US Life
Life sales summary
APE sales at $143 million increased by 34% relative to the
comparative period. Fixed indexed annuities, which represent more
than half of the total APE, increased 30% in 2010 compared to 2009.
The increase was driven by product revisions and competitive
annuity rates. The sales levels are within the range set for the
business and reflect the approach to managing capital within the
business. Our top 10 annuity distribution partners who have
represented an average of 60% of our total sales volume over the
past five years grew sales collectively by 62% in 2010.
IFRS results
The IFRS pre-tax profit for the year for the US Life business
was $50 million (2009: loss of $195 million), with financial
performance benefiting from lower impairment losses and the
reversal of prior impairments, partially offset by higher deferred
policy acquisition costs amortisation as a result of higher gross
profits.
Value of new business
The value of new business decreased by $66 million relative to
the comparative period. The decrease in VNB was mainly due to the
extended low yield environment and a lower assumed liquidity
premium. The negative VNB position is largely the result of the
MCEV basis used, where credit spreads in addition to the liquidity
premium are not valued in the determination of MCEV, but shown as
earnings when earned. Although we believe that the VNB is positive
on an EEV basis, the negative figure on the MCEV basis quantifies
the extent to which the business would rely on earning credit
spreads in order to provide the guarantees underwritten. Management
actions taken during the period included lowering commission rates
and increasing bonus on certain products, which improved consumer
value.
MCEV results
The 2010 operating MCEV earnings after tax of $72 million
decreased significantly relative to the comparative period. This
was mainly due to the 2009 expected returns being based off higher
asset yields, higher credit spreads and a very depressed starting
position. The persistency assumption changes of Universal Life
insurance plans (UL) and Return of Premium term insurance plans
(ROP) also contributed to the lower MCEV operating earnings.
Operating experience variances were higher than 2009. Fixed Indexed
Annuity (FIA) contributed most to the favourable result in 2010.
The positive variance of FIA was primarily due to higher than
expected surrenders of FIA contracts that are unprofitable on an
MCEV basis, while in 2009, the positive impact from higher than
expected surrenders were more than offset by the negative impact
from lower than expected interest margins.
MCEV increased by $220 million over the year. In addition to the
effects above, other significant movements affecting the closing
MCEV were the variances related to the change in economic
conditions, largely due to reduced risk-free rates and lower credit
spreads, partially offset by the liquidity premium reducing from
100 bps to 75 bps.
Funds under management
Funds under management ended the year at $17.2 billion, up $0.5
billion from the opening position, primarily due to a $0.8 billion
increase in the market value of the investment portfolio for the
year and increased net investment income. Net client cash flows
improved by 47% in 2010 compared to 2009 primarily due to lower
surrender activity and higher sales in 2010. Net cash and short
term holdings at 31 December 2010 were $630 million.
Investment portfolio
The net unrealised position on the fixed income security
portfolio improved to a net gain of $309 million at 31 December
2010 ($497 million net unrealised loss at 31 December 2009 and $138
million net unrealised gain at 30 June 2010). Although the increase
in Treasury yields during the fourth quarter of 2010 negatively
affected the net unrealised position, as credit spreads were
tighter overall on a year-on-year basis, the unrealised position
improved compared to the prior year. In addition, management
undertook selective de-risking of the investment portfolio. As at
31 December 2010, $546 million of the total $551 million of the
specified securities in the stock purchase agreement with Harbinger
Capital Partners had been sold at terms better than those expected
on signing of the sale agreement. The remaining $5 million of
specified securities have been sold since the year end.
The quality of the investment portfolio improved throughout the
year and 92% of the total portfolio had a market-to-book value
ratio greater than 90% at the end of 2010. The market to book value
ratio of the fixed income portfolio improved from 97% at the
beginning of the year to 102% at 31 December 2010.
There were no defaults in 2010. Net realised gains in 2010 of
$19 million include $22 million of trading gains on previously
impaired securities that had recovered in fair value and $70
million of losses realised on the sale of securities in
anticipation of the sale of the company. US Life also generated $64
million of net gains on de-risking trades during favourable market
conditions. Expected cash flows on certain previously impaired
structured securities improved significantly in 2010, resulting in
$54 million of revaluation gains. These revaluation gains were
partially offset by impairments.
During 2010, IFRS impairments were $50 million, generally in
line with our long-term assumption of $48 million, and compared to
$389 million in 2009. The 2010 impairments on 42 securities related
primarily to structured securities, with the losses due to adverse
changes in expected cash flows, or the likelihood of diminished
loss coverage from distressed monoline insurers that guaranteed the
performance of the security. The impairment losses were primarily
in RMBS ($30 million), ABS ($8 million), and CMBS ($6 million).
Capital
OM Financial Life's risk-based capital ratio increased from 312%
as at 31 December 2009 to 350% as at 31 December 2010. Regulatory
capital grew $83 million during 2010 driven by strong statutory
operating earnings. OM Financial Life's required capital decreased
(at the targeted 300% level) primarily due to a lower risk
investment portfolio offset by capital required for new business
growth. The US Life Group distributed a total of $109 million to
Old Mutual plc in 2010 comprising of $59 million from OM Financial
Life Insurance Company and $50 million from OM Re.
Bermuda
As disclosed in our Preliminary Results in March 2010, Bermuda
remains a non-core business, and as such its profits are therefore
excluded from the Group's IFRS adjusted operating profit. A review
of the operating performance of Bermuda is set out below:
Overview
The business continued to perform well against its strategy with
significant enhancements delivered in 2010 including business
service improvements, further enhancements to liability management
and to management information to improve the dynamic management of
exposures and further de-risk the Guaranteed Minimum Accumulation
Benefits (GMABs) attached to certain of the in-force variable
annuities.
Surrender activity in 2010 occurred largely in respect of
variable annuity contracts without GMABs, with the business
instituting a focused conservation strategy supported by high
customer interaction in order to retain as much of this profitable
business as possible. Surrender behaviour with respect to variable
annuity contracts with GMABs is directly influenced by the
differential between the value of the underlying funds and the
nominal level of the guarantee, as well as the financial
circumstances of the policyholder. The recovery across global
equity markets, particularly in the fourth-quarter in 2010,
resulted in an increase in the number of contracts where the
underlying fund values were greater than the level of the
guarantee. This resulted in a sharp increase in the levels of
contracts with GMABs surrendering in the fourth quarter of 2010,
with overall surrender activity across GMAB contracts for the year
at close to double 2009 levels (2010: 1,211 policies; 2009: 638
policies). Further gains across global equity markets in 2011 would
be expected to result in increased levels of surrenders across
variable annuity contracts with GMABs, accelerating the run-off of
these contracts. Ultimately, surrender activity will determine the
speed of the run-off and the extent and timing of any associated
capital, or cash release for this business. In February 2011, the
business launched an offer to account holders with non-Hong Kong
UGO contracts permitting them to surrender their contracts without
incurring penalties. The special offer increased the rate and
number of surrenders across this book, further de-risking the
business. The take-up rate was 6.2% at 4 March 2011. Management
will continue to assess demand for similar such offers in the
future.
