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FINANCIAL HIGHLIGHTS CHAIRMAN'S STATEMENT CHIEF EXECUTIVE'S STATEMENT BROADENING OUR INTERNATIONAL PROFILE GROUP FINANCE DIRECTOR'S REPORT BOARD OF DIRECTORS CORPORATE CITIZENSHIP CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Accounting policies 2 Foreign currencies 3 Segment information 4 Operating profit adjusting items 5 Income tax expense 6 Minority interests - Income statement 7 Earnings and earnings per share 8 Investment income (net of investment losses) 9 Banking interest and similar income 10 Fee and commission income, and income from service activities 11 Finance costs (including interest and similar expenses) 12 Banking interest expense 13 Fees and commission expense, and other acquisition costs 14 Other operating and administrative expenses 15 Acquisition of subsidiaries 16 Goodwill and other intangible assets 17 Investments in associated undertakings 18 Investment property 19 Property, plant and equipment 20 Operating lease arrangements 21 Finance lease arrangements 22 Deferred tax assets and liabilities 23 Insurance contract provisions 24 Deferred acquisition costs 25 Loans, receivables and advances 26 Derivative financial instruments - assets and liabilities 27 Financial assets fair valued through income statement 28 Other financial assets 29 Short-term securities 30 Other assets 31 Assets and liabilities held-for-sale 32 Financial liabilities fair valued through income statement 33 Borrowed funds 34 Provisions 35 Deferred revenue 36 Amounts owed to depositors 37 Other liabilities 38 Equity 39 Minority interests - balance sheet 40 Post balance sheet events 41 Post employment benefits 42 Share-based payments 43 Dividends 44 Contingent liabilities 45 Commitments 46 Related parties 47 Principal subsidiaries and Group enterprises 48 Financial risk 49 Insurance risk
COMPANY FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS EUROPEAN EMBEDDED VALUE SUPPLEMENTARY INFORMATION NOTICE OF ANNUAL GENERAL MEETING SHAREHOLDER INFORMATION

Notes to the consolidated financial statements

For the year ended 31 December 2006

15 Acquisition of subsidiaries

On 26 January 2006, the Company's offer for Försäkringsaktiebolaget Skandia (publ) (Skandia) was declared unconditional. Settlement of acceptances received up to that date was effective on 3 February 2006, which resulted in the Company obtaining 72.1 per cent of Skandia. The offer was extended and further acceptances were received and settled on 17 February 2006 (17.4 per cent) and on 23 March 2006 (8.7 per cent). Consequently, following further permitted open market purchases, the Group's interest in Skandia was 98.8 per cent at 31 December 2006.

The Company has instigated a compulsory purchase of the remaining Skandia shares. The compulsory purchase proceedings are in progress. Access to the minority shares is anticipated to be completed during 2007.

Under the terms of the offer, consideration was paid to Skandia shareholders by way of a combination of cash and shares in Old Mutual plc. To date, cash consideration of £1,253 million has been paid by the Company and the Company has issued 1,389 million Old Mutual plc shares, with a fair value of £2,670 million.

The results of Skandia have been included in these financial statements of the Group from 1 February 2006.

Total revenue and profit before tax for the eleven months ended 31 December 2006 were £5,148 million and £89 million, respectively. The total revenue and profit before tax for the twelve months ended 31 December 2006 were £5,309 million and £97 million, respectively.

The fair value of the consideration paid for the Group's 98.8 per cent holding in Skandia is as follows:

 
£m
 
Year ended
31 December
2006
Cash paid
1,253
Fair value of 1,389 million Old Mutual plc shares issued, based on the published prices at applicable rates of exchange
2,670
Costs of acquisition
72
Total consideration
3,995

The acquisition of Skandia in exchange for the Group's ordinary shares means that merger relief is applicable under section 131 of the Companies Act 1985. As a result during the year £2,532 million has been credited to the merger reserve within the Company's balance sheet.

The fair value of the assets and liabilities acquired was as follows:

 
£m
 
Book value
Fair value and
accounting
policy
adjustments
Acquired
intangibles
Fair value as
reported at
31 December
2006
Assets
Intangible assets
52
(41)
3,036
3,047
Deferred acquisition costs (DAC)
1,422
(1,422)
-
-
Deferred tax assets
40
(5)
-
35
Other assets
39,366
(270)
-
39,096
Total assets
40,880
(1,738)
3,036
42,178
Liabilities
Deferred revenue liability (DRL)
1,214
(1,214)
-
-
Provisions
89
99
-
188
Contingent liabilities
-
63
-
63
Deferred tax liabilities
234
(109)
500
625
Other liabilities
38,426
(18)
-
38,408
Total liabilities
39,963
(1,179)
500
39,284
Net assets acquired
917
(559)
2,536
2,894
Less: Minority share of net assets acquired
(29)
Residual goodwill
1,130
Total consideration
3,995

The fair value of the net assets and acquired intangibles has been updated following revisions to original estimates in the fourth quarter of 2006. The calculation of residual goodwill will be finalised in 2007.

Separate intangible assets have been identified and valued at £3,036 million, using estimated post-tax cash flows and post-tax discount rates. These intangibles represent the value of the PVIF, the values of the Skandia distribution network, customer relationships in respect of non-life businesses, and the Skandia brand. No other intangibles were identified which were capable of reliable measurement. A deferred tax liability of £500 million has been provided for in respect of these intangible assets, based on the tax rates applicable in the various territories, on the grounds that the assets have no tax base, thereby creating temporary differences on which deferred tax must be provided.

The useful economic lives of the PVIF and other intangibles have been assessed, taking into account factors such as the usage of the asset, life cycles, obsolescence, maintenance, and period of control over the asset. PVIF and other intangible assets will be amortised over a period of between 10 and 20 years. Related deferred tax liabilities will be amortised in line with the amortisation of the particular intangible asset.

Other fair value adjustments principally comprise the derecognition of DAC, DRL and related balances (including deferred tax impacts thereon) on the basis that these items have no fair value at acquisition. These items are included in the calculation of the PVIF.

The remaining fair value and accounting policy adjustments relate to the derecognition of goodwill shown in Skandia's balance sheet, recognition at fair value of certain assets and liabilities previously recorded at amortised cost in Skandia's balance sheet, and other adjustments to reflect up to date estimates in respect of certain litigation issues and tax, including the recognition of certain contingencies.

Of the fair value and accounting policy adjustments shown above, £147 million relates to reductions in net assets determined in the final quarter of 2006 on the basis of new information that has become available subsequent to the publication of the Group interim financial statements to 30 June 2006.

The residual goodwill of £1,130 million represents the value of the Skandia workforce and synergies, both from increased revenues and reduced costs which are expected to arise across the Skandia business and within our UK life assurance operations as a result of the acquisition. It also represents the value of new business growth and other customer intangible assets which cannot be reliably measured.


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