Notes to the consolidated financial statements

For the year ended 31 December 2007

24 Long-term and general business policyholder liabilities

Of the £1,394 million (2006: £1,371 million) included in reinsurer's share of long-term and general insurance policy liabilities is an amount of £682 million (2006: £743 million) which is classified as current, the remainder being non-current.

Of the £213 million (2006: £247 million) included in deposits held with reinsurers £183 million (2006: £218 million) is classified as current, the remainder being non-current.

Movements in the amounts outstanding in respect of long-term business policyholder liabilities, other than outstanding claims, are set out below.

(i) Insurance contracts

(ii) Unit-linked investment contracts and similar contracts, and other investment contracts

(iii) Discretionary participating investment contracts

A maturity analysis of long-term and general insurance policyholder liabilities is shown in the following table:

Insurance contract provisions are calculated based upon assumptions determined in accordance with local accounting requirements. As described in the accounting policies, these vary significantly between geographies and are therefore discussed separately below.

South Africa

In the calculation of liabilities, provision has been made for:

• the best estimate of future experience, as described below; plus
• the compulsory margins as set out in the Actuarial Society of South Africa professional guidance notes; plus
• discretionary margins reflecting mainly the excess of capital charges over the compulsory investment margin of 0.25 per cent for policies that are valued prospectively. These discretionary margins cause capital charges to be included in operating profits as they are charged and ensure that profits are released appropriately over the term of each policy.

Other discretionary margins, mainly held to cover:

• mortality and investment return margins for Group Schemes funeral policies, due to the additional risk associated with this business, and to ensure that profit is released appropriately over the term of the policies;
• expense margins in the pricing basis for Employee Benefits annuities;
• profit margins on Employee Benefits non-profit annuities to ensure that profit is released appropriately over the life of the policies;
• mortality margins on Individual Business life policies, accidental death supplementary benefits and disability supplementary benefits, due to uncertainty about future experience;
• margins on certain Individual Business non-profit annuities, due to the inability to fully match assets to liabilities as a result of the limited availability of long-dated bonds;
• interest margins on Employee Benefits PHI claims in payment due to the inability to fully match assets to liabilities as a result of the high rate of change in the portfolio (high volume of new claimants and terminations); and
• investment guarantee reserves calculated on a market-consistent basis because they are very sensitive to market interest rates in particular.

Liabilities include provisions to meet financial options and guarantees on a market-consistent basis, and make due allowance for potential lapses and surrenders, based on levels recently experienced. Mortality and disability rates assumed are consistent with Old Mutual's recent experience, or expected future experience if this would result in a higher liability. In particular, allowance has been made for the expected deterioration in assured lives experience due to HIV/AIDS, and for the expected improvement in annuitant mortality.

The provision for expenses (before allowing for margins) starts at a level consistent with recent experience and allows for an escalation thereafter.

The future gross investment returns by major asset categories and expense inflation (excluding margins) assumed for South Africa insurance business are as follows:

1 7.5% (2006: 7%) for Individual Business administered on old platforms and 6.5% (2006: 6%) for Group Schemes business.

For non-profit annuities, liabilities are determined by calculating the present value of projected future benefits and expenses, valued using current fixed-interest yields or swap curve yields.

Assumptions are based upon experience as analysed in the following investigations:

There were various changes to valuation assumptions, which have resulted in a net increase in the value of insurance contract provisions of £22 million as at 31 December 2007, with a corresponding reduction in profit before tax of the same amount. The most significant item was a £60 million increase (including a discretionary margin) in the reserve for investment guarantees which has been calculated on a market-consistent basis for the first time. The basis for terminations and alterations was strengthened by £10 million leading to an increase in liabilities. Lower assured lives mortality and a reduction in retail maintenance expenses reduced the value of liabilities by £21 million and £11 million respectively. Various methodology changes reduced the value of liabilities by £12 million.

United States

Insurance contract provisions and Deferred Acquisition Costs (DAC) balances for traditional insurance products with fixed premiums and benefits (measured according to FAS 60 under US GAAP) are calculated using mortality, lapse, expense and discount assumptions as at inception of the contract. These assumptions are determined based on management's best estimate, reflecting actual and expected experience, and also include provision for adverse deviation. The assumptions are locked in as of the date of issue, and are revised only where liability adequacy testing based on current best estimate assumptions results in loss recognition.

For insurance products with flexible premiums or benefits (measured according to FAS 97 under US GAAP), the account value is held as the base insurance contract provision, and the assumptions below are therefore not applicable. DAC balances, and additional reserves held for items including lapse guarantees, persistency bonuses and gains followed by losses, utilise best estimate assumptions as of the valuation date.

Mortality rates vary by gender and issue age; lapse rates vary by issue age and duration.

Reserves for life contingent payout annuities are accumulated using the effective interest rate, which is the rate that discounts future liability cash flows back to the gross premium less transaction costs. All other FAS 60 products use a discount rate based on best estimate of future yields at policy inception.

Best estimate assumptions as of December 2007 reflect experience as analysed in the following investigations:

Europe

Insurance contract provisions for the Group's Europe long-term business are limited, and principally comprise technical provisions for pure disability and death benefit cover sold in the United Kingdom and Sweden, together with death benefit risk cover in respect of unit-linked assurance products.