EMBEDDED-VALUE REPORT OF NEDGROUP LIFE ASSURANCE COMPANY LIMITED

	2010 Rm	2009 Rm
Adjusted net worth	279	205
Required capital	173	113
Free surplus	106	92
Value of in-force business	752	590
Present value of future profits	808	635
Frictional costs	(37)	(27)
Cost of non-hedgeable risk	(19)	(18)
Total EV	1 031	795
Value of new business	295	187
New business sales*	770	562
APE* margin (%)	38,3	33,3
PVNBP**	1 943	1 600
PVNBP margin** (%)	15,2	11,7

Analysis of EV earnings:
		2010 Rm
EV at the beginning of the year		795
Total EV earnings		390
Operating EV earnings		364
Value of new business		295
Expected return		46
Experience variances		32
Non-economic assumption changes		(9)
Economic variances		16
Return on adjusted net worth		10
Adjustment: dividends paid		(154)
EV at the end of the year		1 031
Return on EV (%)		45,8

*	APE Annualised premium equivalent
**	Present value of new-business premiums

Nedgroup Life experienced strong sales growth during 2010, particularly in the credit life and single-premium lines of business, with APE growth of 37,0% during the year. The return on EV of 45,8% is driven by strong 2010 sales. Nedgroup Life paid dividends totalling R312 million during 2010.

METHODOLOGY
Covered business refers to all long-term life insurance business underwritten by the company.

Embedded value
The EV of the covered business is the discounted value of the projected future after-tax shareholder earnings arising from covered business in-force at the valuation date, plus the adjusted net worth.

Adjusted net worth represents the excess of the market value of assets over the statutory financial soundness valuation of liabilities.

Required capital
Required capital is the market value of assets that is required to support the covered business over and above that required to back the statutory liabilities, whose distribution to shareholders is restricted. The following capital measures are considered acceptable when determining the required capital:

  – economic capital; and

  – regulatory capital.

Economical capital for the covered business is based on the company’s own internal assessment of risk inherent in the business, consistent with a 99 ,93% confidence interval over a one-year time horizon.

At 31 December 2010 the economic capital measure was used and is the more onerous measure.

Free surplus
Free surplus is the excess of market value of assets over the statutory liabilities and the required capital. It is the assets that are available for distribution to shareholders.

Value of in-force (VIF) business
VIF consists of the following components:

  – present value of future profits;

  – less frictional costs of required capital;

  – less cost of non-hedgeable risks.

Projected liabilities and cashflows are calculated net of outward reinsurance.

Present value of future profits (PVFP)
PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that are expected to emerge from the in-force covered business, including the value of contractual renewal of in-force business, on a best-estimate basis where assumed earned rates of return and discount rates are equal to risk-free rates.

Frictional costs
Due to the requirement to hold capital in addition to statutory liabilities (ie required capital), there is a cost to shareholders since this capital is locked in the company. Frictional cost is the cost in respect of the taxation on the investment return and investment costs on the assets backing the required capital.

Cost of non-hedgeable risk (CNHR)
Non-hedgeable risks are those risks which cannot be hedged in deep and liquid markets (eg. mortality, morbidity, persistency, expense, reinsurance and operational risk). These risks are managed by holding risk capital. CNHR is calculated using a capital approach, ie it is determined as the present value of capital charges for all future non-hedgeable risk capital requirements until the liabilities have run off. A weighted average cost of capital rate of 2.0% has been applied to residual symmetric and asymmetric non-hedgeable capital.

Value of new business (VNB)
This is a measure of the value added to a company as a result of writing new business. This is calculated as the discounted value, at the date of sale, of projected after-tax shareholder profit from covered new business written during the reporting period net of frictional costs and the cost of CNHR associated with writing new business, using economic assumptions at the start of the reporting period.

APE and PVNBP margins
APE is the annual premium for regular premium sales plus 10% of single-premium sales sold during the reporting period. The APE margin is defined as the ratio of VNB to APE.

PVNBP is the present value of future premium and is calculated using a calculation approach that is consistent with calculation of VNB . The PVNBP margin is defined as the ratio of VNB to PVNBP.

ASSUMPTIONS

Non-economic assumptions
The EV and VNB were determined using best-estimate assumptions regarding future mortality, persistency rates and expenses. These best-estimate assumptions are determined using past, current and expected future experience.

Economic assumptions
Economic assumptions are determined such that projected cashflows are valued in line with the prices of similar cashflows that are traded in the capital markets. Investment return and discounting assumptions are based on the SA swap yield curve. The swap curve is sourced from a third-party market-consistent asset model. Expense inflation assumptions are determined considering a spread to the swap yield curve.

The risk-free spot yields and expense inflation at various terms are provided in the tables below :

Risk-free yields	2010	2009
Term (years)
1	5,6%	7,3%
5	7,4%	8,9%
10	8,2%	9,2%
Expense inflation
Term (years)
1	4,4%	5,9%
5	5,8%	7,0%
10	6,6%	7,2%

SENSITIVITIES
The table below shows the sensitivities of VNB, VIF and EV at 31 December 2010 to changes in key assumptions:

	VIF	EV	VNB
Central assumptions	752	1 031	295
Economic assumptions increase by 1%	754	1 034	296
Economic assumptions decrease by 1%	794	1 069	315
Equity and property market value decreasing by 10%	793	1 107	290
Voluntary discontinuance rates decreasing by 10%	815	1 091	324
Mortality and morbidity rates decrease by 5%	838	1 129	315
Maintenance expenses decrease by 10%, with no corresponding change in expense charges	785	1 072	318
Acquisition expenses increase by 10%	752	1 031	290

REVIEW BY INDEPENDENT ACTUARIES
Independent consulting actuaries have reviewed the results, methodology and assumptions underlying the calculation of EV and VNB. Based on the information supplied to them by Nedgroup Life, they are satisfied that the methodology and assumptions have been determined in accordance with generally accepted actuarial principles and in accordance with guidance note PGN 107 – Embedded Value and the Valuation of New Business.