London-listed South African life assurance group Old Mutual said on Monday that the adoption of European Embedded Value (EEV) increased its embedded value by 0,5% at the end of December 2004.
The EEV principles require best-estimate assumptions, consistency between assumptions and active review.
The outcome of a review of the economic assumptions is to increase the gross of tax equity risk premium in South Africa from 2% pa to 3,5% pa to better recognise the level of historical equity risk premiums and the future growth prospects of the economy.
Following a review of expense assumptions in Old Mutual’s North American business, a higher allocation has been made to maintenance expenses. The expense assumptions in respect of the South African business now also include an annual allowance for one-off project costs.
A total of 6,6-million pounds of unallocated head office expenses have been allocated to the covered business and included in the value of in-force calculations for South Africa and North America.
To clarify terminology, the embedded value of the covered business is the sum of the shareholders’ net worth in respect of the covered business, and the value of the in-force covered business.
The group embedded value includes the value of all other business at the book value detailed in the primary financial statements, on an IFRS basis.
The adjusted embedded value, a measure used by management to assess the shareholders’ interest in the value of the group, includes the group’s listed banking and general insurance subsidiaries at market value as well as the value of own shares held in policyholders’ funds.
The overall impact on adjusted embedded value at 31 December 2004 is a 0,5% increase from 139,1p to 139,7p.
The value of the in-force business, which is affected by the allowance for risk and inclusion of a proportion of unallocated head-office expenses, reduces by 7%.
The adjusted net worth increases by 4%, as a result of the impact of the adoption of IFRS on our non-life businesses.
The changes that have principally caused this increase are the change to dividend recognition and the change in goodwill amortisation in respect of the asset management businesses.
The adjusted operating profit for 2004 has increased by 3% (2% reduction, in respect of the covered business) with the return on adjusted embedded value (ROEV) increasing from 19,4% to 19,9%.
The most significant items affecting the operating profit of the covered business resulted from the effect of the increase of the equity risk premium on the expected return on capital in South Africa, and the lower value of new business in North America. – I-Net Bridge