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Johannesburg - London-listed financial services group Old Mutual plc announced on Wednesday that continuing market volatility and a significant strengthening of the US dollar have led to a further increase in the costs associated with the guaranteed benefits on the variable annuity contracts in its US life business.
At the interims in August 2008, Old Mutual announced a strengthening of reserves in its US life business to reflect the impact of volatile equity markets on variable annuity product guarantees.
Old Mutual has therefore recognised additional guarantee reserves of $155m. Under current group accounting policy, $93m of this will be taken through adjusted operating profits reflecting the ineffective portion of the hedge and the remaining $62m will be recognised in adjusted operating profits over five years.
Separately, it said, the announcement on September 7 that the US government has placed Fannie Mae and Freddie Mac in conservatorship has resulted in a sharp fall in the market value of the preferred stock of these companies.
This has led to a write down of around $135m in the value of the preferred stock in these companies held by the Old Mutual US Life business.
Under the Old Mutual group accounting policy, this write down will be taken through adjusted operating profits over five years.
Good progress
As calculated today, these two charges are likely to result in a combined impact for 2008 of 1.2p per share on adjusted operating EPS (IFRS basis) and 2.9p per share on basic EPS (IFRS basis) and adjusted operating EPS (EEV basis), as there is unlikely to be any tax credit associated with these charges.
Old Mutual said a number of actions have been underway with the aim of limiting Old Mutual Bermuda's exposure to the guarantees, including withdrawing products, currency hedging, improved fund mapping to reduce basis risk and reviewing options available to de-risk the in-force book through various corporate actions.
While this work has made good progress, it will take some time before the benefits from these actions are realised. In the meantime, if market conditions remain adverse, it is likely that further reserve strengthening will be required.
The board has therefore decided to set aside a further $250m of
capital to support the ongoing capital needs of the Bermuda business. The board expects to inject some or all of this capital by the end of the year, depending on business performance in the light of actual market conditions.
"Following the preference share write downs in the US life business, we are reviewing the options we have to ensure that the US life business continues to be appropriately capitalised. Apart from the US Life business, the rest of the Old Mutual's businesses continue to perform in line with our expectations at the time of the interims on August 6 2008," it concluded.
- I-Net Bridge