ENABLING YOUR DREAMS OLD MUTUAL LIFE ASSURANCE COMPANY. Annual Report & Financial Statements for the year ended 31 December 2016

Transcription

1 ENABLING YOUR DREAMS OLD MUTUAL LIFE ASSURANCE COMPANY Annual Report & Financial Statements for the year ended 31 December

2 VALUES Integrity Respect Accountability Pushing beyond boundaries OUR VISION To become our customers most trusted savings and wealth management partner in East Africa. OUR MISSION Through understanding and meeting our customers needs, we will profitably expand our market for wealth accumulation and protection in East Africa. 2 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED 3

3 ENABLING YOUR DREAMS Dreams can be defined in many and unique ways, but all of them have one thing in common: they all have the need to be achieved. At UAP Old Mutual, we are dedicated to Enabling East Africans Dreams. We walk with you to turn your dreams of today into tomorrow s reality. TABLE OF CONTENTS Corporate Information 6 Notice & Agenda 7 Report of the Directors 9 Chairman s Statement 12 Managing Director s Statement 16 Corporate Governance Statement 22 Our Story 25 Statement of Directors Responsibilities 30 Statutory Actuary s Report 31 Independent Auditors Report 32 Financial Statements: 36 Statement of Profit or Loss and Other Comprehensive Income 36 Statement of Financial Position 37 Statement of Changes in Equity 38 Statement of Cash Flows 39 Notes to the Financial Statements 42 Top 20 Shareholders in OMLAC 84 Form of Proxy 85 4 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED 5

4 CORPORATE INFORMATION NOTICE OF THE ANNUAL GENERAL MEETING BOARD OF DIRECTORS Mr. P. De Beyer* - Chairman Mr. P. Mwangi Ms. R. N. Ogega Mr. P. Truyens** Mrs. A. Mutahi Dr. P.W. Muthoka EBS, MBS Mr. C. Nyokangi - Resigned on 21st October NOTICE IS HEREBY GIVEN that the Twenty Third Annual General Meeting of the Company will be held at the UAP Old Mutual Tower, 2 nd floor, Upper Hill Road, Nairobi on Friday, 26th May 2017 at 9.00 a.m. for the following purposes: Ordinary Business 1. To read the notice convening the meeting, table the proxies received and confirm the presence of a quorum. * South African **Dutch PRINCIPAL OFFICER Mr. J. Otieno - Acting Principal Officer, Appointed on 31st October 2. To confirm the minutes of the Twenty Second Annual General Meeting held on 25th August. 3. To receive, consider and adopt the audited Financial Statements for the year ended 31 December together with the reports of the Directors and Auditors thereon. 4. To note that the Directors do not recommend the payment of a dividend in respect of the Financial Year ended 31 December. COMPANY SECRETARY Ms P. Ngonyo Certified Public Secretary (Kenya) 3 rd Floor, I & M Bank House Second Ngong Avenue, Upper Hill P O Box GPO Nairobi 5. Election of Directors: a) Mr. Peter De Beyer retires in accordance with Articles 17(a) and 17(b) of the Company s Articles of Association and, being eligible, offers himself for re-election. REGISTERED OFFICE 3 rd Floor, I & M Bank House P O Box GPO Nairobi. Company Registration Number 1/94 b) Dr. Peter Wanyaga Muthoka retires in accordance with Articles 17(a) and 17(b) of the Company s Articles of Association and, being eligible, offers himself for re-election. 6. To approve the Directors remuneration in respect of the Financial Year ended 31 December and to authorize the Board to fix the remuneration of Directors for the current year. AUDITORS LEGAL ADVISERS Deloitte & Touche Certified Public Accountants (Kenya) Deloitte Place, Waiyaki Way, Muthangari P O Box GPO Nairobi. Daly & Inamdar Advocates ABC Towers, ABC Place, 6 th Floor, Waiyaki Way P O Box GPO Nairobi. 7. To note that Messrs Deloitte & Touche (Kenya), having expressed their willingness would continue in office as the Company s Auditors in accordance with the provisions of the Companies Act and to authorise the Directors to fix their remuneration for the ensuing financial year. Any Other Business 8. To consider any other business whose notice has been received. BY ORDER OF THE BOARD PRINCIPAL BANKERS SHARE REGISTRARS Standard Chartered Bank Kenya Limited Kenyatta Avenue P O Box GPO Nairobi. Custody & Registrars Services Limited 6th Floor, Bruce House, Standard Street P O Box Nairobi COMPANY SECRETARY 7 March 2017 Note: In accordance with section 298(1) of the Companies Act,, every member entitled to attend and vote at the above meeting is entitled to appoint a proxy to attend and to speak and to vote on his/her behalf. A proxy need not be a member of the Company. To be valid, a form of proxy must be duly completed by the member and must be lodged at the registered office of the Company, I & M Building, 3rd Floor, 2nd Ngong Avenue, P O Box 30059, GPO, Nairobi not less than 48 hours before the time of the meeting. A form of proxy is provided with this report. 6 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 7

5 BOARD OF DIRECTORS REPORT OF THE DIRECTORS The Directors present their report together with the audited financial statements of Old Mutual Life Assurance Company Limited (the company ) for the year ended 31 December which show their state of affairs. ACTIVITIES The principal activity of the Company is the transaction of all classes of life assurance, savings and retirement benefits business. RESULTS FOR THE YEAR Mr. Peter De Beyer Chairman Mr. Jerim Otieno Acting Principal Officer Mr. Paul Truyens Non Executive Director Loss before taxation (257,184) (24,019) Taxation - - Loss for the year transferred to accumulated losses (257,184) (24,019) HOLDING COMPANY The Company is a subsidiary of Old Mutual Holdings Limited which is incorporated in Kenya. The ultimate holding company is Old Mutual Plc, which is incorporated in the United Kingdom and listed on the London, Johannesburg, Malawi, Namibia, and Zimbabwe stock exchanges. DIVIDENDS The directors do not recommend the payment of a dividend in respect of the year ended 31 December ( Shs nil). Mr. Peter Mwangi Executive Director Dr. Peter Muthoka EBS, MBS Non Executive Director Mrs. Anne Mutahi Non Executive Director DIRECTORS The directors who served on the board during the year and up to the date of approval of the financial statements are listed on page 6. Chris Nyokangi resigned from the Board on 21 October. PRINCIPAL OFFICER Jerim Otieno was appointed as an Acting Principal Officer on 31 October. AUDITORS Deloitte & Touche, having expressed their willingness, continue in office in accordance with the provisions of the Kenyan Companies Act and subject to approval by the Commissioner of Insurance under Section 56(4) of the Kenyan Insurance Act. BY ORDER OF THE BOARD Ms. Rose Ogega Non Executive Director Ms. Pauline Ngonyo Company Secretary Ms. Pauline Ngonyo Company Secretary 7th March, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 9

6 Walking with you as we enable Together, you let s to grow realize & nurture your your dreams dreams 10 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 11

7 CHAIRMAN S STATEMENT PETER DE BEYER CHAIRMAN We are adequately capitalized and able to support profitable growth under the existing and imminent regulatory framework. Operating Environment According to the Central Bank of Kenya ( CBK ) the Kenyan economy is estimated to have grown by 5.9% in, mainly supported by consistent agricultural production and significant government investment in infrastructure projects. However, the Kenyan economy also encountered the following challenges in : Slowing private sector credit growth which was exacerbated by the Banking Amendment Act (effective 24th August ) which introduced a maximum interest rate chargeable on a credit facility (4% above the Central Bank Rate CBR currently 14%) and a minimum deposit rate (70% of the CBR rate currently 7%); Volatility in capital flows due to the U.S. Dollar strengthening against global currencies and the subsequent depreciation of the Kenya Shilling towards the end of the year; Insufficient rainfall at the end of the year leading to the current drought. Inflation and Interest Rates The inflation rate decreased from 8.0% in December to 6.4% in December due to lower food and oil prices and a stable Shilling. The inflation rate steadily declined in the first half of, hitting a low of 5.0% in May, but rose slightly in the second half of the year as a result of: Higher fuel prices following the additional KES 6.00 fuel levy implemented in July and the introduction of excise tax on kerosene at a rate of KES 7.21 per litre effective June ; Increased food prices towards the end of the year due to insufficient rainfall. In September, the Monetary Policy Committee ( MPC ) reduced the Central Bank Rate ( CBR ) from 11.5% to 10.0% citing a favourable inflation outlook, currency stability and a slowdown in private sector credit growth. Interest rates rose in the last quarter of the year as a result of: An increase in government borrowing; Investor expectations of an increase in yields resulting from an anticipated rise in the inflation rate in 2017; An increase in perceived political risk due to the August 2017 General Election. Listed Equities Performance The NSE 20 Index and Nairobi All Share Index ( NASI ) declined by 21.1% and 8.5% respectively in owing to reduced participation by foreign investors in the equities market. Although fewer listed companies issued profit warnings 4 compared to 16 in the operating environment was tougher. The Banking Amendment Act exacerbated equities performance by dampening investor enthusiasm for banking stocks which also constitute a large weighting of the equities market capitalization. Thus, the overall impact was a second year of poor equity market performance for the NSE. Foreign Exchange Rate The Kenya Shilling exchange rate was relatively flat against the U.S. Dollar in, declining by 0.2%. The Shilling strengthened against the U.S. Dollar the first half of the year supported by low international oil prices, diaspora remittances and inflows from the horticulture and tourism sectors. Towards the end of the year, the Shilling weakened mainly due to the 0.25% rate hike in the Federal Funds Rate, markets positive reaction to the conclusion of the US Presidential Election and increased U.S. Dollar demand from local importers and corporates. The CBK intervened to support the Shilling and this reduced Kenya s foreign reserves to USD 7.0bn from USD 7.8bn in September, which is approximately 4.6 months of import cover. Insurance Industry In, the Insurance Industry generated gross insurance premiums of KES 194.7B compared to KES 173.4B as at the end of. Similar to previous years, the nonlife business continues to dominate industry premiums accounting for 62.5% of the total premiums compared to a 37.5% contribution from the life business. However, life business experienced higher year-on-year premiums growth of 19.3% compared to 8.5% for non-life. The Insurance Amendment Act came into effect on 13th January The biggest impact to insurers will be the implementation of the risk based supervision model. The Act has not been operationalized because the regulator is yet to gazette the guidelines. Nonetheless, we are adequately capitalized and able to support profitable growth under the existing and imminent regulatory framework. 12 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 13

8 CHAIRMAN S STATEMENT CHAIRMAN S STATEMENT Business Performance OMLAC recorded mixed financial performance in with strong growth in total income countered by an increase in the provision for insurance contract liabilities which resulted in a net loss position. Gross Written Premiums, Net Earned Premium and Investment Income grew 15.8%, 30.3% and 21.3% respectively compared to. Net Claims grew by a manageable 4.9% while operating expenses declined 12.6% over the prior year due to stringent cost control. However, the company posted a comprehensive loss of KES 427M in, an increase in the loss position of KES 262M in. The major driver of this decline was a 170% increase in the provision for insurance contract liabilities due to a model change in our product offering, particularly products we launched in late. We undertook the changes to improve the product performance while retaining the customer value proposition. Total assets in closed at KES 13.4B, a slight decline of 3% compared to mainly attributable to negative returns on listed equities. Future Outlook We expect continued economic resilience despite headwinds encountered in the first quarter of The investment rationale for our business in Kenya remains intact and we continue to develop a strong customer value proposition. Additionally, the 2013 General Election was conducted peacefully illustrating the strength of our democracy and institutions. Merger of UAP Holdings & Old Mutual Holdings Groups In, Old Mutual Holdings Limited ( OMH ) acting in conjunction with Old Mutual Life Assurance Company (South Africa) Limited ( OMLACSA ) (collectively referred to as the OM Group ) acquired an equity interest amounting to 60% of the issued shares in UAP Holdings Limited ( UAPHL ). As a result of these acquisitions, UAPHL became a subsidiary of the OM Group. We intend to reorganize the Kenyan operating companies of the OM Group to have them under UAPHL. Consequently, UAPHL made an offer to the shareholders of OMLAC to acquire the entire issued share capital of the Company. The offer was to purchase the shares at a consideration of KES per share ( the Offer Price ), on a subject to contract basis with the consideration to be satisfied by the issue of new fully paid up shares of UAPHL ( UAPHL Shares ) at an agreed price of KES for each UAPHL Share. The shareholders were also given the option for a cash consideration equivalent to the shares they held. The UAPHL share price represented the ruling trading price of the UAPHL Shares at the OTC Market for the three months to 31st March. To date the overall acceptances amount to 96.73% shareholding in OMLAC, meaning that only minority investors with an aggregate of 3.27% shareholding are yet to accept the Offer. UAPHL continues to encourage the non-responding shareholders to submit their acceptances as and when they are ready. Old Mutual Plc. Financial Performance The process will result in four standalone businesses which Based on preliminary results for the year ended 31 will include Old Mutual Emerging Markets ( OMEM ), December, the Group reported an adjusted US-based Old Mutual Asset Management ( OMAM ), operating profit (AOP) before tax of 1.7B (KES 220B)up Old Mutual Wealth ( OMW ) and Nedbank. 1% in constant currency and had funds under management of 394.9B (KES 51.22T) up 30% compared to. It aims to deliver value through the removal of Old Profits for Rest of Africa division grew by 18% and Mutual plc central operational costs, by unlocking the contributed 14% to the overall profits of Old Mutual conglomerate discount and by delivering enhanced Emerging Markets ( OMEM ). performance of the four businesses. Managed Separation Update As part of OMEM, we remain confident that this will not The business strategy announced in aimed at impact our local business but will lead to the creation conducting a managed separation of the wider Old Mutual Group s four businesses remains on track to be of shareholder value and strong businesses for our substantially completed by the end of customers, staff and other stakeholders. Gratitude I would like to convey my appreciation to the management and staff for their hard work. I would also like to extend a warm welcome to Mr. Jerim Otieno who was appointed as the Acting Principal Officer on 31st October and assure him of the full support of the board in discharging his duties. He was appointed to replace the former Principal Officer Mr. Chris Nyokangi who resigned on 21st October. We wish Mr. Nyokangi well in his future endeavors. I wish to thank the Board of Directors for continuously providing expert direction to the company. My appreciation also goes to our clients and business affiliates for their continued support throughout the year. We look forward to continuing our business partnership in 2017 and beyond. Lastly, I thank the Government of Kenya and the regulatory authorities namely: Insurance Regulatory Authority, Retirement Benefits Authority, Capital Markets Authority, Central Bank of Kenya and Kenya Revenue Authority who continue to provide an enabling business environment that fosters growth in the financial services industry. We are optimistic that the 2017 General Election will not be different from this tradition. Although investors and customers generally become more cautious in the run-up to an election, we do not view the election as posing a substantial risk to our business. We hope to complete the integration of OMLAC with UAP Life in 2017 subject to securing shareholder and regulatory approval. We look forward to driving revenue and cost synergies from the strengthened capacity of the combined businesses. Thank you. Mr. Peter De Beyer Chairman 14 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 15

9 MANAGING DIRECTOR S STATEMENT Our Aspirations The Old Mutual Life Assurance Company Limited ( OMLAC ) aspires to become a more agile, innovative financial services business built around the customer. We aim to deliver a fulfilling customer experience that enables our customers to achieve their financial goals. This is in line with our goal of enabling the dreams of Kenyans, especially in their financial planning. Some of the initiatives to support our aspirations in included: Product Review: Closure of the Max Education and Rafiki Halisi Education products to new business and initiating the re-pricing of the Lengo product; Combination of the sales teams for Old Mutual Life Assurance and UAP Life towards the end of the year to offer unified financial advice to all customers who patronize our brand; Shifting the distribution model for Retail Mass into Faulu to improve the distribution economics for this segment. Total assets under management marginally increased by 6% largely due to higher inflows and positive returns from interest bearing assets; Insurance contract liabilities increased by 2% due to a model change to the Whole of Life product & new business sales; whereas unit linked investment contract liabilities decreased by 1% due to an increase in maturities on the Regular Savings product as well as impact of negative returns on listed equities. Capital Adequacy Requirements The capital cover which measures the ratio of Excess Assets to Capital Adequacy Requirements ( CAR ) decreased from 3.3x as at the end of to 2.6x as at end of. Our capital cover ratio declined because of an increase in the CAR for which in turn increased because of the following: Increases in investment risk, surrender risk, lapse risk and operational risk elements; A reduction in the excess asset position driven by a net IFRS loss result for the year. We will continue to pursue solutions that address the protection and savings needs of our customers and explore better ways to deliver these solutions to the market Financial Performance The company recorded a comprehensive loss of KShs 427M compared to a loss of KShs 262M in. The key reason for this increase in the loss position was a 170% increase in the provision for insurance contract liabilities. We undertook a model change to the Whole of Life product to align product features and new business sales particularly in respect of the Lengo product which was launched in late. Key financial performance highlights include: Our Community The UAP Old Mutual Group has continued to support various communities in Kenya through the UAP Old Mutual Foundation. Our foundation focuses on healthcare, education and environmental conservation. Healthcare In, we completed the refurbishment of the Kenyatta National Hospital Accident & Emergency ( A&E ) wing. This project significantly reduced the average time spent per patient at the A&E wing from 7 hours to 5 hours. It also improved health-care attendants satisfaction with their work environment through renovation of the nurses rest and changing rooms. JERIM OTIENO ACTING PRINCIPAL OFFICER We aim to deliver a fulfilling customer experience that enables our customers to achieve their financial goals. This is in line with our goal of enabling the dreams of Kenyans, especially in their financial planning. Gross earned premiums grew by 16% in line with higher sales from the Lengo product that was launched in ; Claims and benefits marginally grew by 5% due to an increase in maturities, surrenders and group life death claims; Commissions and other acquisition costs remained flat during the prior financial year; Operational and administration expenses decreased by 13% mainly due to cost rationalization process currently underway and lower operating losses (lower once off costs) and low tax & underwriting expenses; Education With regards to education, we widened our scope to include special education because it is our belief that all Kenyan children should have access to quality education. We partnered with the Kenya Society for the Blind ( KSB ) and donated learning devices valued at KShs 3 Million for pupils with visual impairment in 5 schools. Our collaboration with KSB benefitted schools in Mombasa, Meru, Kisumu, Bomet and Kitui counties. Over 600 pupils will now have access to various assistive devices ranging from Braille machines to books-to-braille geometrical sets. Our commitment to supporting access to quality education 16 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 17

10 MANAGING DIRECTOR S STATEMENT is also visible through our scholarship programme for students in Starehe Boys Centre, Starehe Girls School and Gatanga Girls School. Our Kenya Certificate of Secondary Education ( KCSE ) candidates excelled and will proceed to university this year. The Environment On the environmental front, through partnerships with our employees, Kenya Wildlife Service ( KWS ) and Ndakaini Dam Environmental Conservation Association ( NDEKA ) we have managed to plant approximately 150,000 trees to date. These efforts will go a long way in conserving the Aberdare, a critical water tower, and Ndakaini Dam which is the source of Nairobi s water. Risk and Governance We continue to maintain sound risk management and internal control systems within the organization to safeguard shareholder value and the company s assets. Our risk management objectives are to demonstrate good corporate governance by managing our risks effectively, prioritizing risks appropriately and taking appropriate risks for appropriate return in line with our risk culture and appetite whilst avoiding damage to our reputation. The Insurance Amendment Act came into effect on 13th January The amendments effectively ensure the actualization of the risk based supervision model and the only pending item will be for the regulator to gazette the regulations to operationalize the Act. We are ready to comply with any regulatory changes and are well positioned to continue growing our business in this new regulatory regime. Product Offerings, Insurance Industry Outlook and Future OMLAC continues to develop innovative products to fill in gaps that have been identified and will be disclosed at an appropriate time. Other ongoing activities are re-pricing of the Lengo product so as to maximize shareholder value. We will continue to create awareness about the importance of insurance through our financial education programs. We remain committed to our vision of being our Customers most trusted partner-passionate about helping them achieve their lifetime financial goals. Thank you Mr. Jerim Otieno Acting Principal Officer 18 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 19

11 Giving you the support you need to realize your dreams 20 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED 21

12 CORPORATE GOVERNANCE STATEMENT CORPORATE GOVERNANCE STATEMENT INTRODUCTION Old Mutual views good governance as a vital ingredient of operating a successful business, so that we can provide assurance to shareholders, customers and regulators that the business is being properly managed and controlled. During 2010, the Old Mutual Group ( the Group ) rolled out the new Group Operating Model which is an overarching governance structure, incorporating principles of governance to facilitate effective and dynamic management and oversight of a Group containing several regulated entities, in different jurisdictions. These overarching governance structures are set out in the Group Operating Manual ( the Manual ) which contains the internal operating framework and governance structure for the Group. The Board passed a resolution to adhere to the Manual with effect from 31st December 2010, noting that it is a governance framework for the promotion of efficiency and mitigation of risks, both in the interests of the Company and the Group, whilst maintaining the primacy of the fiduciary duties of the Board. The Board is satisfied that the Company has made every practical effort to comply with all material aspects of King III during the review period, insofar as it was applicable to wholly owned subsidiaries, insofar as they are not in conflict with the Manual and the regulatory guidelines. THE BOARD The Company has a balanced unitary board comprising a majority of independent and non-executive directors. The Board currently has seven members, one of whom is executive, one is non-executive while five are independent directors. Mr. C. Nyokangi resigned as director in the course of the year and Mr. J. Otieno was appointed as the Acting Principal Officer. The non-executive Chairman of the Board is Mr. P. De Beyer. The Board has a Charter which defines its functions, accountabilities and responsibilities. The Directors are provided with appropriate and timely information by management so that they can maintain full and effective control over the strategic, financial, operational and compliance issues. The day-to-day running of the business of the Company is delegated to the Acting Principal Officer but the Board is responsible for establishing and maintaining the Company s system of internal controls so that the objectives of profitable growth and shareholder value are realized. Selection and succession planning The selection and appointment of directors is effected through a formal and transparent process which has been delegated to the UAP Old Mutual Group Corporate Governance and Nominations Committee. Emphasis is placed on achieving a balance of skills, experience and knowledge. A formal orientation programme exists to familiarize incoming directors with the Company s operations, senior management and its business environment and to induct them in their fiduciary duties and responsibilities. Rotation and retirement Newly appointed non-executive directors hold office only until the next annual general meeting at which they retire and become available for re-election by the shareholders on the recommendations of the Board. All directors except the Managing Director are subject to retirement by rotation and re-election by the shareholders at least once every three years. Executive directors have no fixed term of appointment, but are subject to short-term notice periods, typically three months. Performance and assessment The Board meets regularly, having met five times in. It may also meet as and when required to deal with specific matters that may arise between scheduled meetings. Access to company resources All directors have access to management, including the Company Secretary, and to such information as is needed to carry out their duties and responsibilities fully and effectively. The Company Secretary provides support to the Board to ensure its effective functioning and proper administration of Board proceedings. The Company ensures that the non-executive directors are kept informed on latest developments regarding the Company s business and industry-wide issues through a formal communication process. Chairman and Managing Director The roles of the Chairman and Principal Officer are separate. The executive management of the Company is the responsibility of the Acting Principal Officer, J. Otieno. MANAGEMENT COMMITTEE The Acting Principal Officer has set up a Management Committee to assist him in discharging the duties and responsibilities that have been delegated by the Board. BOARD COMMITTEE The Audit, Risk & Compliance Committee is constituted at the Holdings company level with a mandate of oversight across all the subsidiaries including Old Mutual Life Assurance Company Limited. The committee is chaired by an independent non-executive director, and is free to take independent professional advice as and when necessary. Committee members remuneration All non-executive directors are remunerated for their services to the committee. Audit, Risk and Compliance Committee Members: R. N. Ogega (Chairperson), A. Mutahi, and P. Truyens The committee, which comprises independent nonexecutive directors, meets quarterly during the year with senior management, which includes the Managing Director, the Company Secretary, Chief Risk Officer, the Chief Finance Officer and the Group Internal Auditors. The independent external auditors also attend these meetings to ensure that their independence is not impaired and have unrestricted access to the committee and to its chairperson. The Committee met five times in the year under review. Ad hoc meetings are held as required. Principal functions The committee serves in an advisory capacity to the Board and assists the directors to discharge their duties relating to the safeguarding of assets, the operation of adequate systems, risk management and compliance, the review of financial information and the preparation of the annual financial statements. This includes satisfying the Board that adequate internal, operating and financial controls are in place and that material corporate risks have been identified and are being effectively managed and monitored. Directors Emoluments and Loans The aggregate amount of emoluments paid to directors for services rendered during is disclosed in Note 9 (c) to the Financial Statements. In the year under review, directors have received no benefits other than fees and no loans to directors have been advanced. Internal Control Environment The Board acknowledges its overall responsibility for the Company s system of internal control and for reviewing its effectiveness, whilst executive management is accountable to the Board for monitoring the system of internal control and for providing assurance to the Board that it has done so. Executive management has implemented an internal control system designed to facilitate effective and efficient operation of the Company aimed at enabling management to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the Company s business objectives. These include protecting policyholders interests, safeguarding shareholders investments, safeguarding assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed, and addressing any social, environmental or ethical matters that are significant for the Company s business. The system of internal control also helps to ensure the quality of internal and external reporting, compliance with applicable laws and regulations, and internal policies with respect to the conduct of business. The Company s internal control system is designed to manage, rather than eliminate, the risk of failure to achieve the Company s business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. Approach to Risk Management Creating long-term shareholder and policyholder value is the Company s overriding business objective and the Company derives its approach to risk management and control from a shareholder value perspective. As a result, the business manages a broad range of risk categories and specifically includes Strategic Risk and Enterprise Risk Management ( ERM ). The Company s overall approach is to understand the diversity and full breadth of risk to its objectives, and to respond to it appropriately, with a strong emphasis on implementing controls that reduce residual risk to a level 22 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 23

13 CORPORATE GOVERNANCE STATEMENT OUR STORY calculated to optimize the level of return on investment. However, risk management is not limited solely to risks that may adversely affect the Company s ability to achieve its objectives; it is also about identifying and seizing new opportunities while ensuring that the risks are understood, evaluated and appropriately managed. Risk Governance A risk governance model based on three lines of defence complements the formal governance structures described earlier in this report. This model distinguishes between functions owning and managing risks, functions overseeing risks and functions providing independent assurance. The first line of defence The Company s Board sets its risk appetite, approves the strategy for managing risk and is responsible for the system of internal control. The Managing Director supported by the management team, has overall responsibility for the management of risks facing the Company and is supported in the management of these risks by Line Management. Line Management and staff have the primary responsibility for managing risk. They take ownership for the identification, assessment, management, monitoring and reporting of enterprise risks arising within their areas of responsibility. The second line of defence This comprises the Head of Risk and Governance and the Statutory Actuary. The Head of Risk and Governance recommends the Company s Risk Policies for approval by the Audit, Risk and Compliance Committee, provides objective oversight and co-ordinates ERM activities in conjunction with other specialist risk related functions. The Chief Risk Officer is not accountable for the day-today management of financial and non-financial risks. The third line of defence This provides independent objective assurance on the effectiveness of the management of enterprise risks across the Company. This is provided by the Internal Audit function, External Audit function and the Audit, Risk and Compliance Committee. Risk Policies Risk policies, for each major risk category to which the Company is exposed, have been established and approved by the Management and the Board. These are designed to provide management with guiding principles within which to manage risks. Corporate Social Responsibility Old Mutual Life Assurance Company Limited is committed to the creation of a stable and prosperous society and invests in socially responsible business activities. Amongst the initiatives and endeavours that we participate in include the support of charities, non-governmental organizations, schools and trusts. During the year, we made donations to various charitable institutions for the betterment of the welfare of the many people that they support. saw the business exert renewed energy geared towards realising the dream of becoming East Africa s truly Integrated Financial Services company. Suffice it to say, the business realised various milestones including the launch of a thematic marketing campaign dubbed Keep Good Company that was launched across all the markets that we operate in. In the same breath, the dream of offering an integrated financial services centre inched closer with the opening of an inaugural one stop financial services centre in Nairobi that has the capacity to offer banking, investment, insurance and savings products under one roof. From the global front, the Old Mutual Group celebrated 171 years of enabling positive futures. In East Africa, all our teams came together to make the day memorable. We focused on the colourful culture of Rwanda and staff across the region from UAP, Old Mutual and Faulu Microfinance Bank participated in the day long festivities. Diversity day celebrations across the Group in East Africa Mr. P. De Beyer Chairman Mr. P. Mwangi Director Mr. J. Otieno Acting Principal Officer The business enjoyed the opportunities to engage various stakeholders through forums such as SME exhibitions, financial education classes, customer engagement forums, and product training. These activities took place alongside a countrywide rebranding exercise of all branches and satellite offices. Our integration journey is at an advanced stage and we are working tireless to ensure that we offer the customers exceptional service and products that help them secure their financial future. 24 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 25

14 OUR STORY OUR STORY SHOWCASING OUR BRANDS INTEGRATED FINANCIAL SERVICES The UAP Old Mutual Group will operate under the banner of: The business will drive two key brands in the market. As an Integrated Financial Service partner, our vision has been to serve our customers under one roof through the provision of central branches where investment, insurance and banking services are made available. We made headway on our branch merger project and successfully brought together the insurance and investment service centres in Kisii, Kisumu,Mombasa and Nyeri. In Nairobi, we unveiled the very first fully integrated centre at the Ground floor of Old Mutual Building on Kimathi Street. Here our customers can access the full service offering of our Group. We intend to seamlessly unify our national network and enhance our services to you. The integration is not limited to our branches, but also includes our head office. The UAP Old Mutual Tower in Upper Hill is soon going to be the head office of UAP Old Mutual Group in East and Central Africa. Plans are underway to relocate all our operations to this prestigious address. Banking Business Insurance and Investment Business A brand is the unique identifier of who we are and our promise to our customers. In, we unveiled the new brand banner of UAP Old Mutual Group, this follows the attainment of a majority shareholding in UAP in and Faulu Microfinance Bank in We embarked on a joint brand campaign in October to highlight the formation of our integrated financial services model which is focused on enabling every East African s dream. The campaign was themed Keep Good Company and was executed through outdoor billboards and television adverts. It celebrated the qualities we believe make us your financial partner of choice. The online execution of the campaign which challenged the public to celebrate those they consider Good Company, through the theme song composed by the Redforth choir emerged second (2nd) out of the 2,600 entries made in the prestigious international Lynx award. This attained the Silver Recognition category. In the same breath of unity, you can now access our Group information through the website Official opening of the integrated financial services centre located at the Old Mutual building - Nairobi TOGETHER, LET S PROTECT WHAT YOU VALUE. MAKE THE RIGHT CHOICE,KEEP GOOD COMPANY Call us today on or visit: TOGETHER, LET S BUILD YOUR INVESTMENT. MAKE THE RIGHT CHOICE,KEEP GOOD COMPANY Call us today on or visit: Customer facing staff at the newly opened centre No journey is long when in good company. To achieve your dreams, Keep Good Company. TEAM EFFORT TEAMS KNOW THE VALUE OF KEEPING GOOD COMPANY SUKUMA LAND TANZANIA KNOW THE VALUE OF GOOD COMPANY Let s celebrate our journey GREATER TOGETHER THERE ARE THOSE WHO INSPIRE US Staff and intermidiaries during a training session UAP Old Mutual Tower is now open for business 26 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 27

15 OUR STORY OUR STORY IMPACTING LIVES Positively impacting the lives of the communities we operate is the inspiration behind our Community Social Investment (CSI) programme. This is run by the Old Mutual Group Foundation and is focused on projects centred on education, healthcare infrastructure and environmental conservation. Special education was a top priority for the Foundation as we believe in creating opportunities for children on an equal platform. The business donated assistive devices in five (5) counties i.e. Bomet, Kitui, Kismu, Likoni and Meru Through the partnership with Kenya Society for the Blind valued at Kes 3,000,000; For the second consecutive year, the business participated in the Ndakaini tree planting where over 100,000 indigenous tree seedlings were planted in a collaborative effort between our staff and the local community. In September, staff joined athletes and marathon enthusiasts for the annual Ndakaini Half Marathon. The marathon was in its 13th edition and continues to support the conservation agenda. In December, through partnership with the Kenya Wildlife Service, the Group planted trees in Aberdares National Park. A total of approximately 159,000 trees were planted. Staff involvement in community engagement was enhanced through the launch of a donations drive dubbed Care and Share. The main aim was to encourage staff across all our businesses to individually give back to the community by contributing food, clothing and stationery. All the items donated were distributed to various beneficiaries across Kenya, Tanzania, Uganda, Rwanda and South Sudan. Financial education forums continue to be our core channel of imparting financial management skills to all. We realised the training of over 9,000 individuals through various forums across Kenya. TOP EMPLOYER AWARD The Top Employers Institute named the UAP Old Mutual Group, which Old Mutual Kenya is an entity of, as the leading Top Employer in Financial Services and Insurance sector in: create for the development of their employees after conducting months of research into an organization s HR environment. Old Mutual Kenya was awarded the Top Employers Kenya Kenya, South Sudan, Tanzania Certification. and Uganda. The Top Employers Institute globally certifies excellence Additionally, the Best Company to in the conditions organisations work for recognition conducted by Deloitte ranked the business as one of the best companies in November. The accolade allows the business to use the excellence seal. The Business was also recognised in the Think Business Awards as the Most improved Life Insurer Exchanging of Memoranda of understanding with the Kenya Society for the Blind 2. Presenting special education material in Bomet county 3. Hand over of braille equipment 4. Dignitaries at the Ndakaini Half Marathon 5. Winner takes it all at Ndakaini 6. Flagging off a KWS convoy for the Aberdares Tree planting event 7. Staff take part in a voluntary care and share event 8. Engaging customers during a Financial Education Session The HR Team displays the TOP Employer Trophy 28 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 29

16 STATEMENT OF DIRECTORS RESPONSIBILITIES STATUTORY ACTUARY S REPORT The Kenyan Companies Act, requires the directors to prepare financial statements for each financial year that give a true and fair view of the financial position of the company as at the end of the financial year and of its profit or loss for that year. It also requires the directors to ensure that the company maintains proper accounting records that are sufficient to show and explain the transactions of the company and disclose, with reasonable accuracy, the financial position of the company. The directors are also responsible for safeguarding the assets of the company, and for taking reasonable steps for the prevention and detection of fraud and error. I have conducted an actuarial review of the Company as at 31 December, according to generally accepted actuarial principles and in accordance with the requirements of the Kenya Insurance Act. Contracts classified as insurance and investment contracts with discretionary participation features have been valued using the Financial Soundness Valuation (FSV) method. Contracts classified as investment contracts (without discretionary participation in profit) have been valued at fair value as per IAS 39, Financial Instruments: Recognition and Measurement ( IAS 39 )....preparation and presentation of these financial statements in accordance with the International Financial Reporting Standards... Policyholders reasonable benefit expectations have been taken into account in valuing policy liabilities. Further notes to this report, including a description of the valuation basis, are provided in Note 4 to the annual financial statements. ACTUARIAL STATEMENT OF FINANCIAL POSITION SHS 000 SHS 000 Total value of assets 12,230 12,677 The directors accept responsibility for the preparation and presentation of these financial statements in accordance with the International Financial Reporting Standards and in the manner required by the Kenyan Companies Act,. They also accept responsibility for: Total value of policy liabilities (10,207) (10,227) Excess assets over liabilities 2,023 2,450 Capital adequacy requirements (CAR) (i) (ii) (iii) designing, implementing and maintaining such internal control as they determine necessary to enable the presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting suitable accounting policies and applying them consistently; and making accounting estimates and judgements that are reasonable in the circumstances. Ratio of excess assets to CAR Certification of statutory financial position Having made an assessment of the company s ability to continue as a going concern, the directors are not aware of any material uncertainties related to events or conditions that may cast doubt upon the Company s ability to continue as a going concern. The directors acknowledge that the independent audit of the financial statements does not relieve them of their responsibilities. I hereby certify that: the valuation on the Published basis of the Company as at 31st December, the results of which are summarised above, has been produced in accordance with the requirements of the International Financial Reporting Standards; and the Company was financially sound on the statutory basis as at the valuation date. Approved by the board of directors on 7th March 2017 and signed on its behalf by: Giles Waugh Statutory Actuary FASSA Mr. P. De Beyer Chairman Mr. P. Mwangi Director Mr. J. Otieno Acting Principal Officer Cape Town, South Africa 7th March th March OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 31

17 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED REPORT ON THE FINANCIAL STATEMENTS Opinion We have audited the financial statements of Old Mutual Life Assurance Company Limited set out on pages 36 to 79, which comprise the statement of financial position as at 31 st December, and the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements give a true and fair view of the financial position of the company as at 31 December and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act. KEY AUDIT MATTER Valuation of technical liabilities Significant judgement is required by the directors in determining the estimate of insurance contract liabilities and, for the purposes of our audit, we identified the valuation of insurance contract liabilities as representing a key audit matter due to the significance of the balance to the financial statements as a whole, combined with the judgement and estimation uncertainty associated with determining the amounts. HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER We assessed the competence, capabilities and objectivity of the company s external actuaries, and verified their qualifications and experience. In addition, we discussed the scope of their work and reviewed their terms of engagement to determine that there were no matters that affected their independence and objectivity or scope limitations imposed upon them. We confirmed that the approach they used is consistent with industry norms....evidence obtained is sufficient and appropriate to provide a basis for our opinion... Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( ISA ). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), together with other ethical requirements that are relevant to our audit of the financial statements in Kenya. We have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The determination of future contractual cash flows in relation to insurance contract liabilities involves a significant estimation process. There are several sources of uncertainty that are considered in the estimate of the liability that the Company will ultimately pay for such claims. Claims incurred but not reported (IBNR) are determined on the basis of prevailing claims reported and settlement patterns. The company also determines its liabilities under long term insurance contracts based on the prescribed valuation basis in the Insurance Act. This basis contains prudent margins for adverse experience in mortality, expenses, withdrawals and investment return. The inputs with the most significant impact on these valuations are discount rates and mortality rates. The liabilities are calculated by the company s internal actuaries and validated by the appointed external actuary. The critical significant valuation assumptions and basis applied in estimating the value of the insurance contract liabilities are disclosed in note 4 of the financial statements while the value of the liabilities is disclosed in note 19 of the financial statements. We involved our in-house actuarial specialists in evaluating the directors and the actuaries judgements and, in particular the models used by the directors and the company s Actuaries. Our actuarial experts counterchecked the data used for calculation and the output from the calculation of the liabilities and the emerging reserves as prepared and presented by the Company s independent actuaries. We performed an analysis of the significant assumptions made by the actuaries so as to evaluate the extent of impact on the liability and assessed the appropriateness of the disclosures in the financial statements. In addition, we tested a selection of data inputs underpinning the technical liabilities valuation, including gross premiums and claims, against appropriate supporting documentation, to assess the accuracy, reliability and completeness thereof. We found that the models used for the calculation of the technical liabilities were appropriate. The disclosures pertaining to the technical liabilities were found to be appropriate and comprehensive in the financial statements. 32 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 33

18 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OTHER INFORMATION The directors are responsible for the other information, which comprises the directors report, the statement of corporate social responsibility and the embedded report as required by the Kenyan Companies Act. The other information does not include the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Statements The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act, and for such internal controls as directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA s will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entity or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the company audit. We remain responsible for our audit opinion. We communicate with the Audit, Risk and Compliance Committee regarding, among other matters, the significant audit findings including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit, Risk and Compliance Committee with a statement that we have complied with the relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Audit, Risk and Compliance Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. Report on Other Legal and Regulatory Requirements As required by the Kenyan Companies Act, we report to you, based on our audit, that: We have obtained all the information and explanations which to the best of our knowledge and belief, were necessary for the purposes of our audit; In our opinion, proper books of account have been kept by the company, so far as appears from our examination of those books of account; and The company s statement of financial position (balance sheet) and statement of profit or loss and other comprehensive income (profit and loss account) are in agreement with the books of account. The engagement partner responsible for the audit resulting in this independent auditor s report is FCPA J W.Wangai - P/No Certified Public Accountants (Kenya) Nairobi, Kenya 24th March OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 35

19 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER REVENUE Notes STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER ASSETS Notes Gross earned premiums 975, ,883 Insurance premium ceded to reinsurers (201,127) (248,333) Net earned premiums 774, ,550 Intangible assets 12 4,838 6,768 Investment property , ,000 Property and equipment 14 1,198,666 1,097,246 Financial assets at fair value through profit or loss 15 4,166,192 4,690,309 Net investment income 6 668, ,885 Available-for-sale financial assets 15 3,462,369 4,299,287 Net fee and commission income 7 482, ,687 Loans secured by mortgages on real property 15 28,858 28,969 Fair value change on investment property 13 12,053 33,890 Loans on life insurance policies within their surrender values , ,064 Total revenue 1,938,172 1,659,012 EXPENSES Claims and benefits (636,350) (606,772) Commissions and other acquisition costs 8 (265,250) (264,793) Amounts due from group companies ,136 1,095,855 Insurance and other receivables , ,051 Cash and cash equivalents 18 3,003,354 1,281,379 Tax recoverable 10(b) 77,625 74,343 Total assets 13,436,670 13,887,271 Other operating and administration expenses 9 (1,033,759) (1,183,147) LIABILITIES (Increase)/decrease in provision for insurance contract liabilities 19 (259,997) 371,681 Insurance contract liabilities 19 4,204,046 4,138,572 Total expenses (2,195,356) (1,683,031) Investment contract liabilities 20 6,003,498 6,088,645 LOSS BEFORE TAXATION (257,184) (24,019) Taxation LOSS FOR THE YEAR (257,184) (24,019) Amounts due to reinsurers 30,083 22,548 Amounts due to group companies ,939 67,972 Deferred revenue on investment contracts 21 12,558 14,028 Other payables and accruals , ,684 OTHER COMPREHENSIVE INCOME Outstanding claims 437, ,096 Items that will not be reclassified subsequently to profit or loss Total liabilities 11,414,319 11,437,545 SHAREHOLDERS' EQUITY Revaluation of leasehold land and buildings 11 44,194 71,258 Share capital and premium 24 4,059,827 4,059,827 Items that may be reclassified subsequently to profit or loss Available for sale reserve , ,782 Property revaluation reserve 332, ,533 Fair value losses on available-for-sale financial assets 11 (214,385) (309,690) Accumulated losses (3,115,600) (2,858,416) Total other comprehensive loss net of related income tax (170,191) (238,432) Total equity 2,022,351 2,449,726 TOTAL COMPREHENSIVE LOSS FOR THE YEAR (427,375) (262,451) Total liabilities and shareholders' equity 13,436,670 13,887,271 The financial statements set out on pages 36 to 79 were approved and authorised for issue by the Board of Directors on 7 March 2017 and authorised on its behalf by: Mr. P. De Beyer Chairman Mr. P. Mwangi Director Mr. J. Otieno Acting Principal Officer 36 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 37

20 STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER Share Capital and Premium Shs 000 Investment Revaluation Reserve* Shs 000 Property Revaluation Reserve** Shs 000 Accumulated Losses Shs 000 Total Shs 000 OPERATING ACTIVITIES Notes Loss before tax (257,184) (24,019) Non-cash movements and adjustments to profit before tax 26(a) (234,591) (396,063) At 1 January 4,059,827 1,269, ,275 (2,834,397) 2,712,177 Total comprehensive loss for the year - (309,690) 71,258 (24,019) (262,451) At 31 December 4,059, , ,533 (2,858,416) 2,449,726 At 1 January 4,059, , ,533 (2,858,416) 2,449,726 Total comprehensive loss for the year - (214,385) 44,194 (257,184) (427,375) At 31 December 4,059, , ,727 (3,115,600) 2,022,351 *The investment revaluation reserve represents the net cumulative surplus arising from revaluation of available for sale investments. The revaluation reserve is not distributable. **Property revaluation reserve represents the surplus arising from revaluation of leasehold land and buildings and is not distributable. Changes in working capital 26(b) 865,105 (1,394,568) Interest received 380, ,818 Cash generated from/(used in) operating activities 753,666 (1,335,832) Income tax paid 10(b) (3,282) (9,553) Net cash generated from/(used in) operating activities 750,384 (1,345,385) Cash flows from investing activities Purchase of property and equipment 14 (28,533) (96,953) Purchase of available-for-sale financial assets 15 (8,067) (152,436) Purchase of intangible assets 12 - (7,482) Proceeds from sale of available-for-sale financial assets , ,095 Net movement of treasury bonds 524,119 (435,856) Net movement of mortgages on real property 111 1,900 Net movement of loans with surrender values 55,871 (31) Dividend received 6 89,997 76,634 Net cash generated from/(used in) investing activities 971,591 (488,129) Net increase/(decrease) in cash and cash equivalents 1,721,975 (1,833,514) Cash and cash equivalents at beginning of year 1,281,379 3,114,893 Cash and cash equivalents at end of year 18 3,003,354 1,281, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 39

21 Make your dreams a reality 40 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 41

22 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER NOTES TO THE FINANCIAL STATEMENTS 1 GENERAL INFORMATION Old Mutual Life Assurance Company Limited is a limited company incorporated in Kenya under the Kenya Companies Act and is domiciled in Kenya. Its parent company is Old Mutual Holdings Limited which is incorporated in Kenya, and the ultimate holding company is Old Mutual Plc. which is incorporated in United Kingdom. The address of its registered office and principal place of business is disclosed under corporate information in page 6. Old Mutual Life Assurance Company Limited underwrites life insurance risks, such as those associated with death and disability. It also issues a diversified portfolio of investment contracts to provide its customers with asset management solutions for their savings and retirement needs. 2 ACCOUNTING POLICIES (a) (b) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). For the Kenyan Companies Act reporting purposes, in these financial statements the balance sheet is represented by/or is equivalent to the statement of financial position and the profit and loss account is presented in the statement of profit or loss and other comprehensive income. Adoption of new and revised International Financial Reporting Standards (IFRSs) and interpretations (IFRIC) i) Relevant new standards and amendments to published standards effective for the year ended 31December The following new and revised IFRSs were effective in the current year and had no material impact on the amounts reported in these financial statements. IAS 1 Disclosure Initiative The amendments clarify that an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material, and give guidance on the bases of aggregating and disaggregating information for disclosure purposes. However, the amendments reiterate that an entity should consider providing additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, events and conditions on the entity s financial position and financial performance. In addition, the amendments clarify that an entity s share of the other comprehensive income of associates and joint ventures accounted for using the equity method should be presented separately from those arising from the Company, and should be separated into the share of items that, in accordance with other IFRSs: (i) will not be reclassified subsequently to profit or loss; and (ii) will be reclassified subsequently to profit or loss when specific conditions are met. As regards the structure of the financial statements, the amendments provide examples of systematic ordering or grouping of the notes. The application of these amendments has not resulted in any impact on the financial performance or financial position of the Company. IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortisation of an intangible asset. This presumption can only be rebutted in the following two limited circumstances: a) when the intangible asset is expressed as a measure of revenue; or b) when it can be demonstrated that revenue and consumption of the economic benefits of the 2 ACCOUNTING POLICIES (Continued) intangible asset are highly correlated. As the Company already uses the straight-line method for depreciation and amortisation for its property and equipment, and intangible assets respectively, the application of these amendments has had no impact on the Company s financial statements. Annual Improvements to IFRSs Cycle The Annual Improvements to IFRSs Cycle include a number of amendments to various IFRSs, which are summarised below: IFRS 5 - The amendments introduce specific guidance in IFRS 5 for when an entity reclassifies an asset or disposal group) from held for sale to held for distribution to owners (or vice versa). The amendments clarify that such a change should be considered as a continuation of the original plan of disposal and hence requirements set out in IFRS 5 regarding the change of sale plan do not apply. The amendments also clarifies the guidance for when held-for- distribution accounting is discontinued. IFRS 7 - The amendments provide additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of the disclosures required in relation to transferred assets. IAS 19 - The amendments clarify that the rate used to discount post-employment benefit obligations should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The assessment of the depth of a market for high quality corporate bonds should be at the currency level (i.e. the same currency as the benefits are to be paid). For currencies for which there is no deep market in such high quality corporate bonds, the market yields at the end of the reporting period on government bonds ii) iii) denominated in that currency should be used instead. The application of these amendments has had no effect on the Company s financial statements. New and amended standards in issue but not yet effective in the year ended 31 December New standards and Amendments to standards IFRS 16 Leases 1 January 2019 IFRS 9 Financial Instruments 1 January 2018 IFRS 15 Revenue from contracts with customers 1 January 2018 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions 1 January 2018 Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 Amendments to IAS 7 Disclosure Initiative 1 January 2017 Impact of new and amended standards on the financial statements for the year ended 31 December and future annual periods IFRS 9 Financial Instruments Effective for annual periods beginning on or after IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. Key requirements of IFRS 9: All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is 42 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 43

23 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 2 ACCOUNTING POLICIES (Continued) 2 ACCOUNTING POLICIES (Continued) to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability s credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until a detailed review has been completed. IFRS 16 Leases financial liabilities. However, it is not practical to provide a reasonable estimate of the effect of IFRS 16 until a detailed review has been completed. Amendments to IAS 7 Disclosure Initiative The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities including both changes arising from cash flows and non-cash changes. The amendments do not prescribe a specific format to disclose financing activities. However, an entity may fulfil the disclosure objective by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities. (iv) Early adoption of standards The Company did not early-adopt any new or amended standards in. Basis of preparation The financial statements have been prepared under the historical cost convention except for buildings, property and equipment, investment property, available-forsale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss equity or liabilities which are stated at fair value. Revenue is accounted for in accordance with the particular accounting policies as set out below. Insurance and investment contracts Classification of contracts Insurance contracts Contracts under which the Company accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. If significant additional benefits would be payable in scenarios that have commercial substance, significant insurance risk exists even if the insured event is extremely unlikely or even if the expected present value of contingent cash flows is a The directors of the Company are assessing the impact of the application of IFRS 9 in the future. It is not practical to provide a reasonable estimate of this effect until a detailed review has been completed. IFRS 15 Revenue from Contracts with Customers In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The directors of the Company do not anticipate that the application of IFRS 16 in the future will have a significant impact on amounts reported in respect of the Company s financial assets and Functional and presentation currency These financial statements are presented in Kenya shillings (Shs) which is the company s functional currency, the currency of primary economic environment in which the entity operates. Except as otherwise indicated, financial information presented in Kenya Shillings has been rounded to the nearest thousand (Shs 000). Revenue Revenue comprises premium income from insurance contracts and investment contracts with a discretionary participating feature, fee income from investment management contracts, commission income and investment income. small proportion of the expected present value of all the remaining contractual cash flows. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Investment contracts Contracts under which the transfer of insurance risk to the Company from the policyholder is not significant are classified as investment contracts. Contracts with a discretionary participating feature Contracts with a discretionary participating feature are 44 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 45

24 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 2 ACCOUNTING POLICIES (Continued) 2 ACCOUNTING POLICIES (Continued) those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. These additional payments, the amount or timing of which is at the Company s discretion, represent a significant portion of the total contractual payments and are contractually based on (i) the performance of a specified pool of contracts or a specified type of contract or (ii) realised and/or unrealised investment returns on a specified pool of assets held by the Company. Contracts with a discretionary participating feature may be classified either as insurance contracts or investment contracts. All contracts with a discretionary participating feature are accounted for in the same manner as insurance contracts. Premiums on contracts Premiums and annuity considerations receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums in respect of insurance contracts and investment contracts with a discretionary participation feature are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Amounts received under investment contracts other than those with a discretionary participating feature are recorded as deposits and added to investment contract liabilities. Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as revenue in the income statement as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over a period of 10 years. Claims on contracts Claims and benefits incurred in respect of insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments and are recognised in the income statement. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. Insurance contract liabilities Insurance contract liabilities are measured using the Financial Soundness Valuation (FSV) method as set out in the guidelines issued by the actuarial society of South Africa (SAP 104). Under this guideline, provisions are valued using realistic expectations of future experience, with compulsory margins for prudence and deferral of profit emergence. Provisions for investment contracts with a discretionary participating feature are also measured using the FSV method. Surplus allocated to policyholders but not yet distributed (i.e. bonus smoothing reserve) related to these contracts is included as a provision. Derivatives embedded in an insurance contract are not separated and measured at fair value if the embedded derivative itself qualifies for recognition as an insurance contract. The entire contract is measured as described above. The Company performs liability adequacy testing on its insurance liabilities (including insurance liabilities with discretionary participating features) to ensure that the carrying amount of its liabilities is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the Company discounts all contractual cash flows and compares this amount to the carrying value of the liability. Where a shortfall is identified, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement as they occur. These are described in more detail in the notes to the Statutory Actuary s report on page 9 and in the note on insurance risk on page 52. Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recovery are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amount provided. Investment contract liabilities Liabilities for investment contracts without a discretionary participating feature are classified as financial liabilities at fair value through profit or loss and are recorded at fair value. For unit linked contracts, this is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the value of the assets in the fund (adjusted for tax). Acquisition costs Costs that are directly attributable to securing an investment management contract are deferred if they can be identified separately and measured reliably and it is probable that they will be recovered. The deferred costs represent the contractual right to benefit from providing investment management services. Intangible assets Intangible assets are measured at cost on initial recognition. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and impairment losses. Intangible assets are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method is reviewed at least each financial year-end. Changes in expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. Investment property Investment properties are stated at fair value. External valuations are obtained on such a basis as to ensure that substantially all properties are valued annually. In the event of a material change in market conditions between the valuation date and statement of financial position date an internal valuation is performed and adjustments made to reflect any material changes in value. Surpluses and deficits arising from changes in fair value are reflected in the income statement and investment contract liabilities. Property and equipment (i) (ii) (iii) Owned assets Property and equipment which includes buildings, computer equipment, motor vehicles, fixtures and furniture, are stated at cost or valuation less accumulated depreciation and impairment losses. Depreciation Depreciation is charged on a straight-line basis over the estimated useful lives of the assets. The rates of depreciation used are summarized on the table table below: Asset class Depreciation Useful life rate % (years) Buildings Furniture & fittings 20 5 Motor vehicle 25 4 Computer equipment 25 4 Reclassification to investment property When the use of a property changes from owneroccupied to investment property, the property changes in accounting estimates. 46 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 47

25 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 2 ACCOUNTING POLICIES (Continued) 2 ACCOUNTING POLICIES (Continued) is re-measured to fair value and reclassified as investment property. When the use of a property changes, that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. Taxation Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. differences will not reverse in the foreseeable future. A deferred tax asset is recognised to the extent that it is probable that future taxable income will be available, against which the unutilised tax losses and deductible temporary differences can be used. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised. Reinsurance Reinsurance asset comprises contracts with reinsurers under which the Company is compensated for losses on one or more contracts which are classified as insurance contracts. Reinsurance on contracts that do not meet this classification are classified as financial assets. The contractual rights to the cash flows arising from the financial asset have expired or been forfeited by the Company; or It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or It transfers the financial asset, neither retaining nor transferring substantially all the risks and rewards of ownership of the asset, but no longer retains control of the asset. A financial liability is de-recognised when and only when the liability is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or has expired. Categories of financial instruments Financial instruments are categorised financial assets and financial liabilities at fair value through profit and loss, loans and receivables or available-for-sale financial assets. An analysis of the Company s statement of financial position, showing the categorisation of financial instruments is set out in Note 15. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss comprise financial assets classified as held for trading (including derivative instruments that are not used as hedging instruments) and those that the Company has elected to designate as at fair value through profit or loss. Financial assets at fair value through profit or loss are Deferred taxation is provided using the statement of financial position liability method, based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the statement of financial position date. Deferred taxation is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in equity. The effect on deferred taxation of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to equity. Deferred tax liability is not recognised on temporary differences that arise from: initial recognition of an asset or liability in a transaction that is not a business combination which, at the time of transaction, affects neither the accounting nor taxable profit or loss; and temporary differences associated with investment in subsidiaries and associates where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary Reinsurance asset principally includes the reinsurers share of liabilities in respect of contracts with policyholders. Amounts recoverable under reinsurance contracts are recognised in a manner consistent with the reinsured risks and in accordance with the terms of the reinsurance contract. Reinsurance is presented in the statement of financial position on a gross basis. Reinsurance assets are assessed for impairment at each statement of financial position date. An asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Company may not recover all amounts due, and that the event has a reliably measurable impact on the amounts that the Company will receive from the reinsurer. Financial instruments Financial instruments comprise investments and securities, loans and advances, including amounts due by/to group companies, derivative instruments, cash and cash equivalents. Recognition and de-recognition of financial instruments Financial instruments are recognised when, and only when, the Company becomes a party to the contractual provisions of the particular instrument. The Company de-recognises a financial asset when and only when: The difference between the carrying amount of a financial liability (or part thereof) extinguished or transferred to another party and consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement. All purchases and sales of financial assets carried at fair value through profit or loss that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recognised at trade date, which is the date that the Company commits to purchase or sell the asset. Otherwise such transactions are treated as derivatives until settlement occurs. Fair value measurement considerations The fair values of quoted financial assets are based on quoted prices. If the market for a financial asset is not active, the Company establishes fair value using valuation techniques that refer as far as possible to observable market data. These include the use of recent arm s-length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. To the extent that the fair values of unlisted equity instruments cannot be measured reliably, such instruments are carried at cost less impairments. These impairments are not subsequently reversed. initially recognised at fair value excluding transaction costs directly attributable to their acquisition which are recognised immediately in the income statement. After initial recognition, financial assets at fair value through profit or loss are measured at fair value with resulting fair value gains or losses adjustment being recognised directly in the income statement. Financial assets that the Company has elected to designate at fair value through profit or loss are those where this designation either eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis or those that are managed, evaluated and reported on using a fair value basis in accordance with a documented risk management and/or investment strategy. This election is in respect of financial assets held to support liabilities in respect of contracts with policyholders. All related fair value gains and losses are included in investment income. Interest earned whilst holding financial assets at fair value through profit or loss is included in interest income. Dividends received are included in dividend income. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative 48 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 49

26 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 2 ACCOUNTING POLICIES (Continued) 2 ACCOUNTING POLICIES (Continued) financial assets that are designated as available-for-sale or not classified in any other financial asset categories. Available-for-sale financial assets are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative loss previously reported in other comprehensive income is included in the income statement. Investments are derecognised when the rights to receive cash flows from the investments have expired or where they have been transferred and the Company has also transferred substantially all risks and rewards of ownership. Where available-for-sale financial assets are interest-bearing, interest calculated using the effective interest method is recognised in the income statement as investment income. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those designated by the Company as at fair value through profit or loss or available-for-sale. Loans and receivables are initially recognised at fair value. Subsequent to initial measurement, loans and receivables are measured at amortised cost using the effective interest method less any impairment losses. Interest received is recognised as part of investment income. All loans and receivables are recognised when cash is advanced to borrowers. Derivative financial instruments Derivative instruments, including options, futures, forwards and swaps are used to economically hedge against market and currency movements in the values of assets and liabilities. Derivative instruments are classified as financial assets or financial liabilities at fair value through profit or loss - held for trading. Listed derivatives are stated at quoted prices. Unlisted derivative instruments are valued using standard market valuation techniques. Hedge accounting is not applied. All gains and losses, whether realised or unrealised, are recognised in the income statement as investment income. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition, including cash and balances with banks but excluding cash and cash equivalent instruments held for investing purposes. It includes cash balances held in policyholder investment portfolios. Cash balances include cash collateral held. Financial liabilities All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process, i.e. finance cost Interest income and expense Interest income and expense is recognised in the income statement using the effective interest method taking into account the expected timing and amount of cash flows. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest method. Interest earned on financial assets is presented as part of investment income. Dividend income Dividend income is recognised in full on the ex-dividend date as investment income. Dividends from certain redeemable preference shares are recognised as income on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is probable such income will accrue to the Company. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expense items are offset only to the extent that their related instruments have been offset in the statement of financial position. Lending of securities The equities or bonds on loan, and not the collateral security, are reflected in the statement of financial position of the Company at year-end. Scrip lending fees received are included under fee income. The Company continues to recognise the related income on the equities and bonds on loan. Impairment of financial assets The company assesses at each statement of financial position date whether there is any objective evidence that a financial asset or group of financial assets, excluding financial assets at fair value through profit or loss, is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans or receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between asset s carrying amount and the present value of estimated future cash flows (excluding credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced either directly or through use of an allowance account. The impairment loss is recognised in net profit or loss. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in net profit or loss, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Available-for-sale financial assets If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current value, less any impairment loss previously recognised in net profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognised in net profit or loss. Reversals of impairment losses on availablefor-sale debt instruments are reversed through net profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in net profit or loss. Foreign currency translation Foreign currency transactions are measured using Kenya shillings, the Company s functional currency, on initial recognition by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of assets and liabilities denominated in foreign currencies, whether monetary or non-monetary, are recognised in the income statement as part of investment income. Employee benefits Defined contribution plan Contributions in respect of defined contribution retirement plans are recognised as an expense in the income statement as incurred. 50 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 51

27 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 2 ACCOUNTING POLICIES (Continued) 2 ACCOUNTING POLICIES (Continued) The majority of the company s employees are eligible for retirement benefits under a defined contribution plan provided through a separate fund arrangement. The assets of the scheme are held in separate trustee administered funds, which are funded by contributions from both the company and employees. Employees are also members of National Social Security Fund contributions to which are done by the employee and the employer. Contributions to the defined contribution plan and to the National Social Security Fund are charged to the income statement as incurred. Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under the Company s insurance arrangements, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of discounting is material, provisions are discounted. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. line basis over the period of the lease. Leases of land are considered as finance leases and accounted for as property and equipment. As lessor When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method (before income tax expense), which reflects a constant periodic rate of return. To date, the company has not leased out any assets under finance leases. Impairment of other assets The carrying amounts of the Company s other assets, other than financial assets and deferred tax assets, are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. The recoverable amount is the greater of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that reflects current market assessment of the time value of money and of the risks specific to the asset. For an asset Investments Investments are generally stated at the following values: (i) (ii) (iii) (iv) (v) Mortgages and loans are classified as loans and receivables and valued at amortised cost. Investment properties at professional valuation Government securities are classified as financial assets held at fair value through profit or loss. Quoted preference and ordinary shares are classified as available for sale through equity and are valued at fair value on the statement of financial position date, based on market prices. Unquoted ordinary shares are classified as available for sale and are valued at fair value or directors valuation. The unrealised gains and losses arising from the valuation of properties are dealt with in the revenue account for long-term business. The unrealised gains and losses on valuation of quoted and unquoted shares are credited to the available for sale reserve in respect of shareholders and to the revenue account in respect of long-term business. The realised gains on disposal of quoted shares are credited to retained earnings in respect of shareholders and to the revenue account for long-term business. Claims Claims expense comprises claims due in the year and changes in the provisions for outstanding claims. Maturity and annuity claims are recorded as they fall due for payment. Death claims and surrenders are recorded when notified. Commissions and expenses of management Commissions and expenses of management are allocated/charged to the relevant revenue accounts as incurred in the management of each class of business. Offsetting Financial assets and liabilities are offset and the net amount reported on the statement of financial position when there is a legally enforceable right to offset the recognised amount and there is an intention to settle on a net basis, or to realise the asset and settle the liability Comparatives Where necessary the comparative information has been changed to agree to the current year presentation. Future operating costs or losses are not provided for. Leave Accrual for annual leave is made as employees earn it and reduced when taken. Leases Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. As lessee All leases entered into by the company have been operating leases. Payments made under operating leases are charged to the income statement on a straight- that does not generate largely independent cash flows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of the asset exceeds its recoverable amount. Impairment losses are recognised in profit or loss for the period. An impairment loss is reversed to profit or loss for the period if there has been a change in the estimates used to determine the recoverable amount. Dividends Dividends payable on ordinary shares are charged to retained earnings in the period in which they are declared. Proposed dividends are not accrued for until ratified in an Annual General Meeting.. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING THE COMPANY S ACCOUNTING POLICIES In the process of applying the Company s accounting liabilities, provisions and impairment charges. policies, management has made estimates and The fair values of financial assets and liabilities are assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based classified and accounted for in accordance with the policies set out above. They are valued on the basis of listed market prices in so far as this is possible. on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. If prices are not readily determinable, fair value is based either on internal valuation models or management estimates of amounts that could be realised under Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Company s business that typically require such estimates are life insurance contract provisions, determination of the fair value for financial assets and current market conditions. Fair values of certain financial instruments including derivative instruments together with fair values of share-based payment liabilities are determined using pricing models that consider, among other factors, contractual and market prices, correlations, 52 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 53

28 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING THE COMPANY S ACCOUNTING POLICIES (Continued) 4. NOTES TO THE STATUTORY ACTUARY S REPORT yield curves, credit spreads, and volatility factors. The nature and the key assumptions made in determining provisions are disclosed in note 2. Assets are subject to regular impairment reviews as required. Impairments are measured as the difference between the cost (or amortised cost) of a particular asset and the current fair value or recoverable amount. Impairments are recorded in the income statement in the period in which they occur. The Company s policy in relation to investment securities is described in note 2. The critical areas of accounting estimates and judgements in relation to the preparation of these financial statements are as set out below: a) Critical judgements in applying accounting policies. Deferred income tax Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. As a result, the company has not recognised the deferred tax asset due to accumulated losses. See note 23 for further details. Held to maturity financial assets The directors have reviewed the Company s held to maturity financial assets in light of the Company s capital and liquidity requirements and have confirmed the Company s positive intention and ability to hold these assets to maturity. The carrying amount of the held to maturity financial assets is Shs 236,051,000 (: Shs 292,033,000). Details of these assets are set out in note 15. b) Key sources of estimation uncertainty. Property and equipment Critical estimates are made by directors in determining the useful lives and residual values for equipment based on the intended use of the assets and the economic lives of those assets. Subsequent changes in circumstances or prospective utilisation of the assets concerned could result in the actual useful lives or residual values differing from initial estimates. Impairment of assets At each reporting date, the company reviews the carrying amount of its financial and tangible assets to determine whether there is any indication that the assets have suffered impairment. If any such indication exists, the asset s recoverable amount is estimated and an impairment loss is recognised in the profit or loss whenever the carrying amount of the asset exceeds its recoverable amount. Valuation of investment property Investment property are stated at valuation. Revaluations are performed by professional valuers at sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the reporting date. (a) Analysis of change in excess assets on published reporting basis Shs Million Shs Million Excess assets at end of year 2,023 2,450 Excess assets at beginning of year 2,450 2,712 Change in excess assets on published reporting basis during the year (427) (262) (b) Analysis of change in excess assets on published reporting basis The change in the excess assets on the published reporting basis has arisen from the following main sources: Total comprehensive income (427) (262) Change in excess assets on published reporting basis during the year (427) (262) (c) Valuation assumptions IFRS applies for published reporting purposes. Under IFRS, contracts need to be classified as investment, financial instruments with discretionary participating features or insurance. Investment management contracts provide both a financial instrument and an investment management service component. Fees and expenses associated with the investment management service component are subject to IAS 18. The published valuation of insurance contracts and investment contracts with discretionary participating features was performed as at 31 December using the Financial Soundness Valuation method, in accordance with SAP 104 issued by the Actuarial Society of South Africa. This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience, plus margins for prudence. The result of the valuation method and assumptions is such that profits are released appropriately over the term of each policy, and avoid premature recognition of profits that may give rise to losses in later years. Liabilities under investment contracts without discretionary participation are valued at fair value in accordance with IAS 39. A Deferred Acquisition Cost (DAC) asset (set up in the past for incremental expenses, and amortised over the expected term of the contract) is no longer held. A Deferred Revenue Liability (DRL) is set up for excess initial fees, and is amortised over the expected term of the contract. Significant valuation assumptions are summarised below: (i) Mortality The company uses the following base tables of standard mortality: Individual Business Old Generation Assurances A49-52 select Individual Business Old Generation Annuities a (55) ultimate Individual Business New Generation Risk Products use an internal mortality table. Statistical methods are used to adjust the rates reflected on the above tables based on the company s expected future experience for each class of business. In particular allowance has been made for the expected deterioration in assured lives mortality due to AIDS. (ii) Persistency Liabilities include allowance for potential surrenders and lapses, with reference to the company s most recent experience, adjusted for any expected differences in future experience. 54 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 55

29 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4 NOTES TO THE STATUTORY ACTUARY S REPORT (Continued) (iii) Investment returns (iv) Expenses, tax and inflation 6 NET INVESTMENT INCOME For the current valuation, the rate of return before tax used for each relevant class was: Individual Business with Profits 12.5% p.a ( 12.5% p.a.) Individual Business Annuities and New Generation 11.4% p.a ( 11.4% p.a.) The current level of expenses is taken to be an appropriate expense base. Expense inflation is assumed to be 9.1% (: 8.6%). It has been assumed that the current tax legislation and rates continue unaltered. Dividend income 89,997 76,634 Net gain/(loss) on financial assets at fair value through profit and loss 37,275 (129,466) Interest income on loans and receivables 124,094 82,790 Interest income on cash and cash equivalents 380, , , ,776 Net rental income 36,698 42,109 5 DIVISION RESULTS Statement of comprehensive income Retail Corporate Total Retail Corporate Total Net investment income 668, ,885 7 NET FEE AND COMMISSION INCOME Division revenue Gross earned premiums 698, , , , , ,883 Outward reinsurance (64,749) (136,378) (201,127) (62,439) (185,894) (248,333) Net earned premium 634, , , , , ,550 Investment income net of realised losses 287,213 19, ,111 47,267 14,711 61,978 Fee and commission income 438,184 44, , ,629 64, ,687 Division expenses Claims and benefits (543,304) (93,046) (636,350) (533,310) (73,462) (606,772) Change in provision for insurance contract liabilities (321,000) 61,003 (259,997) 373,721 (2,040) 371,681 Commissions and other acquisition costs (241,840) (23,410) (265,250) (227,183) (37,610) (264,793) Operating and administration Expenses (927,612) (84,568) (1,012,180) (935,876) (101,955) (1,037,831) Investment contracts Investment management fees 421, ,227 Commission income 60,439 78,754 Change in deferred revenue (note 21) 1,470 1,706 8 COMMISSIONS AND OTHER ACQUISITION COSTS 9 OTHER OPERATING AND ADMINISTRATION EXPENSES 482, ,687 Commission expenses 181, ,427 Other acquisition costs 84,045 73, , ,793 Division result (689,938) 64,991 (624,947) (445,612) 44,112 (401,500) (a) Operating expenses Amortisation of intangibles (note 12) 1,931 1,975 Asset management expenses 38,379 43, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 57

30 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 9 OTHER OPERATING AND ADMINISTRATION EXPENSES (Continued) Operating expenses (Continued) 11 FAIR VALUE CHANGES THROUGH OTHER COMPREHENSIVE INCOME Depreciation of property and equipment (note 14) 37,113 30,323 Amortisation of intangibles (note 12) 558, ,044 Other operating expenses 635, ,055 (b) Auditors remuneration Revaluation of leasehold land and building 44,194 71,258 Net loss on financial assets available-for-sale (note 25) (214,385) (309,690) (170,191) (238,432) Statutory audit services 5,669 5, INTANGIBLE ASSETS (c) Directors emoluments: (d) - As directors 10,794 10,569 - As executives 31,738 25,319 Staff costs: 42,532 35,888 Wages and salaries 305, ,533 Social security costs Defined contribution plans 36,658 32,868 Group life assurance 7,291 9, , ,805 COST At 1 January 242, ,470 Additions - 7,482 At 31 December 242, ,952 DEPRECIATION At 1 January (236,183) (234,208) Amortisation charge for the year (1,931) (1,975) At 31 December (238,114) (236,183) Total expenses (9(a), 9(b), 9(c) and 9(d)) 1,033,759 1,183,147 NET BOOK VALUE At 31 December 4,838 6,768 The intangible assets comprise of financial reporting software. 10 TAXATION (a) Reconciliation of taxation (credit)/charge to expected tax based on accounting (loss)/profit Accounting loss before taxation (257,184) (24,019) Tax at the applicable rate of 30% (77,155) (7,206) 13 INVESTMENT PROPERTY At 1 January 950, ,000 Fair value movement during the year: - Profit or loss 12,053 33,890 Other deferred tax movements 77,155 7,206 - Investment contract liabilities 17,947 25,110 (b) Tax recoverable relates to prior period taxes paid and withholding taxes recoverable from the Kenya Revenue Authority ,000 59,000 At 31 December 980, ,000 At beginning of the year 74,343 64,790 Comprising: Paid during the year 3,282 9,553 Leasehold land and building 980, ,000 At end of the year 77,625 74, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 59

31 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 13 INVESTMENT PROPERTY (Continued) 14 PROPERTY AND EQUIPMENT The investment property is stated at its revalued amounts, being the fair values at the date of revaluation. The fair value measurements of the investment property as at 31 December were performed by Roack Consult Limited, registered and independent valuers (i.e. not related to the company). Roack Consult Limited are members of the Institute of Surveyors of Kenya and they have appropriate qualifications and relevant and recent experience in the fair value measurement of property in the various locations in Kenya. Leasehold Land Buildings Computer Equipment & Motor Vehicles Furniture & Office Equipment Total The fair value of investment property was determined by reference to market evidence of recent transactions for similar properties. The valuations were based on open market value. VALUATION At 1 January 627, , ,628 95,001 1,102,038 Additions - 4,267 79,487 13,199 96,953 Change in fair value 138,000 (13,000) ,000 Rental income from investment property 84,407 83,458 Direct operating expense arising from rented out investment property (8,791) (9,239) 75,616 74,219 Details of the company s investment property and information about fair value hierarchy as at 31 December is as follows: At 31 December 765, , , ,200 1,323,991 At 1 January 765, , , ,200 1,323,991 Additions ,312 7,221 28,533 Change in fair value 34,000 76, ,000 At 31 December 799, , , ,421 1,462, December Level 1 Level 2 Level 3 Fair value as DEPRECIATION At 1 January - 21,899 95,922 78, ,422 Depreciation charge for the year - 1,768 21,012 7,543 30,323 Investment property (located in City Centre, Nairobi ) - 980, , December Investment property (located in City Centre, Nairobi ) - 950, ,000 There were no transfers between level 1 and level 2 during the year. At 31 December - 23, ,934 86, ,745 At 1 January - 23, ,934 86, ,745 Depreciation charge for the year - 1,350 28,050 7,713 37,113 At 31 December - 25, ,983 93, ,858 NET BOOK VALUE At 31 December 799, ,659 73,444 21,563 1,198,666 At 31 December 765, ,009 80,181 22,056 1,097, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 61

32 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 14. PROPERTY AND EQUIPMENT (continued) Leasehold land relates to a land leased from the Government of Kenya under renewable leases. The lease period is 99 years with effect from 1 October, Such long term leases should be revalued. Had the leasehold land and buildings been carried at cost, the carrying value would be: 15. FINANCIAL ASSETS At Fair Value through Profit and Loss Available for Sale Loans and Receivables Total Cost 379, ,137 Accumulated depreciation (65,582) (56,103) Net book value 313, , December Loans secured by mortgages on real property ,858 28,858 Loans on life insurance policies within their surrender values , ,193 Financial assets at fair value through profit or loss 4,166, ,166,192 The company s land and buildings are stated at their revalued amounts, being the fair values at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The fair value measurements of the company s leasehold land and buildings as at 31 December were performed by Roack Consult Limited, registered and independent valuers (i.e. not related to the company). Roack Consult Limited are members of the Institute of Surveyors of Kenya and they have appropriate qualifications and relevant and recent experience in the fair value measurement of properties in the various locations in Kenya. Financial assets - available for sale - listed - 3,071,645-3,071,645 Financial assets available for sale unlisted - 390, , December - 3,462,369-3,462,369 4,166,192 3,462, ,051 7,864,612 The fair value of land and buildings was determined by reference to market evidence of recent transactions for similar properties. There has been no change to the valuation technique during the year. Fair value hierarchy Loans secured by mortgages on real property ,969 28,969 Loans on life insurance policies within their surrender values , ,064 Financial assets at fair value through profit or loss 4,690, ,690,309 Details of the company s leasehold land and buildings and information about fair value hierarchy as at 31 December is as follows: Financial assets - available for sale- listed - 3,861,602-3,861,602 Financial assets available for sale unlisted - 437, ,685 Level 1 Level 2 Level 3 Fair Value As 31 December Leasehold land and buildings (located in Upper Hill, Nairobi) - 1,103,659-1,103,659 Movement in financial assets as follows: - 4,299,287-4,299,287 4,690,309 4,299, ,033 9,281, December Leasehold land and buildings (located in Upper Hill, Nairobi) - 995, ,009 Balance at beginning of the year 4,690,309 4,299, ,033 9,281,629 Additions 582,273 8,067 27, ,276 Fair value change 88,967 (506,892) - (417,925) There were no transfers between level 1 and level 2 during the year. Disposals (1,195,357) (338,093) (83,918) (1,617,368) Balance for end of the year 4,166,192 3,462, ,051 7,864, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 63

33 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 15 FINANCIAL ASSETS (Continued) Movement in financial assets as follows: At Fair Value through Profit And Loss Available for Sale Loans and Receivables Total 16 AMOUNTS DUE FROM/ (TO) GROUP COMPANIES (continued) The amounts due from or to group companies above are unsecured, interest free and are not subject to fixed terms of repayment. However, the amount due from UAP Holdings Limited, which was repaid in full during the year was issued at an annual interest rate of 12.5%. 17 INSURANCE AND OTHER RECEIVABLES Prepayments and other debtors 140,806 83,077 Balance at beginning of the year 4,254,453 4,822, ,902 9,370,824 Additions 1,269, ,436 1,156 1,423,454 Accrued investment income 17,633 16, , ,051 Fair value change (217,194) (549,523) - (766,717) Disposals (616,812) (126,095) (3,025) (745,932) Balance for end of the year 4,690,309 4,299, ,033 9,281, CASH AND CASH EQUIVALENTS Cash at bank and in hand 296, , AMOUNTS DUE FROM/ (TO)GROUP COMPANIES Amounts due from Amounts due to Amounts due from Amounts due to Old Mutual Investment Services (Kenya) Limited - (329) 3,043 - Old Mutual Investment Group Limited 12,437 (2,206) 12,685 (2,127) Old Mutual Holdings Limited 53,451-14,423 - Unit trusts 19,888 18,642 Deposits with banks 2,686, ,784 3,003,354 1,281,379 Movement in unit trusts during the year was as follows: At 1 January 18,642 17,457 Additional Investments (including re-invested interest) 1,246 1,185 At 31 December 19,888 18,642 Old Mutual Africa Limited 46,306-4,815 - Old Mutual South Africa Limited 1,965-1,594 - Old Mutual Securities Limited 15, INSURANCE CONTRACT LIABILITIES Future policyholders benefits Old Mutual Emerging Markets 18, Old Mutual Plc. - (644) - (600) Old Mutual Life Assurance Company (South Africa) Limited - (115,760) - (65,245) Faulu Microfinance Bank Limited At 1 January 4,138,572 4,511,524 Movement in the year (income statement) 259,997 (371,681) Returns allocated from shareholder funds (194,523) (1,271) At 31 December 4,204,046 4,138, ,136 (118,939) 37,905 (67,972) Amounts Due from UAP Holdings Limited - - 1,057, ,136 (118,939) 1,095,855 (67,972) 64 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 65

34 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 20 INVESTMENT CONTRACT LIABILITIES 22 OTHER PAYABLES AND ACCRUALS (Continued) Composition of liabilities in respect of investment contracts: Liabilities at fair value through profit or loss 6,003,498 6,088,645 Movement in liabilities fair valued through profit or loss: Balance at beginning of year 6,088,645 6,242,136 Payable at beginning of year - 10,812 Paid during the year - (1,666) Remitted to Unclaimed Financial Asset Authority (UFAA) - (9,146) Payable at end of year - - New contributions received 1,062,452 1,161,576 Withdrawals (1,644,386) (1,400,575) 23 DEFERRED TAX Fair value gains on financial assets (234,353) (327,561) Revaluation of investment property (note 13) 17,947 25,110 Revaluation of leasehold land and building 65,806 52,795 Unrecognised deferred tax asset The deferred taxation asset is attributable to the following items: Investments returns 495, ,667 Fees deducted (42,329) (39,774) Other movements (note 19) 194,523 1,271 Balance at end of year 6,003,498 6,088,645 Tax losses carried forward 231, ,158 Revaluation surplus property, plant and equipment (99,818) (86,560) Revaluation surplus - investment property (18,385) (14,769) Deferred tax asset not recognised (112,826) (76,829) DEFERRED REVENUE ON INVESTMENT CONTRACTS Balance at beginning of year 14,028 15,734 Amortisation (1,470) (1,706) Balance at end of year 12,558 14, OTHER PAYABLES AND ACCRUALS Premium creditors 235, ,505 VAT payable 16,077 7,331 Other creditors and accruals 355, ,848 The movement on the deferred taxation account is as follows: At beginning of year - - Credit to profit or loss 77,155 7,206 Deferred tax credit not recognised (77,155) (7,206) - - The net deferred tax asset has not been recognised as it is attributable to the losses accumulated in the current and prior years and the directors are uncertain about the ability of the company to generate sufficient profits in the foreseeable future to enable it utilize the tax losses. The life fund is not subject to taxation and with the accumulated losses, the company will only be liable for taxation when the accumulated losses have been offset by future profits and the surplus is adequate for the actuary to recommend a distribution to shareholders. The surplus not recommended for distribution to shareholders will not be taxable. As at 31 December, the company has reported accumulated tax losses amounting to Shs 770,096,039 (: Shs 593,859,568). Unclaimed dividends , , OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 67

35 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 24 SHARE CAPITAL AND PREMIUM Share capital: Authorised share capital 300,000,000 ordinary shares of Shs 10 each 3,000,000 3,000, NOTES TO THE STATEMENT OF CASH FLOWS (Continued) Notes Gain on sale of available-for-sale financial assets (50,339) (43,360) Fair value adjustment on investment property 13 (30,000) (59,000) Fair value adjustment on available-for-sale 277, ,451 Issued and paid up: (234,591) (396,063) 217,487,051 ordinary shares of Shs 10 each 2,174,871 2,174,871 Share Premium At 1 January and 31 December 1,884,956 1,884,956 Total share capital and share premium 4,059,827 4,059,827 (b) Changes in working capital comprises (Increase)/decrease in insurance and other receivables (58,388) 77,815 Decrease/(increase) in amounts due from group companies 946,719 (1,086,299) Increase/(decrease)/ in insurance contract liabilities 65,474 (372,952) The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the company. Increase in amounts due to reinsurers 7,535 14,772 (Increase)/decrease in amounts due to group companies 50,967 (4,256) 25 INVESTMENT REVALUATION RESERVE (Decrease)/increase in claims, insurance and other payables (60,585) 131,549 The fair value reserve represents the cumulative net change in the fair value of available-for-sale financial assets until Decrease in investment contracts liabilities (85,147) (153,491) the investments are derecognised or impaired. Decrease in deferred revenue on investment contracts (1,470) (1,706) The surplus arising from available-for-sale financial instruments attributable to investment contracts are credited directly to investment contract liabilities. The surplus attributed to insurance contract liabilities are recorded through equity in the available for sale reserve. 27 RELATED PARTY DISCLOSURES 865,105 (1,394,568) The movement in the balance is as follows; At the beginning of the year 959,782 1,269,472 Fair value losses on available for sale financial assets (214,385) (309,690) At end of the year 745, , NOTES TO THE STATEMENT OF CASH FLOWS (a) Non-cash movements and adjustments to loss before tax Notes Depreciation 14 37,113 30,323 Amortisation of intangible assets 12 1,931 1,975 During the year the company entered into the following transactions with related companies: Asset management fees Old Mutual Investment Group Limited 24,713 28,287 Rental income Old Mutual Investment Services (Kenya) Ltd 2,584 3,101 Old Mutual Investment Group Limited 2,915 2,915 Actuarial services 5,419 6,016 Old Mutual Life Assurance Company (South Africa) Ltd 35,141 35,141 Interest income 6 (380,336) (478,818) Dividend income 6 (89,997) (76,634) 68 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 69

36 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 27 RELATED PARTY DISCLOSURES (Continued) Internal audit services 29 FINANCIAL RISK MANAGEMENT Risk management forms an important part of the governance structures for the company. This section outlines the various types of risks faced by the company and the strategies adopted to minimise the effect of the risks. Old Mutual Life Assurance Company (South Africa) Ltd 4,567 6,477 Investment in Unit Trust Old Mutual Investment Services (Kenya) Ltd 19,888 18,642 Directors emoluments 42,532 35,888 Management of risk is the responsibility of the board of directors but the daily monitoring has been delegated to the executive committee with a dedicated risk and compliance officer. Through its risk management structure the company seeks to manage the following key risks: Liquidity, Market, Interest rate, Credit, Insurance and Capital risks. Operational and reputational risks are inherent in the business and are managed through internal processes and controls. The Company s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance. The Board Audit, Risk and Compliance committee is responsible for monitoring compliance with group risk management policies and procedures and for reviewing the robustness of the risk management framework. The company is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that proceeds from its financial assets may not be sufficient to fund the obligations arising from its insurance and investment contracts. Due from employees (included in trade and other receivables) 2,420 3,252 The transactions with the related companies are at arm s length. 28 OPERATING LEASES During the year the company entered into the following transactions with related companies: Lessee Non-cancellable operating lease rentals are payable as follows: Financial risk management strategy and policy The company manages these positions within an asset liability (ALM) framework that has been developed to achieve long-term investment returns in excess of its obligations under benefits payable to contract holders, as well as seeking to maximise the return on shareholders funds, all within an acceptable framework. For each distinct category of liabilities, a separate portfolio of assets is maintained. Within 1 year 7,653 12,444 Between 1-5 years 7,882 21,017 The insurance contracts retain substantial exposure to the extent that the benefits payable to policyholders are not linked to the performance of the underlying assets and/or contract holder enjoy options embedded in their contracts which are not matched by identical options in the underlying investments. These exposures include duration risk, credit risk and market risk. The notes below explain how financial risks are managed using the categories utilised in the ALM framework. Above 5 years ,535 33,891 During the year an amount of Shs 13,101,347 ( Shs 13,500,946) was recognised as an expense in respect of operating leases. Lessor The company leases out its investment property. The future minimum lease payments under non-cancellable leases are as follows: i) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. Credit risk arises from cash and cash equivalents and fixed deposits held in banks, interest bearing investments with Government of Kenya and commercial paper and corporate bonds with various entities. The Government of Kenya (GoK) has a long term rating of B+ (Stable) by Standard and Poors and has not defaulted on debt obligation in the past. Within 1 year 76,837 68,681 Between 1-5 years 179, ,478 Above 5 years 16,736 11,139 The company has appointed an investments manager who takes overall responsibility for carrying out a quarterly due diligence investigation on banks to determine those that qualify for deposits placement. The criteria used in the due diligence process is rigorous and adopts parameters such as capital adequacy, liquidity, non performing loan ratio and other non financial ratios in determining qualified institutions. Based on the outcome of this investigation a maximum exposure is set for each financial institution. To invest in the corporate bond, the bond must in addition to CMA approval be guaranteed by an approved bank or by an international financial institution whose rating meets set requirements. 272, , OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 71

37 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 29 FINANCIAL RISK MANAGEMENT (Continued) The amount that best represents the company s maximum exposure to credit risk as at 29 FINANCIAL RISK MANAGEMENT (Continued) The Investment Manager moderates this risk through a careful selection and diversification of securities and other 31 December is made up as follows: financial instruments within specified limits. The Investment manager conducts research on overall economic performance and determines probable sector Fully Performing Past due Impaired Total performances and, therefore, asset allocation. Typically, the choice of investment involves the following steps tailored to minimize the level of exposure to asset classes and specific securities: 31 December Strategic Asset Allocation (SAA) SAA is the first step in the selection process and sets the minimum and maximum for each asset class. During Fixed deposits held with banks 2,686, ,686,982 Financial assets at fair value through profit or loss 4,166,192 4,166,192 this process a long term guideline is developed taking into account the investment objectives, which include the asset and liability profile and the maturity profile of funds. All this is done under the guide of in-depth research by the asset manager s research department. Amounts due from group companies 149, ,136 Loans secured by mortgages on real property 28, ,858 Loans on life insurance policies within their surrender values 207, ,193 Tactical Asset Allocation (TAA) TAA sets the short term objectives (quarterly) in terms of ranges for each asset class allowing the manager to take advantage of prevailing market conditions, The manager then identifies actual assets invested within each investment class but within the overall strategic range. The selection of the specific securities invested in is Bank balances 295, ,764 reviewed monthly by an investment committee. 31 December 7,534, ,534,125 Each asset class is benchmarked against appropriate market indices with the primary objective of outperforming the indices over the medium to longer term. Fixed deposits held with banks 993, ,784 Financial assets at fair value through profit or loss 4,690,309 4,690,309 Amounts due from group companies 1,095, ,095,855 Loans secured by mortgages on real property 28,969 28,969 Loans on life insurance policies within their surrender values 263, ,064 Bank balances 267, ,714 7,339, ,339,695 Sensitivity analysis As at 31 December, if the prices at the Nairobi Stock Exchange had appreciated by 5% with all other factors held constant, the impact on loss would have been a reduction by KShs 153,582 (: Kshs 193,080) Changes in prices of Government Securities & corporate bonds for the Company would have the following impact in statement of profit or loss and equity; % Change in Base Government Securities & Corporate Bonds +(-)5% +(-) 208,310 +(-) 234,515 ii) iii) Market risk Market risk is the risk that changes in market prices, which include currency exchange rates, interest rates and share prices (NSE index), will affect the value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control risk exposures within acceptable limits, while optimising return. Overall responsibility for the management of market risk rests with the Assets Manager. The company through its board of directors defines investment mandates to be used by the Asset Manager. Price risk The Company is exposed to the equity and bond markets, which present a risk of partial or total loss of capital. The price of the units is directly linked to the price of the underlying securities and any loss on the value of the underlying securities will result in a diminution of the unit price. iv) Interest rate risk The company is exposed to various risks associated with the effects of fluctuations in prevailing levels of market interest rates on both fair values and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The individual life and employees benefits businesses have due regard to the nature of the liabilities and guarantees given to policyholders. The interest rate risk of such liabilities is managed by investing in assets of similar duration. The asset manager through the investment committee closely monitors interest rate trends to minimise the potential adverse impact of rate changes. The tables below set out the carrying amounts, by maturity of the company s financial instruments that are exposed to interest rate risk. 72 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 73

38 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 29 FINANCIAL RISK MANAGEMENT (Continued) iv) Interest rate risk (Continued) Participating profile of financial assets and liabilities (including insurance) exposed to interest rate risk Effective Interest 6 Months Or Less 6 12 Months 1 2 Years More Than 2 Years Total 29 FINANCIAL RISK MANAGEMENT (Continued) v) Foreign Exchange Risk The Company operates within Kenya. The various currencies to which the Company was exposed at 31 December and 31 December are summarised in the table below (all amounts expressed in Kenya Shillings). The exposure is only in relation to the non Kenya Shilling denomination balances. 31 December Rate % Kshs 000 Rand 000 US$ 000 Total 000 Treasury bonds & bills 11.94% 199, , ,843 2,618,635 3,434,187 Loan secured by mortgages on real property 14.00% ,858 28,858 Deposits with banks 8.43% 2,686, ,686,982 Unit trusts 7.73% 19, ,888 Corporate bonds 11.51% - 127, , , ,005 Loans on life insurance policies 20.00% 207, , December 3,113, , ,437 3,036,875 7,109,113 Treasury bonds 11.85% 734, , ,914 2,489,802 3,887,246 Loan secured by mortgages on real property 14.00% ,969 28,969 Deposits with banks 11.95% 993,784 _ 993,784 Unit trusts 8.00% 18,642 _ 18,642 Corporate bonds 11.85% - 74, , , ,063 Loans on life insurance policies 20.00% 263, ,064 Sensitivity analysis 2,009, , ,153 3,129,662 5,994,768 As at 31 December, if interest rates had changed by 1% with all other variables remaining constant, the impact on profit and equity would have been as: % Change +1 71,091 59,948-1 (71,091) (59,948) Assets Amounts due from group companies 66, ,684 Cash in hand Total assets 66, ,305 Liabilities Amounts due to group companies - 116, ,404 Total liabilities - 116, ,404 Net Assets At 31 December 66,684 (116,404) 621 (49,099) At 31 December 6,917 (65,845) 1,140 (57,788) In the opinion of the directors, the Company s foreign currency exposure is low vi) Liquidity risk Expected cash demands arise day-to-day to fund anticipated policyholder benefits, expenses and investment activities. Under stressed conditions, unexpected cash demands could arise primarily from an increase in the level of policyholders either terminating policies with material cash surrender values, or not renewing them when they mature, and from an increase in the level of borrowers renewing or extending their loans when they mature. To manage this risk, liquidity management policies and procedures have been designed to ensure we have adequate liquidity available to cover financial obligations as they fall due, and to sustain and grow operations in both normal and stressed conditions. These take into account any legal, regulatory, tax, operational or economic impediments. Liquidity risk is reduced by having policy liabilities that are well-diversified by product, market, and policyholder. We design insurance products to encourage policyholders to maintain their policies in-force, thereby generating a diversified and stable flow of recurring premium income. We establish and implement investment strategies that match the term profile of the assets to the liabilities they support, taking into account the potential for the unexpected. We forecast and monitor actual daily operating liquidity and cash movements in local operations as well as centrally, to ensure liquidity is available and cash is employed optimally. 74 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 75

39 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 29 FINANCIAL RISK MANAGEMENT (Continued) The table below analyses assets and liabilities into current and non-current categories based on the remaining period at statement of financial position date to settlement date: Current Non-Current Total 29 FINANCIAL RISK MANAGEMENT (Continued) vii) Capital management The company s objectives when managing capital, on the statement of financial position, are to comply with the capital requirements set by the regulators and safeguard the company s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders as well as maintain a strong capital base to support the development of its business. 31 December Financial assets Fixed deposits held with banks 2,686,982-2,686,982 Statutory capital and the use of working capital are monitored regularly by management, employing techniques based on guidelines developed by the regulatory authorities for supervisory purposes. Returns on capital adequacy are filed with the regulators on a regular basis. Financial assets at fair value through profit or loss 4,166,192-4,166,192 Amounts due from group companies 149, ,136 Loans secured by mortgages on real property - 28,858 28,858 Loans on life insurance policies within their surrender values 207, ,193 The company is subject to the externally imposed capital requirements. The Insurance Act imposes a minimum capital requirement of Shs 150 million and a margin of solvency requirement of total assets not less than admitted liabilities and ten million shillings or 5% of the admitted liabilities whichever is higher. The company met these minimum requirements during the year. Bank balances 295, ,764 viii) Insurance risk management Financial liabilities 7,505,267 28,858 7,534,125 The company issues contracts that transfer insurance risk or financial risk or both. Amounts due to reinsurers 30,083-30,083 Amounts due to group companies 118, ,939 Other payables and accruals 607, ,761 Outstanding claims - 437, , , ,434 1,194,217 Net liquidity gap 6,748,484 (408,576) 6,339,908 The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments will exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year the estimate established using statistical techniques. 31 December Financial assets Fixed deposits held with banks 993, ,784 Financial assets at fair value through profit or loss 4,690,309-4,690, FAIR VALUES MEASUREMENTS Amounts due from group companies 1,095,855-1,095,855 Loans secured by mortgages on real property - 28,969 28,969 i) Fair value of the company s financial assets and financial liabilities that are measured at fair value on a recurring basis. Loans on life insurance policies within their surrender values 263, ,064 Bank balances 267, ,714 7,310,726 28,969 7,339,695 Some of the Company s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table provides information about how the fair values of these financial assets and liabilities are determined (in particular, valuation technique(s) and inputs used). Financial liabilities Amounts due to reinsurers 22,548-22,548 Amounts due to group companies 67,972-67,972 Other payables and accruals 659, ,684 Outstanding claims - 446, , , ,096 1,196,300 Net liquidity gap 6,560,522 (417,127) 6,143, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 77

40 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 30 FAIR VALUES MEASUREMENTS (Continued) iii) Fair value hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Financial Assets/ Financial Liabilities Fair Values As At Fair Value Hierarchy Valuation Techniques And Key Inputs Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; 31/12/ 31/12/ Financial assets at (FVPL) - Treasury Quoted bid prices in bonds and bills 3,434,187 3,887,246 Level 1 an active market Quoted bid prices in - Corporate bonds 732, ,063 Level 1 an active market Available for sale - Quoted bid prices in Listed investments 3,071,645 3,861,602 Level 1 an active market Discounted cash flow - Unlisted investments 390, ,685 Level 2 approach ii) Except as indicated above, the directors consider that the fair values of these financial assets and liabilities approximates to carrying amounts Carrying Amount Carrying Amount Financial Assets Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data 31 INSURANCE AND INVESTMENT CONTRACTS CLASSIFICATION The company continues to apply the same accounting policies for the recognition and measurement of obligations arising from insurance contracts and investment contracts with Discretionary Participation Feature (DPF) that it issues (including related deferred acquisition costs and other related intangible assets for insurance contracts and investment contracts with DPF) and reinsurance contracts that it holds. The company developed its accounting policies for insurance contracts before the adoption of International Financial Reporting Standard (IFRS) 4 and in the absence of a specific standard for insurance contracts. The adoption of IFRS 4 resulted in the reclassification of the other reserves in equity to present separately the equity component of DPF. IFRS 4 has affected the disclosures with respect to insurance contracts issued, reinsurance contracts held and investment contracts with DPF. Deposits with banks 2,686, ,784 2,686, ,784 Unit trusts 19,888 18,642 19,888 18,642 Corporate bonds 732, , , ,063 Loans on life insurance policies 207, , , , INCORPORATION The company is incorporated as a limited company in Kenya under the Kenya Companies Act, and is domiciled in Kenya. Financial liabilities Insurance contract liabilities 4,204,046 4,138,572 4,204,046 4,138,572 Investment contract liabilities 6,003,498 6,088,645 6,003,498 6,088,645 Other payables and accruals 607, , , ,684 Outstanding claims 437, , , , CURRENCY These financial statements are presented in Kenya shillings (Shs) which is the company s functional currency, the currency of primary economic environment in which the entity operates. Except as otherwise indicated, financial information presented in Kenya Shillings has been rounded to the nearest thousand (Shs 000). 34 APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the Board of directors and authorised for issue on 7 March OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 79

41 NOTES 80 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 81

42 NOTES How do I ensure the well being of my employees in my business? LET S TALK BIASHARA FLEXI Biashara Flexi is a protection product specially tailored for small - mid-sized business owners and organized groups to offer life cover for their employees or members 82 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 83

43 TOP 20 SHAREHOLDERS IN OMLAC AS AT DECEMBER Name of Shareholder Number of Shares % Shareholding 1 OLD MUTUAL HOLDINGS LTD 145,063, OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED FORM OF PROXY I/WE (names in block letters) Of (address) 2 TIDANGA LIMITED 54,371, HIROKO LIMITED 3,868, AVIN GALOT 1,944, NGUGI KIUNA 1,096, DHIMANTILAL S SHAH 457, ESTATE OF THE LATE JAMES EVANS NJOGU 194, MAHENDRA G PATEL 125, SHAH VIPINCHANDRA DHIRAJLAL 123, VIMAL VELJI DHARAMSHI SHAH 108, RETIT HOLDINGS LIMITED 99, PATEL ANIL KUMAR MANUBHAI 99, KANCHAN RAMNIKLAL KHETSHI SHAH 93, RAMESH CHANDRA G SHAH 91, RUPAREL, SHILA J 89, DAVID MUOKA MUTISO 82, KIRITKUMAR A SHAH 82, SHAH CHANDULAL MULJI PUMJA 77, JAMES MAHINDA GATIGI 75, VEKARIA V. K. 71, VEKARIA D. M. 71, OTHER (1404) SHAREHOLDERS 9,198, TOTAL 217,487, Being a member/s of the Old Mutual Life Assurance Company Limited, hereby appoint: (Name in block letters) Of Or failing him, the duly appointed Chairman of the meeting to be my/our proxy, to vote on my/our behalf as indicated below on the ordinary resolutions, with or without modification, as set out in the notice dated 7th March 2017 convening the Annual General Meeting of the Company to be held at the UAP Old Mutual Tower, 2nd floor, Upper Hill Road, Nairobi, on Friday, 26 May 2017 at 9.00 a.m. or at any adjournment thereof. As witness my/our hand this day of 2017 Signature Please indicate with a tick in the appropriate block how you wish your vote to be cast: Agenda Item Ordinary Business For Against 2. To confirm the minutes of the 22nd Annual General Meeting held on 25 August. 3. To receive, consider and adopt the audited Financial Statements for the year ended 31 December together with the reports of the Directors and Auditors thereon. 4. To consider and adopt the recommendation of the Directors that no dividend be declared in respect of the Financial Year ended 31 December. 5. Election of Directors: a) To re-elect Mr. Peter De Beyer, a Director retiring in accordance with Articles 17(a) and 17(b) of the Company s Articles of Association. b) To re-elect Dr. Peter Wanyaga Muthoka, a Director retiring in accordance with Articles 17(a) and 17(b) of the Company s Articles of Association. 6. To approve the Directors remuneration in respect of the Financial Year ended 31 December and to authorize the Board to fix the remuneration of Directors for the current year. 7. To note that Messrs Deloitte & Touché (Kenya) would continue in office as the Company s Auditors in accordance with the provisions of the Companies Act and to authorize the Directors to fix their remuneration for the ensuing financial year. Notes: This proxy form is to be delivered to the Company s registered office not later than 9.00 a.m. on 24th May In case of a Corporation, the proxy form must be under its Common Seal. If a member does not indicate how their proxy is to vote, the proxy may vote as they think fit. 84 OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED OLD MUTUAL LIFE ASSURANCE COMPANY LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS ANNUAL REPORT & FINANCIAL STATEMENTS 85

44