULTIVATE VALUE02 12 OLD MUTUAL INSURE LIMITED Annual Report 2019 Communication We encourage the sharing of ideas, facts and values from one person to another or one organisation to another. We focus on stakeholder communication, both externally and internally, while developing strategic partnerships to meet our continuous objective of delivering excellent customer service. We believe in transparent engagement and recognise the value our various teams bring to the organisation and the importance of understanding the market to meet the challenging economic environment. The musical instrument is one form of communication that stirs up interest and provides the opportunity to open conversations. OLD MUTUAL INSURE LIMITED Annual Report 2019 13 Chairman’s report The Board is confident that Old Mutual Insure's current strategy will deliver immediate gains and sustainable value-creation in the medium and long- term. Steffen Gilbert Chairman Introduction I was honoured to be invited to the Board in September 2019 and, following regulatory approval from the prudential authorities in December 2019, stepping into the role of Chairman. On behalf of the Group, I extend a word of thanks to our outgoing Chairman, Mike Ilsley, for his leadership and for handing over such a well-managed team. My first months on the Board and as Chairman were taken up with Old Mutual Insure implementing significant strategic changes against a challenging trading backdrop. The most obvious and significant obstacle South Africa faces at present is an increasingly constrained economic operating environment. A poor economy usually mutes the insurance business, as consumers are more likely to cancel or reduce their insurance when budgets come under pressure. This adversely affects customer acquisition and persistency across all sectors of the economy. As a consequence, insurance providers tend to compete more aggressively with one another, which can reduce profit margins. In this environment, property owners and businesses often reduce budgets for maintaining their buildings and equipment, which increases claims and reduces profitability further. Performance Old Mutual Insure’s top-line performance was acceptable in the light of these challenging operating conditions. Strategic partnerships in our Specialty division contributed well to growth in gross written premiums and we continue identifying opportunities to diversify our offerings. The Group’s bottom line was on track to improve on 2018’s results, but major weather-related claims from the Northern Cape in the final quarter dampened the final underwriting results. Our first half of 2019 was characterised by catastrophe events, compared to the relatively benign first half of the previous year. This led to 14 OLD MUTUAL INSURE LIMITED Annual Report 2019 losses below the reinsurance threshold that significantly reduced our net underwriting margins. In essence, Old Mutual Insure’ s underlying performance improved, although the final net underwriting outcome was disappointing. Strategy During my short tenure on the Old Mutual Insure Board to date, I’ve seen how much time and energy has been invested in the new strategy and reinsurance overhaul. These matters clearly dominated the board’s attention throughout the year. The Group’s revised strategy is setting the business up to be agile, adaptable and resilient, which is vital for an insurance business that undergoes volatile economic cycles. Old Mutual Insure’s new strategic direction was developed by the newly formed executive team in a deeply immersive strategy building session, including the Board, executives, key persons and shareholders. Everybody of material influence was invited to give input, so that all have bought into it. Old Mutual has multigenerational traction across South Africa, which must be leveraged into financial results. As the Group’s relatively new MD, Garth Napier’s initial priority was to implement the strategy and teams to take Old Mutual Insure on the next leg of its journey. This strategy required the executive to reorganise Old Mutual Insure into two operating divisions, being Retail and Corporate and Niche as explained in more detail in the MD’s report. The resulting two prong approach enables Old Mutual Insure to more effectively pursue future growth opportunities that include more intensive use of technology and data, accelerated cross-selling across the broader Old Mutual Group and diversified income streams through partnerships with UMAs. Getting this strategy into gear required putting the right people in place – which has now also been completed. Prospects In 2020, the Board is concentrating on the legislative and ethical aspects of governance, as well as embedding Old Mutual Insure’s refreshed strategy and reinsurance strategy. As our new strategy is embedded, the Board will support the executive team to the hilt as it changes the trajectory of the company. Our number one challenge remains South Africa’s stuck economy, although the major, underlying issue is climate change, which the insurance industry must assess realistically. We need to ensure that our products and pricing take accurate account of this phenomenon. Thanks To my fellow directors who serve Old Mutual Insure with the highest levels of diligence and enthusiasm, I extend my sincere appreciation. I especially thank our recently departed Board members, who have been integral to Old Mutual Insure’s ongoing viability. During 2019, the Board and Executive worked through the arduous exercise of reconceptualising and reframing Old Mutual Insure for the future. I commend all for their inspired approaches to this exercise, which I’m sure will unlock results and sustainable value in the long run for all our stakeholders. On behalf of the Board, I thank our Executive committee and employees for their relentless contribution to making our company the success it has become, in tandem with our loyal business partners and clients. At the end of the day we rely on the interest and goodwill of our investors, who continue seeking value in ever more challenging markets. I am confident that Old Mutual Insure shows all the signs of being well on track for sustainable growth of shareholder value over the medium to longer term. Any strategy is unlikely to succeed in the current environment if the business is not capital efficient. The new reinsurance structure we’re introducing as part of strategy actualisation enables the company to write large risks whilst reducing the volatility of results and building longer term reinsurance partners. The incoming reinsurance philosophy rewards each business entirely on the merits of its own performance, with cross subsidisation falling away. The Board is confident that Old Mutual Insure’s current strategy will deliver immediate gains and sustainable value-creation in the medium and long-term. Ethics, leadership and corporate governance The Board underwent a considerable refresh during the reporting period. Paul Truyens, Pieter Rörich and Peter Moyo departed, while Mark Scharneck and I joined the Board during the year. I am pleased to be chairing an attuned Board with the skills, integrity and diversity to guide Old Mutual Insure in this new chapter by overseeing strategy and providing insights and counsel to the executive team. The Old Mutual Group drives good governance through King IV™ practices that are continuously enhanced. Various regulatory changes over the past year have impacted the insurance industry and Old Mutual Insure. The most recent requirement involves resubmitting and re-applying for our licences, as part of the process for phasing in the ‘Twin Peaks’ licensing framework. All existing insurance licence holders have been required to reapply for their licences in terms of the new framework, which is expected for completion by 31 July 2020. In recent years, the only constant in South Africa’s insurance industry was change – we are sure there is more to come. Stakeholder relationships The Board remains well informed of stakeholder commentary and sentiment, with an efficient feedback loop in place. The Board considers these views as a fundamental to accurate decision-making. Our employees are key stakeholders in our collective success and the leadership is determined to enhance the wellness and productivity of our current workforce and to attract high quality talent. Apart from offering attractive remuneration, Old Mutual Insure attracts the level of skills it requires to compete by being a great place to work. Old Mutual Insure is more than a business that supplies a pay cheque at the end of the month – it is a place where our employees feel valued and part of a vibrant team. The MD has pushed this approach hard during the past year and has been able to attract top talent to add to the already impressive line-up of skill throughout the organisation. OLD MUTUAL INSURE LIMITED Annual Report 2019 15 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsManaging director’s report Old Mutual Insure has delivered strong growth in gross written premiums of 10.9% and seen improvement in our customer satisfaction metrics in challenging market conditions. We have made significant progress in implementing our strategic objectives, however, our net underwriting results has been significantly impacted by multiple catastrophe events in 2019. Garth Napier Managing Director Overview Looking back at 2019, it will be remembered as a tough year with low economic growth, increased natural catastrophes and poor consumer sentiment. Our focus over the last few years has been on delivering profitable growth by improving our customer and intermediary experience and enhancing our underwriting across our business. I’m happy to report that this focus has delivered positive results, as shown by: • Gross Written Premium (GWP) growth of 10.9%. • Improved customer and partner satisfaction scores. • Growth in Gross Underwriting Margin to 6.0% (1.8% in 2018). Unfortunately, these positive results were offset by an increase in natural catastrophes, poor performance in our Agri-Crop portfolio and higher attritional claims in our CGIC trade credit business. As a result, our Net Underwriting Margin declined to 0.4% in 2019 (5.3% in 2018), which is below our targeted 4% to 6% Net Underwriting Margin. Gross Written Premium Growth We delivered solid GWP growth of 10.9%, driven by strategic partnerships concluded in 2018. iWYZE, our direct insurance division, achieved 15.7% GWP growth and continues to gain market share. Our Specialty division, which includes our corporate property, marine and engineering portfolios, delivered strong growth of 17.4%. Improving our customer and intermediary service Our focus on improving customer and intermediary service was shown in the improved net promoter score (NPS) of 50.2% (33.9% in 2018) recorded in the most recent South African Customer Satisfaction Index (SA-CSI). We were also awarded the Sunday Times Top Brand award for the Consumer Short Term Insurance category. These awards and an improvement in our internal customer metrics are testament to the hard work that has gone into putting customers first in everything we do. 16 OLD MUTUAL INSURE LIMITED Annual Report 2019 Improvement in Gross Underwriting Result The Gross Underwriting Result is a useful metric to determine the quality of underwriting before taking into account the risk mitigation impact of reinsurance. Old Mutual Insure improved its Gross Underwriting Result to 6.0% of GWP (1.8% in 2018). Over the last three years we focused on remediating our book by reducing our exposure to possible large losses. We also recorded a significant drop in large claims in both our Corporate Property and Commercial portfolio to 2.1% of GWP in 2019 (10.5% in 2018) as a result of the hard work done in these areas. We will continue focusing on disciplined underwriting as our foundation for sustainable success. Net underwriting Our net underwriting results were significantly lower with the Net Underwriting Margin slipping to 0.4% (5.3% 2018). This was due to natural catastrophes, poor crop performance and the impact of a tough economy on CGIC. Natural catastrophes The higher number of natural catastrophe events registered during the year included fires at Betty’s Bay, hailstorms at Newcastle and Ladysmith, as well as April flooding in KwaZulu-Natal. November and December featured heavy flooding in KwaZulu-Natal and Centurion. The impact of these natural disasters on our financial results again highlights the industry’s exposure to weather patterns and natural disasters. Collectively, the impact of these events reduced our Net Underwriting Profit by R140 million in 2019. Agriculture Our Agri-Crop business struggled in 2019 due to severe frost and hail damage to crops. The combined net value of these claims amounted to R90 million after taking into account the quota share and stop loss recovery. CGIC Retail As a result of load shedding and GDP contraction, trade credit was severely impacted in Q1 and Q2 of 2019 and CGIC reported a loss of R54 million at half year. We were pleased that in the second half of 2019, the CGIC team generated sufficient profit to deliver an overall profit for the year of R51 million (R102 million in 2018) for the business. This effort was highly commendable given the overall market conditions, which resulted in some competitors choosing to exit the trade credit business in 2019. Underwriting costs Our overall cost ratio increased to 15.4% (15.1% in 2018). These were driven mainly by: • • • the costs of moving to a new head office; removal of administration fees previously charged to policy holders; fees incurred by moving to a collect direct strategy for premiums; and • provision for losses from Insure Group Managers. Underwriting highlights Some businesses were able to record strong performances despite the overall downturn. These included two notable achievements: • iWYZE sales grew by a strong 15.7%, with its new products well received by the market. iWYZE also achieved an Underwriting Profit Margin of 8.8%. • Specialty division’s net underwriting result improved significantly. From a loss in 2018, the division achieved a Net Underwriting Margin of 6.3% in 2019. Communities We prioritise making positive impacts in the communities we operate in, with a particular focus on financial inclusion, education and responsible investment. During the year, Old Mutual Insure invested R700 000 in Consumer Education Initiatives based on Old Mutual’s On The Money ‘OTM’ Programme, which teaches South Africans how to manage their finances. In partnership with The Mutual Foundation, Old Mutual Insure’s Corporate Social Investment (CSI) department invested R437 000 in providing healthy and safe Concretex Eaziflush toilets for rural Eastern Cape primary school goers. Old Mutual Insure also joined forces with the Nelson Mandela Education Programme and Soul City Institute to donate two Mobile Libraries, valued at R500 000. Our Nakelela Week, meaning ‘to care or to nurture something or someone’ in isiXhosa, is a week where employees partner with local charities to do good. Employee teams engage with their local charitable organisations to determine their needs, then present plans and budgets to the CSI team for assessment. In 2019, our CSI department supported 17 approved projects spread across the country. The way forward We recently completed a strategic review of our business, which we split into two components, being Retail and Corporate and Niche. Our Retail business will comprise our intermediated personal lines and SME commercial portfolio, as well as iWYZE, our direct business. For Retail to compete effectively, we must lower our costs and improve service levels by focusing on operational excellence. Retail is focussing on diversifying its distribution channels and products, while leveraging data and technology to drive efficiency, pricing and risk selection. We will also be focusing on enhancing off-platform business by partnering with our key stakeholders. Corporate and Niche Our Corporate and Niche business includes Specialty, MFRF (Mutual and Federal Risk Financing) and CGIC (Trade Credit), which are focusing on delivering customer intimate solutions. The Specialty division has taken on our complex commercial portfolio in addition to corporate property, marine, engineering and travel insurance. This division will prioritise developing a market leading underwriting practice, supported by optimised reinsurance structures. Performance will be driven by fit-for-purpose IT solutions that allow us to enhance risk management and improve customer and partner experiences. We are diversifying and scaling our specialist lines of business by growing our engineering, marine, travel and liability lines. Our risk financing business (MFRF) is creating an environment that allows entrepreneurs to thrive. MFRF is achieving this by reducing the compliance and regulatory burden on the cell and introducing the high level skills to mould solutions that suit the needs of the cell owner. We are leveraging specialist skills from across the Group to offer underwriting, product, systems and claims support to the cells. The strategic review has identified further areas of improvement that we are committed to delivering in the ongoing turnaround and growth of Old Mutual Insure. In closing 2019 was my first full year as MD of Old Mutual Insure. It was a year in which we have made significant progress in strengthening the core of our business within a difficult economic environment. I would like to take this opportunity to thank the Board for their support and guidance over the last 12 months. I also thank our former Chairman, Mike Ilsley, for his contribution to Old Mutual Insure and for his support and counsel. Mike will stay on our Board until later this year to ensure a smooth transition over the year-end financial and regulatory reporting cycle for Steffen Gilbert. To all the staff of Old Mutual Insure – thank you for contributing to our 2019. It was a year in which we all worked extremely hard and have much to be proud of. Our journey to complete the turnaround of Old Mutual Insure continues and I know you will all continue to work even harder in 2020 to ensure we can “Do Great things everyday” for our customers, partners, employees and communities. OLD MUTUAL INSURE LIMITED Annual Report 2019 17 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsBusiness model HOW WE DO BUSINESS Our business model is informed by our vision, purpose, values and governance, and supports the delivery of our strategic objectives. PROFITABLE GROWTH • Revitalised distribution approach • Product upgrade in Personal Lines and Commercial Lines • Deliver on our direct strategy • Restore the quality of our core commercial book • Continuously improve/enhance claims processes • Optimise procurement and cost-efficiency leadership • Pursue inorganic growth opportunities and build on initiatives implemented in 2018. INCREASE AND DIVERSIFY OUR LINES OF BUSINESS • Increase and diversify Specialty and CGIC’s lines of business • Optimise reinsurance structures to build long-term partnerships with reinsurers • Disciplined underwriting combined with systematic improvement in the quality of the risk pool. IMPROVE CUSTOMER AND INTERMEDIARY EXPERIENCE • Customer-led – embed a customer service culture • Refresh our technology offering • Responsible business. INVEST IN PEOPLE AND TALENT TO SUPPORT OUR BUSINESS INITIATIVES • Win the war on talent • Leadership and culture. 18 OLD MUTUAL INSURE LIMITED Annual Report 2019 OUTPUTS OUTCOMES With an embedded culture of service excellence, we will deliver on our strategy and long-term key performance indicators, while generating value for all our stakeholders. When making decisions on allocating capital, we consider the trade-offs, and seek to maximise positive outcomes and curb negative impacts. DEFINING CONCEPTS • Market-leading service proposition • Easy to do business with us • Deliver differentiated and distinctive customer experiences • Efficient use of capital • Upper end of 4% – 6% underwriting margin • Sustainable growth within our risk appetite • Increased market and portfolio understanding • Data-driven decision-making culture • Improved decision-making speed and accuracy • Higher agility, faster turn-around times and high-volume change • Change delivered where it will have the highest impact • Efficiency and cost reduction • People are transformed, energised and able to deliver the exciting upcoming growth phase • Empowerment of young leadership talent. 10.9% GWP growth rate (2018: 6%) 50% Improved NPS (2018: 33%) 36.3% Improved NES (2018: 24.75%) 18.5% OSTI Complaints (excluding iWyze) overturn cases (2018: 20%) Winner of the 2019 Sunday Times Top Brand Award – Consumer category Second place in the annual 2019 SAMBRA Awards for contribution to sustainability in motor body repairs Third place in the 2019 Orange Index Customer Satisfaction Awards Number one in Treating Customers Fairly in the customer intermediated segment as measured by SAcsi OLD MUTUAL INSURE LIMITED Annual Report 2019 19 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements03 OUR VALUE CUSTODIANS Working together Co-operation, support and unity are the driving force behind a team that works together. Alliances, partnerships and teams are key to the link that needs to be in place for us to keep rising to the challenges in the industry. From our Board through to our Executive committee and the employees at Old Mutual Insure, our message must be understood and presented to form a united position that talks to the heart of what we do each day. The links symbolise connecting and can form a never-ending chain of collaboration. OLD MUTUAL INSURE LIMITED Annual Report 2019 21 OUR VALUE CUSTODIANS Executive leadership Garth Napier (40) Managing Director Qualification: MBA, B.Comm Acc (Hons) Appointed: 1 November 2018 Skills, expertise and experience: Extensive retail, consumer behaviour and stakeholder management experience. Nokuthula (Thuli) Manyoha(36) Financial Director Qualification: CA(SA), B.Comm (Fin Acc), B.Comm Fin Acc (Hons) Appointed: 1 January 2018 Skills, expertise and experience: Accounting and financial management. Soul Abraham(34) Chief Executive: Retail Qualification(s): BSc Honours (Actuarial Science), Post Graduate Diploma in Leadership Appointed: 1 January 2020 Skills, expertise and experience: Short-term insurance and actuarial. Charles Nortje(59) Chief Executive: Credit Guarantee Insurance Corporation (CGIC) Qualification(s): Bachelor of Commerce, Bachelor of Accountancy, CA(SA) Appointed: 1 August 2013 Skills, expertise and experience: Corporate risk services, as well as credit and political risks expertise. Hennie Nortje(56) Chief Executive: Claims Qualification(s): MCompt, CA(SA) Appointed: 1 February 2017 Skills, expertise and experience: Extensive experience in life insurance and short-term insurance operations. Ludwyn Lortan(42) Chief Information Officer Qualification(s): BCom (Information Systems & Insurance and Risk Management) Appointed: 21 November 2019 Skills, expertise and experience: Banking, insurance and technology. John Nienaber(47) Chief Executive: Specialty Qualification(s): BA LLB Appointed: 1 July 2016 Skills, expertise and experience: Extensive experience in insurance. Lisa Pines(51) Chief Actuary Qualification(s): BSc (Actuarial Science), Fellow of the Actuarial Society of South Africa (FASSA), ASSA Practising Certificate Short-term Insurance Appointed: 1 September 2017 Skills, expertise and experience: Actuarial, capital, risk and insurance. Liziwe Masoga(47) Executive: People & Brand Qualification(s): Doctorate Consulting Psychology Appointed: 1 January 2015 Skills, expertise and experience: Human resources, business transformation and consulting. 22 OLD MUTUAL INSURE LIMITED Annual Report 2019 Gender (%) Race (%) Age (%) Male 55% Female 45% White 45% Black 27% Indian 10% Coloured 18% 31 – 40 27% 41 – 50 45% 51 – 60 28% Thabile Nyaba(45) Chief Risk Officer Qualification(s): Certified Risk Management Professional (CRM Prof), Certified Internal Auditor (CIA) and BTech Cost Management Accounting Appointed: 1 January 2018 Skills, expertise and experience: Governance, Risk and Compliance (GRC), auditing and combined assurance. Susan Dalby(49) Chief Operations Officer: iWYZE Qualification(s): Business Management Degree, Master of Business Administration (MBA) Appointed: 1 March 2016 Skills, expertise and experience: Business continuity and customer management. Experience Finance Customer Risk Actuarial 2 2 2 2 Short-term insurance 6 Technology 1 Human resources 1 OLD MUTUAL INSURE LIMITED Annual Report 2019 23 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsBoard of directors The Old Mutual Insure Board structure was optimised during 2018 in line with the Board succession plan, as well as regulatory and governance requirements in respect of Board size, composition, knowledge and skills. Old Mutual Insure has completed the Board restructure, including the appointment of a lead independent director as recommended by the King IV™ Code, Prudential Governance and Operational Standards for Insurers, Old Mutual Insure Board Charter and Old Mutual Limited Group Governance Framework. Board composition, mix and experience The experience of the Board of Old Mutual Insure is as follows: Gender (%) Race (%) Male 71% Female 29% Age (%) White 42% Black 29% Indian 0% Coloured 29% Steffen Gilbert (57) Chairman – Independent non-executive Director Qualification: FIA Appointed: 1 September 2019 Skills, expertise and experience: Actuarial, Strategy and Customer Related. 31 – 40 43% 41 – 50 0% 51 – and above 57% 24 OLD MUTUAL INSURE LIMITED Annual Report 2019 Nokuthula (Thuli) Manyoha (36) Financial Director Qualification: CA(SA), B.Comm (Fin Acc), B.Comm Fin Acc (Hons) Appointed: 1 January 2018 Skills, expertise and experience: Financial and Strategy. Gary Steven Palser (63) Lead Independent non-executive Director Qualification: B.BusSc (Hons), FASSA Appointed: 1 March 2014 Skills, expertise and experience: Financial, Risk and Actuarial. Garth Napier (40) Managing Director Qualification: MBA, B.Comm Acc (Hons) Appointed: 1 November 2018 Skills, expertise and experience: Strategy and Customer Related. Thandeka Pamela Zondi (38) Independent non-executive Director Qualification: CA(SA), B.Comm Acc (Hons) Appointed: 1 June 2018 Skills, expertise and experience: Financial and Strategy. Mark Scharneck (58) Independent non-executive Director Qualification: CA(SA), B.Acc Appointed: 1 June 2019 Skills, expertise and experience: Financial, Operations and Customer Related. Michael Gerald Ilsley (57) Non-executive Director Qualification: CA(SA), B.Comm, B.Acc Appointed: 1 April 2018 Skills, expertise and experience: Financial and Strategy. OLD MUTUAL INSURE LIMITED Annual Report 2019 25 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements04HOW WE PROTECT VALUE Protection We are responsible for the shelter and defense of our clients. Our customers’ needs are evolving at a rapid pace and they expect it to be fulfilled effortlessly via a channel of their choice. To remain competitive, we must be agile to continually match the pace of rapidly changing customer expectations The shield is representative of our commitment to insuring our clients’ lives – be it their businesses, families or prized possessions. OLD MUTUAL INSURE LIMITED Annual Report 2019 27 HOW WE PROTECT VALUE How we protect value Corporate governance and King IVTM statement of commitment The Old Mutual Insure Board of Directors is ultimately responsible for the effective governance and overall success of the Old Mutual Insure Group of companies. Its role is to provide entrepreneurial leadership for the Group within a framework of prudent and effective controls which enable risks to be assessed and managed. The Board has to oversee insurance operations of the Group and needs to ensure compliance with all statutory and regulatory requirements. The Board confirms its commitment to achieving high standards of corporate governance within the Group. Old Mutual Insure is a licensed short-term insurer and wholly-owned subsidiary of Old Mutual Limited, which is a JSE listed entity. Old Mutual Limited established a Group Governance Framework (GGF) which complies with King IV. This framework outlines the governance requirements for the newly listed Group and its subsidiary entities. The Group is in compliance with King IV and requires that its subsidiaries comply with King IVTMgovernance outcomes through the application of the principles as set out in the Code. The Old Mutual Insure Board is satisfied that during 2019, it complied with the GGF, and has applied the King IVTMprinciples on the same basis as the Group. Refer to the full governance report 2019 on our corporate website for the full detail of the application and explanation of King IV requirements. Leading ethically and effectively The governing members of Old Mutual Insure bring a diverse range of skills and experience to the Board and have the integrity, skills and experience to provide insight and strategic direction to the company. Only individuals with sound ethical reputations and business or professional acumen and who have sufficient time to effectively fulfil their role as a Board member, are considered for appointment to the Board. The purpose of committee work is derived from the Board’s responsibility to all stakeholders to ensure that they comprise of individuals who are best able to exercise their responsibilities, having due regard to the law and the highest standards of governance. The Board consists of individuals with the necessary skills and experience to lead Old Mutual Insure. The Board acts in good faith at all times and leads the company with integrity, fairness and transparency. The Chairman, who is an independent non-executive director, is principally responsible for the effective operation of the Board. To this end, Old Mutual Insure has appointed a lead independent director to meet its regulatory requirements as well as internal governance rules. Specific functions have been delegated to committees to assist in meeting the Board’s oversight responsibilities. 28 OLD MUTUAL INSURE LIMITED Annual Report 2019 The roles and responsibilities of each committee are set out in the relevant terms of reference. Each committee will review and assess the adequacy of the terms of reference annually and recommend changes to the Board when necessary. All committees are chaired by independent non-executive directors. Members of the Board regularly attend industry updates, training and seminars. Board training is provided to members to keep them abreast of industry developments relevant to Old Mutual Insure. Board charter The Board operates in terms of a Board charter, which defines its functions and responsibilities. The Board’s responsibility to ensure best practice in ethical governance is entrenched in the Board charter. The charter delineates the powers of the Board, which ensures an appropriate balance of power and authority. A fundamental theme of the charter is that the Board must provide effective leadership on an ethical foundation and ensure that the company is, and is seen to be, a responsible corporate citizen by having regard to not only the financial aspects of the business of the company, but also the impact that business operations have on the environment and the society within which it operates. Board and Board committee meetings Director meeting attendance is as follows for Board and Board committee meetings. Risk and com- pliance com- mittee People, customer and trans- formation com- mittee Audit com- mittee 4/4 2/2 2/2 4/4 2/2 4/4 2/2 2/2 4/4 4/4 2/2 1/1 1/1 1/1 Director Board Mr MG Ilsley Mr MP Moyo[1] Ms NB Manyoha Mr GS Palser Mr PGM Truyens[2] Mr PC Rörich[3] Mr GL Napier Ms TP Zondi Mr MA Scharneck[4] Mr SC Gilbert[5] 4/4 1/2 4/4 4/4 2/2 2/2 4/4 4/4 2/2 1/1 [1] Mr Moyo resigned 27 June 2019 [2] Mr Truyens resigned 31 May 2019 [3] Mr Rörich resigned 31 May 2019 [4] Mr Scharneck was appointed 1 June 2019 [5] Mr Gilbert was appointed 9 December 2019 and attended one Board meeting as an observer Corporate governance Old Mutual Insure has adopted the Old Mutual Limited Group Governance Framework (GGF) and its principles, incorporating the three lines of assurance governance model. The GGF contains a suite of various enterprise wide risk policies that have been developed in line with the risk categorisation model. Each of these policies have been developed internally by Old Mutual Limited and approved by the Board. Compliance with each of the risk policies is monitored on an on-going basis and is reported via the bi-annual letter of representation process and also in reports to the Risk Committee. Governance is actively promoted at Board level and drives sustainable performance and value within Old Mutual Insure. The Board of Old Mutual Insure is responsible for providing leadership for corporate governance and is the ultimate custodian of corporate governance within the company. The Board is the focal point of corporate governance of an ethical culture, good organisational performance, effective control, and organisational legitimacy. The Old Mutual Insure Board has adopted the Old Mutual Limited Board Appointment and Diversity policy to ensure that there is adequate representation on the Board. Balance of knowledge, skills, experience, diversity and independence The efficacy of the Board depends on its composition and an appropriate balance of skills, power and authority on the Board. The Board, through the Old Mutual Limited Corporate Governance and Nominations Committee, has assumed responsibility to independently review and monitor the integrity of the Group’s non-executive director nomination and appointment processes. The Board determines its composition by setting the direction and approving the processes for it to attain the appropriate balance of knowledge, skills, experience, diversity and independence to objectively and effectively execute its governance role and responsibilities. The Old Mutual Limited Corporate Governance and Nomination Committee considers the appropriate balance of knowledge, skills and experience, mix of executive, non-executive and independent non-executive directors, as well as the need for a sufficient number of members Old Mutual Insure Board committees are set out below: who qualify to serve on the committees of the Board. As at 31 December 2019, the Board comprised seven directors, five non-executive directors and two executive directors. Of the five non-executive directors, four are independent. Appointments to the Board are formal and transparent and are a matter for the Board of Directors as a whole. The Board should be appointed (and where necessary, removed) in accordance with the requirements of the GGF, which sets out the size and composition requirements and that meets applicable legal and Memorandum of Incorporation requirements. The Board considers, within the GGF requirements, the following: • plans for succession for the Managing Director and the direct reports of the Managing Director; • the appointment of any non-executive director; and • membership of the committees of the Board, taking into consideration the relevant legal requirements and skills necessary to perform the delegated functions. Board delegation The Board delegates the day-to-day management of the company to the Managing Director. A formal scheme of delegated authority has been approved by the Board, which clearly sets out the parameters of the delegated authority to take, authorise or approve decisions in respect of specified Business Actions. However, ultimate responsibility rests with the Board. Board committees In terms of King IV, the Board of the holding company should assume responsibility for governance across the Group, by setting the direction for how the relationships and exercise of power within the Group should be approached and conducted. Executive members and senior management are invited to attend committee meetings either by standing invitation or on an ad-hoc basis to provide feedback on their areas of responsibility. The Board delegates functions to committees to assist the Board in meeting its mandated responsibilities. Formal terms of reference exist for each committee. The committee chairpersons report back at quarterly Board meetings as to how the committees have carried out their responsibilities. An assessment of the performance of the committees and their members is conducted on an annual basis. BOARD AUDIT COMMITTEE RISK & COMPLIANCE COMMITTEE PEOPLE, CUSTOMER AND TRANSFORMATION COMMITTEE OLD MUTUAL INSURE LIMITED Annual Report 2019 29 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsHow we protect value (continued) Audit committee The Audit Committee is chaired by Thandeka Zondi, an independent non-executive director. The committee mandate primarily concerns the effectiveness of the company’s internal system of control to ensure the integrity of internal and external financial reporting. It reviews the accounting policies and judgements used to prepare financial statements for compliance with the International Financial Reporting Standards (IFRS), legal requirements (Companies Act) and, when relevant, group accounting standards. The committee oversees and directs the work of internal audit and considers findings by the function and holds management accountable to address these. The appointment and remuneration of external audit is mandated to the committee, and part of its responsibility is to assess the independence of the function. Risk and compliance committee The Risk and Compliance Committee is chaired by Gary Palser, an independent non-executive director. This committee was established to independently review, on behalf of the Board, management’s recommendations on risk management, particularly in relation to the structure and implementation of the risk strategy, system of governance, risk management framework and reporting processes, risk appetite limits and exposures, and the overall risk profile of the business. The solvency assessment and management (SAM) regulatory framework is consolidating many aspects of the committee’s mandate in the own risk and solvency assessment report. This report deals with all aspects relevant to the committee’s mandate, including risk appetite, risk monitoring and capital management. People, customer and transformation committee During 2019, the Board constituted the People, Customer and Transformation Committee. The purpose of this committee is to ensure that there is a proper focus by Old Mutual Insure itself on the following key business issues: (a) Ethical health and culture (b) Stakeholder relationships: (i) (ii) Employee engagement and transformation Fair treatment of customers (iii) Regulatory compliance and responsiveness The committee is chaired by Thandeka Zondi, an independent non-executive director with the Managing Director and Board Chairperson being members. The following committees are centralised at Group and perform specific functions on behalf of the company. All committees are chaired by independent non-executive directors. The terms of reference of these committees can be found at https://www.oldmutual.com/about/ governance/board-committees. Remuneration committee The Old Mutual Limited Remuneration Committee has oversight and ensures that all Old Mutual Limited Group companies comply with all remuneration and risk-related principles including relevant policies as set out in the adopted GGF. Corporate governance and nominations committee The Old Mutual Limited Corporate Governance and Nominations Committee was established to independently review and monitor the integrity of the overall Old Mutual Group’s non-executive director nomination and appointment process. The Committee reviews and monitors the adequacy, efficiency and appropriateness of the corporate governance structure and practices of the Old Mutual Group of companies, ensuring that the entities within Old Mutual Limited over which it has oversight, comply with the Group Governance Framework. Responsible business (incorporating social and ethics) committee The Old Mutual Limited Responsible Business (incorporating Social and Ethics) Committee is constituted to, among other things, assist the Board in ensuring that Old Mutual and other entities in the Old Mutual Group of companies (the Group) are and remain committed, socially responsible corporate citizens by creating a sustainable business and having regard to the Company’s economic, social and environmental impact on the communities in which it operates. Company secretary The Company Secretary appointed to the Board is Old Mutual Life Assurance Company (South Africa) Limited (OMLACSA), a fellow subsidiary within the Group. The OMLACSA representative currently providing secretarial support to the Old Mutual Insure Board is Nontando Khoza. All Directors had unlimited access to Nontando during the year. 30 OLD MUTUAL INSURE LIMITED Annual Report 2019 Board evaluation The Board assumes responsibility for the evaluation of its own performance and that of its committees and members. In line with the board charter as well as the Prudential Standards, the Board has absolute responsibility for the performance of the company and is accountable for such performance and, therefore, continually strives to improve its performance and effectiveness for the benefit of the Old Mutual Insure. Leadership roles The responsibilities of the Chairman and Managing Director are clearly defined and separated, as set out in our Board Charter. While the Board may delegate authority to the Managing Director, the separation of responsibilities is designed to ensure that no single person or group can have unrestricted powers and that appropriate balances of power and authority exist on the Board. OLD MUTUAL INSURE LIMITED Annual Report 2019 31 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements05 32 32 OLD MUTUAL INSURE LIMITED OLD MUTUAL INSURE LIMITED Annual Report 2019 Annual Report 2019 Trust As a leading insurance company, we have confidence, faith and hope in a better future for all. Every successful journey begins with trust and the foundation of trust is honesty and truth. Old Mutual is committed to being open and transparent so that the messages delivered are both clear and understood. Integrity is key to our value chain. The baobab tree is also known as the tree of life. An icon in the history of Africa where important meetings were held and significant decisions made. OLD MUTUAL INSURE LIMITED Annual Report 2019 33 Financial director’s report Albeit a disappointing result, 2019 has been testament to the resilience, stability and expertise of Old Mutual Insure’s management and employees. Nokuthula (Thuli) Manyoha Financial director Old Mutual Insure has delivered a marginal result following an unrelenting series of weather-related disasters and severe crop losses in the 2019 season, the core of the business is improving as evidenced through the attritional loss experience. Albeit a disappointing result, 2019 has been testament to the resilience, stability and expertise of Old Mutual Insure’s management and employees. Financial results (Rm) Old Mutual Insure Group GWP Net claims ratio Underwriting margin[1] Net earned premium Underwriting results[2] 2019 14,656 64.5% 0.4% 9,922 35 2018 13,218 60.7% 5.3% 9,048 480 • Crop losses due to large hail and frost claims The 2019 investment income of R387 million (2018: R459 million) decreased due to reduced cash holdings after the dividend distribution and a reduction in the interest rate. Premium growth While organic growth in our intermediated businesses remained challenging, good topline results from strategic partnerships, treaty reinsurance agreements and MFRF exceeded targets. iWYZE recorded strong growth in highly competitive market conditions for non- intermediated general insurance players. Our trade credit business (CGIC) continued dominating its market position with close to 80% market share. Several competitors have exited this line of business. CGIC reported satisfactory topline growth despite the low real annual gross domestic product (GDP) growth, which is directly linked to CGIC’s gross written premium (GWP). Administration expenses (2,261) (2,003) Underwriting profit Profit after tax Cost: Income ratio (GWP) 323 15.4% 705 15.1% [1] Underwriting margin: Net underwriting result as a percentage of net earned premium. [2] The 2018 underwriting result and cost base exclude the R70 million negative effect of the accelerated vesting of Quilter and Nedbank shares due to the Old Mutual plc managed separation. Profit after tax The decrease in profit after tax was driven by the following: • Significant catastrophe losses below the reinsurance recovery threshold • CGIC reduction in profits, largely driven by the poor economic environment Old Mutual Insure continued its performance turnaround journey of the past 24 months, with profitable growth being built on several key strategic pillars. • Over the past two years the Commercial business unit invested largely in acquiring market-leading underwriting skills. Group underwriting policies are linked to restricted underwriting capacity to promote portfolio improvements in profitability. • Our Personal lines business unit competes in the most competitive sector of the short-term insurance industry. Price is often the main driver for new business, which, coupled with a challenging economic environment, translates into tough trading conditions. The personal business unit has consolidated its market position and has stabilised its profitability over the past three years. This has been achieved primarily by improved claims procurement and process enhancements that have 34 OLD MUTUAL INSURE LIMITED Annual Report 2019 managed to keep average claims costs at 2016 levels. In addition, we have focused on building a straight through processing capability to improve our customer experience. • Our Specialty business unit results were highly pleasing, showing solid traction on its ‘Return to Technical’ journey. Strict adherence to our revised underwriting philosophy introduced two years ago across all Specialty divisions (Property, Engineering and Marine) has yielded positive results in the gross account. • The Credit and Bond insurance market experienced a challenging trading environment throughout 2019, brought on by the correlation between business performance and the state of the economy. This informs the gross written premium growth for the 2019 year of 4.7%. Old Mutual Insure’s key challenges are: • higher frequency of catastrophe events, driven by the accelerated pace of climate change; increasing reinsurance costs; and • • new market entrants, particularly ‘insuretech’ players, placing pressure on traditional players through innovative and low-cost operating models. Investment returns Old Mutual Insure’s investments consist primarily of interest-bearing money market instruments and a protected equity portfolio. The average investment return on money market instruments during the year was 8.5% compared to 8.7% in 2018. Dividend income was in line with expectations. Investment returns decreased from the prior year mainly due to the implementation of IFRS 16. Investable funds are invested in assets that maximise the returns earned relating to funds in excess of the minimum capital requirement, while remaining within the stated risk appetite and adhering to set constraints. Acquisitions and disposals Following the pending disposal of our Helen Joseph building in the Johannesburg CBD, the Old Mutual Insure head office was relocated to premises at Wanooka Place in Parktown from June 2019. Capital expenditure projects in 2019 A material contributor to additional capital expenditure during 2019 was the relocation costs of the move to Parktown. The total capital expenditure of the move was approximately R125 million and included office furniture and fittings, office equipment and IT related costs. These costs enabled employee occupation of the new building and included the transfer of connectivity, telephony systems and other IT related systems. Net finance cost and debt repayment obligations In 2017, the JSE Securities Exchange granted approval for the listing of the Old Mutual Insure unsecured subordinated callable notes programme. This allowed for the listing of R1 billion in notes, of which R500 million was issued. The notes are 10 years notes, not callable for the first five years and priced at JIBAR plus 209bps. The interest payment has not significantly changed from 2018. All interest payments due to debt holders to date have been paid. This programme has been consolidated into a larger Group (Old Mutual Limited) programme. Expenses Administration expense growth was well contained despite incurring additional costs related to the relocation of our head office building. Higher direct channel administration costs were caused by pursuing opportunities and the cost of writing new business. This increase compares favourably with a higher level of new business premium being written. Increasing regulatory compliance costs continue adding significantly to our expense base. Transformational changes required by the introduction of IFRS17 will add new challenges in terms of data, business processes, systems and resources. Old Mutual Insure continues to seek more innovative and cost-effective ways to comply, while still meeting short-term shareholder profit expectations. An upgrade of our policy administration system was successfully implemented in December 2019. We have adopted a staggered approach due to the high costs and time required for full implementation. Margins in the industry remained under pressure, while we sought to balance profitability against investing into business initiatives that will deliver real returns. Commission and service fee payment levels are subject to regulated caps and other regulatory requirements. The cost of these fees is included in the premium or other product charges and is subject to explicit disclosure to the customer regarding quantum and purpose of the fee. We continued working to reduce internal costs associated with third-party service providers. We also drove cost reductions for service models through process enhancements and channelling broker administration through apps and MyOMInsure. Old Mutual Insure invests significantly into making the lives of our customers easier by delivering customer experiences that meet and exceed their expectations. Managing our risks Inherent risk always exists, evidenced by the higher-than- average frequency and severity of natural catastrophes experienced in this period. Applying a responsible and disciplined underwriting approach, combined with class- leading claims management and service, creates a strong performance foundation to buffer the results from short- term large claim fluctuations. Alongside our reinsurance brokers and reinsurers, we review the frequency of losses caused by natural perils and the volatility this represents. We consider revisions to structures purchased based on managing the volatility of a larger frequency of smaller events. The cost of claims arising from natural perils is, however, not an isolated reinsurance consideration. We simultaneously consider the level of pricing that should support trends in the frequency of natural catastrophes. OLD MUTUAL INSURE LIMITED Annual Report 2019 35 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsFinancial director’s report (continued) Old Mutual Insure’s Reinsurance philosophy is based on four main pillars: • Alignment of results with reinsurers and managing volatility • Long-term strategic partnership • Continued portfolio refinement • Sharing of Intellectual Property. Alignment of results with reinsurers and managing volatility Our reinsurance purchase was based on a more equitable balance between the ultimate performance of Old Mutual Insure and that of our reinsurers. In addition, this purchase will continue to manage the volatility of large losses and catastrophe losses. Long-term strategic partnerships We value long-term strategic partnerships and are committed to working with reinsurers who have walked the journey with us through the years. We are aiming at a reinsurer panel that represents reinsurers who support our reinsurance philosophy and provide additional capacity. Financial position Old Mutual Insure’s directors assessed the cash flow position of the business on a forward-looking basis for the period until 2020 to establish ourselves as a going- concern. Our cash flows are projected and managed based on the prior year business plan and we remain a going- concern with sound cash flow tracking. Our Group capital target is 1.2 times using the Solvency Assessment and Management (SAM) Deduction and Aggregation capital requirement. Our company target is 1.3 times the solvency capital requirement. This implies that the Group holds an additional buffer over and above a 99.5% confidence level. Old Mutual Insure’s capital is allocated to subsidiaries and lines of business based on a combination of the risks associated with each line of business and the SAM capital requirements for each line of business or subsidiary. Return on equity targets are set at 17% to 20%. Investment allocation and reinsurance programmes are largely based on the company’s risk appetite and decisions are made considering the impact on the SAM capital requirements. Old Mutual Insure, as well as all individual entities, were solvent as at 31 December 2019. Our buffer and capital requirements are lower than those of our stand-alone peers on the basis that we form part of Old Mutual Limited. As such, we remain capital light and leverage off a strong parent company balance sheet. Excess capital will be held in Old Mutual Insure if any of our subsidiaries fall below target. Our approach to dividends The company’s dividend policy is to consider an interim and a final dividend for each financial year. At its discretion, the Board of Directors may consider a special dividend. For the 2019 financial year, the Board of directors did not recommend the approval of any dividend (2018: R381 million). Old Mutual Insure specifies a target solvency cover range (specified annually in the risk appetite statement) and will generally pay dividends to maintain the target required solvency cover ratio. Maintaining a target solvency cover range will also take account of the following factors: • capital required over the planning horizon to implement the business strategy; and • liquidity available currently and over the planning horizon in excess of the minimum required liquidity. 36 OLD MUTUAL INSURE LIMITED Annual Report 2019 Divisional performance Commercial, personal and distribution Garth Napier Overview Our largest business unit distributes a wide spectrum of products through the independent intermediary network to retail, small and medium enterprises, as well as our corporate customers. Insurance cover is provided for loss or damage to movable and immovable property, as well as risks associated with ownership of the insured assets. We also extend cover to operational risks such as business interruption. Commercial, Personal and Distribution (CPD) also offers insurance products and services to agricultural customers for farming equipment, infrastructure and protection of crops. CPD’s distribution channel combines the intermediary channel, direct channel and Old Mutual channel to enable customers to access and purchase products in the most efficient way for the business. These operations are primarily broker-led, with 96% of policies and 97% of premiums actioned through the intermediary channel. The Old Mutual Group channel provides access to the broader Old Mutual customer base. The CPD business has set up regional underwriting “centres of excellence” throughout a network of 32 branches, with central oversight over delegated underwriting authorities. Underwriting and sales functions are maintained separately. 2019 Performance More than 400 system enhancements to the MyOMInsure platform over the reporting year were driven by feedback from the intermediary market. These developments grew system capability, significantly improved the user experience and underpinned CPD’s improving performance. Despite several catastrophe events with a net value of R130 million, our profit variance improved due to an improved loss process following extensive improvements in the risk pool, supported by other remedial actions. Commercial lines and Agricultural assets The commercial lines segment reported an underwriting margin of -3.9% for the year relative to the prior year margin of 2.7%. Organic gross written premium growth in the intermediated segment remains muted, while initial growth targets were exceeded due to strategic initiatives concluded in 2018. Personal lines Gross written premium growth of 9.6% (Elite contributed 3.5%) is satisfactory, while the reduced net underwriting ratio of 0.6% (2018: 11.6%) was mostly driven by the catastrophe losses. Although the net contribution from catastrophe claims to the loss ratio was 2.5% higher in 2019 than the prior year, the catastrophe experience is considered to be in line with the 10-year average experience. The 10-year average was however significantly increased by the catastrophe experience in 2017. The attritional loss experience when compared to the prior year is 4.3% higher, but shows a significant improvement when compared to the 10-year average. The favourable attritional loss experience in 2018 (approximately 4% better than average) was not expected to continue into 2019. Opportunities and challenges Climate change and widespread poor maintenance of infrastructure has increased our risk exposure. The underwriting result for both personal and commercial lines were impacted by catastrophe events, which included severe storms and floods across the country. Bucking the trend was underwriting performance of the commercial property class, which recorded a reduced incidence of large property fire claims when compared to the previous year and the 10-year average. Higher catastrophe and other claims strained Old Mutual Insure capacity, which reduced underwriting margins. Strategy Old Mutual Insure is distinguished by the ease of doing business with us. To safeguard our distinct market presence, CPD articulates specific areas for differentiating ourselves to our brokers and clients. We are further differentiating our approach through specific Client Value Propositions aimed at each segment’s needs, opportunities, and risks. We prioritised the restated segmentation approach for optimal resource utilisation, supported by new rules on quantifiable returns and cost and waste reduction. Distribution will be transformed from a largely intermediated model to omnichannel capabilities through a revised structure planned for 2020. OLD MUTUAL INSURE LIMITED Annual Report 2019 37 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsDivisional performance (continued) Specialty John Nienaber Overview This business unit offers specialist insurance cover to corporate customers and includes individual risk selection and risk pricing. Cover is provided on a non-standard basis and requires specialist intermediaries to advise customers. Solutions exist for corporate property, engineering and marine risks. Old Mutual Insure’s underwriting management agencies also form part of this business unit and services, among others, the heavy commercial vehicle industry. Other than our Travelsure personal product, all our business products are intermediated. Mutual & Federal Risk Financing (MFRF) is the Group’s registered cell captive insurer, offering first and third- party insurance facilities to corporate customers, affinity groups, corporate retail customers and niche insurance administrators. MFRF retains limited underwriting risk and primarily earns fee-based income. It is wholly-owned by Old Mutual Insure and outsources its operations and all the control functions to Old Mutual Insure. It does however, have a separate insurance license, within which external companies (cells) operate ring-fenced funds to finance their insurance requirements (first-party cells) or those of their business clients (third-party cells). 2019 Performance Specialty reported a net underwriting profit of R51,4 million, which is above the budgeted R49,5 million and a significant improvement from the prior year loss of R46,4 million. The engineering segment contributed meaningfully to this result by achieving a net underwriting profit margin of 27% (Actual: R31,6 million) versus a planned profit margin of 18.5% (BP: R18,9 million; PY: R36,3 million). Remediation of the corporate property portfolio is continuing in line with a stricter underwriting process and risk appetite. The result for the year is a profit of R4,8 million, which is a vast improvement on the prior year results (2018: -R58,3 million). Total gross written premium growth for Specialty was 17,4% and is 15% above the planned growth target. Operating highlights for FY2019 include: • We expanded our capacity in risk management and surveying to improve risk selection and client risk tracking. • Underwriting actions. These included implementing premium rate increases and reducing exposure to certain types of risks. • Our strategic partnerships with Transition Risk Solutions and Sintelum are progressing well and we exceeded growth targets for these initiatives. 38 OLD MUTUAL INSURE LIMITED Annual Report 2019 The MFRF business reported a solid performance throughout the year, resulting in a significant increase in our net profit before tax (R25 million) compared to R12 million reported in 2018. Contributing factors: • Gross written premium increased by 13,1%. • Investment income decreased by 16,6% mainly due to the disinvestment made from money market investments to pay dividends. • The fee income reported increased by 14% as a result of revised fees charged, new business and the cells introducing new products. Opportunities and challenges Growth in 2019 was hampered in Specialty due to the contracted state of the construction industry and the impacts of the economic downturn. In corporate property the availability and cost of facultative reinsurance proved challenging but despite this, results have been stabilised. The lack of scale in marine, engineering, travel and casualty creates opportunities for partnerships and product development in the year ahead. Strategy Specialty • Profitable growth and diversifying the Specialty business with a continued focus on non-organic opportunities. • Continued underwriting actions, appropriate risk selection and stringent risk management to ensure a sustainable return to profitability. • Negotiate appropriate treaty reinsurance contracts to ensure maximum protection of volatility as well as maximum commission returns. We will also secure facultative reinsurance markets through engagements and evidence of corrective actions taken. MFRF • Pursue a strategy of customer intimacy to continually shape products and services to fit an increasingly fine definition of the customer. • Build capabilities that can be offered to the end client to increase income and product offerings. • Upskill existing employees. • Continue to build strategic partnerships that can contribute to MFRF and Old Mutual Insure. • Partner/collaborate with tech companies to provide ready-made solutions to potential clients. iWYZE Opportunities and challenges The 2019 iWYZE performance was delivered against a challenging economic environment and costly weather- related losses. Continued low economic growth, high levels of unemployment and crime will continue to pressure growth and our profitability. These challenges also hold opportunity, motivating the iWYZE team to continue seeking ways to offer insurance solutions at highly attractive premiums. Key drivers are to reduce costs, spread and diversify exposure to risk, judicious use of reinsurance and heightened productivity. Expanding digital capabilities Strategy The iWYZE strategic goals are aligned to support top- and bottom-line growth as well as improve customer centricity. Our goals include: • Further modernising the customer experience • • Developing and delivering new products • Maintaining focus on improved operational excellence During 2019 iWYZE made significant progress on all fronts, as evidenced by our strong financial and operational performances. The business has set challenging targets for 2020. Susan Dalby Overview Since 2010, iWYZE has enabled Old Mutual Insure to engage directly with customers. The iWYZE direct distribution channel allows Old Mutual Insure to dynamically respond to the changing needs of customers and outcompete other direct insurers. iWYZE has a comprehensive product range based on personal insurance. Products include car, home, all risk, medical gap, personal liability and hospital cash plans. Our product range is continuously being developed and will soon include business insurance and legal cover. Insurance products are supported by a range of value-added services that include 24/7 home and roadside assistance. The 148 000 iWYZE clients are supported by 414 employee members that are based in the Old Mutual Insure Wanooka office in Parktown, Johannesburg. 2019 Performance Total Gross Written Premium for 2019 was R1 billion, a 15.7% increase over the previous year. A comprehensive focus on claims cost and management expenses enabled an improvement in the underwriting profit of R81 million. Operational highlights included: • Ongoing investment in customer service levels that manifested in excellent Ombudsman performance, with only 23 referred claims overturned. This confirms fair and proper policyholder outcomes for the 37 500 claims received. • Leveraging improved processes continued to deliver productivity improvements. This is evidenced by the 4.5% growth in employee numbers over the last four years that has delivered 28% growth in administered policies. • • IWYZE became the first South African insurer to use drone technology for assessing accident damage. Improvements in employee safety and the work environment. The move to the Wanooka office complex benefits current iWYZE employees and positions the business to attract key talent that was previously reluctant to travel to downtown Johannesburg. OLD MUTUAL INSURE LIMITED Annual Report 2019 39 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statementsDivisional performance (continued) CGIC Charles Nortje Overview CGIC is the leading trade credit insurance company on the African continent. We insure our clients (policyholders) against payment default by their customers (buyers) when goods and services are sold by our clients on credit terms. Buyers include South African domestic companies and buyers located overseas in export markets, resulting in CGIC underwriting risk across 146 countries. CGIC operates in the B2B space and does not offer payment default protection for private individuals. Trade credit insurance is an important component of supporting trade in the South African economy. Most businesses are unable to operate on purely cash terms, needing time to sell their own products and services before they can pay suppliers. Credit extension has become a necessary part of modern business. CGIC enables trade by providing our clients with complete peace of mind with regard to potential bad debts. CGIC also offers a range of bond and guarantee products, mainly those needed in the construction sector by principals requiring protection against non-performance by a contractor. Fuel guarantees and customs bonds are ancillary products. We estimate that CGIC covers close to 20% of the insurable component of the South African GDP. CGIC is thus a major component of the Old Mutual Insure range of products for sustaining and growing the prosperity of our customers. Our underwriting process is focussed on the credit quality of the buyers on which we offer cover. We perform comprehensive assessments of buyer financial statements, market standing, past payment behaviours and management quality, among other factors. Our more than 4 000 clients transact with a combined 150,000 buyers with total risk exposure on our books of R340 billion. We employ 280 professional employees headquartered in Johannesburg, supported by a regional presence in Durban and Cape Town. At the core of our distribution network are 50 intermediaries with specialist trade credit and risk management skills. 2019 Performance Over the past year we achieved GWP of R1,219 billion, with growth on the prior year at 4.7%. Net earned premium was R896 million posting growth of 8%. Underwriting profit was R51 million being a 50% reduction on the prior year, reflecting weak economic conditions. Opportunities and challenges CGIC’s market share in South Africa is above 75% and we were impacted by the subdued financial performance of the broader credit environment in South Africa. The country recorded GDP growth for 2019 of less than 1%, with four out of the last seven quarters reporting negative GDP growth. Low business confidence and the 40 OLD MUTUAL INSURE LIMITED Annual Report 2019 high rate of distressed companies and business failures resulted in numerous claims. The construction sector was at the epicentre, with several high profile companies going in to business rescue. Several major businesses in the steel sector also went into failure. During the year, our largest competitor in trade credit closed its doors citing unmanageable economic headwinds and underwriting losses. Our Domestic Credit and Bond portfolio weathered the brunt of these challenges, while our Export Credit portfolio performed strongly. Storm clouds are however, gathering on the international horizon, which is dark with trade wars, uncertainties around Brexit, regional conflicts and slowing growth in the world’s major economies, along with generally rising debt levels. CGIC continues to weather the storm through cautious underwriting and a strengthened risk-sharing philosophy with our policyholders. Business successes include our support throughout the restructuring of a large national retail chain that preserved over 100,000 jobs. We also participated in several other important business rescues. Our greatest success however, lies in enabling trade and managing risk every day for our clients, as they seek to grow and prosper in a challenging environment. Strategy CGIC aspires to remain the foremost trade credit insurer in Africa and the clear first choice of our customers. We intend retaining and building on our lead in the market with the support and footprint of our majority shareholder, Old Mutual, and strategic equity partner Atradius, which is a dominant global player present in more than 50 countries. We are deeply conscious of our social responsibility for promoting growth and preserving jobs in our home market, South Africa. At the time of writing, we are seized with our role in the much needed restructuring of State Owned Enterprises such as SAA and Eskom, with spillover risks to the rest of the economy. In so doing we sustainably provide for the needs of all our stakeholders and generate acceptable returns on capital. We intend entering into adjacent spaces through business turnaround consulting skills and working capital finance packages. These will take us closer to our vision of “Beyond Credit Insurance”. In closing In these uncertain times we have seen competitors enter our market and expand rapidly, only to contract just as rapidly and withdraw from the market a short time later. CGIC has a stable track record of more than 60 years in sustainable credit insurance and risk management solutions, and an enviable reputation to uphold. We will continue building on our solid foundations. People and brand Liziwe Masoga Overview Our corporate culture Old Mutual Insure believes organisational culture drives business outcomes and accelerates performance. In 2019, our Managing Director continued prioritising engagement with leadership and employees, supported by new employee onboarding and organisational reward systems. 2019 Performance highlights • Plans for implementing the Workday Human Capital Management solution are on track, causing excitement by this technology’s potential to transform how we engage with leaders and employees. Our 2019 HR focus areas: • Culture and engagement • Talent • Transformation • Implementing Phase 1 of the Zoom project led to four Old Mutual Insure head office employees gaining opportunities to work at Group level. • Our ongoing transformation led to the Group being rated a level 4 contributor. This is the first time Old Mutual Insure has achieved this level of transformation across all elements, although the category ‘access to financial services’ remains a challenge. • Some 59 graduates received invaluable work experience through positions at Old Mutual Insure. • The Junior Board was created to introduce talented black employees to the business value chain. Employee engagement In 2019, we utilised a tool specifically designed for Old Mutual. This tool considers all feedback received through our Pulse employee engagement survey and focused interviews held across the business. A new employee engagement model was developed to drive internal cultural change by tracking 13 selected cultural dimensions. We prioritised engagement between leadership and employees to create a culture of transparency. In this process employees engaged directly with senior leadership on Group strategy. Attracting, retaining and motivating people Old Mutual Insure aims to attract, develop, motivate and retain select employees capable of delivering meaningful customer experiences at every moment of the customer journey. Only fully engaged employees will truly understand their roles and uphold consistently high customer service levels. Succession planning Our ‘Ready Now’ initiative helps build a pipeline of leadership and management skills to lead the business into the future. Health and wellness The Group’s ‘We Care’ wellness programme has grown from strength to strength over the last few years. ‘We Care’ empowers employees to cope with life’s multiple demands, make healthy lifestyle decisions, and address well-being challenges. Transformation and B-BBEE We have prioritised creating an environment that embraces diversity, equity and inclusion. The focus includes working towards having a representative workforce across all levels and creating a culture in which all employees feel a sense of belonging, regardless of their differences. Operating in a South African context means that issues affecting the country will also affect our employees and the company. Our unprecedented level 4 B-BBEE score reflects our commitment to help transform the entire industry. All pillars on the scorecard displayed exceptional scoring improvement. OLD MUTUAL INSURE LIMITED Annual Report 2019 41 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements06 ANNUAL FINANCIAL STATEMENTS Value Our value-creation story is focused on the stakeholder and the return on investments. We have a fiduciary duty to fulfil our stakeholder expectations of a return on investments and a sustainable future. The pot, a symbol of holding, gathering and collecting to keep investments and finances secure. ANNUAL FINANCIAL STATEMENTS General information  Country of incorporation and domicile South Africa Nature of business and principal activities Short-term insurance Directors  Registered office Postal address Mr SC Gilbert Mr G Napier Ms NB Manyoha Mr M Ilsley Mr G Palser Mr MA Scharneck Ms TP Zondi Wanooka Place St Andrews Road Parktown PO Box 1120 Johannesburg 2000 Holding company Mutual and Federal Investments Proprietary Limited incorporated in South Africa Ultimate holding company  Auditors Old Mutual Limited  incorporated in South Africa KPMG Inc. Chartered Accountants (SA) Registered Auditors Secretary Old Mutual Life Assurance Company (South Africa) Limited Company registration number 1970/006619/06 Level of assurance These financial statements have been audited in compliance with the applicable requirements of the Companies Act. Preparer The financial statements were internally compiled by: NB Manyoha Chartered Accountant (SA) Old Mutual Insure Limited Financial Director 44 OLD MUTUAL INSURE LIMITED Annual Report 2019                                                                           Contents Audit committee report Directors’ responsibilities and approval Group Secretary’s certification Directors’ report Independent auditor’s report Statement of financial position Statement of profit or loss and other comprehensive income Statement of changes in equity Statement of cash flows Accounting policies Notes to the group and company financial statements Page 46 – 47 48 49 50 – 51 52 – 55 56 – 57 58 – 59 60 – 63 64 65 – 83 84 – 152 OLD MUTUAL INSURE LIMITED Annual Report 2019 45 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements  Audit committee report 3. Effectiveness of internal financial controls We have established a combined assurance capability to ensure the collaboration of assurance between the various assurance providers. The assurance has provided reasonable coverage over the internal controls of the organisation. The audit committee has confirmed that satisfactory systems of internal control and risk management have been maintained. There were no breakdowns in the functioning of the internal financial control systems during the year which had a material impact on the annual financial statements. However, we still have some areas of concern and these remain an area of focus for management. The areas are reinsurance, data and technology and third party management. Internal and external audit The committee ensures the appointment of a registered auditor as external auditor for the company who in the opinion of the audit committee, is independent of the company. The committee approves the terms of engagement and remuneration for the external audit engagement. The audit committee is satisfied that KPMG and the audit partner are independent. The external auditor provided assurance that its internal governance processes ensure, support and demonstrate its independence. KPMG has been the auditors of the Group for forty-nine years and Mr M Danckwerts the audit partner for three years. There were no significant changes in the audit management team from the prior year. The committee is satisfied with the quality of the external audit engagement as evidenced in the audit quality report back to the audit committee. The report included the audit quality governance structure and the results of the monitoring of audit quality. There were no significant non-audit services performed by the external auditors in the current year. The head of internal audit functionally reports to the chairman of the audit committee and the audit committee is responsible for reviewing and approving the internal audit charter, the internal audit coverage as well as the resource and financial plans of the internal audit department. The committee evaluates and promotes the independence of internal audit. The audit committee is satisfied with the effectiveness of the internal audit arrangements and function. The Old Mutual Insure Limited audit committee is a Group audit committee. The audit committee acts as such for the following companies of the Group where an audit committee is required in terms of the Companies Act: Old Mutual Insure Limited, Credit Guarantee Insurance Corporation of Africa Limited (CGIC) and Mutual and Federal Risk Financing Limited (MFRF). 1. Composition and charter The committee comprises three independent non-executive directors of the company. During the year, Mr PC Rörich resigned as chairperson and Ms TP Zondi was appointed as the chairperson. Mr PGM Truyens resigned and Mr GS Palser and Mr MA Scharneck were appointed as members of the committee. The current members are Ms TP Zondi (Chairperson), Mr GS Palser and Mr MA Scharneck. The qualifications of the members of the committee are listed on page 25 of the governance report. The members possess the necessary expertise to direct the committee in the execution of its duties. The committee has a charter, approved by the Board, dealing, inter alia, with its membership, frequency of meetings and responsibilities. The committee reviews reports from the external and internal auditors and the chairman of the committee reports on the findings at Board meetings. 4. 2. Role of the audit committee The committee fulfilled its responsibilities as required by the Companies Act and its terms of reference. The committee performed among others, the following functions: • Reviewed the operational effectiveness of the Group policies, systems and procedures. • Reviewed the results of the work performed by the internal audit function on financial reporting, corporate governance, internal control and any significant investigations and management’s responses. • Reviewed any other relevant matters referred to it by the Board of Directors. • Reviewed the quality of financial information included in the annual financial statements. • Reviewed the financial statements taken as a whole to ensure they present a balanced and understandable assessment of the position, performance and future viability of the Group. • Reviewed the external auditor’s report. • Discussed any issues and reservations arising from the external audit, and any matters the external auditor wished to discuss (in the absence, where requested by the committee, of executive directors and any other person who is not a member of the committee). 46 OLD MUTUAL INSURE LIMITED Annual Report 2019 5. Meetings The committee held four scheduled meetings during the year under review. The required quorum was present at all meetings held. During the year, Mr PC Rörich resigned as chairperson and Ms TP Zondi was appointed as the chairperson. Meetings for the year and attendance thereat are set out below: Name 19 February 2019 17 May 2019 7 August 2019 31 October 2019 PC Rörich (resigned 31 May 2019 PGM Truyens (resigned 31 May 2019) GS Palser (appointed 26 November 2018) MA Scharneck (appointed 1 June 2019) TP Zondi x x x x x x x x x x x x x x comprising operational risk and compliance staff and reviews assurance activity planning and execution as well as tracking of progress on remedial actions. The second governance structure that has been established is the Combined Assurance Management Forum comprising heads of departments which is a decision-making body primarily to approve assurance plans. Other key achievements include the establishment of a database of issues from all assurance providers, along with monthly tracking of remedial actions. Reporting is based on assurance coverage per Level one risk, as defined by the Old Mutual Insure Limited Enterprise Risk Management methodology, and conclusions drawn by the assurance providers per assurance activity.  The committee is satisfied that the arrangements in place for combined assurance were satisfactory throughout the year. The committee is satisfied that it has fulfilled its responsibilities regarding its terms of reference during the year under review and believes that it complied with its legal, regulatory and other responsibilities. On behalf of the audit committee Thandeka Zondi Chairperson Audit Committee 6. Expertise and experience of the financial director and the finance team The committee is satisfied that the expertise of the financial director is appropriate to meet the responsibilities of the position. The committee considered the expertise, resources and experience of the finance function and concluded that these are appropriate to meet the requirements of the Group. 7. Approval of the report The audit committee reviewed the 2019 report and considered factors and risks that may impact on the integrity of the report and is satisfied that it is prepared in accordance with International Financial Reporting Standards and supported by reasonable and prudent judgements consistently applied. The reports of the capital management and reserving committees to the audit committee were considered in assessing the appropriateness of the judgements made relating to the valuation of insurance reserves and subsidiaries and material asset impairments, if any. The audit committee has also considered the conclusions of independent assurance providers in reviewing the relevant sections of the annual financial statements. The Group established a combined assurance function in 2018 which was set up to ensure the optimisation of assurance services and functions to ensure the effectiveness of the overall control environment, and provide assurance of the integrity of information used for internal decision making and external reporting. The primary output of this function is ensuring increased collaboration, the sharing of information as well as reducing duplication of assurance activities which has ultimately resulted in improved efficiencies and more effective reporting within the individual assurance functions. The combined assurance process has been supported by the establishment of appropriate governance structures namely the Combined Assurance Task Team which meets quarterly OLD MUTUAL INSURE LIMITED Annual Report 2019 47 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsDirectors’ responsibilities and approval  The directors have reviewed the Group’s cash flow forecast for the year to 31 December 2020 and, in light of this review and the current financial position, they are satisfied that the Group has or had access to adequate resources to continue in operational existence for the foreseeable future. The external auditors are responsible for independently auditing and reporting on the Group's financial statements. The financial statements have been examined by the Group's external auditors and their report is presented on pages 52 to 55. The financial statements set out on pages 56 to 152, which have been prepared on the going-concern basis, were approved by the Board of Directors on 12 March 2020 and were signed on their behalf by: Approval of financial statements   Authorised Director Authorised Director The company is required in terms of the Companies Act to keep accurate and complete accounting records and the directors are responsible for the content and integrity of the annual financial statements and related financial information included in this report. It is their responsibility to ensure that the financial statements fairly present the state of affairs of the Group as at the end of the financial year and the results of its operations and cash flows for the period then ended, in conformity with International Financial Reporting Standards. The external auditors are engaged to express an independent opinion on the financial statements. The Group and company financial statements are prepared in accordance with International Financial Reporting Standards and are based upon appropriate accounting policies consistently applied and supported by reasonable and prudent judgements and estimates. The directors acknowledge that they are ultimately responsible for the system of internal financial control established by the Group and place considerable importance on maintaining a strong control environment. To enable the directors to meet these responsibilities, the Board of Directors sets standards for internal control aimed at reducing the risk of error or loss in a cost effective manner. The standards include the proper delegation of responsibilities within a clearly defined framework, effective accounting procedures and adequate segregation of duties to ensure an acceptable level of risk. These controls are monitored throughout the Group and all employees are required to maintain the highest ethical standards in ensuring the Group’s business is conducted in a manner that in all reasonable circumstances is above reproach. The focus of risk management in the Group is on identifying, assessing, managing and monitoring all known forms of risk across the Group. While operating risk cannot be fully eliminated, the Group endeavours to minimise it by ensuring that appropriate infrastructure, controls, systems and ethical behaviour are applied and managed within predetermined procedures and constraints. The directors are of the opinion, based on the information and explanations given by management, that the system of internal control provides reasonable assurance that the financial records may be relied on for the preparation of the financial statements. However, any system of internal financial control can provide only reasonable, and not absolute, assurance against material misstatement or loss. 48 OLD MUTUAL INSURE LIMITED Annual Report 2019 Group Secretary’s certification In terms of Section 88(2)(e) of the Companies Act, I certify that the Group has lodged with the Commissioner all such returns as are required of a public company in terms of the Act and that all such returns are true, correct and up to date. Old Mutual Life Assurance Company (South Africa) Limited OLD MUTUAL INSURE LIMITED Annual Report 2019 49 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsDirectors’ report The directors have pleasure in submitting their report on the financial statements of Old Mutual Insure Limited and the Group for the year ended 31 December 2019. 1. Nature of business Old Mutual Insure Limited was incorporated in South Africa with interests in the insurance industry. The activities of the Group are undertaken through the company and its principal subsidiaries and associates. The Group operates in South Africa, Zimbabwe and Mauritius. There have been no material changes to the nature of the Group's business from the prior year. 2. Review of financial results and activities The Group and company financial statements have been prepared in accordance with International Financial Reporting Standards and the requirements of the Companies Act. The accounting policies have been applied consistently compared to the prior year, except for the adoption of new or revised accounting standards as set out in note 3. Full details of the financial position, results of operations and cash flows of the Group are set out in these Group and company financial statements. 3. Share capital Authorised Number of shares 2019 2018 Ordinary shares of 10 cents each 350,000,000 350,000,000 Issued Ordinary shares of 10 cents each 2019 R mil 32 Number of shares 2018 R mil 2019 2018 32 319,823,465 319,823,465 There have been no changes to the authorised or issued share capital during the year under review.    4. Dividends The company's dividend policy is to consider an interim and a final dividend in respect of each financial year. At its discretion, the Board of Directors may consider a special dividend, where appropriate. The Board of Directors recommend the approval of a dividend of R381,000,000 (2018: R229,000,000). This dividend relates to the 2018 financial year and was approved and paid during the 2019 year. 50 OLD MUTUAL INSURE LIMITED Annual Report 2019 5. Directorate The directors in office at the date of this report are as follows: Directors Office Designation Changes Mr SC Gilbert Chairperson Non-executive Independent Appointed 1 September 2019 Mr G Napier Managing Director Executive Ms NB Manyoha Financial Director Executive Mr M Ilsley Non-executive Mr P Moyo Group Chief Executive Non-executive Resigned 27 June 2019 Mr G Palser Lead Independent Director Non-executive Independent Mr P Rörich Mr MA Scharneck Mr PGM Truyens Mr TP Zondi 6. Holding company Non-executive Independent Resigned 31 May 2019 Non-executive Independent Appointed 1 June 2019 Non-executive Independent Resigned 31 May 2019 Non-executive Independent The Group's holding company is Mutual and Federal Investments Proprietary Limited which holds 100% (2018: 100%) of the Group's equity. Mutual and Federal Investments Proprietary Limited is incorporated in South Africa. 7. Ultimate holding company The Group's ultimate holding company is Old Mutual Limited which is incorporated in South Africa. 8. Events after the reporting period On 11 March 2020, COVID-19 was declared as a pandemic due to the rising rate and scale of infections observed. Further on 23 March 2020 the President of South Africa announced a national lockdown for 21 days, expected to last to 16 April 2020. The rapid spread of the virus has caused significant disruption in global equity markets and the impact of lockdowns in several countries worldwide is expected to reduce GDP growth in 2020, both locally and globally. These impacts associated with this pandemic could negatively impact the performance of the business in 2020 and we are in the process of assessing this impact. There have been no other material events after 31 December 2019 up to the date of this report. 9. Going concern The directors believe that the Group has adequate financial resources to continue in operation for the foreseeable future and accordingly the Group and company financial statements have been prepared on a going-concern basis. The directors have satisfied themselves that the Group is in a sound financial position and that it has adequate cash resources to meet its foreseeable cash requirements. The directors are not aware of any new material changes that may adversely impact the Group. The directors are also not aware of any material non-compliance with statutory or regulatory requirements or of any pending changes to legislation which may affect the Group. 10. Auditors KPMG Inc. continued in office as auditors for the company and its subsidiaries for 2019. 11. Secretary The Company Secretary is Old Mutual Life Assurance Company (South Africa) Limited. OLD MUTUAL INSURE LIMITED Annual Report 2019 51 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsIndependent auditor’s report To the shareholder of Old Mutual Insure Limited    Report on the audit of the Consolidated and Separate Financial Statements Opinion We have audited the consolidated and separate financial statements of Old Mutual Insure Limited (the group and company) set out on pages 56 to 152, which comprise the statement of financial position as at 31 December 2019, and the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, accounting policies and the notes to the financial statements. In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Old Mutual Insure Limited as at 31 December 2019, and its consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated and separate financial statements section of our report. We are independent of the group and company in accordance with the sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters  Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How the matter was addressed in our audit Valuation of gross claims Incurred But Not Reported (IBNR) This key audit matter relates to our audit of the consolidated and separate financial statements. Refer to accounting policy 1.18, significant judgements and sources of estimation uncertainty note 1.22 and notes 23 and 42 At year-end, the group and company estimate insurance claims that have been incurred before year-end but will only be reported after year end. The IBNR is included in outstanding claims which forms part of the general insurance liabilities financial statement caption. The calculation of IBNR is based on actuarial methods which are subject to inherent uncertainty and significant judgement is required in its determination. In determining the IBNR the group and company used patterns based on past experience and historical claims, adjusted for current year developments, to provide a basis for future development of claims. The key procedures we undertook to address the valuation of the IBNR provision included: – Together with our actuarial specialists, we evaluated the work of management's actuaries in determining the IBNR. This included: a) independent loss projection for selected classes of business and compared the result to the point estimate determined by management; b) assessment of the appropriateness of the methodology applied in the determination of the IBNR; c) assessment of the reasonability of the key assumptions used; and d) assessment of the overall reasonability of the IBNR. 52 OLD MUTUAL INSURE LIMITED Annual Report 2019 Key audit matter How the matter was addressed in our audit This matter is a key audit matter due to the inherent uncertainty and significant judgements required in the actuarial modelling process. – We tested the claims development data supporting the IBNR percentages by agreeing the data in the actuarial reports to data on the underlying claims system which was adequately supported. – We tested the design, implementation and operating effectiveness of the control performed by management over the reconciliation of the claims data to the general ledger. – Where insufficient data is available to perform an actuarial analysis on specific business classes, we challenged the method applied by management in determining the IBNR percentages applied to these business classes. – We evaluated the reasonableness of current year IBNR estimates by comparing them to prior years’ estimates which we had evaluated as being reasonable based on a retrospective calculation of the actual IBNR. Key audit matter How the matter was addressed in our audit Valuation of the investment in subsidiaries This key audit matter relates to our audit of the separate financial statements. Refer to accounting policy 1.3, significant judgements and sources of estimation uncertainty note 1.22 and note 9 At each year-end, the company estimates the fair value of its investments in subsidiaries. The total value of the company's investment in subsidiaries is R1,4 billion, as disclosed in note 9. The valuation is subject to inherent uncertainty and significant judgement is applied in deriving the assumptions used in the valuation model. In determining the estimated fair values of the investments in subsidiaries, the company uses a discounted earnings model or net asset value if the net asset value approximates fair value. The valuation model used is sensitive to the projected business plans as well as the risk- adjusted discount rates used This matter is a key audit matter due to the significant judgements applied in the determination of the fair values of investments in subsidiaries. Our procedures included: – Together with our valuation specialists, we assessed the key assumptions underlying the fair values of these unlisted subsidiaries by performing the following: a) We tested the inputs into the discounted earnings models by agreeing the inputs to approved business plans of the subsidiaries and assessed the appropriateness of the business plans in the context of the South African market. Previous budgets prepared were compared to actual results, and the key drivers in the forecasts were compared to our independent expectations, which are based on historical experience. b) Using independent discount rates and assumptions, we compared our range of determined fair values to those determined by management. OLD MUTUAL INSURE LIMITED Annual Report 2019 53 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsIndependent auditor’s report (continued) Other information The directors are responsible for the other information. The other information comprises the information included in the document titled "Old Mutual Insure Limited Annual Report 2019", which includes the Directors’ report, the Audit committee report and the Group Secretary’s certification as required by the Companies Act of South Africa. The other information does not include the consolidated and separate financial statements and our auditor’s report thereon. Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the consolidated and separate financial statements The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group and company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group and/or company or to cease operations, or have no realistic alternative but to do so. Auditor's responsibilities for the audit of the consolidated and separate financial statements Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it 54 OLD MUTUAL INSURE LIMITED Annual Report 2019 exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's and company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group and company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group and/or company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory requirements In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that KPMG Inc. has been the auditor of Old Mutual Insure Limited for 49 years. KPMG Inc. Registered auditor Per Mark Danckwerts Chartered Accountants (SA) Registered Auditor Director 31 March 2020 KPMG Crescent  85 Empire Road Parktown Johannesburg OLD MUTUAL INSURE LIMITED Annual Report 2019 55 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsStatement of financial position as at 31 December 2019  GROUP COMPANY 2019 2018 2019 2018 Notes R million R million R million R million 4 5 6 7 8 9 10 11 12 13 14 23 15 16 17 18 19 20 21 174 249 478 41 – 79 7 – 2 221 243 2,112 27 6,561 1,744 569 257 18 559 21 162 129 – 67 – 104 7 – 1 223 231 2,574 27 6,305 1,618 646 243 122 604 1,084 1,386 – 174 238 475 8 – 162 120 – 46 1,426 1,548 13 84 634 2 160 174 1,421 – 3,183 1,503 222 257 15 274 283 13 84 611 1 160 158 1,553 – 3,516 1,270 275 243 112 322 343 14,446 14,470 10,546 10,537 Assets Goodwill Intangible assets Property and equipment Right-of-use assets Deferred tax Investments in subsidiaries Investments in associates Loans to share trusts Investments in employee share trusts Loans receivable Retirement benefit asset Deferred acquisition cost Reinsurers' share of general insurance liabilities Deposits with cedants Investments and securities Amounts due from agents and reinsurers Subrogation and salvage recoveries Non-current asset held for sale Current tax receivable Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Equity Equity attributable to equity holders of parent Share capital 21 Reserves Retained income Non-controlling interest 1,797 25 2,072 3,894 287 4,181 1,797 62 2,162 4,021 268 4,289 1,797 90 2,157 4,044 – 4,044 1,797 90 2,375 4,262 – 4,262 56 OLD MUTUAL INSURE LIMITED Annual Report 2019                                                               Liabilities General insurance liabilities Lease liabilities Debt instrument Deferred reinsurance commission revenue Amounts due to agents and reinsurers Retirement benefit obligation Share-based payment liability Employee benefits Deferred tax Deposits owing to reinsurers Amounts payable to cell owners Current tax payable Trade and other payables GROUP COMPANY 2019 2018 2019 2018 Notes R million R million R million R million 23 7 24 14 16 13 25 26 8 27 28 5,639 494 500 196 1,103 243 91 160 41 239 1,119 8 432 6,119 3,641 3,829 – 500 186 514 254 68 213 103 796 878 7 543 491 500 125 884 178 80 141 – 226 – – 236 – 500 114 355 191 54 201 – 672 – – 359 Total liabilities  10,265 10,181 6,502 6,275 Total equity and liabilities  14,446 14,470 10,546 10,537 OLD MUTUAL INSURE LIMITED Annual Report 2019 57 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements                            Statement of profit or loss and other comprehensive income  for the year ended 31 December 2019 GROUP COMPANY 2019 2018 2019 2018 Notes R million R million R million R million 29 30 31 32 33 34 35 14,656 (4,710) 13,218 (4,148) 10,660 (1,645) 9,511 (1,320) 9,946 9,070 9,015 8,191 (97) 73 (24) 9,922 892 10,814 (9,295) 2,896 (6,399) (2,096) (175) 153 (22) 9,048 792 9,840 (8,839) 3,344 (5,495) (1,932) (79) 42 (37) 8,978 376 9,354 (6,727) 939 (5,788) (1,588) (156) 144 (12) 8,179 236 8,415 (5,942) 1,001 (4,941) (1,351) (2,261) (2,003) (1,984) (1,815) 58 387 (76) 49 418 (95) 323 10 – 10 410 459 (51) 96 914 (209) 705 6 – 6 2 (36) (6) 326 (76) – 244 (94) 150 8 – 8 – 308 10 (51) – 267 (143) 124 1 (5) (4) – Gross written premiums Reinsurers premiums Net written premiums Gross change in provision for unearned premiums Reinsurers’ share of change in provision for unearned premiums Net change in provision for unearned premiums Net earned premiums Commissions received Net income Gross claims incurred Reinsurers’ share of claims incurred Net claims incurred Acquisition cost Expenses Operating profit Investment income Finance costs Income from equity accounted investments Profit before taxation Taxation Profit for the year Other comprehensive income: Items that will not be reclassified to profit or loss (net of taxation): Remeasurements on net defined benefit liability/ asset Losses on property revaluation Total items that will not be reclassified to profit or loss  Items that may be reclassified to profit or loss (net of taxation): Exchange differences on translating foreign operations 58 OLD MUTUAL INSURE LIMITED Annual Report 2019                                                                             Other comprehensive income for the year net of taxation Total comprehensive income for the year Profit attributable to: Owners of the parent Non-controlling interest Total comprehensive income attributable to: Owners of the parent Non-controlling interest GROUP COMPANY 2019 2018 2019 2018 Notes R million R million R million R million 12 335 299 24 323 311 24 335 (30) 675 671 34 705 641 34 675 8 158 150 – 150 158 – 158 (4) 120 124 – 124 120 – 120 OLD MUTUAL INSURE LIMITED Annual Report 2019 59 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements                                                  Statement of changes in equity for the year ended 31 December 2019  GROUP  Balance at 1 January 2018 Profit for the year  Other comprehensive income – Exchange differences on translating foreign operations Total comprehensive income for the year Transfer between reserves Other non-distributable reserve Capital distributions from the share trusts Dividends Total contributions by and distributions to owners of company recognised directly in equity Balance at 1 January 2019 Profit for the year Other comprehensive income remeasurements on net defined benefit liability/ asset  Other comprehensive income – Exchange differences on translating foreign operations Total comprehensive income for the year Foreign currency translation on reserves Capital distributions from the share trusts Dividends  Total contributions by and distributions to owners of company recognised directly in equity Share capital R million Share premium R million Total share capital R million Foreign currency Other non- Non- translation Revaluation distributable Total Retained the Group/ controlling reserve reserve reserve reserves income company interest Total R million R million R million R million R million R million R million R million Total attributable to equity holders of 32 1,765 1,797 (2) 60 58 1,906 – – – – – – – – – – – – – – – – – – – – – – – – 32 1,765 1,797 (38) – – – – – – – – – – – – – – – – – – – – – – – – Balance at 31 December 2019 Notes 32  21 1,765 1,797 21 21 60 OLD MUTUAL INSURE LIMITED Annual Report 2019 (36) – – – – – – – – – 2 – – – (37) (37) (75) 30 30 90 – – – – – – – – – – – – – – 90 22 10 10 10 – – – – – – – – – – – – – – – 3,761 671 (36) 635 – 10 (156) (229) 4,021 299 10 2 311 (37) (25) (376) 671 – – 671 (30) (156) (229) 2,162 299 10 311 2 – (25) (376) (415) (375) 234 34 34 268 24 – – – – – – – – – – 24 (5) (5) 3,995 705 (36) 669 – 10 (156) (229) (375) 4,289 323 10 2 335 (37) (25) (381) (443) (36) 30 10 40 62 – – – – – – 2 – – – (37) (37) 25 (401) (438) 10 2,072 3,894 287 4,181 Other comprehensive income – Exchange differences on translating foreign GROUP  Balance at 1 January 2018 Profit for the year  operations Total comprehensive income for the year Transfer between reserves Other non-distributable reserve Capital distributions from the share trusts Dividends directly in equity Balance at 1 January 2019 Profit for the year asset operations Total comprehensive income for the year Foreign currency translation on reserves Capital distributions from the share trusts Dividends directly in equity Balance at 31 December 2019 Notes Total contributions by and distributions to owners of company recognised 32 1,765 1,797 Other comprehensive income remeasurements on net defined benefit liability/ Other comprehensive income – Exchange differences on translating foreign Total contributions by and distributions to owners of company recognised Share capital Share Total share premium capital R million R million R million 32 1,765 1,797 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 32 21 1,765 1,797 21 21 Foreign currency translation reserve R million Revaluation reserve R million Other non- distributable reserve R million Total reserves R million Retained income R million Total attributable to equity holders of the Group/ company R million (2) – (36) – – – – – – (38) – – 2 – (37) – – (37) (75) 60 – – – 30 – – – 30 90 – – – – – – – – 90 22 – – – – – 10 – – 10 10 – – – – – – – – 10 58 – (36) – 30 10 – – 40 62 – – 2 – (37) – – (37) 25 Non- controlling interest R million Total R million 234 3,995 34 – 34 – – – – – 268 24 – – 24 – – (5) (5) 705 (36) 669 – 10 (156) (229) (375) 4,289 323 10 2 335 (37) (25) (381) (443) 1,906 671 – 671 (30) – (156) (229) 3,761 671 (36) 635 – 10 (156) (229) (415) (375) 2,162 299 10 2 311 – (25) (376) 4,021 299 10 2 311 (37) (25) (376) (401) (438) 2,072 3,894 287 4,181 OLD MUTUAL INSURE LIMITED Annual Report 2019 61 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsStatement of changes in equity  (continued) For the year ended 31 December 2019 Share capital R million Share premium R million Total share capital R million Foreign currency Other non- Non- translation Revaluation distributable Total Retained the Group/ controlling reserve reserve reserve reserves income company interest Total R million R million R million R million R million R million R million R million 32 1,765 1,797 (2) 86 84 2,480 4,361 – – – – – – – – – – – – – – – – – – – – – 32 1,765 1,797 90 90 2,375 4,262 – – – – – 32 21 – – – – – – – – – – 1,765 1,797 21 21 Total attributable to equity holders of 124 124 1 (5) 120 – (225) 150 8 158 – – 2 124 (225) 150 8 158 (225) (223) (376) (376) (376) (376) 90 2,157 4,044 – – – – – – – – – – – – – – – – – 4 4 2 – 2 – – – – – – – – – – – – – – – – – – – – 4,361 124 – – 2 124 (225) (223) 4,262 150 8 158 (376) (376) 4,044 – – – – 2 – 2 – – – – – – – – – 4 4 – – – – – – – – 90 22 COMPANY Balance at 1 January 2018 Profit for the year Other comprehensive income – Remeasurements on net defined benefit liability/asset Other comprehensive income – Losses on property revaluation Total comprehensive income for the year Foreign currency translation reserve Dividends Total contributions by and distributions to owners of company recognised directly in equity Balance at 1 January 2019 Profit for the year Other comprehensive income – Remeasurements on net defined benefit liability/asset Total comprehensive income for the year Dividends Total contributions by and distributions to owners of company recognised directly in equity Balance at 31 December 2019 Notes 62 OLD MUTUAL INSURE LIMITED Annual Report 2019 Share capital Share Total share premium capital R million R million R million Foreign currency translation reserve R million Revaluation reserve R million Other non- distributable reserve R million Total reserves R million Retained income R million Total attributable to equity holders of the Group/ company R million Non- controlling interest R million Total R million COMPANY Balance at 1 January 2018 Profit for the year liability/asset Other comprehensive income – Remeasurements on net defined benefit Other comprehensive income – Losses on property revaluation Total contributions by and distributions to owners of company recognised Other comprehensive income – Remeasurements on net defined benefit Total comprehensive income for the year Foreign currency translation reserve Dividends Total comprehensive income for the year directly in equity Balance at 1 January 2019 Profit for the year liability/asset Dividends directly in equity Balance at 31 December 2019 Notes Total contributions by and distributions to owners of company recognised – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 32 1,765 1,797 32 21 1,765 1,797 21 21 32 1,765 1,797 (2) 86 – – – – 2 – 2 – – – – – – – – – 4 4 – – – 90 – – – – – 90 22 – – – – – – – – – – – – – – – 84 2,480 4,361 – – 4 4 2 – 2 124 124 1 (5) 120 – (225) – – 124 2 (225) (225) (223) 90 2,375 4,262 – – – – – 150 8 158 150 8 158 (376) (376) (376) (376) 90 2,157 4,044 – – – – – – – – – – – – – – – 4,361 124 – – 124 2 (225) (223) 4,262 150 8 158 (376) (376) 4,044 OLD MUTUAL INSURE LIMITED Annual Report 2019 63 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsStatement of cash flows  for the year ended 31 December 2019 Cash flows generated from operating activities Cash generated from operations Interest income Dividends received Finance costs Tax (paid)/received Net cash generated from operating activities Cash flows (used in)/generated from investing activities Purchase of property and equipment Sale of property and equipment Purchase of other intangible assets Purchase of non-current asset held for sale Purchase of subsidiary Sale of investments and securities Purchase of investments and securities (Repayments)/Receipts from loans receivable at amortised cost Net cash (used in)/generated from investing activities Cash flows used in financing activities Dividends paid Total cash movement for the year Cash at the beginning of the year GROUP COMPANY 2019 2018 2019 2018 Notes R million R million R million R million 37 38 6 6 5 321 329 61 (76) (26) 609 (197) 3 (44) (14) – 7,083 (7,361) 823 366 102 (51) (344) 896 (188) 10 (43) – (21) (766) – 3 (164) 215 168 (76) 41 184 542 253 25 (9) (272) 539 (192) (186) 4 (44) (14) – 4,397 (4,019) 10 (43) – (21) (53) – 3 (530) (1,005) 132 (290) (381) (302) 1,386 (229) (338) 1,724 (376) (60) 343 283 (225) 24 319 343 Total cash at the end of the year 20 1,084 1,386 64 OLD MUTUAL INSURE LIMITED Annual Report 2019 Accounting policies Corporate information Old Mutual Insure Limited is a public company incorporated and domiciled in South Africa. The Group and company financial statements for the year ended 31 December 2019 were authorised for issue in accordance with a resolution of the directors on 12 March 2020. 1. Significant accounting policies  The principal accounting policies applied in the preparation of these Group and company financial statements are set out below: 1.1 Basis of preparation The Group and company financial statements have been prepared on the going concern basis in accordance with, and in compliance with, International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations issued and effective at the time of preparing these financial statements and are in compliance with the Companies Act. These financial statements comply with the requirements of the South African Institute of Chartered Accountants Financial Reporting Guides and the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council and the JSE requirements for financial statements. The financial statements have been prepared on the historic cost convention, unless otherwise stated in the accounting policies which follow and incorporate the principal accounting policies set out below. They are presented in Rand, which is the Group presentation currency. These accounting policies are consistent with the previous period, except for the changes set out in note 3. 1.2 Segmental reporting The segmental results are reported on a basis consistent with the manner in which the Executive committee assesses performance of the underlying businesses and allocated resources. The Group’s reported segments are Commercial lines, Personal lines, Risk financing, Specialty lines and CGIC Guarantee Products. The performance of insurance activities is based on gross written premium as a measure of growth, with net underwriting result as a measure of profitability. The reporting segments are described as follows: • Commercial lines: The commercial business portfolio that serves small to large enterprises by providing commercial insurance solutions that suit the needs of entrepreneurs and businesses. • Personal lines: The personal business portfolio offers a multiproduct and multichannel distribution portfolio that provides individuals with cover through a wide range of products. • Risk financing: Risk financing includes specialist cell captive business. • Specialty: The Specialty business portfolio focuses on the insurance of large and complex risks in niche market segments. • CGIC Guarantee: The main business is that of trade credit insurance in both the domestic and export trade credit insurance market. Segment revenue is revenue that is directly attributable to a segment and the relevant portion of the Group’s revenue that can be allocated on a reasonable basis. Segment expenses are expenses resulting from the operating activities of a segment that are directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis. The segmental information has been set out in note 39. 1.3 Consolidation Basis of consolidation  The consolidated financial statements incorporate the financial statements of the company and all subsidiaries. Subsidiaries are entities (including structured entities) which are controlled by the Group. The Group has control of an entity when it is exposed to or has rights to variable returns from involvement with the entity and it has the ability to affect those returns through use of its power over the entity. The results of subsidiaries are included in the consolidated financial statements from the effective date of acquisition to the effective date of disposal. OLD MUTUAL INSURE LIMITED Annual Report 2019 65 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.3 Consolidation (continued) Adjustments are made when necessary to the financial statements of subsidiaries to bring their accounting policies in line with those of the Group. All inter-company transactions, balances, and unrealised gains on transactions between Group companies are eliminated in full on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Non-controlling interests in the net assets of consolidated subsidiaries are identified and recognised separately from the Group's interest therein, and are recognised within equity. Losses of subsidiaries attributable to non-controlling interests are allocated to the non-controlling interest even if this results in a debit balance being recognised for non-controlling interest. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions and are recognised directly in the statement of changes in equity. The difference between the fair value of consideration paid or received and the movement in non-controlling interest for such transactions is recognised in equity attributable to the owners of the company. Where a subsidiary is disposed of and a non-controlling shareholding is retained, the remaining investment is measured to fair value with the adjustment to fair value recognised in profit or loss as part of the gain or loss on disposal of the controlling interest. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. Investments in subsidiaries in the separate financial statements  In the company's separate financial statements, investments in subsidiaries are carried at fair value. 1.4 Investment in structured entities Special purpose vehicles are those entities directly or indirectly controlled by the Group and include share incentive trusts. To consider if control exists, consideration is given to how decisions about the relevant activities of the trusts are made. Control is assessed on a continuous basis and is reassessed as facts and circumstances change. Special purpose vehicles are consolidated from the date on which the Group obtains control and are deconsolidated when control ceases. Investments in special purpose vehicles in the financial statements of the company are designated as at fair value through profit or loss. 1.5 Investments in associates An associate is an entity over which the Group has significant influence and which is neither a subsidiary nor a joint arrangement. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. It generally accompanies a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method for the Group and company, except when the investment is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are carried in the Statement of Financial Position at cost adjusted for post-acquisition changes in the Group's share of net assets of the associate, less any impairment losses. The Group's share of post-acquisition profit or loss is recognised in profit or loss, and its share of movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. Losses in an associate in excess of the Group's interest in that associate, including any other unsecured receivables, are recognised only to the extent that the Group has incurred a legal or constructive obligation to make payments on behalf of the associate. Dividends declared by associates reduce the carrying value of the equity accounted investments in associates. Any goodwill on acquisition of an associate is included in the carrying amount of the investment, however, a gain on acquisition is recognised immediately in profit or loss. 66 OLD MUTUAL INSURE LIMITED Annual Report 2019 Profits or losses on transactions between the Group and an associate are eliminated to the extent of the Group's interest therein. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. When the Group reduces its level of significant influence or loses significant influence, the Group proportionately reclassifies the related items which were previously accumulated in equity through other comprehensive income to profit or loss as a reclassification adjustment. In such cases, if an investment remains, that investment is measured to fair value, with the fair value adjustment being recognised in profit or loss as part of the gain or loss on disposal. The Group determines at each reporting date whether there is any objective evidence that the investment in associates is impaired. If this is the case, the Group calculates the amount of the impairment as the difference between the recoverable amount of the associate and its carrying value. The carrying amount of such investments is reduced to recognise any impairment in the value of individual investments. 1.6 Property and equipment Property and equipment are tangible assets which the Group holds for its own use or for rental to others and which are expected to be used for more than one year. An item of property and equipment is recognised as an asset when it is probable that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. Property and equipment is initially measured at cost. Cost includes all of the expenditure which is directly attributable to the acquisition or construction of the asset, including the capitalisation of borrowing costs on qualifying assets and adjustments in respect of hedge accounting, where appropriate. Expenditure incurred subsequently for major services, additions to or replacements of parts of property and equipment are capitalised if it is probable that future economic benefits associated with the expenditure will flow to the Group and the cost can be measured reliably. Day-to-day servicing costs are included in profit or loss in the year in which they are incurred. Revaluations are made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting year. When an item of property and equipment is revalued, the gross carrying amount is adjusted consistently with the revaluation of the carrying amount. The accumulated depreciation at that date is adjusted to equal the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses. Any increase in an asset’s carrying amount, as a result of a revaluation, is recognised in other comprehensive income and accumulated in the revaluation reserve in equity. The increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. Any decrease in an asset’s carrying amount, as a result of a revaluation, is recognised in profit or loss in the current year. The decrease is recognised in other comprehensive income to the extent of any credit balance existing in the revaluation reserve in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in the revaluation reserve in equity. The revaluation reserve related to a specific item of property and equipment and is transferred directly to retained income when the asset is derecognised. Depreciation of an asset commences when the asset is available for use as intended by management. Depreciation is charged to write off the asset's carrying amount over its estimated useful life to its estimated residual value, using a method that best reflects the pattern in which the asset's economic benefits are consumed by the Group. Leasehold improvements are depreciated in a consistent manner over the shorter of their expected useful lives and the lease term. Depreciation is not charged to an asset if its estimated residual value exceeds or is equal to its carrying amount. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or derecognised. The useful lives of items of property and equipment have been assessed as follows: Item Depreciation method Average useful life Furniture and fixtures Motor vehicles IT equipment Leasehold improvements Straight-line Straight-line Straight-line Straight-line 6 4 – 5 3 over the lease term OLD MUTUAL INSURE LIMITED Annual Report 2019 67 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.6 Property and equipment (continued) The residual value, useful life and depreciation method of each asset are reviewed at the end of each reporting year. If the expectations differ from previous estimates, the change is accounted for prospectively as a change in accounting estimate. Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The depreciation charge for each year is recognised in profit or loss. Impairment tests are performed on property and equipment when there is an indicator that they may be impaired. When the carrying amount of an item of property and equipment is assessed to be higher than the estimated recoverable amount, an impairment loss is recognised immediately in profit or loss to bring the carrying amount in line with the recoverable amount. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its continued use or disposal. Any gain or loss arising from the derecognition of an item of property and equipment, determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item, is included in profit or loss when the item is derecognised. 1.7 Goodwill and intangible assets An intangible asset is recognised when: • it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and • the cost of the asset can be measured reliably. Intangible assets consist of internally developed computer software. Costs include employee costs of the software development team and an appropriate portion of relevant overheads. Intangible assets are initially recognised at cost. Expenditure on research (or on the research phase of an internal project) is recognised as an expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) is recognised when: • it is technically feasible to complete the asset so that it will be available for use or sale; • there is an intention to complete and use or sell it; • there is an ability to use or sell it; • it will generate probable future economic benefits; • there are available technical, financial and other resources to complete the development and to use or sell the asset; and • the expenditure attributable to the asset during its development can be measured reliably. Intangible assets are carried at cost less any accumulated amortisation and any impairment losses. Intangible assets are amortised on a straight-line basis over their useful life ranging between two to ten years and are expected to have a nil residual value. The amortisation method, period and residual values are reviewed at each reporting period. Internally generated brands, customer lists and items similar in substance are not recognised as intangible assets. The carrying value of intangible assets is reviewed for indicators of impairment annually. If indicators of impairment exist, the particular asset is tested for impairment. An intangible asset that is not yet available for use or has an indefinite useful life is tested for impairment on an annual basis. Goodwill arising from business combinations Goodwill is determined as the consideration paid, plus the fair value of any shareholding held prior to obtaining control, plus non-controlling interest and less the fair value of the identifiable assets and liabilities of the acquiree. If, in the case of a bargain purchase, the result of this formula is negative, then the difference is recognised directly in profit or loss. Goodwill is not amortised but is tested on an annual basis for impairment. If goodwill is assessed to be impaired, that impairment is not subsequently reversed. 68 OLD MUTUAL INSURE LIMITED Annual Report 2019 1.8 Financial instruments Financial instruments held by the Group are classified in accordance with the provisions of IFRS 9 Financial Instruments. Broadly, the classifications, which are adopted by the Group, as applicable, are as follows: Financial assets which are equity instruments are measured at: • Mandatorily at fair value through profit or loss; or • Designated as at fair value through other comprehensive income. This designation is not available to equity instruments which are held for trading or which are contingent consideration in a business combination. Financial assets which are debt instruments are measured at: • Amortised cost. This category applies only when the contractual terms of the instrument give rise, on specified dates, to cash flows that are solely payments of principal and interest on principal, and where the instrument is held under a business model whose objective is met by holding the instrument to collect contractual cash flows; or • Fair value through other comprehensive income. This category applies only when the contractual terms of the instrument give rise, on specified dates, to cash flows that are solely payments of principal and interest on principal, and where the instrument is held under a business model whose objective is achieved by both collecting contractual cash flows and selling the instruments; or • Mandatorily at fair value through profit or loss. This classification automatically applies to all debt instruments which do not qualify as at amortised cost or at fair value through other comprehensive income; or • Designated at fair value through profit or loss. This classification option can only be applied when it eliminates or significantly reduces an accounting mismatch. Financial liabilities: • Amortised cost; or • Mandatorily at fair value through profit or loss. This applies to contingent consideration in a business combination or to liabilities which are held for trading; or • Designated at fair value through profit or loss. This classification option can be applied when it eliminates or significantly reduces an accounting mismatch; the liability forms part of a group of financial instruments managed on a fair value basis; or it forms part of a contract containing an embedded derivative and the entire contract is designated as at fair value through profit or loss. The specific accounting policies for the classification, recognition and measurement of each type of financial instrument held by the Group are presented below: Loans receivable at amortised cost   Classification Amounts due from group companies (note 19), loans to share trusts (note 11), deposits with cedants and loans receivable are classified as financial assets subsequently measured at amortised cost. They have been classified in this manner because the contractual terms of these loans give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding, and the Group's business model is to collect the contractual cash flows on these loans. Recognition and measurement Loans receivable are recognised when the Group becomes a party to the contractual provisions of the loan. The loans are measured, at initial recognition, at fair value plus transaction costs, if any. They are subsequently measured at amortised cost. The amortised cost is the amount recognised on the loan initially, minus principal repayments, plus cumulative amortisation (interest) using the effective interest method of any difference between the initial amount and the maturity amount, adjusted for any loss allowance. Application of the effective interest method Interest income is calculated using the effective interest method, and is included in profit or loss in investment income. The application of the effective interest method to calculate interest income on a loan receivable is dependent on the credit risk of the loan as follows: • The effective interest rate is applied to the gross carrying amount of the loan, provided the loan is not credit impaired. The gross carrying amount is the amortised cost before adjusting for a loss allowance. OLD MUTUAL INSURE LIMITED Annual Report 2019 69 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.8 Financial instruments (continued) Impairment The Group recognises a loss allowance for expected credit losses on all loans receivable measured at amortised cost. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective loans. The Group measures the loss allowance at an amount equal to lifetime expected credit losses (lifetime ECL) when there has been a significant increase in credit risk since initial recognition. If the credit risk on a loan has not increased significantly since initial recognition, then the loss allowance for that loan is measured at 12-month expected credit losses (12 month ECL). Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a loan. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a loan that are possible within 12-months after the reporting date. In order to assess whether to apply lifetime ECL or 12-month ECL, in other words, whether or not there has been a significant increase in credit risk since initial recognition, the Group considers whether there has been a significant increase in the risk of a default occurring since initial recognition rather than at evidence of a loan being credit impaired at the reporting date or of an actual default occurring. Significant increase in credit risk In assessing whether the credit risk on a loan has increased significantly since initial recognition, the Group compares the risk of a default occurring on the loan as at the reporting date with the risk of a default occurring as at the date of initial recognition. The Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort. Forward-looking information considered includes the future prospects of the industries in which the counterparties operate, obtained from economic expert reports, financial analysts, governmental bodies, relevant think-tanks and other similar organisations, as well as consideration of various external sources of actual and forecast economic information. Irrespective of the outcome of the above assessment, the credit risk on a loan is always presumed to have increased significantly since initial recognition if the contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise. By contrast, if a loan is assessed to have a low credit risk at the reporting date, then it is assumed that the credit risk on the loan has not increased significantly since initial recognition. The Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increases in credit risk before the amount becomes past due. Definition of default For purposes of internal credit risk management purposes, the Group consider that a default event has occurred if there is either a breach of financial covenants by the counterparty, or if internal or external information indicates that the counterparty is unlikely to pay its creditors in full (without taking collateral into account). Write-off policy The Group writes off a loan when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings. Loans written off may still be subject to enforcement activities under the Group recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss. Measurement and recognition of expected credit losses The measurement of expected credit losses is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default, taking the time value of money into consideration. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information as described above. The exposure at default is the gross carrying amount of the loan at the reporting date. An impairment gain or loss is recognised for all loans in profit or loss with a corresponding adjustment to their carrying amount through a loss allowance account. The impairment loss is included in other operating expenses in profit or loss as a movement in credit loss allowance. 70 OLD MUTUAL INSURE LIMITED Annual Report 2019 Trade and other receivables Classification Trade and other receivables, excluding, when applicable, VAT and prepayments, are classified as financial assets subsequently measured at amortised cost (note 19). They have been classified in this manner because their contractual terms give rise, on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding, and the Group's business model is to collect the contractual cash flows on trade and other receivables. Recognition and measurement Trade and other receivables are recognised when the Group becomes a party to the contractual provisions of the receivables. They are measured, at initial recognition, at fair value plus transaction costs, if any. They are subsequently measured at amortised cost. The amortised cost is the amount recognised on the receivable initially, minus principal repayments, plus cumulative amortisation (interest) using the effective interest method of any difference between the initial amount and the maturity amount, adjusted for any loss allowance. Impairment The Group recognises a loss allowance for expected credit losses on trade and other receivables, excluding VAT and prepayments. The amount of expected credit losses is updated at each reporting date. The Group measures the loss allowance for trade and other receivables at an amount equal to lifetime expected credit losses (lifetime ECL), which represents the expected credit losses that will result from all possible default events over the expected life of the receivable. Measurement and recognition of expected credit losses The Group makes use of a provision matrix as a practical expedient to the determination of expected credit losses on trade and other receivables. The provision matrix is based on historic credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current and forecast direction of conditions at the reporting date, including the time value of money, where appropriate. The customer base is widespread and does not show significantly different loss patterns for different customer segments. The loss allowance is calculated on a collective basis for all trade and other receivables in totality. An impairment gain or loss is recognised in profit or loss with a corresponding adjustment to the carrying amount of trade and other receivables, through use of a loss allowance account. The impairment loss is included in other operating expenses in profit or loss as a movement in credit loss allowance. Write-off policy The Group writes off a receivable when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings. Receivables written off may still be subject to enforcement activities under the Group recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss. Investments in equity instruments Classification Investments in equity instruments are presented in note 15. They are classified as mandatorily at fair value through profit or loss. As an exception to this classification, the Group may make an irrevocable election, on an instrument by instrument basis, and on initial recognition, to designate certain investments in equity instruments as at fair value through other comprehensive income. The designation as at fair value through other comprehensive income is never made on investments which are either held for trading or contingent consideration in a business combination. Recognition and measurement Investments in equity instruments are recognised when the Group becomes a party to the contractual provisions of the instrument. The investments are measured, at initial recognition, at fair value. All other transaction costs are recognised in profit or loss. Investments in equity instruments are subsequently measured at fair value with changes in fair value recognised either in profit or loss or in other comprehensive income (and accumulated in equity in the reserve for valuation of investments), depending on their classification. OLD MUTUAL INSURE LIMITED Annual Report 2019 71 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.8 Financial instruments (continued) Dividends received on equity investments are recognised in profit or loss when the Group's right to receive the dividends is established, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends are included in investment income (note 33). Impairment Investments in equity instruments are not subject to impairment provisions. Trade and other payables Classification Trade and other payables (note 28), excluding VAT and amounts received in advance, are classified as financial liabilities subsequently measured at amortised cost. Recognition and measurement They are recognised when the Group becomes a party to the contractual provisions, and are measured, at initial recognition, at fair value plus transaction costs, if any. They are subsequently measured at amortised cost using the effective interest method. Trade and other payables expose the Group to liquidity risk and possibly to interest rate risk. Refer to note 43 for details of risk exposure and management thereof. Cash and cash equivalents Cash and cash equivalents are measured at amortised cost. Debt instrument Debt instruments issued by the Group comprise subordinated debt instruments held at amortised cost. Interest accruals are recognised as finance costs in the statement of profit or loss and other comprehensive income. Periodic re-estimation of cash flows to reflect the movements in the market rates of interest will alter the effective interest rate. A floating-rate financial liability is recognised initially at an amount equal to the principal payable on maturity, re-estimating the future interest payments has no significant effect on the carrying amount of the liability. Derecognition Financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Financial liabilities The Group derecognises financial liabilities when, and only when, the Group obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.  Reclassification Financial assets The Group only reclassifies affected financial assets if there is a change in the business model for managing financial assets. If a reclassification is necessary, it is applied prospectively from the reclassification date. Any previously stated gains, losses or interest are not restated. The reclassification date is the beginning of the first reporting period following the change in business model which necessitates a reclassification. Financial liabilities Financial liabilities are not reclassified. 72 OLD MUTUAL INSURE LIMITED Annual Report 2019 1.9 Tax Current tax assets and liabilities Current tax for current and prior periods is, to the extent unpaid, recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities A deferred tax liability is recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from the initial recognition of an asset or liability in a transaction which at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. A deferred tax asset is not recognised when it arises from the initial recognition of an asset or liability in a transaction at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax asset is recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to settle the balances on a net basis. Tax expenses Current and deferred taxes are recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from: • a transaction or event which is recognised, in the same or a different period, to other comprehensive income or equity; or • a business combination. Current tax and deferred taxes are charged or credited to other comprehensive income if the tax relates to items that are credited or charged, in the same or a different period, to other comprehensive income. Current tax and deferred taxes are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly in equity. Withholding tax on dividends and invoices is measured at the amount expected to be paid to the relevant tax authorities in the country from which dividend income or services rendered originates. The tax rates and tax laws used to compute the amount are those that are enacted when the dividend was declared. 1.10 Leases The Group assesses whether a contract is, or contains a lease, at the inception of the contract. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In order to assess whether a contract is, or contains a lease, management determine whether the asset under consideration is "identified", which means that the asset is either explicitly or implicitly specified in the contract and that the supplier does not have a substantial right of substitution throughout the period of use. Once management has concluded that the contract deals with an identified asset, the right to control the use thereof is considered. To this end, control over the use of an identified asset only exists when the Group has the right to substantially all of the economic benefits from the use of the asset as well as the right to direct the use of the asset. In circumstances where the determination of whether the contract is or contains a lease requires significant judgement, the relevant disclosures are provided in the significant judgements and sources of estimation uncertainty section of these accounting policies. OLD MUTUAL INSURE LIMITED Annual Report 2019 73 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.10 Leases (continued) Group as lessee A lease liability and corresponding right-of-use asset are recognised at the lease commencement date, for all lease agreements for which the Group is a lessee, except for short-term leases of 12 months or less, or leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense (note 32) on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. The various lease and non-lease components of contracts containing leases are accounted for separately, with consideration being allocated to each lease component on the basis of the relative stand alone prices of the lease components and the aggregate stand alone price of the non-lease components (where non-lease components exist). However, as an exception to the preceding paragraph, the Group has elected not to separate the non-lease components for leases of land and buildings. Details of leasing arrangements where the Group is a lessee are presented in note 7 Leases (Group as lessee). Lease liability The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: • Fixed lease payments, including in-substance fixed payments, less any lease incentives; • lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option; and • penalties for early termination of a lease, if the lease term reflects the exercise of an option to terminate the lease. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability (or right-of-use asset). The related payments are recognised as an expense in the period incurred and are included in operating expenses. The lease liability is presented as a separate line item on the statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect lease payments made. Interest charged on the lease liability is included in finance costs (note 34). The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) when: • there has been a change to the lease term, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; • there has been a change in the assessment of whether the Group will exercise a purchase, termination or extension option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; and • a lease contract has been modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised payments using a revised discount rate. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recognised in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Right-of-use assets Right-of-use assets are presented as a separate line item on the Statement of Financial Position. Lease payments included in the measurement of the right of use asset comprise the following: • The initial amount of the corresponding lease liability; • any lease payments made at or before the commencement date; • any initial direct costs incurred; 74 OLD MUTUAL INSURE LIMITED Annual Report 2019  • any estimated costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, when the Group incurs an obligation to do so, unless these costs are incurred to produce inventories; and • less any lease incentives received. Right-of-use assets are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. However, if a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. Depreciation starts at the commencement date of a lease. For right-of-use assets which are depreciated over their useful lives, the useful lives are determined consistently with items of the same class of property and equipment. Refer to the accounting policy for property and equipment for details of useful lives. The useful life and depreciation method of each asset are reviewed at the end of each reporting year. If the expectations differ from previous estimates, the change is accounted for prospectively as a change in accounting estimate. Each part of a right-of-use asset with a cost that is significant in relation to the total cost of the asset is depreciated separately. The depreciation charge for each year is recognised in profit or loss unless it is included in the carrying amount of another asset. 1.11 Leases (Comparatives under IAS 17) A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Operating leases – lessee (prior year and short-term leases) Operating lease payments are recognised as an expense on a straight-line basis over the lease term. The difference between the amounts recognised as an expense and the contractual payments are recognised as an operating lease asset. This liability is not discounted. Any contingent rents are expensed in the period they are incurred. 1.12 Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as 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 from the date of classification. Non-current assets and disposal groups are classified as held for distribution to owners when the entity is committed to distribute the asset or disposal group to the owners. This condition is regarded as met only when the distribution is highly probable and the asset or disposal group is available for immediate distribution in its present condition, provided the distribution is expected to be completed within one year from the classification date. Non-current assets or disposal groups held for sale (distribution to owners) are measured at the lower of their carrying amount and fair value less costs to sell (distribute). A non-current asset is not depreciated or amortised while it is classified as held for sale (held for distribution to owners), or while it is part of a disposal group classified as such. Investments which are held for sale are accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. 1.13 Impairment of non-financial assets The Group assesses at each end of the reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, the Group also: • tests intangible assets with an indefinite useful life or intangible assets not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test is performed during the annual period and at the same time every period; and • tests goodwill acquired in a business combination for impairment annually. If there is any indication that an asset may be impaired, the recoverable amount is estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. OLD MUTUAL INSURE LIMITED Annual Report 2019 75 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.13 Impairment of non-financial assets (continued) The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss. An impairment loss of assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in profit or loss. Any impairment loss of a revalued asset is treated as a revaluation decrease. Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, and is not larger than an operating segment as defined by paragraph 5 of IFRS 8 Operating Segments before aggregation. An impairment loss is recognised for cash-generating units if the recoverable amount of the unit is less than the carrying amount of the units. The impairment loss is allocated to reduce the carrying amount of the assets of the unit in the following order: • first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit; and • then, to the other assets of the unit, pro rata on the basis of the carrying amount of each asset in the unit. An entity assesses at each reporting date whether there is any indication that an impairment loss recognised in prior periods for assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amounts of those assets are estimated. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss of assets carried at cost less accumulated depreciation or amortisation other than goodwill is recognised immediately in profit or loss. Any reversal of an impairment loss of a revalued asset is treated as a revaluation increase. 1.14 Share capital and equity Ordinary shares are recognised and classified as 'share capital' in equity. Incremental costs directly attributable to the issue of ordinary shares are recognised in equity as a deduction from the proceeds, net of taxation. Transaction costs of an equity transaction are accounted for as a deduction from the proceeds to the extent that they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. 1.15 Cash-settled share-based payments Services received in a share-based payment transaction are recognised when the services are received. A corresponding increase in a liability is recognised if the services were acquired in a cash-settled share-based payment transaction. When the services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they are recognised as expenses. For cash-settled share-based payment transactions, the services acquired and the liability incurred are measured at the fair value of the liability. 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 profit or loss for the period. Vesting conditions, other than market conditions, are not taken into account when estimating the fair value of cash-settled share-based payment at the measurement dates. These vesting conditions are taken into account by adjusting the number of awards included in the measurement of the liability arising from the transaction. Market conditions and non-vesting conditions are taken into account when estimating the fair value of the cash-settled share-based payment. 76 OLD MUTUAL INSURE LIMITED Annual Report 2019 If the share-based payments granted do not vest until the counterparty completes a specified period of service, the Group accounts for those services as they are rendered by the counterparty during the vesting period, or on a straight-line basis over the vesting period. If the share-based payments vest immediately the services received are recognised in full. In circumstances where the Group is involved in a share-based payment transaction among entities in the Group, the following is applied in the entity’s separate financial statements: • Where the Group settles the share-based payment transaction and another entity in the Group receives the goods or services, the entity recognises the transaction as an equity settled share-based payment transaction only if it is settled in the entity’s own equity instruments. In all other circumstances, the transaction is recognised as a cash-settled share-based payment transaction. 1.16 Employee benefits Short-term employee benefits The cost of short-term employee benefits, (those payable within 12 months after the service is rendered, such as paid vacation leave and sick leave, bonuses, and non-monetary benefits such as medical care), are recognised in the period in which the service is rendered and are not discounted. The expected cost of compensated absences is recognised as an expense as the employees render services that increase their entitlement or, in the case of non-accumulating absences, when the absence occurs. The expected cost of profit sharing and bonus payments is recognised as an expense when there is a legal or constructive obligation to make such payments as a result of past performance. When employees are paid retention bonuses in terms of the retention bonus plan and these beneficiaries are subject to retention periods, the cost associated with the retention bonus plan are recognised in the statement of profit or loss and other comprehensive income over the retention period. Defined contribution plans Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. The Group contributes a fixed percentage of salary in respect of members of the defined contribution pension plans and this cost is recognised as an expense in profit or loss. The Group has no constructive obligation to pay further contributions to the fund if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. Defined benefit plans For defined benefit plans the cost of providing the benefits is determined using the projected unit credit method for a fund closed to new entrants and with less than 5% of the Group’s employees participating in the fund. Actuarial valuations are conducted on an annual basis by independent actuaries separately for each plan. Consideration is given to any event that could impact the fund up to the end of the reporting period where the interim valuation is performed at an earlier date. Past service costs are recognised as an expense at the earlier of the following dates: • when the plan amendment or curtailment occurs; and • when the Group recognises related restructuring cost or termination benefits. Actuarial gains and losses are recognised in the year in which they arise, in other comprehensive income. The amount recognised in the statement of financial position represents the present value of the defined benefit obligation reduced by the fair value of plan assets and adjusted for the asset ceiling. The asset is the lower of the present value of the available refund and reduction in future contribution to the plan and the surplus in the plan. Any asset is limited to recognised actuarial losses and past service costs, plus the present value of available refund and reduction in future contributions to the plan. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the following dates: OLD MUTUAL INSURE LIMITED Annual Report 2019 77 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.16 Employee benefits (continued) • when the entity can no longer withdraw the offer of those benefits; • when the entity recognises costs for a restructuring which involves the payment of termination benefits. Post-employment benefits The Group provides post-retirement medical benefits to qualifying employees who joined the Group prior to 15 March 1999 by way of subsidising medical scheme contributions. The expected costs of these benefits are assessed in accordance with advice of qualified actuaries on an annual basis, using the projected unit credit method. The last valuation was performed at 31 December 2019. Service costs are recognised in profit or loss. Actuarial gains or losses are recognised in other comprehensive income. 1.17 Provisions, commitments and contingencies Provisions are recognised when: • the Group has a present obligation as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • a reliable estimate can be made of the obligation. Provisions are not recognised for future operating losses. If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision. A constructive obligation to restructure arises only when an entity: • has a detailed formal plan for the restructuring, identifying at least: – the business or part of a business concerned; – the principal locations affected; – the location, function, and approximate number of employees who will be compensated for terminating their services; – the expenditures that will be undertaken; and – when the plan will be implemented; and • has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Transactions are classified as contingencies where the Group’s obligations depend on uncertain future events. Items are classified as commitments where the Group commits itself to future transactions with external parties. Contingent assets and contingent liabilities are not recognised. 1.18 Insurance contracts Classification Insurance contracts are classified into two main categories, namely general insurance and cell insurance. General insurance provides benefits under general insurance policies, which include engineering, marine, guarantee, liability, miscellaneous, motor, accident and health, property, transportation and crop policies, or a contract comprising a combination of any of those policies. General insurance contracts are further classified into the following categories: • Personal insurance, consisting of insurance provided to individuals and their personal property. • Commercial insurance, providing cover on the assets and liabilities of business enterprises. • Corporate insurance, providing cover on the assets and liabilities of business enterprises exceeding a limit of R250 000 000. • Credit guarantees. 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 or other beneficiary are classified as insurance contracts. Insurance risk is risk, other than financial risk, transferred from the holder of the contract to the issuer. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event that is significantly more than the benefits payable if the insured event did not occur. 78 OLD MUTUAL INSURE LIMITED Annual Report 2019 Premiums Premiums exclude value-added taxation and any other foreign indirect taxes. Premiums are earned from the date of attachment of risk, spread over the indemnity period by using an unearned premium provision, based on the pattern of risks underwritten and are recognised in profit or loss. This includes premiums received in terms of inward reinsurance arrangements. All premiums are shown before deduction of commission payable to intermediaries. Premiums on reinsurance assumed are included in gross written premiums as if this was direct business taking into account the product classification of the reinsured business and are recognised in profit or loss. Claims incurred Claims incurred consist of claims and claims-handling expenses paid during the financial year, together with the movement in the provision for outstanding claims. Claims outstanding comprise provisions for the Group’s estimate of the ultimate cost of settling all claims incurred, but unpaid at the reporting date, whether reported or not, and an appropriate risk margin. Adjustments to the amounts of claims provisions established in prior years are reflected in profit or loss for the period in which the adjustments are made and disclosed separately, if material. The ultimate cost of the reported claims may vary as a result of future developments or better information becoming available about the current circumstances. Case estimates are therefore reviewed regularly and updated if new information becomes available. The provisions for the notified claims are initially estimated at a gross level. Each notified claim is assessed on a separate, case-by-case basis with due regard to the specific circumstances, information available from the insured and/or loss adjuster and past experience with similar claims. The provision for each notified claim includes value-added taxation, where applicable. Claims incurred but not yet reported (IBNR) The IBNR provision is initially estimated at a gross level and incorporates future developments on the case estimates of notified claims (claims incurred but not enough reported or “IBNER”) and claims reported after the reporting date (true IBNR claims). The IBNR provision consists of a best-estimate reserve and an explicit risk margin. Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (salvage). The Group also has the right to pursue third parties for payment on some or all costs (subrogation). After the occurrence of a cause of loss or payment of an indemnity, the insured, at the request of the Group, remains obligated to take all reasonable steps, including legal proceedings, in order to obtain recoveries from whatever source. Any salvage and subrogation collected by the insured or the Group shall be shared in proportion to their respective interests. Estimates of salvage and subrogation receivables are raised as a separate asset only when the reimbursement has a high probability of certainty and movements in the asset are recognised in profit or loss. Unexpired risk provision Provision is made for unexpired risks arising where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the reporting date exceeds the unearned premium provision in relation to such policies after the deduction of any deferred acquisition costs. Movements in the unexpired risk provision are recognised in profit or loss. The net liability recognised for insurance contracts is tested for adequacy by discounting current estimates of all future contractual cash flows and comparing this amount to the carrying value of the total insurance liability net of deferred acquisition costs. Where a shortfall is identified, an additional provision is made and the Group recognises the deficiency in profit or loss for the year. Unearned premium provision The provision for unearned premiums represents the portion of the current year’s premiums that relate to risk periods extending into the following year. The Group raises provisions for unearned premiums on a basis that reflects the underlying risk profile of its insurance contracts. An unearned premium provision is created at the commencement of each insurance contract and is then released as the risk under the contract expires. The majority of the Group’s insurance contracts have an even risk profile. Movement in the gross and reinsured earned premium provision is recognised in profit or loss. Low claims and no-claims bonus OLD MUTUAL INSURE LIMITED Annual Report 2019 79 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.18 Insurance contracts (continued) Included in the unearned premium provision is a provision made for probable future low claims and no-claims cash bonus payments. The probability of paying out the provision is calculated based on claim frequency and lapse assumptions for active policies and based on the total number of event-free months. A low claims or no-claims bonus is paid to policyholders based on a fixed calculation as per endorsements that form part of the insurance contract. The bonuses are paid upon the policyholder meeting certain criteria in terms of their policy for a specific underwriting year. The low-claims bonus is determined over a 12-month period and is calculated as a percentage of premium, less net claims paid during the bonus period. The no-claims bonus becomes payable after the 12-month period of the expired policy, provided that no indemnity has been paid and that a written confirmation has been received from the insured that no claim will be payable in respect of insurable transactions concluded during the period. A provision is made for unpaid bonuses at each reporting date and movements in the provision are recognised in profit or loss. Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the transfer of its risks. Only reinsurance agreements that give rise to a significant transfer of insurance risk are accounted for as reinsurance contracts. Reinsurance agreements that do not transfer significant insurance risk are accounted for as financial assets. Reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. A separate calculation is carried out to determine the estimated reinsurers’ share of insurance liabilities. The calculation of these reinsurance recoveries considers the type of risk underwritten, the year the gross claim occurred and therefore under which reinsurance contract the recovery will be made, the size of the claim and whether the claim was an isolated incident or forms part of a catastrophe reinsurance claim. The asset is then estimated using similar methods to those used to estimate the gross provision. There is no risk margin added to the best estimate of reinsurance IBNR provisions, consistent with the treatment of other insurance assets. Amounts recoverable under reinsurance contracts are recognised in the same year as the related claim and are assessed for impairment at each reporting date. Such assets are 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. Movements in reinsurance assets are accounted for in profit or loss. Acquisition cost and deferred acquisition costs Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costs incurred in order to secure new contracts and renewing of existing contracts and are deferred over the period in which the related premiums are earned, and recognised as an asset. Acquisition costs relevant for the financial period (including the movement in deferred acquisition costs) are recognised in profit or loss. All other costs are recognised as expenses when incurred. Commission income Commission income comprises commissions earned in respect of reinsurance contracts. Commission income is recognised on the effective commencement or renewal date of the reinsurance contract. A portion of the income is deferred when further servicing is required to be rendered. The amount deferred is that which will cover the expected future servicing costs, together with a reasonable profit thereon, and is recognised as a liability. Deferred income is recognised in profit or loss evenly over the period of the policy. Where commission income is earned on an indemnity basis, provision is made for the potential repayment of commissions. Agents’ and reinsurers’ balances Agents’ and reinsurers’ balances are measured at transaction price when due, and the Group is of the opinion that the carrying values of these receivables are a reasonable approximation of fair value. The amounts include amounts due to and from agents, brokers and insurance contract holders. Portfolio impairment allowance Included in the agents' and reinsurance balances are a portfolio impairment allowance and specific allowances for possible losses. A loss allowance is recognised for amounts due from agents and reinsurers and is monitored at the end of each reporting period. In addition to the loss allowance, amounts due from agents and reinsurers are 80 OLD MUTUAL INSURE LIMITED Annual Report 2019 written off when there is no reasonable expectation of recovery, for example, when a debtor has been placed under liquidation. Amounts due from agents and reinsurers which have been written off are not subject to enforcement activities. The Group measures the loss allowance for amounts due from agents and reinsurers by applying the simplified approach which is prescribed by IFRS 9. In accordance with this approach, the loss allowance on amounts due from agents and reinsurers is determined as the lifetime expected credit losses on amounts due from agents and reinsurers. These lifetime expected credit losses are estimated using a provision matrix. The provision matrix has been developed by making use of past default experience of debtors but also incorporates forward looking information and general economic conditions of the industry as at the reporting date. Deposits with reinsurers and cedants Deposits with reinsurers and cedants are cash held by the Group on behalf of reinsurers and cedants. Amounts payable to cell owners The Group offers cell captive facilities to clients. A cell captive is a contractual arrangement entered into by the Group with a cell shareholder, whereby the risks and rewards associated with certain insurance activities accrue to the cell shareholder. Cell captives allow clients to purchase non-convertible preference shares in the registered insurance company which undertakes the professional insurance management of the cell, including underwriting, reinsurance, claims management, actuarial and statistical analysis, investment and accounting services. The terms and conditions are governed by the shareholders’ agreement. There are currently two distinct types of cell captive arrangements. First party cell captive arrangements, where the cell owner insures their own risk. First party cell captives arrangements are accounted for as financial liabilities. Third party cell captive arrangements where the cell owner provides the opportunity to its own client base to purchase branded insurance products. The insurance company is the principal to the insurance contract, although the business is underwritten on behalf of the cell owner. The shareholder’s agreement, however, determines that the cell owner remains responsible for the solvency of the cell captive arrangements. In substance, the insurance company therefore reinsures this business to the cell owner as the cell owner remains responsible for the solvency of the cell captive arrangement. The cell shareholder’s interest represents the cell shareholder’s funds, in respect of the insurance business conducted in the cell structures, held by the insurer and is included in amounts payable to cell owners. The carrying value of amounts payable to cell owners is the consideration received for preference shares plus the accumulated funds in respect of business conducted in the cells less repayment to cell owners. 1.19 Investment returns Investment returns comprises interest, dividends, as well as net fair value gains or losses on financial assets held at fair value through profit or loss. Interest income is presented separately from fair value movements. Investment income is accounted for as follows: • interest income is recognised in profit or loss as it accrues, using the effective interest method; • dividend income is recognised in profit or loss when the right to receive payment is established; and • net unrealised and realised profits and losses on financial assets held at fair value through profit or loss comprise of gains and losses on disposal or revaluation of assets to fair values and are recognised in profit or loss. 1.20 Finance cost Finance costs are recognised in profit or loss in the period they are incurred using the effective interest method. 1.21 Translation of foreign currencies Functional and presentation currency The consolidated financial statements are presented in Rand which is the Group's presentation currency. The functional currency of the separate financial statements of the Group entities are in Rand, except for Mutual and Federal Company of Zimbabwe which is presented in RTGS and Old Mutual Holdings (Mauritius) Limited and its subsidiaries which are presented in United States Dollar. Foreign currency transactions A foreign currency transaction is recorded, on initial recognition in Rand, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of the reporting period: OLD MUTUAL INSURE LIMITED Annual Report 2019 81 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements1. Significant accounting policies (continued) 1.21 Translation of foreign currencies (continued) • foreign currency monetary items are translated using the closing rate; • non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction; and • non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. In circumstances where the Group receives or pays an amount in foreign currency in advance of a transaction, the transaction date for purposes of determining the exchange rate to use on initial recognition of the related asset, income or expense is the date on which the Group initially recognised the non-monetary item arising on payment or receipt of the advance consideration. If there are multiple payments or receipts in advance, the Group determines a date of transaction for each payment or receipt of advance consideration. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognised in profit or loss in the period in which they arise. When a gain or loss on a non-monetary item is recognised to other comprehensive income and accumulated in equity, any exchange component of that gain or loss is recognised to other comprehensive income and accumulated in equity. When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised in profit or loss. Cash flows arising from transactions in a foreign currency are recorded in Rand by applying to the foreign currency amount the exchange rate between the Rand and the foreign currency at the date of the cash flow. Investments in subsidiaries and associates as foreign operations The results and financial position of a foreign operation are translated into the functional currency using the following procedures: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; • income and expenses for each item of profit or loss are translated at exchange rates at the dates of the transactions. Exchange differences arising on a monetary item that forms part of a net investment in a foreign operation are recognised initially to other comprehensive income and accumulated in the translation reserve. Such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation. 1.22 Significant judgements and sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requires management, from time to time, to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. These estimates and associated assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Key sources of estimation uncertainty 82 OLD MUTUAL INSURE LIMITED Annual Report 2019 Fair value estimation Several assets and liabilities of the Group are either measured at fair value or disclosure is made of their fair values. The Old Mutual Insure Capital Management Committee approves the assumptions and inputs applied in the fair value calculations relating to investments in subsidiaries, associates, unlisted shares and share trusts. Observable market data is used as inputs to the extent that it is available. The valuation model used to determine the value of the subsidiaries is sensitive to the inputs (the projected business plans) as well as the assumptions (risk-adjusted discount rates) used. Judgement is applied in deriving these inputs and assumptions as set out in Note 9. Impairment testing The Group reviews and tests the carrying value of assets when events or changes in circumstances suggest that the carrying amount may not be recoverable. When such indicators exist, management determine the recoverable amount by performing value in use and fair value calculations. These calculations require the use of estimates and assumptions. When it is not possible to determine the recoverable amount for an individual asset, management assesses the recoverable amount for the cash-generating unit to which the asset belongs. Valuation of insurance policy liabilities and assets Claims incurred The Group's estimates for reported and unreported claims are continually reviewed and updated, and adjustments resulting from this review are reflected in profit or loss. The process relies upon the assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events as set out in note 23. Incurred but not reported claims (IBNR) The IBNR provision comprises the Group's estimate at a 75% confidence level of the undiscounted cost of settling all claims incurred but not yet reported at the reporting date and related claims handling expenses. The assumptions used in the calculation is set out in note 23. Subrogation and salvage recoveries An asset is raised for expected subrogation and salvage recoveries that have occurred, whether reported or based on past experience. The ultimate amounts recovered will vary as a result of subsequent information and events and may result in significant adjustments to the amounts estimated. The methods used to determine the expected amounts are reviewed regularly by management. The assumptions used in the calculation is set out in note 23. Defined post-employment benefits Assumptions are made regarding the discount rates, inflation rates and retirement ages in calculating the Group’s post-retirement medical benefits. Details of these assumptions are set out in note 13. Share-based payment liability  The judgement applied in valuing the cash-settled share-based payment liability for employees relates to the assumption of the expected employee attrition and the associated vesting that is expected for each tranche of shares issued as set out in note 25. OLD MUTUAL INSURE LIMITED Annual Report 2019 83 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statementsNotes to the group and company Financial Statements 2. New Standards and Interpretations 2.1 Standards and interpretations effective and adopted in the current year In the current year, the Group has adopted the following standards and interpretations that are effective for the current financial year and that are relevant to its operations: IFRS 16 Leases IFRS 16 Leases is a new standard which replaces IAS 17 Leases, and introduces a single lessee accounting model. The main changes arising from the issue of IFRS 16 which are likely to impact the Group are as follows:  Group as lessee: • Lessees are required to recognise a right-of-use asset and a lease liability for all leases, except short-term leases or leases where the underlying asset has a low value, which are expensed on a straight-line or other systematic basis. • The cost of the right-of-use asset includes, where appropriate, the initial amount of the lease liability; lease payments made prior to commencement of the lease less incentives received; initial direct costs of the lessee; and an estimate for any provision for dismantling, restoration and removal related to the underlying asset. • The lease liability takes into consideration, where appropriate, fixed and variable lease payments; residual value guarantees to be made by the lessee; exercise price of purchase options; and payments of penalties for terminating the lease. • The right-of-use asset is subsequently measured on the cost model at cost less accumulated depreciation and impairment and adjusted for any re-measurement of the lease liability. However, right-of-use assets are measured at fair value when they meet the definition of investment property and all other investment property is accounted for on the fair value model. If a right-of-use asset relates to a class of property, plant and equipment which is measured on the revaluation model, then that right-of-use asset may be measured on the revaluation model. • The lease liability is subsequently increased by interest, reduced by lease payments and re-measured for reassessments or modifications. • Re-measurements of lease liabilities are affected against right-of-use assets, unless the assets have been reduced to nil, in which case further adjustments are recognised in profit or loss. • The lease liability is re-measured by discounting revised payments at a revised rate when there is a change in the lease term or a change in the assessment of an option to purchase the underlying asset. • The lease liability is re-measured by discounting revised lease payments at the original discount rate when there is a change in the amounts expected to be paid in a residual value guarantee or when there is a change in future payments because of a change in index or rate used to determine those payments. • Certain lease modifications are accounted for as separate leases. When lease modifications which decrease the scope of the lease are not required to be accounted for as separate leases, then the lessee re-measures the lease liability by decreasing the carrying amount of the right of lease asset to reflect the full or partial termination of the lease. Any gain or loss relating to the full or partial termination of the lease is recognised in profit or loss. For all other lease modifications which are not required to be accounted for as separate leases, the lessee re-measures the lease liability by making a corresponding adjustment to the right-of-use asset. • Right-of-use assets and lease liabilities should be presented separately from other assets and liabilities. If not, then the line item in which they are included must be disclosed. This does not apply to right-of-use assets meeting the definition of investment property which must be presented within investment property. IFRS 16 contains different disclosure requirements compared to IAS 17 leases. The effective date of the standard is for years beginning on or after 01 January 2019. The Group has adopted the standard for the first time in the 2019 financial statements. The impact of the standard is set out in note 3 Changes in Accounting Policy. 84 OLD MUTUAL INSURE LIMITED Annual Report 2019 2.2 Standards and interpretations not yet effective The Group has chosen not to early adopt the following standards and interpretations, which have been published and are mandatory for the Group’s accounting periods beginning on or after 01 January 2020 or later periods: IFRS 17 Insurance Contracts IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It will replace IFRS 4 Insurance Contracts. The effective date of the standard is for years beginning on or after 1 January 2021, with comparative numbers for 2020 (however the IASB has made a tentative decision to defer the effective date to 2023, subject to due process). The standard combines current measurement of the future cash flows with the recognition of profit over the services period under the contract. The standard looks at the presentation of insurance revenue separately from insurance finance income or expenses and requires and entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income. The Old Mutual Limited Group has instituted an implementation programme under the sponsorship of the Old Mutual Limited Chief Financial Officer, who chairs a programme steering committee consisting of senior finance, actuarial and information technology executives from impacted business areas. The company, as a specific IFRS 17 focus area within Old Mutual Limited, has established a project within the Old Mutual Limited programme structure. The company’s project is governed by a delivery committee, which consists of senior finance and actuarial managers who make decisions on scope, design and enablement for their relevant focus areas. All decisions relating to the interpretation of the standard (i.e. policies and methodologies) are made by a Technical Review Committee (TRC), which consists of actuarial and finance subject matter experts across the company. Ratification of major decisions is done by the Old Mutual Limited programme steering committee. Project resources include a mix of dedicated and shared internal technical experts, as well as external consultants where appropriate. During 2017, 2018 and 2019, the company completed a gap analysis, initial impact assessments and provided training to the actuarial and finance teams. Progress has been made on the development of accounting and actuarial policies and methodologies for the company, with formal sign off from the TRC on each version of a paper, as well as outcomes of investigations. This also includes a comprehensive product classification model. The company’s project is in the process of defining detailed enablement requirements and is also currently focusing on implementing a procured IFRS 17 reporting solution. 2.3 Standards and interpretations effective and not yet effective and not material to the Group The following standards and interpretations have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2019 or later periods but are not material to its operations:  Standard/ Interpretation Effective date: Years beginning  on or after • Definition of a business – Amendments 1 January 2020 to IFRS 3 • Presentation of Financial Statements: 1 January 2020 Disclosure initiative • Accounting Policies, Changes in 1 January 2020 Accounting Estimates and Errors: Disclosure initiative • Plan Amendment, Curtailment or 1 January 2019 Settlement – Amendments to IAS 19 • Long–term Interests in Joint Ventures 1 January 2019 and Associates – Amendments to IAS 28 • Prepayment Features with Negative 1 January 2019 Compensation – Amendment to IFRS 9 • Amendments to IFRS 3 Business 1 January 2019 Combinations: Annual Improvements to IFRS 2015 – 2017 cycle Expected impact: Unlikely there will be a material impact Unlikely there will be a material impact Unlikely there will be a material impact The impact of the amendment is not material. The impact of the amendment is not material. The impact of the amendment is not material. The impact of the amendment is not material. OLD MUTUAL INSURE LIMITED Annual Report 2019 85 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesFinancial statements    2. New standards and interpretations (continued) 2.3 Standards and interpretations effective and not yet effective and not material to the Group (continued) Standard/ Interpretation Effective date: Years beginning  on or after Expected impact: • Amendments to IFRS 11 Joint 1 January 2019 The impact of the amendment is not material. Arrangements: Annual Improvements to IFRS 2015 – 2017 cycle • Amendments to IAS 12 Income Taxes: Annual Improvements to IFRS 2015 – 2017 cycle 1 January 2019 The impact of the amendment is not material. • IFRIC 23 Uncertainty Over Income Tax 01 January 2019 Treatments The impact of the amendment is not material. 3. Changes in accounting policy The financial statements have been prepared in accordance with International Financial Reporting Standards on a basis consistent with the prior year except for the adoption of the following new standard. Application of IFRS 16 Leases In the current year, the company has adopted IFRS 16 Leases (as issued by the IASB in January 2016) with the date of initial application being 1 January 2019. IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC 27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating and finance leases and requiring the recognition of a right-of-use asset and a lease liability at the lease commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged. Details of these new requirements are described in the accounting policy for leases. The impact of the adoption of IFRS 16 on the Group’s financial statements is described below. The lease agreement for 1 Mutual Place is with a related party. The floor space can change annually to meet demand requirements to ensure optimal usage of the premises. The lease amount is variable according to the floor space consumed. The rental charges of leases with variable rates are expensed as they are incurred. IFRS 16 has been adopted by applying the modified retrospective approach, whereby the comparative figures are not restated. Leases where Group is lessee Leases previously classified as operating leases    The Group undertook the following at the date of initial application for leases which were previously recognised as operating leases: • Recognised a lease liability, measured at the present value of the remaining lease payments, discounted at the Group’s weighted average incremental borrowing rate at the date of initial application. • Recognised right-of-use assets measured on a lease by lease basis at an amount equal to the lease liability adjusted for accruals or prepayments relating to that lease prior to the date of initial application. The Group did not apply IAS 36 to consider if these right-of-use assets are impaired, but rather applied the practical expedient of IFRS 16 par C10(b). In accordance with this practical expedient, the carrying amounts were adjusted with the amount of any onerous provision which existed immediately prior to the date of initial application. As an exception to the above, no adjustments were made on initial application of IFRS 16 for leases previously classified as operating leases: • for which the underlying asset is of low value. From the date of initial application, these leases are accounted for in accordance with paragraph 6 of IFRS 16 by recognising the lease payments on a straight-line basis or another systematic basis which is more representative of the pattern of benefits consumed. 86 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)    The Group applied the following practical expedients when applying IFRS 16 to leases previously classified as operating leases in terms of IAS 17. Where necessary, they have been applied on a lease by lease basis: • when a portfolio of leases contained reasonably similar characteristics, the Group applied a single discount rate to that portfolio; • leases which were expiring within 12 months of 1 January 2019 were treated as short-term leases, with remaining lease payments recognised as an expense on a straight-line basis or another systematic basis which is more representative of the pattern of benefits consumed; • hindsight was applied where appropriate. This was specifically the case for determining the lease term for leases which contained extension or termination options. Impact on financial statements On transition to IFRS 16, the Group recognised an additional R101 million of right-of-use assets and R101 million of lease liabilities. When measuring lease liabilities, the Group discounted lease payments using its weighted average incremental borrowing rate at 1 January 2019. The weighted average rate applied is 9%. 4. Goodwill Group 2019 2018 Cost R million Accumulated impairment R million Carrying value R million Cost R million Accumulated impairment R million Carrying value R million Goodwill 21 – 21 21 – 21 Reconciliation of goodwill – Group – 2019 Goodwill Reconciliation of goodwill – Group – 2018 Opening balance R million Total R million 21 21 Opening balance R million Additions through business combinations R million Total R million Goodwill – 21 21 The goodwill relates to a 100% equity stake in Sintelum Proprietary Limited. The value of goodwill is reviewed annually for indicators of impairment. The Group uses a discounted cashflow methodology to make this assessment. Cashflows are projected over a three-year period, with a growth rate of 5% and discounted at a rate of 17%. There were no indicators of impairment of goodwill. 5. Intangible assets Group 2019 2018  Cost R million Accumulated amortisation R million Carrying value R million Cost R million Accumulated amortisation R million Carrying value R million Computer software 848 (674) 174 804 (642) 162 Company Computer software 848 (674) 174 804 (642) 162 OLD MUTUAL INSURE LIMITED Annual Report 2019 87 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements5. Intangible assets (continued) Reconciliation of intangible assets – Group – 2019 Opening balance R million Additions Amortisation R million R million Total R million Computer software 162 44 (32) 174 Reconciliation of intangible assets – Group – 2018 Opening balance R million Additions Amortisation R million R million Impairment loss R million Total R million Computer software 161 43 (32) (10) 162 Reconciliation of intangible assets – Company – 2019 Opening balance R million Additions Amortisation R million R million Total R million Computer software 162 44 (32) 174 Reconciliation of intangible assets – Company – 2018 Opening balance R million Additions Amortisation R million R million Impairment loss R million Total R million Computer software 161 43 (32) (10) 162 6. Property and equipment Group 2019 2018 Cost or revaluation R million Accumulated depreciation R million Carrying value R million Cost or revaluation R million Accumulated depreciation R million Carrying value R million Buildings Furniture and fixtures Motor vehicles IT equipment Leasehold improvements Total 1 109 16 574 40 740 – (49) (7) (431) (4) (491) 1 60 9 143 36 249 3 45 16 504 – 568 (1) (41) (7) (390) – (439) 2 4 9 114 – 129 88 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Company 2019 2018 Cost or revaluation R million Accumulated depreciation R million Carrying value R million Cost or revaluation R million Accumulated depreciation R million Carrying value R million Buildings Furniture and fixtures Motor vehicles IT equipment Leasehold improvements Total  1 106 8 552 39 706 – (47) (3) (414) (4) (468) 1 59 5 138 35 238 3 41 8 470 – 522 (1) (39) (3) (359) – (402) 2 2 5 111 – 120 Reconciliation of property and equipment – Group – 2019  Buildings Furniture and fixtures Motor vehicles IT equipment Leasehold improvements Opening balance R million 2 4 9 114 – 129 Additions R million Disposals R million Transfers Depreciation R million R million Total R million 1 66 1 92 37 197 – (2) – (1) – (3) (2) – – – – 2 – (8) (1) (62) (3) (74) 1 60 9 143 36 249 Reconciliation of property and equipment – Group – 2018 Opening balance Additions Disposals  R million R million R million Classified as held for sale Revalua- tions* Other changes, move- ments Depreci- ation Impair- ment loss Total R million R million R million R million R million R million Buildings Furniture and fixtures Motor vehicles IT equipment 161 6 14 72 89 2 3 94 253 188 – – – (10) (10) (243) – – – (243) 5 – – – 5 – – – 1 1 (10) (4) (3) (43) (60) – – (5) – (5) 2 4 9 114 129 Reconciliation of property and equipment – Company – 2019  Buildings Furniture and fixtures Motor vehicles IT equipment Leasehold improvements Opening balance R million 2 2 5 111 – 120 Additions R million Disposals R million Transfers Depreciation R million R million Total R million 1 66 1 88 36 192 – (1) – (3) – (4) 2 – – – 2 4 – (8) (1) (58) (3) (70) 1 59 5 138 35 238 OLD MUTUAL INSURE LIMITED Annual Report 2019 89 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements6. Property and equipment (continued) Reconciliation of property and equipment – Company – 2018 Opening balance Additions Disposals   R million R million R million Classified as held for sale Revalua- tions* Other changes, move- ments Depreci- ation Impair- ment loss Total R million R million R million R million R million R million Buildings Furniture and fixtures Motor vehicles IT equipment 159 4 14 68 88 1 3 94 245 186 *Revaluations – – – (10) (10) (243) – – – (243) 5 – – – 5 2 – (5) 1 (2) (9) (3) (2) (42) (56) – – (5) – (5) 2 2 5 111 120 The Group received an offer to purchase shortly before the 2018 year end which was deemed to be market-related and determined at arm’s-length. The offer price in the offer to purchase was determined to be the most appropriate value of the land and buildings. The valuation reflects the highest and best use of the property. The property has been reclassified in 2018 to non-current assets held for sale and no further revaluations were performed. 7. Leases (Group as lessee) The Group leases several assets, including buildings, office equipment and motor vehicles. The lease of Wanooka Place makes up the majority of the right-of-use asset, which has a lease term of seven years. All future cashflows to which the lessee is potentially exposed are reflected in the measurement of lease liabilities. Details pertaining to leasing arrangements, where the Group is lessee are presented below: The Group adopted IFRS 16 for the first time in the current financial period. Comparative figures have been accounted for in accordance with IAS 17, the previous accounting standard on leases. The information presented in this note for right-of- use assets period therefore only includes the current period. Net carrying amounts of right-of-use assets The carrying amounts of right-of-use assets are as follows: GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 449 4 25 478 – – – 446 4 25 475 – – – – Leasehold property Office equipment Motor vehicles 90 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Additions to right-of-use assets Leasehold property Office equipment Motor vehicles GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 494 6 35 535 – – – – 489 6 35 530 – – – – Depreciation recognised on right-of-use assets Depreciation recognised on each class of right-of-use assets, is presented below. It includes depreciation which has been expensed in the total depreciation charge in profit or loss (note 32).  Leasehold property Office equipment Motor vehicles Other disclosures Interest expense on lease liabilities Expenses on short term leases included in operating expenses Variable lease payments not included in the measurement of lease liabilities included in operating expenses Lease liabilities GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 45 2 10 57 23 5 44 – – – – – – – 43 2 10 55 23 5 44 – – – – – – Lease liabilities have been disclosed separately on the statement of financial position. The maturity analysis of lease liabilities is as follows:  Within one year Two to five years More than five years Lease liabilities GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 100 402 148 650 494 – – – – 100 402 148 650 491 – – – – OLD MUTUAL INSURE LIMITED Annual Report 2019 91 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                      8. Deferred tax The deferred tax asset and the deferred tax liability relate to income tax in the same jurisdiction, and the accounting standards allow net settlement. Deferred tax liability Deferred tax liability Deferred tax asset Deferred tax asset Total net deferred tax liability Reconciliation of deferred tax asset/(liability) At beginning of year Decrease in post-retirement medical aid provision Decrease in other provisions and impairments Decrease in prepayments Decrease in straight-lining of operating leases Increase in urban development zone allowance Increase in motor vehicle residual value Increase/(decrease) in capital gains taxation Increase/(decrease) in investments and securities Increase in cashback, salvages and subrogation Movement in leases Increase in amortisation of software GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million (41) (103) 41 – (36) (2) 37 (1) – – – 1 15 3 (31) 14 – 67 (36) (36) (3) (213) (12) (3) 27 1 110 3 65 – 25 (36) 8 8 46 (2) (32) – – – – 1 (20) 3 (2) 14 8 – 46 46 50 (3) (81) (12) (3) 27 1 (14) (10) 65 – 26 46 92 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)9. Interests in subsidiaries including consolidated structured entities The following table lists the entities which are controlled by the Group, either directly or indirectly through subsidiaries: Group Name of company Held by Nature of business % holding 2019 % holding 2018 Mutual and Federal Risk Financing Limited Old Mutual Insure Limited Cell captive insurer Credit Guarantee Insurance Corporation of Africa Limited Cougar Investment Holding Company Limited Old Mutual Insure Limited Old Mutual Insure Limited Credit insurer Investment holding Elite Risk Acceptances Proprietary Limited Old Mutual Insure Limited Non-mandated intermediary Sintelum Proprietary Limited Old Mutual Insure Limited Underwriting management agency Mutual and Federal Company of Zimbabwe (Private) Limited Old Mutual Insure Limited Investment holding Old Mutual Holdings (Mauritius) Limited Old Mutual Insure Limited Investment holding Old Mutual Reinsurance (Mauritius) Limited Old Mutual Holdings (Mauritius) Limited Reinsurer Old Mutual Business Services (Mauritius) Limited Old Mutual Holdings (Mauritius) Limited Business services Old Mutual Specialty Insurance (Mauritius) Limited Old Mutual Holdings (Mauritius) Limited Insurer The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad-based Black Economic Empowerment Employee Trust Incentive trust Incentive trust Incentive trust Incentive trust 100.00 % 100.00 % 75.00 % 75.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % Incentive trust 100.00 % 100.00 % The following table lists the entities which are controlled directly by the company, and the carrying amounts of the investments in the company’s separate financial statements: OLD MUTUAL INSURE LIMITED Annual Report 2019 93 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                    9. Interests in subsidiaries including consolidated structured entities (continued) Company Name of company Held by % holding  2019 % holding 2018 Carrying amount 2019 Carrying amount 2018 Mutual and Federal Risk Financing Limited Credit Guarantee Insurance Corporation of Africa Limited Cougar Investment Holding Company Limited Elite Risk Acceptances Proprietary Limited Sintelum Proprietary Limited Mutual and Federal Company of Zimbabwe (Private) Limited Old Mutual Holdings (Mauritius) Limited 100.00 % 100.00 % 75.00 % 75.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 180 963 77 6 92 86 22 1,426 178 1,016 169 2 22 137 24 1,548 Investment in Mutual and Federal Company of Zimbabwe (Private) Limited The reporting and translation of the Zimbabwe operations has been significantly impacted by recent Monetary Policy changes in Zimbabwe. On 1 October 2018, the Reserve Bank of Zimbabwe (RBZ) instructed banks to separate bank accounts into FCA Nostro (US Dollar balances (USD)) and FCA Real Time Gross Settlement (RTGS balances (RTGS)). This has resulted in the need for the Group to reassess the functional currency of the Zimbabwe operations in accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates. It was determined that the functional currency changed to RTGS Dollars with effect from 1 October 2018. On 20 February 2019 the RBZ announced that the RTGS would be recognised as an official currency and that an inter-bank foreign exchange market would be established to formalise trading in RTGS with other currencies. This further confirmed the change in functional currency of the Zimbabwe operations. Due to the lack of a relevant and credible, observable legal exchange rate at which to translate the operations from RTGS into the Group’s presentation currency, the Group has calculated the exchange rate to be utilised for the translation of its Zimbabwe operations whose functional currency now is the RTGS. The Group applied the Old Mutual Limited (OML) Group rate. In deriving at the rate OML derived the rate by: • Assessing the economic developments and RBZ Monetary Policy Announcements (MPA) that informed that the RTGS Dollars had become the de-facto currency of Zimbabwe and was no longer at parity with the US Dollar with effect from 1 October 2018. • Assessing the factors around the availability of a relevant exchange rate that was legal and observable, that would meet the criteria for use as a rate in terms of extracting dividends or net investments in an entity and concluding that no such rate was available leading to the use of estimated exchange rate for translation of the Zimbabwe operations with effect from 1 October 2018. • Reviewing the directors’ calculation of the estimated rate and challenging the methodology and judgements used. 94 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued) • With assistance of a valuation specialist, assessing the merits of a number of possible approaches to calculating the exchange rate and subsequently assessing the validity of the directors’ adopting those as inputs to their calculation. • Recalculating the directors’ sensitivity analysis on the significant assumptions to evaluate the extent of their impact on the disclosed values. • Assessing the appropriateness and adequacy of the Group’s disclosures in accordance with IFRS. Based on the procedures described above, the methodology used by the OML directors to estimate the exchange rate used in the translation of the Zimbabwe operations was found to be appropriate. The table below summarises the exchange rates at which the results of Mutual and Federal Company of Zimbabwe (Private) Limited have been translated into South African Rand: Period 1 January 2019 to 31 December 2019 1 January 2018 to 30 September 2018 1 October 2018 to 31 December 2018 Functional currency RTGS US Dollar RTGS Average rate Closing rate 0.832 12.890 4.321 0.832 n/a 4.352 The average rate from 1 October 2018 to 31 December 2018 was calculated using the average US Dollar to Rand exchange rate of R14.24 for the same period divided by the RTGS rate of 3.3:1 US Dollar. The closing rate for 31 December 2018 was calculated using the average US Dollar to Rand exchange rate of R14.35 for the same period divided by the RTGS rate of 3.3:1 US Dollar. Please refer to note 43 Risk Management for the sensitivity analysis on the exchange rate. The fair value of any financial assets or liabilities was based on the unadjusted quoted prices as the Group believes the traded prices represent fair value in an active and orderly market. The Group has evidenced this through reviewing the volume and value of trades conducted on the ZSE. Subsidiaries with material non-controlling interests The following information is provided for subsidiaries with non-controlling interests which are material to the reporting company. The summarised financial information is provided prior to intercompany eliminations. Summarised statement of financial position Assets Non-current assets Current assets Total assets Liabilities Non-current liabilities Current liabilities Total liabilities Total net assets CREDIT GUARANTEE INSURANCE CORPORATION OF AFRICA LIMITED 2019 R million 2018 R million 2,060 772 2,832 1,474 249 1,723 1,109 1,850 966 2,816 1,449 333 1,782 1,034 OLD MUTUAL INSURE LIMITED Annual Report 2019 95 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements              9. Interests in subsidiaries including consolidated structured entities (continued) Summarised statement of profit or loss and other comprehensive income CREDIT GUARANTEE INSURANCE CORPORATION OF AFRICA LIMITED 2019 R million 2018 R million 896 (756) 140 (43) 97 (2) 95 24 829 (628) 201 (56) 145 (1) 144 36 CREDIT GUARANTEE INSURANCE CORPORATION OF AFRICA LIMITED 2019 R million 2018 R million (23) (148) (21) (192) 5 198 (364) (16) (182) 4 % ownership interest 2019 % ownership interest 2018 Carrying amount 2019 R million Carrying amount 2019 R million 45.00 % 45.00 % 41.00 % 41.00 % 13 66 79 13 91 104 Revenue Other income and expenses Profit before tax Tax expense Profit after tax Other comprehensive income Total comprehensive income Profit allocated to non-controlling interest Summarised statement of cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net decrease in cash and cash equivalents Dividend paid to non-controlling interest 10. Investments in associates The following table lists all of the associates in the Group: Group Name of company Held by Merx Underwriting Managers Proprietary Limited RM Insurance Holdings Limited (incorporated in Zimbabwe) Old Mutual Insure Limited Mutual and Federal Company of Zimbabwe (Private) Limited 96 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Company Name of company Held by Merx Underwriting Managers Proprietary Limited Material associates The following associates are material to the Group: % ownership interest 2019 % ownership interest 2018 Carrying amount 2019 R million Carrying amount 2019 R million 45.00 % 45.00 % 13 13 Country of incorpo- ration Method % OWNERSHIP INTEREST RM Insurance Holdings Limited Zimbabwe Equity 2019 41% 2018 41% RM Insurance Holdings Limited is a member of the Old Mutual Group and is one of the most mature and largest short-term insurance companies in Zimbabwe. It provides insurance solutions to the insuring public, commercial, industrial and corporate entities. Summarised financial information of material associates Summarised Statement of Profit or Loss and Other Comprehensive Income Revenue Other income and expenses Profit before tax Tax expense Profit from continuing operations Total comprehensive income Summarised Statement of Financial Position Assets  Non-current Current Total assets Liabilities Non-current Current Total liabilities Total net assets RM INSURANCE HOLDINGS    LIMITED 2019 R million 2018 R million 59 32 91 (7) 84 84 139 (44) 95 (4) 91 91 RM INSURANCE HOLDINGS LIMITED 2019 R million 2018 R million 121 124 245 111 6 117 128 231 65 296 65 13 78 218 The summarised information presented above reflects the financial statements of the associates after adjusting for differences in accounting policies between the Group and the associate. OLD MUTUAL INSURE LIMITED Annual Report 2019 97 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements11. Loans to share trusts The Mutual and Federal Management Incentive Trust The Mutual and Federal Development Trust The Mutual and Federal Management Incentive Trust (Namibia) GROUP COMPANY 2019 R million 2018 R million  2019 R million 2018 R million – – 7 7 – – 7 7 63 14 7 84 63 14 7 84 The loans have no interest and no fixed repayment terms and are secured by the underlying ordinary Old Mutual Limited shares held by each of the trusts. 12. Investments in employee share trusts Interest in employee share trusts The Mutual and Federal Management Incentive Trust, The Mutual and Federal Senior Black Management Trust, Old Mutual Insure Employee Incentive Trust and Old Mutual Insure Broad-based Black Economic Empowerment Employee Trust (the employee share trusts) were set up for the benefit of employees. Legally all shares are held by the trusts. The Statement of Financial Positions of the employee share trusts are set out below:  Company The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad-based Black Economic Empowerment Trust Carrying amount 2019 R million Carrying amount 2018 R million 188 160 58 73 155 634 282 169 57 34 69 611 98 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                            Summarised financial information of employee share trusts 2019 Summarised statement of financial position Assets The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad-based Black Economic Empowerment Trust Investment in Old Mutual Limited shares* Investment in Quilter Plc shares Investment in Nedbank Limited shares Other assets Total assets 83 64 41 71 152 411 79 3 21 – – 103 56 3 15 – – 74 40 93 7 3 3 146 258 163 84 74 155 734 Liabilities The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Old Mutual Insure Employee Incentive Trust Loan from Old Mutual Insure Limited Other liabilities Total liabilities (63) – (14) – (77) (7) (3) (12) (1) (23) (70) (3) (26) (1) (100) * The closing market value per Old Mutual Limited share was R19.60, Nedbank Limited was R214.30 and Quilter Plc was R29.30. 2018 Summarised statement of financial position Assets The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad-based Black Economic Empowerment Trust Investment in Old Mutual Limited shares* R million Investment in Quilter Plc shares R million Investment in Nedbank Limited shares R million Other assets Total assets R million R million 241 84 81 24 47 59 2 – – – 477 61 72 5 – 9 19 105 31 79 8 1 3 403 170 89 34 69 122 765 OLD MUTUAL INSURE LIMITED Annual Report 2019 99 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                            12. Investments in employee share trusts (continued) Liabilities The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust The Mutual and Federal Development Trust Loan from Old Mutual Insure Limited R million Other liabilities R million Total liabilities R million (63) – (14) (77) (58) (1) (18) (77) (121) (1) (32) (154) * The closing market value per Old Mutual Limited share was R22.40, Nedbank Limited was R274.72 and Quilter Plc was R21.84. Valuation techniques and inputs The value of these employee trusts is calculated using net asset value, as the net asset value approximates fair value. The listed ordinary Old Mutual Limited shares are the main asset in these trust. The fair value of the shares is obtained from an active market. 13. Retirement benefits Defined benefit plan Defined benefit plan obligation The Group has an obligation to staff employed before 15 March 1999 for post-retirement medical aid subsidies in respect of retired and existing employees. Per this plan the Group has an obligation in respect of the post-retirement medical aid cost of the following members: • Current continuation members (i.e. members who retired from the service of the employer or whose service was terminated by the employer on account of age, ill-health or other disability, and dependents of members who have died in service or after retirement). • Future continuation members (i.e. current in-service members who are eligible for an employer subsidy that are employees of Old Mutual Insure Limited Group and joined prior to 15 March 1999). This defined benefit plan exposes the Group to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment risk). The obligation is calculated using the projected unit credit method. The valuation date is 31 December 2019. Defined benefit plan asset The defined benefit plan is administered by a single medical fund that is legally separated from the Group. The Group has provided for this liability towards the retired members by purchasing a Group annuity policy from Old Mutual Life Assurance Company (South Africa) Limited (OMLACSA), with the medical scheme being the beneficiary of the policy. The annuity policy is effectively an insurance policy with the following characteristics: • The annuity guarantees the present value of the liability using the consumer price index as the base for the escalating benefits in respect of existing retirees only; • The policy will take on the liability in respect of the in-service members employed before 15 March 1999 and members of the designated fund, as and when they retire; and • The company will take on the shortfall between the actual subsidy increases and the CPI escalation that is declared each year; and to cater for the above shortfalls, additional premiums will be payable by the company in the future. 100 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)    Carrying value Present value of the defined benefit obligation Fair value of plan assets Reconciliation of defined benefit obligation Opening balance Current service cost Interest cost Actuarial gain Benefits paid Reconciliation of plan assets Opening balance Interest return Actuarial loss Benefits paid Contributions received Asset allocation Equity Property Bonds Cash and Money Market Foreign Insurance policy Alternative assets Key assumptions used Discount rate – in service members Discount rate – continuation members Medical inflation rate – in service members Medical inflation rate – continuation members Expected investment return Retirement ages   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million (243) 221 (22) (254) 223 (31) (254) (272) (2) (24) 18 19 (2) (24) 27 17 (243) (254) 223 21 (11) (17) 5 221 9.85% 3.15% 3.48% 4.65% 6.38% 70.95% 1.54% 235 24 (19) (17) – 223 10.09% 3.22% 3.56% 4.71% 6.53% 70.31% 1.58% (178) 160 (18) (191) (1) (17) 16 15 (178) 160 14 (4) (15) 5 160 (191) 160 (31) (210) (1) (18) 23 15 (191) 170 18 (13) (15) – 160 –% –% –% 2.00% –% –% –% –% 2.00% –% 98.00% 98.00% –% –% 100% 100% 100% 100% 10.00% 10.00% 10.00% 10.00% 8.40% 7.30% 6.30% 8.60% 9.30% 7.80% 7.30% 9.40% 62 – 65 62 – 65 8.40% 7.30% 6.30% 8.60% 62 9.30% 7.80% 7.30% 9.40% 62 Mortality rates of in service members are in accordance with SA 85 – 90 (Light) ultimate table and mortality rates of continuation members are in accordance with PA90, adjusted for the company’s experience and mortality improvements. Sensitivity analysis The impact on profit or loss for the Group when the discount rate is increased by 1% is R20,9 million , when the discount rate is decreased by 1%, R24,7 million, when the medical inflation rate is increased by 1%, R25,57 million and when the medical inflation rate is decreased by 1%, R22,1 million. A change in the retirement age to 60 would impact in the profit and loss by R10,42 million. The impact on profit or loss for the company when the discount rate is increased by 1% is R14,5 million (2018: R7 million), when the discount rate is decreased by 1%, R17 million (2018: R52 million), when the medical inflation rate is increased by 1%, R18 million (2018: R51 million) and when the medical inflation rate is decreased by 1%, R15,7 million (2018: R8 million). A change in the retirement age to 60 would impact in the profit and loss by R4 million. OLD MUTUAL INSURE LIMITED Annual Report 2019 101 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements14. Deferred acquisition cost and reinsurance commission revenue Analysis of movements   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Deferred acquisition cost Balance at the beginning of the year Acquisition cost deferred on inwards business Change in the statement of comprehensive income Other movements Foreign exchange 231 2 10 1 (1) 200 – 31 – – Balance at the end of the year 243 231 Reinsurance commission revenue Balance at the beginning of the year Change in the statement of comprehensive income Balance at the end of the year 186 10 196 139 47 186 158 1 14 – 1 174 114 11 125 123 – 35 – – 158 63 51 114 The net deferred acquisition cost relates to annual contracts and will be released into the Statement of Profit or Loss and Other Comprehensive Income within the next 12 months. 15. Investments and securities Investments and securities held by the Group and company are as follows:   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Amortised cost: Grodidge Mahura Investments Proprietary Limited 3 3 – – The loan is interest free and has no repayment terms. It was issued as part of the Enterprise Social Development Programme of the trust. Troy partnership The loan is unsecured and bears interest at 13.5%. Astute Financial The loan is unsecured, interest free and with no repayment terms. 30 – 30 3 30 – 30 3 102 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Mandatorily at fair value through profit or loss: Listed shares 1,144 1,114 466 468   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million The fair value of the listed ordinary shares is based on a quoted market price in an active market of an identical instrument. The Protected Equity Portfolio comprises two components: a protective derivative overlay portfolio and an underlying equity tracker portfolio that is intended to be passively managed relative to the SWIX benchmark. R500 million has been invested in an underlying tracker portfolio and a protective derivative structure to limit downside risk (put structure only). Unlisted shares 159 137 43 8 The carrying value of the unlisted ordinary shares is based on a valuation of their net assets and where appropriate, an adjustment for systemic and non-systemic risk. Unlisted empowerment private equity fund 90 67 90 67 The unlisted empowerment private equity fund represents black economic empowerment development investment policies with the Old Mutual Investment Group Proprietary Limited. Unlisted money market funds 5,135 4,951 2,554 2,940 The average interest on money market instruments earned during the year was 8.45% (2018: 8.20%). 6,561 6,305 3,183 3,516 Unconsolidated structured entities  The Group has investments in collective schemes to diversify its pool of assets. These vehicles are financed through the issue of units to investors. Some schemes are managed entities in the Old Mutual Limited Group, which generate fees from managing the assets on behalf of third party investors. The carrying value of the interest held by the Group in the unit trusts, which are included in the unlisted money market accounts, is R527 million (2018: R421 million) which equates to 2.9% (2018: 2.7%) of the value of the total unit trust. These investments are therefore not considered to be structured entities that would need to be included in the Group consolidation.  16. Amounts due to/from agents and reinsurers Assets Agents’ balances Reinsurance balances Liabilities Agents’ balances Reinsurance balances   GROUP COMPANY 2019 2018 2019 2018 R million R million R million R million 1,067 677 1,744 (299) (804) (1,103) 1,050 568 1,618 (113) (401) (514) 831 672 702 568 1,503 1,270 (285) (599) (884) (100) (255) (355) OLD MUTUAL INSURE LIMITED Annual Report 2019 103 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements16. Amounts due to/from agents and reinsurers (continued) Analysis of portfolio impairment allowance Balance at the beginning of the year Movement for the year Balance at the end of the year   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million (27) (18) (45) (8) (19) (27) (21) (12) (33) (5) (16) (21) A part of the impairment relates to an outstanding debtor from Insure Group Managers (IGM). Due to liquidity constraints within this company an additional R12 million of the debtor balance was impaired during the year, bringing the total impairment value to R28 million for this debtor (2018: R16 million). 17. Subrogation and salvage recoveries Balance at the beginning of the year Change in subrogation and salvages recoveries Subrogation and salvages received Balance at the end of the year 18. Non-current asset held for sale   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 646 717 (794) 569 653 856 (863) 646 275 490 (543) 222 287 573 (585) 275   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Property and equipment 257 243 257 243 On 21 November 2018, Old Mutual Insure Limited entered into a sale agreement (Agreement) for its head office property, Erf 5230, Helen Joseph Street, as well as Section 1 in the sectional title scheme known as Palace Parkade (to be established on Erf 5286 Johannesburg Township) to Bayete Capital Proprietary Limited (Bayete), a third party purchaser for the purchase price of R259 million. The agreement became unconditional at the end of March 2019. Nedbank Limited (the financiers of Bayete) was not willing to issue separate guarantees for the building and the parkade, and requested for registration to take place simultaneously, notwithstanding the provisions of the Agreement. With the linking of the matters, the transfer could only proceed after the completion of Section 1 of the sectional title scheme and the compliance with the relevant requirements to establish the scheme, which includes, obtaining a rates clearance in respect of Erf 5286 Johannesburg Township. There were delays with receiving a rates clearance certificate. This was received at the beginning of December 2019. The transfer of Unit 1 of the parkade to Old Mutual Insure Limited was lodged on 17 January 2020. After the transfer to Old Mutual Insure Limited, the transfer to Bayete can take place.  During November 2019, our attorneys were notified of a condition imposed by Nedbank Limited insofar as the lease and/or an addendum to the lease on the Old Mutual to proceed with the lodgment Insure Limited building is concerned. This condition remains outstanding and as such, the attorney acting for Nedbank Limited attending to the registration of the mortgage bonds over the properties in favour of Nedbank Limited, is not as yet ready to proceed with the lodgement and registration of the bond over the Old Mutual Insure Limited Building and the Section. These registrations are payment conditions imposed by Nedbank Limited under the guarantee they issued in respect of the purchase price.  The transfers of both properties are expected to take place before 31 July 2020.  104 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)19. Trade and other receivables Financial instruments: Trade receivables Trade receivables – related parties Trade receivables at amortised cost Accrued interest Non-financial instruments: VAT Prepayments Total trade and other receivables 20. Cash and cash equivalents Cash and cash equivalents consist of: Bank balances Short-term deposits 21. Share capital Authorised   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 403 1 404 48 40 67 559 364 17 381 116 45 62 604 173 8 181 44 – 49 274 171 26 197 89 2 34 322   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 1,083 1 1,084 1,385 1 1,386 282 1 283 342 1 343   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 350 000 000 Ordinary shares of 10 cents each 35 35 35 35 Issued 319 823 465 Ordinary shares of 10 cents each Share premium 22. Revaluation reserve Opening balance Revaluation during the year Transfer from/(to) retained earnings  32 1,765 1,797 32 1,765 1,797 32 1,765 1,797 32 1,765 1,797   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 90 – – 90 60 5 25 90 90 – – 90 86 5 (1) 90 OLD MUTUAL INSURE LIMITED Annual Report 2019 105 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements23. General insurance liabilities  2019 2018 Gross Reinsurance R million R million Net R million Gross Reinsurance R million R million Net R million Group Unearned premiums 1,612 873 739 1,515 800 715 Outstanding claims (including incurred but not reported (IBNR)) Company Unearned premiums Outstanding claims (including IBNR) 4,027 5,639 1,034 2,607 3,641 1,239 2,112 505 916 1,421 2,788 3,527 4,604 6,119 1,774 2,574 2,830 3,545 529 955 463 492 1,691 2,220 2,874 3,829 1,090 1,553 1,784 2,276 Analysis of movements in outstanding claims (net of subrogation) including IBNR 2019 2018 Gross Reinsurance R million R million Net R million Gross Reinsurance R million R million Net R million 4,604 9,144 1,774 2,924 2,830 6,220 4,624 8,308 1,693 3,344 2,931 4,964 (833) (11) (844) (342) (107) (235) (6,183) (1,892) (4,291) (5,517) (1,910) (3,607) (2,705) (1,556) (1,432) (2,469) (1,246) (1,223) 4,027 1,239 2,788 4,604 1,774 2,830 2,874 6,300 (197) (4,517) (1,853) 1,090 935 (2) (410) (701) 1,784 5,365 (199) (4,107) (1,152) 2,910 5,411 (276) (3,786) (1,385) 1,027 1,001 (410) 2 (530) 1,883 4,410 134 (3,788) (855) 2,607 916 1,691 2,874 1,090 1,784 Group Balance at the beginning of the year Current year claims incurred Change in previous years’ claims estimates Current year claims paid net of subrogation Previous year claims paid net of subrogation Balance at the end of the year Company Balance at the beginning of the year Current year claims incurred Change in previous years’ claims estimates Current year claims paid Previous year claims paid Balance at the end of the year 106 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                                                Analysis of movements in unearned premiums 2019 2018 Gross Reinsurance R million R million Net R million Gross Reinsurance R million R million Net R million Group Balance at the beginning of the year Change in unearned premium provision Balance at the end of the year Company Balance at the beginning of the year Change in unearned premium provision Balance at the end of the year Assumptions 1,515 97 800 73 715 24 1,340 175 647 153 1,612 873 739 1,515 800 955 79 463 42 1,034 505 492 37 529 799 156 955 319 144 463 693 22 715 480 12 492 Actuarial methods are used to estimate the ultimate cost of claims and there are underlying assumptions within these methods. These include the assumption that past experience is a reasonable guide for the future development of claims. In some classes of business, where processes or systems change, adjustments are made in order to estimate the ultimate claims. Judgement is applied where needed, but the methods are reviewed by the Head of the Actuarial function for reasonability.  A sensitivity analysis has been performed on some of the material assumptions made in calculating the components of the gross IBNR provision and subrogation asset based on the data as at the end of December 2019. IBNR reserve sensitivity analysis  The analysis was conducted for the material insurance contract types including Motor and Property (Commercial division segment only). The IBNR provision is derived by taking into account the way in which historical claims develop to their final settled cost over time. The sensitivity analysis was performed to test the effect of using more or fewer historical years to estimate the IBNR provision. These are set out in the table below. For the Motor Commercial and Property Commercial contracts, the sensitivity analysis is performed on the weighted averages (i.e. the number of historical periods to which the development pattern is based) used for the incurred claims projection. For the Motor Personal contracts the sensitivity analysis is calculated on the weighted averages used for the paid claims projection. Gross best estimate IBNR reserve assumptions 2019 2018 Increase/ (Decrease) in profit or loss R million Increase/ (Decrease) in profit or loss R million Motor commercial gross of salvages and recoveries Incurred claims projection - using the weighted average of the three most recent years Incurred claims projection - using the weighted average of the four most recent years Incurred claims projection - using the weighted average of the five most recent years Motor personal gross of salvages and recoveries Incurred claims projection - using the weighted average of the four (2018: three) most recent years Property commercial net of salvages and recoveries Incurred claims projection – using the weighted average of the three most recent years Incurred claims projection – using the weighted average of the five most recent years (4) (6) (9) (3) 5 (3) (4) (7) (12) (1) – (7) OLD MUTUAL INSURE LIMITED Annual Report 2019 107 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements23. General insurance liabilities (continued) Sensitivity analysis for the salvage and recovery asset The below table indicates the sensitivity analysis that has been performed on the significant assumptions made for the most material classes of business contributing to the salvage and recovery asset. Salvage and recovery asset assumptions Motor commercial recovery asset 2019 2018 Increase/ (Decrease) in profit or loss R million Increase/ (Decrease) in profit or loss R million Decreased recovery ratio assumption to 5.00% from 5.60% for 2019 (2018: Increased to 6.6% from 5.6%) Motor personal recovery asset Increased recovery ratio assumption to 6.20% from 5.35% for 2019 (2018: Increased to 6.8% from 6.04%) (3) 12 3 47 Recovery ratio represents the amount the company expects to recover from third parties expressed as a percentage of the corresponding claims.  For the Motor Commercial and Motor Personal contracts, the recovery sensitivity calculation was performed on the recovery ratio assumption for the 2019 year. Analysis of cumulative claims The following tables illustrate the development of gross and net Insurance cumulative claims for the past five financial periods, including the impact of re-estimation of claims provisions at the end of each financial year. The first table shows actual gross cumulative claims and the second shows actual net cumulative claims. Reporting year Group At end of year One year later Two years later Three years later Four years later Five years later Cumulative payments Estimated balance to pay  ESTIMATE OF CUMULATIVE CLAIMS GROSS OF REINSURANCE Total R million 2019 R million 2018 R million 2017 R million 2016 R million 2015 R million 2014 and prior R million 40,690 32,408 23,649 14,777 6,557 8,695 – – – – – 8,723 8,768 – – – – 8,786 8,855 8,873 – – – 73,525 (69,498) 8,695 (6,183) 8,768 (7,926) 8,873 (8,640) 8,464 8,300 8,232 8,292 – – 8,292 (8,162) 6,022 6,485 6,544 6,485 6,557 – – – – – – 32,340 6,557 32,340 (6,443) (32,144) 4,027 2,512 842 233 130 114 196 108 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Reporting year Company At end of year One year later Two years later Three years later Four years later Five years later Cumulative payments Estimated balance to pay  Reporting year Group At end of year One year later Two years later Three years later Four years later Five years later Cumulative payments Estimated balance to pay Company At end of year One year later Two years later Three years later Four years later Five years later Cumulative payments Estimated balance to pay ESTIMATE OF CUMULATIVE CLAIMS GROSS OF REINSURANCE Total R million 2019 R million 2018 R million 2017 R million 2016 R million 2015 R million 2014 and prior R million 29,663 23,495 17,778 11,475 5,470 – 6,127 – – – – – 5,838 5,759 – – – – 6,169 6,283 6,246 – – – 6,137 6,009 6,007 5,999 – – 5,392 5,444 5,525 5,476 5,470 – – – – – – 30,307 59,908 (57,301) 6,127 (4,517) 5,759 (5,178) 6,246 (6,069) 5,999 (5,925) 5,470 30,307 (5,408) (30,204) 2,607 1,610 581 177 74 62 103 ESTIMATE OF CUMULATIVE CLAIMS NET OF REINSURANCE Total R million 2019 R million 2018 R million 2017 R million 2016 R million 2015 R million 2014 and prior R million 27,977 22,019 16,505 10,803 5,547 5,771 – – – – – 5,571 5,751 – – – – 5,734 5,604 5,700 – – – 5,730 5,355 5,271 5,327 – – 5,171 5,309 5,534 5,476 5,547 – – – – – – 28,705 56,801 (54,013) 5,771 (4,291) 5,751 (4,939) 5,700 (5,568) 5,327 (5,221) 5,547 28,705 (5,453) (28,541) 2,788 1,480 812 132 106 94 164 23,840 18,834 14,587 9,635 4,853 5,192 – – – – – 4,582 4,560 – – – – 4,673 4,832 4,903 – – – 4,852 4,786 4,779 4,775 – – 4,541 4,656 4,905 4,860 4,853 – – – – – – 26,806 51,089 (49,398) 5,192 (4,107) 4,560 (4,274) 4,903 (4,788) 4,775 (4,709) 4,853 26,806 (4,803) (26,717) 1,691 1,085 286 115 66 50 89 OLD MUTUAL INSURE LIMITED Annual Report 2019 109 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements24. Debt instrument   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Unsecured subordinated callable floating rate note 500 500 500 500 The JSE granted the company approval for the listing of its unsecured subordinated callable notes programme during November 2017. The programme allows for the listing of R1 billion in notes. Following the approval being obtained, the company issued notes to the value of R500 million to investors in November 2017. The notes are 10-year notes, not callable for the first five years, and are priced at JIBAR plus 209 bps. The holders of the instruments are: 1. MMI Holdings Limited – 50% 2. 3. 4. Standard Bank of South Africa in Trust – 27% EDGE Financial Group – 10% Other bond holders (hold less than 5% each) – 13% 25. Share-based payment liability   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Employee share awards (Old Mutual Limited shares) (91) (68) (80) (54) Overview of the employee incentive programmes The Mutual and Federal Management Incentive Scheme and the Old Mutual Insure Employee Incentive Trust The primary purpose of these schemes is to attract, reward and retain senior and middle management. Restricted shares (RSP) are awarded to management for retention and attraction purposes. • Bonus plan 40% of an employee's before tax bonus is invested in ordinary Old Mutual Limited shares. The RSP shares are not subject to corporate performance targets (CPTs) and will vest immediately, subject to the condition that the employee remains in the company's employment for a period of three years from grant date. Participants are paid dividends in respect of the RSP share awards and are entitled to exercise the voting rights in respect of the ordinary Old Mutual Limited shares. The expected employee attrition rate used in the calculation was 10%. • Long-term incentive plan (LTIP) A long-term incentive plan is awarded to key employees who are critical to the company achieving its strategic and financial objectives over the next three years. The share awards are subject to employees meeting CPTs and will be determined at the time of vesting based on multiples of the employees' total guaranteed pay. The expected employee attrition rate used in the calculation was 49%. 110 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)            The Mutual and Federal Senior Black Management Incentive Scheme and the Broad-based Black Economic Empowerment Employee Scheme These schemes operate for the benefit of selected senior black management of the company for retention and attraction purposes. • Bonus plan The RSP shares are not subject to corporate performance targets (CPTs) and will vest immediately, subject to the condition  that the employee remains in the company's employment for a period of three years from grant date. Participants are paid dividends in respect of the RSP share awards and are entitled to exercise the voting rights in respect of the ordinary Old Mutual Limited shares. 40% of an employee's before tax bonus is invested in ordinary Old Mutual Limited shares. The expected employee attrition rate used in the calculation was 15%. • Retention plan RSP share awards are not subject to CPTs and will vest immediately, subject to the resolutive condition that the participant remains in the employment of the company for a period of time. Participants are paid dividends in respect of RSP share awards and are entitled to exercise the voting rights in respect of the ordinary Old Mutual Limited shares. Participants may only take delivery of the shares at the following intervals: four years (one-third), five years (one-third) and six years (one-third). All of the above are cash-settled plans, as the Group is not obliged to settle with Old Mutual Insure Limited equity and therefore in terms of IFRS 2 would be considered cash settled. Group and company  At 1 January 2018 Number of shares granted Number of shares vested/settled Number of shares forfeited due to resignations At 31 December 2018 Number of shares granted Number of shares vested/settled Number of shares forfeited due to resignations Total number of shares in issue at 31 December 2019 The Mutual and Federal Management Incentive Trust The Mutual and Federal Senior Black Management Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad- based Black Economic Empowerment Employee Trust  2,964,749  2,701,045  –  – 1,047,690 1,495,087 1,493,110 2,926,258 (1,136,440) (309,678) (531,689) (468,312) (1,008) (5,376) 2,566,321 3,196,131 1,486,726 8,749 (784,944) (247,915) – 2,209,477 (470,441) (377,330) (78,988) (241,965) (1,344) (51,425) 2,873,489 4,875,606 (16,488) (508,478) 1,542,211 2,348,360 3,375,250 7,224,129 The fair value of the ordinary Old Mutual Limited shares at 31 December 2019 was R19.6 (2018: R22.40) The share price at grant date was used to determine the fair value of the RSPs. Expected dividends were not considered when the fair value of the RSPs were determined as the holders of the RSPs are entitled to dividends throughout the vesting period of the shares. Dividends are received by the share trust and then paid directly to the holders of the RSPs, the payment of dividends is offset against the dividend income. 26. Employee benefits Leave accrual Bonus accrual   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 71 89 160 60 153 213 63 78 141 51 150 201 OLD MUTUAL INSURE LIMITED Annual Report 2019 111 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements        27. Amounts payable to cell owners Retained income reserve Preference shares Cell captives reinsurance technical reserves Reconciliation of amounts payable to cell owners Balance at the beginning of the year Capital contribution Underwriting and investment income attributable to cell owners Dividend payments to cell owners Balance at the end of the year 28. Trade and other payables Financial instruments: Trade payables Amounts due to subsidiaries Other payables Non-financial instruments: Amounts received in advance VAT 29. Commissions received Commissions received from reinsurers Change in deferred reinsurance revenue liability Prepaid expense adjustment – binder fee   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 708 91 320 1,119 878 13 265 (37) 1,119 497 78 303 878 761 4 220 (107) 878 – – – – – – – – – – – – – – – – – –   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 34 – 295 96 7 432 68 – 474 – 1 543 31 – 162 36 7 236 65 90 204 – – 359   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 902 (10) – 892 858 (47) (19) 792 387 (11) – 376 287 (51) – 236 112 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                                30. Net claims incurred Gross claims incurred Subrogation and salvages recoveries Reinsurers’ share of claims incurred Gross claims incurred Claims paid Change in provision for outstanding claims Claims administration expenses Subrogation and salvage recoveries Subrogation and salvage recoveries received Change in provision for subrogation and salvage recoveries Reinsurers' share of claims incurred Claims paid Change in provision for outstanding claims 31. Acquisition cost Acquisition cost paid Change in deferred acquisition cost Prepaid expense adjustment – binder fee   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 10,056 (761) 9,295 (2,896) 9,687 (848) 8,839 (3,344) 7,237 (510) 6,727 (939) 6,512 (570) 5,942 (1,001) 6,399 5,495 5,788 4,941 9,682 (193) 567 10,056 (794) 33 (761) 8,849 322 516 9,687 (863) 15 (848) (3,000) 104 (3,156) (188) 6,913 (243) 567 7,237 (543) 33 (510) (1,111) 172 5,756 240 516 6,512 (585) 15 (570) (907) (94) (2,896) (3,344) (939) (1,001)   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million (2,106) (1,984) (1,602) (1,389) 10 – 31 21 14 – 35 3 (2,096) (1,932) (1,588) (1,351) OLD MUTUAL INSURE LIMITED Annual Report 2019 113 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                                32. Operating profit (loss) Expenses by nature The total cost of sales, selling and distribution expenses, marketing expenses, general and administrative expenses, research and development expenses, maintenance expenses and other operating expenses are analysed by nature as follows. This excludes claims administration expenses disclosed under net claims incurred as per note 30: Employee costs Lease expenses Depreciation, amortisation and impairment Directors’ emoluments Impact of restructuring Foreign exchange loss Repairs and maintenance of property and equipment Marketing expenses Professional fees Call option Third party outsource fees Administration fees Other expenses   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 1,209 49 163 11 – 10 7 172 93 15 332 32 168 1,144 1,045 87 116 14 70 25 4 116 84 – 259 6 78 18 158 11 – – 6 177 92 15 317 32 113 936 51 109 14 70 1 3 116 65 – 256 6 188 2,261 2,003 1,984 1,815 114 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)33. Investment income Dividend income Group entities: Subsidiaries – Local Equity instruments at fair value through profit or loss: Listed investments – Local Unlisted investments – Local Total dividend income Interest income Investments in financial assets: Bank and other cash Investments at fair value Other financial assets Fair value gains and losses: Subsidiaries Investments and securities Old Mutual Limited shares Share trusts Disposal of investments Total interest income Total investment income 34. Finance costs Lease liabilities Interest paid on debt instrument Total finance costs   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million – 23 38 61 63 265 1 – 57 (53) – (7) 326 387 – 25 77 102 125 240 1 – (13) (8) – 12 357 459 148 – 20 168 49 165 1 (121) 43 – 22 (1) 158 326 12 – 13 25 35 217 1 (309) (37) – 79 (1) (15) 10   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 23 53 76 – 51 51 23 53 76 – 51 51 OLD MUTUAL INSURE LIMITED Annual Report 2019 115 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements35. Taxation Major components of the tax expense   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Current Local income tax – current period 126 306 Local income tax – recognised in current tax for prior periods Foreign income tax or withholding tax – current period Deferred Originating and reversing temporary differences Arising from previously unrecognised tax loss/tax credit/ temporary difference Arising from prior period adjustments (2) 7 131 11 7 (54) (36) 95 (108) 9 207 (88) 90 – 2 209 Reconciliation of the tax expense Reconciliation between applicable tax rate and average effective tax 64 (8) – 56 31 7 – 38 94 244 (107) – 137 (83) 89 – 6 143 Applicable tax rate Non-taxable income Disallowed expenditure Prior year adjustment Withholding tax Capital gains tax   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 28.00% 9.09% 1.67% 1.19% (2.15)% 28.00% (0.82)% (1.93)% (2.18)% 1.28% 28.00% 9.59% 2.78% (0.46)% (0.03)% (15,08)% (1.48)% (1.36)% 28.00% 2.09% 14.50% 5.28% 0.12% 3.57% 22.72% 22.87% 38.52% 53.56% 116 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)36. Cash (used in)/generated from operations Profit before taxation Adjustments for: Depreciation and amortisation Income from equity accounted investments Dividends received (trading) Interest income Finance costs Fair value (gains) losses Net impairments and movements in credit loss allowances Movements in retirement benefit assets and liabilities Movements in net insurance contract provisions Gains on foreign exchange Changes in working capital: Trade and other receivables Employee benefits Amounts due from agents and reinsurers Trade and other payables Share-based payment liability Amounts payable to cell owners Decrease in deposits with reinsurers  37. Tax (paid) refunded Balance at beginning of the year Current tax for the year recognised in profit or loss Balance at end of the year GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 418 914 244 267 163 (49) (61) (329) 76 3 – 5 (56) 10 45 (53) 463 (111) 241 (557) 321 92 (96) (102) (366) 51 9 5 (6) (61) (25) 334 – (258) 277 (22) 117 (40) 823 157 – (168) (215) 76 57 – 5 (8) (1) 50 (60) 296 (123) 28 – (446) (164) 88 – (25) (253) 9 268 8 (9) (57) (1) 225 – (93) 189 (28) – (46) 542   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 115 (131) (10) (26) (31) (198) (115) (344) 112 (56) (15) 41 (23) (137) (112) (272) OLD MUTUAL INSURE LIMITED Annual Report 2019 117 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                  38. Segmental information The segmental results are reported on a basis consistent with the practice that the chief operating decision-maker (executive committee) assesses performance of the underlying businesses and allocated resources. The Group has identified its reportable segments based on a combination of products and services offered to customers and the location of the markets served. These reportable segments as well as the products and services from which each of them derives revenue are set out below: Reportable Segment Products and services Commercial Personal Risk financing Specialty CGIC Guarantee Insurance for small- to medium-sized enterprises (SMEs) Insurance for personal belongings, including home, household contents and vehicles Cell captive insurer Insurance for specialist areas of corporate clients Trade credit insurance Segmental revenue and results The segment information provided to the executive committee is presented below. The information presented includes a reconciliation of the Group’s earnings per segment to net profit before tax. 2019 Gross written premium R million Revenue Net written premium R million Net earned premium R million Separately disclosable items Profit before taxation R million Net claims incurred R million Net acquisition expenses R million Total expenses R million Commercial Personal Risk financing Specialty CGIC guarantee Central expenses 4,733 4,081 3,222 1,401 1,219 – 4,222 3,947 46 848 883 – 4,215 3,944 46 821 896 – Total 14,656 9,946 9,922 Reconciling items Investment returns and share of profit from associates Finance cost excluding IFRS 16 charge Profit before taxation (165) 99 10 51 51 (11) 35 436 (53) 418 (2,669) (2,563) (5) (455) (707) – (636) (406) – (138) (24) – (1,075) (876) (31) (177) (114) (11) (6,399) (1,204) (2,284) 118 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)2018 Gross written premium R million Revenue Net written premium R million Net earned premium R million Separately disclosable items Profit before taxation R million Net claims incurred R million Net acquisition expenses R million Total expenses R million Commercial Personal Risk financing Specialty CGIC guarantee Central expenses 4,261 3,677 2,840 1,275 1,165 – 3,891 3,637 42 662 838 – 3,882 3,638 39 660 829 – 102 380 (9) (46) 102 (49) (2,239) (2,119) (1) (503) (633) – (662) (362) – (93) (23) – (879) (777) (47) (110) (71) (49) Total 13,218 9,070 9,048 480 (5,495) (1,140) (1,933) Reconciling items Investment returns and share of profit from associates Finance cost Impact of restructuring (included in administration expenses) Profit before taxation 555 (51) (70) 914 Investment income and expenditure attributable to equity holders are not allocated to the segments as this type of activity is primarily driven by the central finance function which manages the cash position of the Group. Whilst the company has subsidiaries and investments located in Zimbabwe, Swaziland and Mauritius, the results of these foreign entities are not material to the Group. As the asset base represents approximately 1.48% in 2019 (2018: 1.76%) of the Group’s total assets, no further information is provided in these financial statements. The chief operating decision-maker (Executive Committee) reviews the segment’s revenue and underwriting results to assess the performance of a segment and make decisions about resources to be allocated to a segment. The Group’s insurance activities are spread over various classes of general insurance. Analysis of gross written premium by class of business Gross written premium was derived from the following products. OLD MUTUAL INSURE LIMITED Annual Report 2019 119 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                                                                                                            38. Segmental information (continued) Class of business Property Transportation Motor Accident and health Guarantee Liability Engineering Miscellaneous   GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 5,657 574 5,913 147 1,219 250 627 269 4,516 590 5,352 177 1,215 197 670 501 4,279 211 5,002 80 – 222 622 244 3,771 201 4,474 71 3 165 631 195 Total gross written premium 14,656 13,218 10,660 9,511 39. Related parties Relationships Ultimate holding company Old Mutual Limited Holding company Subsidiaries Employee share trusts Associates Fellow subsidiaries Fellow associate Mutual and Federal Investments Proprietary Limited Refer to note 9 Refer to note 12 Refer to note 10 Old Mutual Emerging Markets Proprietary Limited Old Mutual Life Assurance Company (South Africa) Limited Old Mutual Investment Group Limited Old Mutual Direct Holdings Limited Old Mutual Short-term Insurance (Botswana) Limited Old Mutual Short-term Insurance (Namibia) Limited Nedbank Limited (2018) Post the managed separation of Old Mutual Limited, Nedbank Limited is no longer considered a related party and therefore no 2019 disclosures have been made. 120 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Related party balances  Loan accounts – Owing (to) by related parties Mutual and Federal Management Incentive Trust Mutual and Federal Development Trust Mutual and Federal Management Incentive Trust (Namibia) Amounts included in trade receivable (trade payable) regarding related parties  Old Mutual Direct Holdings Limited Old Mutual Limited Old Mutual Short-term Insurance (Botswana) Limited Old Mutual Short-term Insurance (Namibia) Limited Mutual and Federal Risk Financing Limited Sintelum (Proprietary) Limited Elite (Proprietary) Limited Couger Investment Holdings (Proprietary) Limited Credit Guarantee Insurance Corporation of Africa Limited Bank balances Nedbank Limited Money market investments Nedbank Limited Post-retirement medical aid asset Old Mutual Life Assurance Company (South Africa) Limited Value of shares held Mutual and Federal Management Incentive Trust Mutual and Federal Senior Black Management Trust Old Mutual Insure Employee Incentive Trust Old Mutual Insure Broad-based Black Economic Empowerment Trust Mutual and Federal Development Trust Related party transactions Dividends paid to (created) from related parties Credit Guarantee Insurance Corporation of Africa Limited Mutual and federal Risk financing Limited Cougar Investment Holding Company Limited  Interest paid to (received from) related parties Nedbank Limited  Mutual and Federal Risk Financing Limited Investment management fees paid  Nedbank Limited Rent paid to (received from) related parties Credit Guarantee Insurance Corporation of Africa Limited Old Mutual Limited Commission paid Personal Financial Advice Limited GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million – – 7 43 – 3 (2) – – 221 83 64 71 152 41 – – – – – 44 143 – – 7 41 (56) 3 7 536 577 223 241 84 24 47 81 – (102) – 28 – – – 63 14 7 43 – 3 (2) 5 1 1 – – 160 – – – – – 16 25 80 – – – (35) 44 143 63 14 7 41 (56) 3 7 (87) (3) 210 548 160 – – – – – 12 – – (61) (8) 27 (35) – – OLD MUTUAL INSURE LIMITED Annual Report 2019 121 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements39. Related parties (continued) GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million Administration fees paid to (received from) related parties Old Mutual Emerging Markets Proprietary Limited 128 96 Mutual and Federal Risk Financing Limited Reinsurance premium received Mutual and Federal Risk Financing Limited Credit Guarantee Insurance Corporation of Africa Limited Reinsurance claims paid Mutual and Federal Risk Financing Limited Credit Guarantee Insurance Corporation of Africa Limited Reinsurance commission received Mutual and Federal Risk Financing Limited Claims incurred Nedbank Limited Premium received Nedbank Limited Fees paid to the Troy consortium – – – – – – – – – – – – – – 88 (154) 128 (30) (437) (1) 276 3 (128) – – 96 (39) (323) (1) 38 3 (83) 88 (154) The intra-Group balance with Old Mutual Direct Holdings Limited relates to prepayments made by the company to the Troy consortium for the development of a direct insurance infrastructure within the wider Old Mutual Group. The R43 million (2018: R41 million) receivable at year-end represents the prepayments made by the company as well as associated interest which will be reimbursed by Old Mutual Direct Holdings. 40. Directors’ and prescribed officer’s emoluments Directors’ and prescribed officer’s emoluments are paid by the company unless otherwise specified. Executive 2019 Mr G Napier Ms NB Manyoha 2018 Mr G Napier Ms NB Manyoha Basic salary R’000 Bonus R ‘000 Pension contribution R’000 Other R’000 Total R’000 IFRS 2 charge on Nedbank/ Quilter share R’000 IFRS 2 fair value of unvested shares at year end# R’000 4,090 2,425 2,129 364 6,515 2,493 544 2,140 649 1,132 2,684 1,781 381 153 534 177 197 374 – – – 4,990 1,500 6,600 2,942 9,542 6,360 4,969 6,490 11,329 – – – – 749 749 4,446 1,732 6,178 433 1,783 2,216 # Shares awarded for performance relating to the year are granted in the following year. 122 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Securities issued  The following share movements took place relevant to the executive directors’ or individuals related to them in the year under review. Shares awarded for performance relating to the year under review are granted in the following year: Issue date Vesting date Share price R Opening number of shares Number of shares granted Number of vested shares Number of forfeited shares Closing number of shares R Snyders – previous managing executive 16 April 2015 16 April 2018 11 March 2016  11 March 2019 NB Manyoha 19 April 2018 19 April 2021 19 April 2018 19 April 2022 19 April 2018 19 April 2023 18 September 2018 18 September 2020 14 December 2018 18 September 2020 20 March 2019  20 March 2022 20 March 2019  20 March 2023 20 March 2019 20 March 2024 20 March 2019 20 March 2024 G Napier 20 March 2019 20 March 2020 20 March 2019 20 March 2021 20 March 2019 20 March 2022 20 March 2019 20 March 2023 20 March 2019 20 March 2024 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 19.60 20,782 49,877 29,349 8,063 8,063 336 128 – – – – – – – – – – – – – – – – 15,326 15,326 15,326 34,689 108,966 108,966 201,764 72,913 72,911 (20,782) – – – – – – – – – – – – – – – – – (24,939) 24,938 – – – – – – – – – – – 29,349 8,063 8,063 336 128 15,326 15,326 15,326 34,689 108,966 108,966 (6,517) 195,248 – – 72,913 72,911 OLD MUTUAL INSURE LIMITED Annual Report 2019 123 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements40. Directors’ and prescribed officer’s emoluments (continued) Directors’ fees R’000 Basic salary R’000 Bonus R’000 Other R’000 55 461 – 752 245 307 363 538 – 1,587 9,012 – – – – – – 2,700 – – – – – – – 303 147 – – – – – Total R’000 55 5,051 9,159 752 245 307 363 538 2,721 10,599 2,700 450 16,470 IFRS 2 charge on Nedbank/ Quilter shares R’000 IFRS 2 fair value of unvested shares at year end R’000 – – – – – – – – – – 19 – – – – – – 19 Directors’ fees R’000 – – 431 288 672 553 258 638 Basic salary R’000 2,850 8,000 – – – – – – Bonus R’000 Other R’000 – 2,250 14,124 – – – – – – – – – – – – – IFRS 2 charge on Nedbank/ Quilter shares R’000 IFRS 2 fair value of unvested shares at year end R’000 1,191 22,748 3,912 11,748 – – – – – – – – – – – – Total R’000 5,100 22,748 431 288 – 553 258 638 2,840 10,850 14,124 2,250 30,016 23,939 15,660 Non-executive 2019 Mr SC Gilbert Mr M Ilsley* Mr P Moyo* Mr G Palser Mr P Rörich Mr MA Schameck Mr PGM Truyens Mr TP Zondi 2018  Mr M Ilsley* Mr P Moyo* Mr M Mia Mr G Palser Mr Rörich Mr PGM Truyens Ms TP Zondi Mr MJ Harper * Paid by Group companies  124 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Securities issued P Moyo M Ilsley Issue date  Vesting date 6 September 2017 6 September 2020 6 September 2017 6 September 2021 6 September 2017 6 September 2022 19.60 724,639 19.60 181,159 19.60 181,160 19 April 2018 19 April 2021 19.60 344,966 18 September 2018 18 September 2019 18 September 2018 18 September 2020 14 December 2018 18 September 2019 14 December 2018 18 September 2020 6 September 2017 6 September 2020 12 November 2018 18 September 2019 18 September 2018 18 September 2020 14 December 2018 18 September 2020 19.60 227,140 19.60 336 19.60 86,180 19.60 128 19.60 78,261 19.60 95,138 19.60 19.60 336 128 1,919,570 Prescribed officers  2018  Mr JW Wilken Mr JW Wilken* * Paid by Group companies Mr JW Wilken is no longer a prescribed officer Share price (R) Opening number of shares Number of shares granted Number of shares vested Number of shares forfeited Closing number of shares – – – – – – – – – – – – – – – – – – – – – – – – – (724,639) (181,159) (181,159) (344,966) (227,140) (336) (86,180) (128) – – – – – – – – – – – – 78,261 95,138 336 128 – 1,745,707 173,863 Emoluments R’000 1,312 2,562 3,874 Other R’000 5,670 – 5,670 Total R’000 6,982 2,562 9,544 OLD MUTUAL INSURE LIMITED Annual Report 2019 125 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements41. Financial instruments and risk management Categories of assets and liabilities Categories of assets Group – 2019 Manda- torily at fair value through profit and loss Desig- nated fair value through profit and loss Financial assets at amor- tised cost Non- financial assets at fair value Non- financial assets at other than fair value Non- current assets* Notes R million R million R million R million R million R million R million R million Current assets* Total Goodwill Intangible assets Property and equipment Right of use asset Deferred tax Investments in associates Loans to share trusts Loans receivable Retirement benefit asset Deferred acquisition costs Reinsurers’ share of general insurance liabilities Deposits with cedants Investments and securities Amounts due from agents and reinsurers Subrogation and salvage recoveries Non-current assets held for sale Current tax receivable Trade and other receivables Cash and cash equivalents 4 5 6 7 8 10 11 13 14 21 174 249 478 41 79 7 2 221 243 23 2,112 27 – – – – – – – – – – – – 6,561 6,528 15 16 17 18 1,744 569 257 18 19 559 20 1,084 – – – – – – 14,446 6,528 – – – – – – – – – – – – – – – – – – – – – – – – – – 7 2 – – – 27 33 – – – – 519 1,084 – – – – – – – – – – – – – – – 257 – – – 21 174 249 478 41 79 – – 221 – – – 86 – – – – – 21 174 249 392 41 79 7 2 221 243 243 – 2,112 1,720 392 – – 27 6,561 1,744 1,744 569 569 – 18 40 257 18 559 – 1,084 – – – – – – – – 1,672 257 5,989 12,868 1,578 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. 126 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Group – 2018 Manda- torily at fair value through profit and loss Desig- nated fair value through profit and loss Financial assets at amor- tised cost Non- financial assets at fair value Non- financial assets at other than fair value Non- current assets* Notes R million R million R million R million R million R million R million R million Current assets* Total Goodwill Intangible assets Property and equipment Deferred tax Investments in associates Loans to share trusts Loans and advances Retirement benefit asset Deferred acquisition costs Reinsurers’ share of general insurance liabilities Deposits with cedants Investments and securities Amounts due from agents and reinsurers Subrogation and salvage recoveries Non-current assets held for sale Current tax receivable Trade and other receivables Cash and cash equivalents 4 5 6 8 10 11 13 14 21 162 129 67 104 7 1 223 231 23 2,574 27 – – – – – – – – – – – 15 16 17 18 19 20 6,305 6,269 1,618 646 243 122 604 1,386 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 7 1 – – – 27 36 – – – – 604 1,386 – – – – – – – – – – – – – – 243 – – – 21 162 129 67 104 – – 223 231 – – – – – – – – – 21 162 129 67 104 7 1 223 231 2,574 2,096 478 – – 27 6,305 1,618 1,618 646 646 – 122 – – 243 122 604 1,386 – – – – – – – – 14,470 6,269 2,061 243 5,897 13,047 1,423 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. OLD MUTUAL INSURE LIMITED Annual Report 2019 127 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements41. Financial instruments and risk management (continued) Company – 2019 Manda- torily at fair value through profit and loss Desig- nated fair value through profit and loss Financial assets at amor- tised cost Non- financial assets at fair value Non- financial assets at other than fair value Non- current assets* Notes R million R million R million R million R million R million R million R million Current assets* Total Intangible assets Property and equipment Right of use asset Deferred tax Investments in subsidiaries Investments in associates Loans to share trusts Interest in employee share trusts Loans receivable Retirement benefit asset Deferred acquisition costs Reinsurers’ share of general insurance liabilities Investments and securities Amounts due from agents and reinsurers Subrogation and salvage recoveries Non-current assets held for sale Current tax receivable Trade and other receivables Cash and cash equivalents 5 6 7 9 10  11 12 13 14 174 238 475 8 – – – – 1,426 1,426 13 84 634 2 160 174 – – 634 – – – – 23 1,421 15 16 17 18 19 20 3,183 3,153 1,503 222 257 15 274 283 – – – – – – 10,546 5,213 – – – – – – – – – – – – – – – – – – – – – – – – – – 84 – 2 – – – 30 – – – – 274 283 673 – – – – – – – – – – – – – – – 257 – – – 174 238 475 8 – 13 – – – 160 – – 86 – – – – – – – 174 238 389 8 1,426 13 84 634 2 160 174 174 – 1,421 1,106 315 – 3,183 1,503 1,503 222 222 – 15 – – – 15 274 283 – – – 257 – – – 257 4,403 6,846 3,700 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. 128 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Company – 2018 Intangible assets Property and equipment Deferred tax Investments in subsidiaries Investments in associates Loans to share trusts Investments in employee share trusts Loans receivable Retirement benefit asset Deferred acquisition costs Reinsurers’ share of general insurance liabilities Investments and securities Amounts due from agents and reinsurers Subrogation and salvage recoveries Non-current assets held for Current tax receivable Trade and other receivables Cash and cash equivalents Financial assets at Non- amor- current tised assets* cost Notes R million R million R million R million R million R million R million R million Non- financial assets at fair value Current assets*  Total Non- financial assets at other than fair value Manda- torily at fair value through profit and loss Desig- nated fair value through profit and loss 5 6 8 9 10 11 12 13 14 162 120 46 – – – 1,548 1,548 13 84 611 1 160 158 – – 611 – – – – 23 1,553 15 16 17 18 19 20 3,516 3,483 1,270 275 243 112 322 343 – – – – – – 10,537 5,642 – – – – – – – – – – – – – – – – – – – – – – – – 84 – 1 – – – 33 – – – – 322 343 783 – – – – – – – – – – – – – – 243 – – – 162 120 46 – 13 – – 1 160 – – – – – – – – – 162 120 46 1,548 13 84 611 1 160 158 158 – 1,553 1,208 345 – 3,516 1,270 1,270 275 275 – 112 – – – 112 322 343 – – – 243 – – – 243 3,870 7,204 3,333 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. OLD MUTUAL INSURE LIMITED Annual Report 2019 129 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements41. Financial instruments and risk management (continued) Categories of liabilities Group – 2019 Desig- nated fair value through profit or loss Total Finan- cial lia- bilities at am- ortised cost Non- financial liabilities at fair value Non- financial liabilities at other than fair value Current liabilities* Non- current liabilities* Notes R million R million R million R million R million R million R million General insurance liabilities Lease liabilities Debt instrument Deferred reinsurance commission revenue Amounts due to agents and reinsurers Post-retirement medical benefit liability Share-based payment liability Employee benefits Deferred tax Deposits owing to reinsurers Amounts payable to cell owners Current tax payable Trade and other payables 23 7 24 14 16 13 25 26 8 27 28 5,639 494 500 196 1,103 243 91 160 41 239 1,119 8 432 10,265 – – – – – – – – – – – – – – – – 500 – – – – – – 239 1,119 – 425 2,283 – – – – – – – – – – – – – – 5,639 494 – 196 5,068 100 – 196 1,103 1,103 243 91 160 41 – – 8 7 – – 160 – 239 1,119 8 432 571 394 500 – – 243 91 – 41 – – – – 7,982 8,425 1,840 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. 130 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Group – 2018 Non- financial liabilities at other than fair value Notes R million R million R million R million R million Financial liabilities at am- ortised cost Non- financial liabilities at fair value Total Desig- nated fair value through profit or loss Current liabilities* R million Non- current liabilities* R million General insurance liabilities Debt instrument Deferred reinsurance commission revenue Amounts due to agents and reinsurers Post-retirement medical benefit liability Share-based payment liability Employee benefits Deferred tax Deposits owing to reinsurers Amounts payable to cell owners Current tax payable Trade and other payables 23 24 14 16 13 25 26 8 27 28 6,119 500 186 514 254 68 213 103 796 878 7 543 10,181 – – – – – – – – – – – – – – 500 – – – – – – 796 878 – 543 2,717 – – – – – – – – – – – – – 6,119 4,982 – 186 514 254 68 213 103 – – 7 – – 186 514 – – 213 – 796 878 7 543 1,137 500 – – 254 68 – 103 – – – – 7,464 8,119 2,062 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. OLD MUTUAL INSURE LIMITED Annual Report 2019 131 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements41. Financial instruments and risk management (continued) Company – 2019 Desig- nated fair value through profit or loss Finan- cial lia- bilities at am- ortised cost Non- financial liabilities at fair value Non- financial liabilities at other than fair value Non- current liabilities* Notes R million R million R million R million R million R million R million Current liabilities* Total General insurance liabilities Lease liabilities Debt instrument Deferred reinsurance commission revenue Amounts due to agents and reinsurers Post-retirement medical benefit liability Share-based payment liability Employee benefits Deposits owing to reinsurers Trade and other payables 23 7 24 14 16 13 25 26 28 3,641 491 500 125 884 178 80 141 226 236 6,502 – – – – – – – – – – – – – 500 – – – – – 226 229 955 – – – – – – – – – – – 3,641 2,983 491 – 125 100 – 125 884 884 178 80 141 – 7 – – 141 226 236 658 391 500 – – 178 80 – – – 5,547 4,695 1,807 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. 132 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Company – 2018  Non- financial liabilities at other than fair value Notes R million R million R million R million R million Financial liabilities at am- ortised cost Non- financial liabilities at fair value Total Desig- nated fair value through profit or loss Current liabilities* Non- current liabilities* R million R million General insurance liabilities Debt instrument Deferred reinsurance commission revenue Amounts due to agents and reinsurers Post-retirement medical benefit liability Share-based payment liability Employee benefits Deposits owing to reinsurers Trade and other payables 23 24 14 16 13 25 26 28 3,829 500 114 355 191 54 201 672 359 6,275 – – – – – – – – – – – 500 – – – – – 672 359 3,829 – – – – – – – – – – 114 355 191 54 201 – – 2,981 – 114 355 – – 201 672 359 848 500 – – 191 54 – – – 1,531 3,829 915 4,682 792 * Current assets and liabilities refer to amounts that are expected to be recovered or settled within 12 months from the reporting date and non-current assets and liabilities refer to amounts that are expected to be recovered or settled after 12 months from the reporting date. OLD MUTUAL INSURE LIMITED Annual Report 2019 133 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements42. Risk management Overview General The Board has overall responsibility for the Group’s systems of internal control and risk management. The executive management is responsible for the management and implementation of the Group enterprise risk management framework and governance frameworks. To assist the Board in the execution of its fiduciary duties in regard to risk management, legal and compliance accountabilities, the Group Risk and Compliance Committee has the following responsibilities: • assisting the Board in setting risk strategy in liaison with management; • assisting the Board in overseeing the Group’s compliance with applicable legal and regulatory requirements and industry standards; • providing independent and objective oversight of risk management also taking account of reports by management and the Group Audit Committee to the Board on all categories of identified risks; • recommending the risk policy and framework to the Board for approval; and • ensuring the establishment of independent risk management, compliance and actuarial control functions and reviewing their effectiveness. The Board has delegated to the Group Audit Committee an oversight role of financial reporting, accounting, the external auditor, appropriate internal controls and the internal auditors, and regulatory compliance, inter alia, to ensure the integrity of reporting and financial controls. The internal control systems continue to be enhanced and developed to safeguard the assets of the Group and to ensure timely and reliable monitoring and reporting. The Group Audit Committee has the following responsibilities: • ensure compliance with all statutory duties imposed in terms of the Companies Act and, where appropriate, the recommendations of the King Code with regard to the auditors of the Group; • oversee the preparation of the annual report that conveys adequate information about the operations of the Group and its sustainability and financial reporting; • review the expertise, resources and experience of the Group’s finance function, and disclose the results of the review in the annual report; • oversee internal audit and consider the effectiveness of internal audit at least annually and report to the Board on the assessment from internal audit on the adequacy of the internal controls; • oversee the financial reporting risks; internal financial controls and IT risks as it relates to financial reporting; • deal with all aspects of the annual financial statements of the Group and ensure compliance with relevant legislation and, where appropriate, the King Code; • review the accounting policies of the Group on an annual basis; and • ensure compliance with all statutory requirements in relation to the external auditors including to review the quality and effectiveness of the audit process and assess whether the external auditors have performed the audit as planned. The risk identification process is used to build an aggregated view of all significant risks faced by the Group. The risk appetite framework governs how the risks should be managed within the Group. It is within this risk appetite framework that the Group has selected its asset allocation and reinsurance programme which are among the most important determinants of risk and capital requirements within the Group. 134 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)The following control functions within the Group are responsible for discharging the operations of risk management and compliance: Risk management • direct and assist in the co-ordination and monitoring of risk management activities; • maintain and update the risk methodology and risk management system for the Group. This includes the identification, assessment, monitoring, mitigation and reporting of the key risks; • monitor and report progress on corrective action plans for risks that require mitigating actions; • drive risk management by promoting awareness of risk management to both management and staff; • ensure effective risk management training programmes are established; • assist management with the embedding of risk management in the day-to-day business activities of the Group; and • ensure that risk management is considered when setting strategic goals and objectives. Compliance • monitors and reports on compliance with regulatory requirements; • monitors that systems and controls are in place to ensure that the Group’s exposure to compliance risk is minimised; • coordinates the Group’s relationship with its regulators; • evaluates the impact of forthcoming legislative regulatory changes and provides advice on potential process and control changes required and whether the proposed control will be adequate; and • reports to the Group Risk and Compliance Committee on the status of compliance of the Group. Actuarial control The purpose of the actuarial control function is the following: • review and report on the reliability and adequacy of the regulatory valuation and solvency results; • review and report on the adequacy of the reinsurance and other risk transfer arrangements; • review and report on the appropriateness of the risk policies relating to the actuarial scope of work, including particularly the Underwriting Policy, the Reinsurance Policy; and the Asset Liability Management Policy; • advise on actuarial matters relating to the Own Risk and Solvency Assessment (ORSA); • advise regarding the long-term solvency of the companies in the Group, allowing for possible scenarios; and • advise on the actuarial soundness of product development and design, including the terms and conditions of insurance contracts and pricing and estimations of the capital required to underwrite the product. Internal audit The purpose of Group Internal Audit is to help the Board and executive management to protect the assets, reputation and sustainability of the Group. This is done by: • assessing whether all significant risks, both current and emerging, are identified and appropriately reported by management and the risk function to the Board; • assessing whether the risks identified are adequately controlled; and • by challenging executive management to improve the effectiveness of governance, risk management and internal controls. Group Internal Audit is strategically well positioned to achieve its objectives. The Head of Audit is accountable to the Chairman of the Audit Committee and has access to the Chairman of the Board. Further to this: • the internal audit function has financial independence through the Old Mutual Limited Group Audit Committee approving a budget to allow Group Internal Audit to meet the requirements of its mandate; • internal audit is functionally independent from the activities it audits and from the day-to-day internal control processes of the Group; • internal audit can conduct assignments on its own initiative, with free and unfettered access to people and information, in respect of any relevant department, establishment or function of the organisation, including the activities of branches and subsidiaries and outsourced activities; • internal audit meets with the Group Audit Committee at least once a year without management being present, and has frequent interactions with the Chairman of the Audit Committee; • functional independence of the head of internal audit and the internal audit function is further maintained by not directly reporting into executive management. Internal audit does, however, have unrestricted access to the Group executive committee as individuals and are present in key meetings and forums, to provide input and feedback. OLD MUTUAL INSURE LIMITED Annual Report 2019 135 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements42. Risk management (continued) Underwriting risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore difficult to predict. Types of insurance contracts The types of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance contracts are set out below: Types of insurance contracts: Accident and personal accident Crop Engineering Liability Marine Motor Trade credit and guarantee Property Accident – Provides indemnity for loss of, or damage to, mainly movable property for losses caused by crime, certain accidental damage, such as damage to goods in transit or accidental damage to glass. Included under the accident classes are legal liabilities an insured may incur as a result of accidental damage to third-party property or accidental death or injury to a third party caused by the insured. Personal accident – Provides compensation arising out of the death, permanent or temporary total disability of the insured, the family of the insured or possibly the employees of a business. Such death or disability is restricted to certain accidents and does not provide the wider cover available from the life insurance industry. Crop – Provides indemnity for crops, while still on the field, against hail, drought and excessive rainfall. The cover ceases as soon as harvesting has taken place. Engineering – Provides indemnity for loss sustained through the use of machinery and equipment or the erection of buildings or structures. This type of contract includes contract works, removal of support, project delay, construction plant, machinery breakdown, loss of profits, deterioration of stock, dismantling, transit and erection, works damage and electronic equipment. Liability – Provides cover for risks relating to the incurring of a liability other than relating to a risk covered more specifically under another insurance contract. Marine – Provides indemnity for both cargo and hull classes of business. Cargo covers physical loss of or damage to cargo, with a project delay option. Hull covers loss or damage to pleasure craft or commercial vessels as a result of accidents and also includes legal liability as a result of the accident. Motor – Provides indemnity for loss of or damage to the insured motor vehicle. The cover is normally on an all risks basis providing a wide scope of cover following an accident or theft of the vehicle, but the insured can select restricted forms of cover, such as cover for fire and theft only. Legal liabilities arising out of the use or ownership of the motor vehicle following an accident for damage to third-party property or death or injury to a third party are also covered under this class of business. Trade credit – This business is predominantly written through Credit Guarantee Insurance Corporation of Africa Limited, a subsidiary company. This is an insurance product for business entities wishing to protect their accounts receivable from loss due to credit risks such as protected default or insolvency. Property – Provides indemnity for loss of, or damage to, immovable and movable property caused by perils, such as fire, lightning, explosion, weather, water, earthquake and malicious damage. The fire classes also include business interruption policies which insure the loss of profits incurred by a business as a result of loss or damage to the insured property by these perils. 136 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)The return to shareholders under the above products arises from the total premiums charged to policyholders less the amounts paid to cover claims and the expenses incurred by the Group. There is also scope for the Group to earn investment income owing to the time delay between the receipt of premiums and the payment of claims. Mutual and Federal Risk Financing Limited underwrites insurance policies that fall within the abovementioned categories, through the use of cell structures. Risk that arises from insurance contracts Insurance risk and policies for mitigating insurance risk The primary activity of the Group relates to the assumption of the risk of loss from events involving persons or organisations. Such risks may relate to any of the abovementioned classes of business. As such, the Group is exposed to the uncertainty surrounding the timing and severity of claims under insurance contracts. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. The principal risk is that the frequency or severity of claims is greater than expected and that the Group does not charge premiums appropriate for the risk accepted. Insurance events are, by their nature, uncertain, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques. The Group manages its insurance risk through the underwriting strategy, approval procedures for transactions that involve new products or that exceed set limits, pricing guidelines, centralised management of reinsurance and monitoring of emerging issues. The Group also employs staff experienced in claims handling and rigorously applies standardised policies and procedures around claims assessment. These actions are described below: Underwriting strategy The Group’s underwriting strategy seeks diversity to ensure a balanced portfolio and is based on a large portfolio of similar risks spread over a large geographical area. The underwriting strategy is set out in an annual business plan and risk appetite that determines the classes of business to be written, the territories in which business is to be written and the industry sectors to which the Group is prepared to accept exposure. Adherence to the underwriting delegated authorities is managed through the underwriting portfolio management and quality assurance processes. Pricing of the Group’s insurance products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes trended forward to recognise anticipated changes in claims patterns. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, the cost of reinsurance and for a profit loading that adequately covers the cost of capital. Underwriting limits are set to ensure that the underwriting policy is consistently applied. Underwriting performance is monitored continuously and the pricing and underwriting parameters are revised accordingly. Risk factors considered as part of the review would typically include factors such as past loss experiences, past insurance history, type and value of the asset covered, security measures taken to protect the asset and major use of the covered items. Reinsurance strategy Reinsurance risk is the risk that the reinsurance cover placed is inadequate and/or inefficient relative to the Group’s risk management strategy and objectives. The Group reinsures a portion of most of the risks it underwrites in order to control its exposures to losses and protect capital resources. The Group buys a combination of proportional and non-proportional reinsurance treaties to reduce the overall volatility as well as the net exposure on any one risk/event to within the stated annual risk appetite limits. Concentrations of insurance risk and policies mitigating the concentrations Within the insurance business, concentrations of risk may arise where a particular event or series of events could impact heavily upon the Group’s resources. Business is mainly carried out in South Africa with the bulk of exposure in Gauteng, followed by Cape Town. The Group has exposure to all major lines of insurance business, but the bulk of exposure is to property and motor risk. OLD MUTUAL INSURE LIMITED Annual Report 2019 137 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements42. Risk management (continued) Exposure relating to catastrophe events The Group sets out the total aggregate exposure that it is prepared to accept in certain territories to a range of events, such as natural catastrophes. The aggregate position is reviewed annually. The Group uses a number of modelling tools to monitor aggregation and to simulate catastrophe losses in order to measure the effectiveness of the reinsurance programmes and the net exposure of the Group. The Group considers that its most significant single loss would arise in the event of an earthquake in Gauteng. However, exposure to multiple storms in a single year or a severe recession can give rise to a higher net retained loss in severe years (1 in 200). The Group’s policies for mitigating catastrophe risk exposure include the use of both proportional and excess-of-loss reinsurance. In the event of a major catastrophe such as an earthquake in Gauteng, the net retained loss would represent 1.8% of capital (2018: 1.9%). The additional reinstatement premiums, variable commissions, loss participation and inclusion of large individual losses within the catastrophe could increase this to 4.5% (2018: 3.4%) of the Group’s capital. Measurement of insurance liabilities The best estimate reserve represents the expected value of the insurance liabilities, essentially the mean in a range of possible outcomes in the development of unreported claims and the future development of notified claims. The explicit risk margins are added to the best estimate to reflect the uncertainty of the ultimate cost of claims. The levels of the IBNR provisions and the risk margins are assessed annually by management against the Group’s past claims experience and adjusted if the experience indicates that the methodology is no longer appropriate. The methods applied by the Group use historical claims development information and therefore the underlying bases assume that the historical claims development pattern will occur again in the future. There are reasons why this may not be the case, which, insofar as they can be identified, have been allowed for by modifying the methods. Such reasons include: • changes in processes that affect the development/recording of claims paid and incurred; • economic, legal, political and social trends; • changes in mix of business; and • random fluctuations, including the impact of large losses. There were no significant changes to these methodologies from the prior year. Claims development The Group is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term, subject to predetermined time scales dependent on the nature of the insurance contract. The Group is therefore exposed to the risk that claims reserves will not be adequate to fund historic claims (run-off risk). To manage run-off risk, the Group takes all the reasonable steps to ensure that it has appropriate information regarding its claims exposures and adopts sound reserving practices. Further, there is capital specifically allowed for the risk of inadequate reserves. The majority of the Group’s 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 cost takes longer to materialise and settle. The Group’s long-tailed business is generally limited to liability, personal accident, third-party motor liability and certain engineering classes. Please refer to note 23 for claims development information. Other risks and policies mitigating these risks The Group is exposed to the risk of false, invalid and exaggerated claims. Sophisticated software and fraud detection measures are also in place to improve the Group’s ability to proactively detect fraudulent claims. 138 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)Capital risk management  The company targets a multiple of 1.3 times the solvency assessment and management’s (SAM) solvency capital requirement. The Group capital target is 1.2 times using the SAM group Deduction and Aggregation capital requirement. This is expected to be replaced by a target of 1.3 times using the SAM Accounting Consolidation capital requirement if this option is approved by the Prudential Authority (PA). This implies that the Group holds a buffer over and above a 99.5% level of sufficiency. The Group capital is allocated to subsidiaries and lines of business based on a combination of the risks associated with each line of business and the SAM capital requirements for each line of business/subsidiary. Return on capital targets are set at 18% – 20%. Investment allocations and reinsurance programmes are based on the Group’s risk appetite, which recognizes the impact on the solvency position. Operational risk Operational risk is the risk of direct or indirect losses resulting from human factors and inadequate or failed internal processes and systems. Operational risk is inherent in the Group’s operations. Major sources of operational risk can include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic and operational change, integration of acquisitions, fraud, human error such as not placing of all the necessary facultative reinsurance correctly, client service quality, inadequacy of business continuity arrangements, recruitment, training and retention of employees, and the social and environmental impact of the Group. The Group manages operational risk by a comprehensive system of internal controls. From a risk governance perspective, the three lines of defence approach is used to identify the various levels of controls, oversight and assurance, including consideration of role-player independence. The Group has developed a number of contingency plans including Business Continuity Plans. Regulatory compliance risk Regulatory compliance risk is the risk that the Group is not able to meet the regulatory requirements, which may impact the Group’s reputation and/or give rise to penalties or fines. The Board of directors and management are actively monitoring the changes in the regulatory and compliance business landscape. The possible implications for the business plans and governance structures going forward are analysed regularly and the necessary changes are implemented. The Group seeks constructive engagement with the various regulators and policymakers. Market conduct risk is the risk that a firm’s behaviour may result in unfair treatment of its clients. Regulatory requirements relating to conduct risk are continually being strengthened by conduct risk mitigation initiatives such as the Retail Distribution Review and the Conduct of Financial Institutions Bill. The Old Mutual Limited Group Market Conduct Framework, to which the Group adheres, is in the process of being implemented and covers these regulated aspects. Financial risk management • Credit risk. • Liquidity risk; and • Market risk (currency risk, interest rate risk and price risk). The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance policy liabilities. The most important components of this financial risk are credit risk, liquidity risk and market risk (including equity price risk, interest rate risk and foreign currency risk). Each of these financial risks is described below, together with a summary of the ways in which the Group manages these risks. Credit risk  Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, where the Group is exposed to credit risk are: • amounts due from insurance policyholders; • amounts due from insurance contract intermediaries and third-party recoveries (refer to note 16); • investments and cash and cash equivalents; • reinsurers’ share of general insurance liabilities; • amounts due from reinsurers and third parties in respect of claims already paid (refer to note 16); and • loans to share trusts, other loans receivable and trade receivables. OLD MUTUAL INSURE LIMITED Annual Report 2019 139 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements42. Risk management (continued) Exposures to individual policyholders, groups of policyholders and third parties are monitored as part of the credit control process. Reputable financial institutions are used for investing and cash-handling purposes. In excess of 99% (2018: 99%) of money market instruments and cash and cash equivalents are placed with institutions that have a national long-term credit rating of at least A-. Analysis of the credit quality and maximum exposure to credit risk of the financial assets AAA AA A lower Not rated Total BBB and – – 220 1,316 R million Group 2019 Loans receivable Reinsurers’ share of general insurance liabilities Loans to share trusts Investments and securities Long–term loans Unlisted empowerment private equity fund Unlisted shares Listed shares – – – – – – – Unlisted money market funds 1,796 3,252 Amounts due from agents and reinsurers Trade and other receivables Cash and cash equivalents – – – 1 – 1,085 – 11 – – – – – – 104 – – 2 565 7 33 90 159 1,144 14 1,015 443 1 2 2,112 7 33 90 159 1,144 5,135 1,744 443 1,086 R million Group  2018 1,796 4,558 2,013 115 3,473 AAA AA A lower Not rated Total BBB and – – 187 2,080 Loans receivables Reinsurers’ share of general insurance liabilities Loans to share trusts Investments and securities Long-term loans Unlisted empowerment private equity fund Unlisted shares Listed shares – – – – – – – Unlisted money market funds 696 4,223 Amounts due from agents and reinsurers Trade and other receivables Cash and cash equivalents – – – 44 – 1,385 – 49 – – – – – – – – – 1 258 7 36 67 137 1,114 – 1,338 604 1 1 2,574 7 36 67 137 1,114 4,951 1,618 604 1,386 140 OLD MUTUAL INSURE LIMITED Annual Report 2019 696 5,839 2,348 49 5,181 – – – – – 73 624 – – – – – – – 32 236 – – – – – – – – – – – – Notes to the group and company Financial Statements (continued)Unlisted money market funds 1,077 1,431 Amounts due from agents and reinsurers Trade and other receivables Cash and cash equivalents – – – 1 – 282 R million Company 2019 Loans receivable  Reinsurers’ share of general insurance liabilities Loans to share trusts Investments and securities Long-term loans Unlisted empowerment private equity fund Unlisted shares Listed shares R million Company 2018 Loans receivable  Reinsurers’ share of general insurance liabilities Loans to share trusts Investments and securities Long-term loans Unlisted empowerment private equity fund Unlisted shares Listed shares AAA AA A lower Not rated Total BBB and – – – – – – – – – – – – – – 1,077 1,934 1,843 115 1,781 AAA AA A lower Not rated Total BBB and – – 220 1,175 – – – – – – – – – – – – – – – 44 624 – – – – – – – 32 236 – – – – 311 914 – 11 – – – – – – 104 – – 2 15 84 30 90 43 466 2 774 274 1 2 1,421 84 30 90 43 466 2,554 1,503 274 283 – 82 – – – – – – – – – 1 246 84 33 67 8 468 6 990 322 1 1 1,553 84 33 67 8 468 2,940 1,270 322 343 Unlisted money market funds  696 2,206 Amounts due from agents and reinsurers Trade and other receivables Cash and cash equivalents – – – 44 – 342 The assets analysed above are based on external credit ratings obtained from Fitch Ratings Inc and Moodys. 696 2,903 1,182 82 2,226 OLD MUTUAL INSURE LIMITED Annual Report 2019 141 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements42. Risk management (continued) The rating scales are based on long-term investment horizons under the following broad investment grade definitions: AAA AA A BBB The financial instrument is judged to be of the highest quality, with minimal credit risk and indicates the best quality issuers that are reliable and stable. Included in the AAA rating is AAA- as well as AAA+. The financial instrument is judged to be of high quality and is subject to very low credit risk and indicates quality issuers. Included in the AA rating is AA- as well as AA+. The financial instrument is considered upper-medium grade and is subject to low credit risk although certain economic situations can more readily affect the issuers’ financial soundness adversely than those rated AAA or AA. Included in the A rating is A- as well as A+. The financial instrument is subject to moderate credit risk and indicates medium-class issuers which are currently satisfactory. Not rated This is where the exposure is not risk-rated in an active market, such as loans and advances listed and unlisted ordinary shares. Reinsurance credit risk Under the terms of reinsurance agreements, reinsurers agree to reimburse the ceded amount in the event that a gross claim is paid. Consequently, the Group is exposed to the credit risk of the reinsurer. The Group risk appetite requires that all reinsurers have a local/international credit rating of A- or better. Maximum exposure per reinsurer is also limited in accordance of the risk appetite.  The Group held deposits of R239 million (2018: R796 million) and the company held deposits of R226 million (2018: R672 million) as security for reinsurers’ share of insurance contract provisions at the reporting date. Following regulatory changes, the Group has released some deposits owing to reinsurers during the year. No new deposits were received during the year. Analysis of the credit quality and maximum exposure to credit risk of the financial assets of the net treaty included in amounts due from/to agents and reinsurers: AAA AA A BBB and lower Not rated Total – – – – – – – – – – – – – – – – – – (13) (13) (74) 86 25 98 (42) 137 (34) (4) 112 74 378 – – – – – – – – 8 8 – – – – – – – – 54 54 (74) 86 25 98 (42) 137 (34) (4) 112 123 427 R million Group  2019 General Reinsurance Africa Ltd GIC Re South Africa Ltd Hannover Reinsurance Africa Ltd Lloyd’s of London Mitsui Sumitomo (Japan) Munich Reinsurance Co of SA Ltd Partner Reinsurance Company Ltd Swiss Re Africa Limited Trans Re London Limited Other 142 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)R million  Group 2018 General Reinsurance Africa Ltd GIC Re South Africa Ltd Hannover Reinsurance Africa Ltd Lloyd’s of London Mitsui Sumitomo (Japan) Munich Reinsurance Co of SA Ltd Partner Reinsurance Company Ltd Swiss Re Africa Limited Trans Re London Limited Other R million Company 2019 General Reinsurance Africa Ltd GIC Re South Africa Ltd Hannover Reinsurance Africa Ltd Lloyd’s of London Mitsui Sumitomo (Japan) Munich Reinsurance Co of SA Partner Reinsurance Company Ltd Swiss Re Africa Limited Trans Re London Limited Other AAA AA A BBB and lower Not rated Total – – – – – – – – – – – (7) – – – – 120 – (21) – 8 100 – (2) (1) 13 39 – 1 – 13 58 121 – – – – – – – – – – – – – – – – – – – – 53 53 (7) (2) (1) 13 39 120 1 (21) 13 119 274 AAA AA A BBB and lower Not rated Total – – – – – – – – – – – – – – – – – – – – – – (74) 83 32 98 (43) 19 (33) (20) 112 85 259 – – – – – – – – – 5 5 – – – – – – – – – (9) (9) (74) 83 32 98 (43) 19 (33) (20) 112 81 255 OLD MUTUAL INSURE LIMITED Annual Report 2019 143 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                                    42. Risk management (continued) R million Company 2018 General Reinsurance Africa Ltd GIC Re South Africa Ltd Hanover Reinsurance Africa Ltd Lloyd’s of London Mitsu Sumitomo (Japan) Munich Reinsurance Co of SA Partner Reinsurance Company Ltd Swiss Re Africa Limited Trans Re London Limited Other Liquidity risk AAA AA A BBB and lower Not rated Total – – – – – – – – – – – (7) – – – – 21 – (40) – 11 (15) – 1 1 13 35 – 1 – 13 56 120 – – – – – – – – – – – – – – – – – – (8) (8) (7) 1 1 13 35 21 1 (40) 13 59 97 Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments to policyholders under policy contracts and in respect of financial liabilities. The Group sets limits on the minimum proportions of maturing funds available to meet such calls and unexpected levels of demand. Maturity analysis of general insurance liabilities Based on actuarial modelling of historical and future expected trends, the Group has estimated the probable cash outflows associated with gross general insurance liabilities. The maturity profile of the related reinsurance assets is expected to be similar to the profile of the liabilities. The Group acknowledges that the unearned premium provision that will be recognised as earned premium in the future, will most likely not lead to claim cash outflows equal to this provision.  The maturity profile of contractual cash flows of non-derivative financial liabilities, and financial assets held to mitigate the risk, are presented in the following table. The cash flows are undiscounted contractual amounts. Group – 2019 Less than 3 months R million 3 months to 1 year 1 to 5 years Over 5 years R million R million R million Total R million – 18 3,296 – 432 – 1,011 – 29 1,771 239 – – 92 500 447 572 – – – – – – – – – 1,119 – 500 494 5,639 239 432 1,119 1,103 (4,757) (2,131) (1,519) (1,119) (9,526) Debt instruments Lease liabilities General insurance liabilities Deposits owing to reinsurers Trade and other payables Amounts payable to cell owners Amounts due to agents and reinsurers 144 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                    Group – 2018  Debt instrument General insurance liabilities Deposits owing to reinsurers Trade and other payables Amounts payable to cell owners Amounts due to agents and reinsurers Company – 2019 Debt instruments Lease liabilities General insurance liabilities Deposits owing to reinsurers Trade and other payables Amounts due to agents and reinsurers Company – 2018 Debt instrument General insurance liabilities Deposits owing to reinsurers Trade and other payables Amounts due to agents and reinsurers Less than 3 months R million 3 months to 1 year 1 to 5 years R million R million Total R million – 2,585 669 543 – 471 – 2,397 127 – – 43 500 1,137 – – 878 – 500 6,119 796 543 878 514 (4,421) (2,634) (2,769) (9,824) Less than 3 months R million 3 months to 1 year 1 to 5 years R million R million Total R million – 17 1,719 – 236 831 – 28 1,264 226 – 53 500 446 658 – – – 500 491 3,641 226 236 884 (2,803) (1,571) (1,604) (5,979) Less than 3 months R million 3 months to 1 year 1 to 5 years R million R million Total R million – 1,717 564 359 334 – 1,264 108 – 21 500 848 – – – 500 3,829 672 359 355 (2,974) (1,393) (1,348) (5,715) OLD MUTUAL INSURE LIMITED Annual Report 2019 145 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                  42. Risk management (continued) Fair value hierarchy carried at fair value The fair value hierarchy of assets carried at fair value are as follows: Group – 2019 Non-current asset held for sale Investments at fair value Unlisted shares Unlisted empowerment private equity fund Listed shares Unlisted money market funds Group – 2018 Non-current asset held for sale Financial assets at fair value Unlisted shares Unlisted empowerment private equity fund Listed shares Unlisted money market funds Level 1 R million Level 2 R million Level 3 R million Total R million – – – – 1,144 5,135 6,279 6,279 257 257 – – – – – 478 – – 159 90 – – 249 249 257 257 159 90 1,144 5,135 6,528 7,006 Level 1 R million Level 2 R million Level 3 R million Total R million – – – – 1,114 1,675 2,789 2,789 243 243 35 – – 3,276 3,311 3,777 – – 102 67 – – 169 169 243 243 137 67 1,114 4,951 6,269 6,735 146 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                    Company – 2019 Investment in subsidiaries Investment in employee share trusts Non-current asset held for sale Investments at fair value Unlisted shares Unlisted empowerment private equity fund Listed shares Unlisted money market funds Company – 2018 Investments in subsidiaries Investments in employee share trusts Non-current asset held for sale Investments at fair value Unlisted shares Unlisted empowerment private equity fund Listed shares Unlisted money market funds Level 1 R million Level 2 R million Level 3 R million Total R million – – – – – – 466 2,554 3,020 3,020 – 634 257 891 – – – – – 1,426 – – 1,426 43 90 – – 133 891 1,559 1,426 634 257 2,317 43 90 466 2,554 3,153 5,470 Level 1 R million Level 2 R million Level 3 R million Total R million – – – – – – 468 678 1,146 1,146 – 611 243 854 – – – 2,262 2,262 3,116 1,548 – – 1,548 8 67 – – 75 1,623 1,548 611 243 2,402 8 67 468 2,940 3,483 5,885 Level 1: Quoted market price in an active market for an identical instrument. Level 2: Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs which reflect assumptions that market participants would use when pricing an asset or liability). Unobservable inputs are developed using best available data. OLD MUTUAL INSURE LIMITED Annual Report 2019 147 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                    42. Risk management (continued) Movement analysis of level 3 instruments The following table shows a reconciliation from the opening balances to the closing balances for fair value measurements in level 3 of the fair value hierarchy: Investments at fair value Opening balance Acquisition of investment Revaluation of investments to fair value through profit or loss Revaluation of unlisted instruments Investments in subsidiaries Opening balance Subsidiary fair value adjustment through profit or loss Acquisition of subsidiary GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 202 35 – 42 279 – – – – 105 – 10 87 202 – – – – 108 35 – – 143 76 – – 32 108 1,548 (122) – 1,836 (309) 21 1,426 1,548 Sensitivity analysis for investments at fair value  Material subsidiary companies are valued using the discounted cash flow method and net asset value is used as a proxy for the valuation of less material subsidiaries. A sensitivity analysis performed on the investment in subsidiaries indicates that an increase of 10% in the discount rate will result in a maximum movement of 12% or R133 million impact on profit or loss (2018: 36% or R559 million) in the calculated fair value. If the market interest rate associated with the unlisted money market investments changes by 1% the impact on fair value as well as the profit or loss would be R13 million for the Group and R3 million for the company. The unlisted empowerment private equity fund consists of cash and unlisted ordinary shares. The unlisted ordinary shares are shown at fair value which is calculated by reference to expected future cash flows, discounted by an applicable risk-adjusted discount rate for similar equity securities. A 2.5% difference in earnings before interest, tax, depreciation and amortisation (EBITDA) would impact the profit or loss by R1 million (2018: R3 million). Further information relating to investments and securities is contained in note 15 of the financial statements. Market risk Market risk can be described as the risk of a change in the fair value or future cash flows of a financial instrument brought about by changes in interest rates, equity prices and foreign exchange rates. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on assets. Foreign currency risk The Group is exposed to foreign currency risk for transactions that are denominated in foreign currencies, with transactions in United States Dollar being the main currency impacting the Group. This exposure is limited to the underwriting operations in foreign currencies, credit insurance, transactions with foreign reinsurers and equity investments in foreign companies. The Group does not take on cover on foreign currency transactions and balances as the net exposure is considered minimal. 148 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                          Exposure in Rand The net carrying amounts, in Rand, of the various exposures, are denominated in the following currencies. The amounts have been presented in Rand by converting the foreign currency amounts at the closing rate at the reporting date: US Dollar exposure Assets: Investments and securities Insurance related assets Trade and other receivables Cash and cash equivalents Liabilities: Trade and other payables Other non financial liabilities Net US Dollar exposure RTGS exposure Assets: Trade and other receivables Investments in associates Investments and securities RTGS exposure Net exposure to foreign currency in Rand Exposure in foreign currency amounts GROUP COMPANY Notes 2019 R million 2018 R million 2019 R million 2018 R million 19 20 28 23 47 22 53 (1) (67) 77 2 24 9 54 (1) (39) 49 – 47 22 35 (67) 37 – 24 8 33 (39) 26 GROUP COMPANY Notes 2019 R million 2018 R million 2019 R million 2018 R million 19 – 66 20 86 163 9 90 37 136 185 – – – – – – – – 37 26 The net carrying amounts, in foreign currency of the above exposure was as follows: US Dollar exposure Assets: Investments and securities Insurance related assets Trade and other receivables Cash and cash equivalents Liabilities: Insurance related liabilities Net US Dollar exposure GROUP COMPANY Notes 2019 R million 2018 R million 2019 R million 2018 R million 19 20 2 3 2 4 (5) 6 – 2 2 1 (3) 2 – 3 2 3 (5) 3 – 2 2 1 (3) 2 OLD MUTUAL INSURE LIMITED Annual Report 2019 149 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements                                                                                                            42. Risk management (continued) RTGS exposure Assets: Trade and other receivables Investments in associates Investments and securities RTGS exposure Exchange rates  GROUP COMPANY Notes 2019 R million 2018 R million 2019 R million 2018 R million 19 – 79 24 103 2 20 8 30 – – – – – – – – The following closing exchange rates were applied at reporting date: Rand per unit of foreign currency  US Dollar RTGS Foreign currency sensitivity analysis  GROUP COMPANY 2019 R million 2018 R million 2019 R million 2018 R million 14.000 0.832 13.250 4.350 14.000 0.832 13.250 4.350 The following information presents the sensitivity of the Group to an increase or decrease in the respective currencies it is exposed to. The sensitivity rate is the rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated amounts and adjusts their translation at the reporting date. No changes were made to the methods and assumptions used in the preparation of the sensitivity analysis compared to the previous reporting period. Group An increase or decrease of 10% in the Dollar currency rate would result in a change of R1 million (2018: R26 million) to the profit after tax and a resultant increase or decrease in retained earnings. The RTGS rate is sensitive to a number of variables. An increase or decrease of 10% in the RTGS rate would result in a change of R5,94 million to the profit after tax and a resultant increase or decrease in retained earnings. For the 2018 financial year a decrease of the RTGS rate to 2.5:1 against the US Dollar would result in an increase in profit or loss of R3 million and an increase of the rate to 5:1 against the US Dollar would result in a decrease in profit or loss of R4 million. Interest rate risk Assets subject to interest rate fluctuations include cash instruments, including unlisted money market funds. Interest rate sensitivity analysis The following sensitivity analysis has been prepared using a sensitivity rate which is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. All other variables remain constant. The sensitivity analysis includes only financial instruments exposed to interest rate risk which were recognised at the reporting date. No changes were made to the methods and assumptions used in the preparation of the sensitivity analysis compared to the previous reporting period. 150 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)                                Group An increase or decrease of 1% in the interest rate on cash instruments would result in a change of R3,4 million (2018: R3,7 million) to the profit after tax of the Group and a resultant increase or decrease in retained earnings. Company An increase or decrease of 1% in the interest rate on cash instruments would result in a change of R2 million (2018: R2 million) to the profit after tax of the Company and a resultant increase or decrease in retained earnings. Equity price risk Equity price risk – unlisted equities The Group has investments in unlisted equities that are exposed to market risk. These include strategic investments in insurance-related undertakings and subsidiaries. The unlisted equities are selected by management after consideration of the benefits and corresponding risk related to the investment. Equity price risk – listed equities The Group has investments in listed equities that are exposed to market risk. The exposure to listed equities is protected from severe drops in equity markets by using hedging derivatives selected by management after consideration of the benefits and corresponding risk related to the investment where this is possible. Please refer to note 15 for more information on the protected equity portfolio. Equity price risk sensitivity analysis The following sensitivity analysis has been prepared using a sensitivity rate which is used when price risk internally to key management personnel and represents management’s assessment of the reasonably possible change in relevant prices. All other variables remain constant. The sensitivity analysis includes only investments held at the reporting date. No changes were made to the methods and assumptions used in the preparation of the sensitivity analysis compared to the previous reporting period. Group An increase or decrease of 10% in the equity prices relating to the protected equity portfolio would result in a change of R39 million (2018: R50 million) to the profit after tax of the Group and a resultant increase or decrease in retained earnings. An increase or decrease of 20% in the equity prices relating to the protected equity portfolio would result in a change of R78 million (2018: R100 million) to the profit after tax of the Group and a resultant increase or decrease in retained earnings. An increase or decrease of 10% in the equity prices relating to the Old Mutual Limited shares and other listed shares would result in a change of R58 million (2018: R61 million) to the profit after tax of the Group and a resultant increase or decrease in retained earnings. An increase or decrease of 20% in the equity prices relating to the Old Mutual Limited shares and other listed shares would result in a change of R117 million (2018: R122 million) to the profit after tax of the Group and a resultant increase or decrease in retained earnings. Company An increase or decrease of 10% in the equity prices relating to the protected equity portfolio would result in a change of R39 million (2018: R50 million) to the profit after tax of the company and a resultant increase or decrease in retained earnings. An increase or decrease of 20% in the equity prices relating to the protected equity portfolio would result in a change of R78 million (2018: R100 million) to the profit after tax of the company and a resultant increase or decrease in retained earnings. OLD MUTUAL INSURE LIMITED Annual Report 2019 151 Who we areWe cultivate valueOur value custodiansHow we protect valueOur value outcomesAnnual Financial statements43. Contingencies, guarantees and options Frontline Underwriting Managers (Pty) Ltd and Old Mutual Insure Limited have agreed that the company will have an option to purchase the Call Option Shares in Frontline during the Call Option Period at the Share Purchase Price. The call option consideration was expensed in the current period. 44. Going concern  The directors believe that the Group has adequate financial resources to continue in operation for the foreseeable future and accordingly the Group and company financial statements have been prepared on a going-concern basis. The directors have satisfied themselves that the Group is in a sound financial position. The directors are not aware of any new material changes post year-end that may adversely impact the Group, The directors are also not aware of any material non-compliance with statutory or regulatory requirements or of any pending changes to legislation which may affect the Group. 45. Events after the reporting period On 11 March 2020, COVID-19 was declared as a pandemic due to the rising rate and scale of infections observed. Further on 23 March 2020 the President of South Africa announced a national lockdown for 21 days, expected to last to 16 April 2020. The rapid spread of the virus has caused significant disruption in global equity markets and the impact of lockdowns in several countries worldwide is expected to reduce GDP growth in 2020, both locally and globally. These impacts associated with this pandemic could negatively impact the performance of the business in 2020 and we are in the process of assessing this impact.  There have been no other material events after 31 December 2019 up to the date of this report. 152 OLD MUTUAL INSURE LIMITED Annual Report 2019 Notes to the group and company Financial Statements (continued)

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