Ref: 14/09 (part 2) The following information extracted from the Annual Financial Report of Old Mutual plc for the year ended 31 December 2008 is published in accordance with DTR 6.3.5(2)(b). The two sections below are the Group Chief Executive's Statement and Risk Management. GROUP CHIEF EXECUTIVE'S STATEMENT "Overall, we delivered a solid set of results with some parts of the Group performing well. The Group and its businesses are well capitalised and our liquidity position remains strong. We have considerably strengthened our risk management and governance from the centre." (Julian Roberts, Group Chief Executive) OVERVIEW 2008 presented major challenges for the Group. The rapid deterioration in global financial markets, most notably in the fourth quarter, resulted in an extremely difficult operating environment, while we faced a number of specific issues in our US Life businesses. Despite these setbacks, we delivered a strong performance across many parts of the Group, especially in the markets where we have significant scale and strong market positions. During the second half of the year, we took major strides to address the issues in our US Life offshore business and, with these largely contained, toward the end of the year we turned our attention to the future and began a full review of the Group's activities. During that time we welcomed Philip Broadley to Old Mutual as our new Group Finance Director and we are already benefiting from his experience and skills. The actions following this review are outlined in more detail below. Capital adequacy position The Group's pro-forma FGD surplus at 31 December 2008 was in excess of £0.7 billion. This is in line with our self-imposed target range which ensures we have sufficient headroom to cover any capital issues across the Group's operations. Our Nordic and UK businesses are well capitalised with solvency ratios of 9.9 times and 2.6 times the required level respectively. Our European businesses are capital light by their nature and therefore present very little capital risk. In South Africa, we have the strongest capital position and credit rating in the long-term insurance industry, with a surplus in OMLACSA of 3.8 times the required level. Nedbank's key ratios also demonstrate its capital strength. In the case of US Life, during 2008 we took action to maintain capital in the onshore business at three times its required level. £314 million of cash was injected into the US Life offshore business during 2008. This business now has significant excess capital over its regulatory requirement. We have carried out significant capital stress testing. Historically, the highest global default rates during a recession have averaged 1.6 percent for investment grade (Source: Moody's). Applying these historical high default rates to our portfolio would generate losses which can be absorbed within our FGD surplus. Actual defaults on our corporate bonds for the year were £85 million resulting in a default rate of approximately 1.3 percent on our corporate bond portfolio. Our FGD surplus would enable us to withstand eight times that rate in a single year. The Group has available cash and facilities of over £600 million as at 31 December 2008. Dividend During 2008 we paid an interim dividend of 2.45p per share. However, in view of the unpredictability of market conditions and continued uncertainty around the performance of financial markets, we believe it is prudent for us to conserve our capital and retain cash. Accordingly, the Board has determined that in order to conserve cash and capital during the current period of economic stress, no dividends will be paid by the Company during 2009. The Board will consider the position in respect of a final dividend for 2009 at the appropriate time in light of the then prevailing market and economic conditions. Longer term, the Board will look to pay a dividend based on the Group's capital, cash flow and earnings, with a view to maintaining cover of at least two times. Strong sales and earnings growth in South Africa In the markets where our businesses are highly developed and we have strong brands, we delivered excellent growth in both sales and profit. In South Africa, life and unit trust sales in local currency grew by 14 percent and 33 percent respectively and there was a significant reduction in net client cash outflows. The boutique model of our South African investment management business has continued to bed down well, with the majority of our boutiques delivering a better investment performance than in 2007. Old Mutual South Africa's adjusted operating profit on an IFRS basis was up 14 percent to R8 billion and the return on equity was up nearly four percentage points to 27.8 percent. This is an excellent result given the fall in equity markets and tightened consumer spending, and demonstrates the strength of our diverse product offering and our ability to adapt to an ever-changing market environment. In contrast to the negative forecast GDP in the UK and US, the South African economy is forecast to grow by 1.2 percent in 2009 (Source: South Africa National Treasury) and, while it is facing its own challenges, the South African banking sector remains in good health, with the inter bank lending market continuing to operate efficiently. Despite an increased level of impairments, Nedbank delivered an adjusted operating profit on an IFRS basis of R8.8 billion, down just 5 percent on 2007, and a return on equity of 17.7 percent with Tier 1 capital at 9.6 percent. Skandia building market share across Europe Skandia saw positive net client cash flows across all its divisions and the drop in funds under management relative to the much larger fall in the equity markets was very pleasing, reflecting good product innovation and investment performance. In Nordic, strong cash inflows were driven by a 30 percent increase in life sales to SEK2.6 billion and adjusted operating profit on an IFRS basis was up 23 percent to SEK1.1 billion. This was largely as a result of the introduction of new products and, in particular, growth in the unit-linked business in Sweden. This was very much against the trend seen in the UK and across the rest of Europe, given the general flight from equities which resulted in a significant drop in unitlinked sales. However, across Europe, we increased our market share, which will stand us in good stead when equity markets recover. In the UK, the relative decline in sales was largely due to reduced demand for unit-linked products, especially bonds and single-premium pensions, although Skandia's market share across the entire pensions market, and especially single-premium personal pensions, remained strong. The core of our business is providing customers with a choice of products which are transparent, flexible and tailored to their specific needs and risk appetite, but which also provide attractive returns. Therefore, unlike many of the UK life insurers, we do not undertake any with-profits or bulk annuity business and therefore our capital requirement is much lower. While our sales have been affected by market volatility in the short-term, we believe that Skandia's open-architecture model is at the forefront of the modern savings and investment market and that this will deliver excellent long-term value. We also launched a re-pricing initiative in order to build our share of the platform market, while increasing the range of investment solutions to create wider customer appeal during this period of market volatility. For example, the Spectrum range of risk-controlled funds launched in April attracted more than £120 million of subscriptions by the year-end and the UK Strategic Best Ideas Fund was the best performing UK fund in the IMA UK All Companies Sector in 2008. Resilient net client cash flows in US Asset Management US Asset Management continued to deliver strong long-term investment performance and our diversified asset mix provided resilience in difficult markets. Fixed income and alternatives make up over half of the total funds under management, which were down 28 percent to $240 billion compared to an overall US market decline of approximately 40 percent. Excluding the cessation of securities-lending at Dwight Asset Management, net client cash flows were positive. This is an excellent result at a time when significant net outflows are being experienced across the industry. However, the equity market decline, especially in the fourth quarter, caused a significant reduction in performance fees, although this was partially offset by a much reduced cost base. Actions to stabilise US Life and return to profitability Overall, the performance of our US Life businesses were heavily impacted by increased reserves related to certain single-premium immediate annuities, write-downs in relation to deferred acquisition costs and hedge losses related to variable annuity products. Difficult credit markets resulted in higher impairment losses than in 2007 and market conditions had a major impact on the level of unrealised losses on our fixed income portfolio, as is the case across the industry. Both oversight and governance have been strengthened considerably and the management team has taken a number of actions in the second half of 2008 aimed at de-risking the business and generating profitable returns. We are in the process of transforming our onshore business into a sustainable operation, based on lower but more profitable sales, from a considerably reduced cost base. We have eliminated unprofitable product lines, and are focused on selling less capital-intensive, more customer-centric products through closer relationships with our core distribution partners. We have consolidated a number of locations from which the business operated and reduced headcount. A strong expense discipline has been established along with a more conservative risk culture. In the offshore business more precise fund-mapping has improved our hedging, which was 92 percent effective during the fourth quarter, and we have a much better understanding of sensitivities to further market and currency movements. Whilst sales have fallen dramatically due to the withdrawal of problem products, we are now focused on rebuilding this business through writing sensible, specialist investment products tailored to our international customers' needs, which will underpin a good recovery in future profitability. Review of Business Over the last four months, with the help of management consultants, we have conducted a thorough review of every part of our business. Our overriding conclusion is that while we have some valuable businesses with high quality people, there is a fundamental need for change. We have therefore identified five key priority areas. 1. Maintain and strengthen our capital position As outlined above, our capital and liquidity position remains healthy. However, in the current environment, continuing to manage our capital responsibly must be our top priority. 2. Streamline the portfolio over time We recognise that our portfolio of businesses is too broad. We operate in too many geographies and have too many lines of business, a number of which are sub-scale in their respective markets. This makes the Group complex and difficult to manage on a decentralised basis as we have done in the past. It therefore requires simplification. However, in the current environment, major rationalisation of our portfolio of businesses would be extremely difficult and, if achievable, would almost certainly destroy value for our shareholders. At this stage, we have therefore concluded that it will take some time to achieve our optimal business structure. That said, we have already taken some actions where it has been sensible to do so, namely: • • • We have agreed to the sale of our Australian business We have exited Portugal We have rationalised our businesses in continental Europe, creating two hubs based in Berlin and Paris for the mass market and affluent markets respectively While we remain committed to our established businesses in India and China, we will scale back significantly our aspirations in the Far East and will therefore close our office in Hong Kong. We are also moving the governance of our businesses to a more centralised model which we believe will reduce risk and bring better control. We will look for opportunities to make further changes as market conditions allow and we can create value for shareholders. We do not need asset sales in order to raise capital and any streamlining activity will be based on enhancing efficiency and our strategic focus. 3. Leverage scale in our long-term savings businesses We intend to bring all our long-term savings businesses into a single operating structure. Skandia, OMSA, US Life and Asia Pacific will report to a single executive, Paul Hanratty, who will relocate to London as Head of Long-Term Savings. We believe that there is a significant amount of value that can be unlocked by these businesses working more closely together. For example: • • • We can deploy the distinctive technology and capabilities within our South African, UK and Nordic platform businesses more effectively across the Group We believe there are operational cost efficiencies that can be achieved We have product capability that can be used across the business. 4. Drive value creation within, and between our South African businesses We have already created significant value through co-operation between Nedbank and OMSA, delivering synergies in excess of R1 billion in annual pre-tax profit. We now have a firm commitment to all our South African businesses and believe that there is more value that can be achieved through their closer co-operation. Tom Boardman remains a member of my Group Executive Committee and both he and Paul Hanratty will be tasked with delivering greater synergies between Nedbank and OMSA as well as agreeing and delivering on new bancassurance targets. Nedbank, which has several wealth management joint ventures with Old Mutual, may also acquire those joint ventures during the year, in exchange for Old Mutual taking an increased shareholding in Nedbank. Mutual & Federal will focus on increasing profitability, strengthening the balance sheet and driving greater co-operation with Nedbank and OMSA. 5. Strengthen governance and risk management In 2008 we started to invest in additional risk resources (people and systems) and, as a result, our risk and governance processes have been significantly strengthened. The next priority is to embed those processes across the Group. One consequence of these initiatives is that we are rolling out a business level risk appetite, which sets the mandatory risk levels each business must adhere to. We have also formed iCRaFT - "integrated Capital, Risk and Financial Transformation". This programme is essentially aimed at ensuring we become fully compliant with Solvency II, the new regulatory regime being introduced for all European-domiciled insurers. Over and above compliance, our programme aims to implement best practice in the way that we measure and manage risk, capital and financial performance. We then integrate these in the way that we run our businesses, and in the implementation of best practice financial controls. To ensure we manage these various Group initiatives effectively, we have appointed Paul Maddox on secondment from Ernst and Young as Head of Strategic Implementation. Paul will be a member of the Group Executive Committee with responsibility for driving through the change programme. Outlook Many of our businesses have performed well in a very difficult operating environment. This performance provides us with an excellent base from which to deal with the challenges presented by the current economic climate and the continued financial market volatility. Going forward, I am determined to rigorously drive performance improvement and strengthen governance, while at the same time looking for opportunities to reshape the Group. Julian Roberts Group Chief Executive 4 March 2009 RISK MANAGEMENT "The practice of risk management in Old Mutual has improved significantly over the past two years. The risk management team will continue to develop and strengthen oversight of the operating businesses as the Group changes in the wake of the strategic review." (Rosie Harris, Former Group Risk Director) Approach to Risk Management Old Mutual is committed to the objective of increasing shareholder value by operating in a manner consistent with our risk appetite. Risk management is not limited solely to consideration of downside impacts or risk avoidance, but also encompasses taking risk knowingly for competitive advantage. Responsibility for risk management resides at all levels within the Group, from the Board of Directors and Group Chief Executive, to Business Unit Chief Executives through to business managers via a Scheme of Delegated Authority. Rosie Harris, Group Risk Director, left Old Mutual at the end of March 2009. Andrew Birrell has taken up the role of Group Risk Director in addition to his responsibilities as Group Chief Actuary. The primary objective of the Group Risk Director is to facilitate alignment of strategic decisions with risk appetite and to provide the necessary framework and oversight tools to help protect Old Mutual from events that could hinder our objectives. A new role, Head of Governance and Regulatory Compliance, has also been created, which will encompass Rosie Harris' previous responsibilities for these areas. Susan Crichton, formerly in Skandia International has joined the Group team to take on the role. Both Andrew and Susan are committed to Old Mutual's enterprise-wide approach to risk management. Our approach is designed so that risk management is not confined to the activities of specific risk management or specialist departments but incorporated in the day-today management of the business. Strengthening Risk Management The issues that emerged in our Old Mutual Bermuda business during 2008 highlighted certain weaknesses in our risk management and business model. Addressing these has been a top priority for the Board and the Group Executive Committee. An independent review of risk management across Old Mutual involving external experts was completed during 2008, and we have implemented a number of initiatives to improve our governance, risk management and internal control processes including implementation of an Enterprise Risk Management programme. These improvements include: • • • • • • Recruitment of significant additional risk and compliance personnel at Group and Business Unit level Development and roll-out of a global risk appetite framework Development of comprehensive and focused risk reporting, including introduction of a risk recording and reporting tool Implementation of a revised and more comprehensive risk categorisation model Revision of the Old Mutual policy suite and framework to reflect increased oversight from Group over Business Units; and Development of formal standards for internal loss data collection and increased use of Key Risk Indicators. Our priority for 2009 is to embed these enhancements and further strengthen our system of risk management. Risk governance The Group's risk governance framework is based on the three lines of defence model. This model distinguishes between: • • • functions owning and managing risk functions overseeing the management of risk; and functions providing independent assurance. The Board is responsible for setting the Group's risk appetite and for approving the strategy for managing risk. Risk management • • As part of the first line of defence, the Group Chief Executive, supported by the Business Unit Executives, has overall responsibility for the management of risk Management and staff within each business are responsible for the identification, assessment, management, monitoring and reporting of risks arising within their respective areas. Risk oversight • • The second line of defence comprises the Group Risk Director supported by the Group Risk function as well as Business Unit Chief Risk Officers and their risk functions 2008 saw the creation of the Group Risk and Capital Committee. Its mandate is to support the Group Executive Committee in understanding the exposure and management of risks impacting the Group, having regard to the Group's risk appetite. The Group Risk and Capital Committee brings together senior executives across the Group functions including Risk, Finance, Actuarial, Capital and Compliance. This Committee is described in further detail in the Directors' report on corporate governance. Independent assurance The third line of defence is designed to provide independent assurance on the effectiveness of systems of governance, risk management and internal control in relation to the most significant risks which threaten the achievement of the Group's business objectives. Group Internal Audit (GIA) plays a key part in the third line of defence and provides assurance to the Group Audit and Risk Committee. GIA is described in further detail in the Directors' report on corporate governance. Risk categorisation During 2008, Old Mutual refined and implemented an updated risk categorisation model which Business Units have aligned to. Using a common risk language across the Group will enable meaningful comparisons to be made between Business Units and we consider the risk categorisation model a fundamental building block to achieve this. Risk events are categorised as shown in the table above, with more detailed sub-categories used for reporting and analysing. Risk appetite The risk appetite framework provides a basis for formally reviewing and controlling business activities to ensure that they are aligned to stakeholder expectations and are of an appropriate scale (relative to the risk and reward of the underlying activities). Once fully embedded, the framework will give the Group clearer sight and better control over risk-taking throughout the organisation. The Group's risk appetite defines the Group's willingness to balance risk exposures with reward, and the management and monitoring of these exposures. During 2008, a Group-wide risk appetite programme was implemented to enable consistent calculation of risk exposure against appetite using a variety of metrics. We are continuing to refine our framework and set limits at increasing levels of granularity. We expect to see significant embedding of the use of risk appetite during 2009. During 2009 the risk profile of the Group will be monitored against agreed limits on an ongoing basis by Group Risk. Business Units report on risk exposure levels on a regular basis and our systems will enable us to proactively identify when we are approaching our risk appetite limits. The use of these early warning triggers and Key Risk Indicators will enable Old Mutual to avoid risk concentrations that could prove a threat to the organisation. Risks or events outside the agreed risk appetite are identified and reviewed, with remedial action agreed with the relevant Business Unit and oversight provided by Group Risk. Depending on the significance of the issue, the remedial action may require the approval of the Group Risk and Capital Committee, Group Executive Committee or the Board. The risk appetite limits of the Group will be reviewed regularly for continuing appropriateness in light of changing market conditions and stakeholder expectations. RISK CATEGORISATION MODEL Risk Category Market risk Credit risk Liquidity risk Underwriting risk Operational risk Compliance risk Definition The risk of loss as a result of adverse changes in the market value of assets and liabilities. The risk of loss as a result of an asset against a counterparty not being repaid at the due and stipulated time. The risk that available liquid assets will be insufficient to meet changing market conditions, liabilities, funding of asset purchases, or an increase in client demands for cash. The risk of loss caused by events that result in predetermined exposures being exceeded. The risk of loss due to failure of people, process, system and / or external events. The risk that laws, regulations and policies will be breached. Although technically a subcategory of operational risk, compliance risk has been elevated to its own category for reporting purposes due to the focus on and importance of this area. The risk that the firm will not have the human capital to sustain business performance. The risk that business performance will be below projections as a result of negative variances in new business volumes, margin, lapse experience and expenses. The risk that strategic decisions will adversely affect future sustainable growth. Human Resources risk Business risk Strategic risk Risk appetite matrix Capital at Risk The reduction in Net Asset Value ("capital") over a oneyear forward-looking time horizon that should only be exceeded 1-in-10 years. This category has both a regulatory and economic capital dimension. Earnings at Risk The 1-in-10 negative deviation from expected (accounting) earnings over a one-year time horizon that should only be exceeded 1-in-10 years. Cashflow at Risk The reduction in the best estimate of operational cash remitted to plc by Business Units, in a 1-in-10 downside outcome. Operational Risk The negative deviation of Economic Value driven by operational loss events over a one-year forward-looking time horizon that should only be exceeded 1-in-10 years. Risk policies Group policies set out the minimum requirements that Business Units must follow and are considered a key entitylevel control. Business Units have their own policies, which are more detailed than the Group minimum requirements and take local regulation into account. The Group policies and framework have been reviewed and revised during 2008 to strengthen our Group-wide controls and these revisions will be embedded during 2009. Risk management processes The Group conducts a number of activities as part of the risk management framework. The principal elements are described below. Risk identification Strategic objectives, reflecting management's choice as to how the Group will seek to create value for its stakeholders, are translated into Business Unit objectives. Risks that would prevent the achievement of both the strategic and business objectives are then identified. Risk identification is an integral part of our annual business planning process as well as an ongoing activity. Risk and control assessments Various means of assessing, categorising and measuring enterprise risks and risk events are used throughout the Group. These include estimating the impact and the likelihood of risk occurrence, taking into account both financial and qualitative factors such as reputational or regulatory impacts. The Board, Group Audit and Risk Committee and the Group Risk and Capital Committee regularly receive and review reports on risks and controls across the Group. Management teams in each Business Unit perform reviews of the control environment in their business, using techniques such as Risk and Control Self-Assessments. During 2008 we revised our minimum standards for qualitative risk assessments (including the Risk and Control SelfAssessment process) across the Group and will be implementing these during 2009. Management actions Actions to implement the risk management strategy in respect of key risks, risk appetite limit breaches or to remedy a material breakdown in control are recorded on risk and control logs maintained by each Business Unit, along with the expected date for completion of the action and the responsible executive. The outcome of independent reviews, including internal and external audit reviews are integrated into risk management activities and action plans. Monitoring and reporting In addition to the Risk monitoring undertaken at Group and Business Unit level by management and specialised risk functions, the following are some of the other processes for risk monitoring used around the Group: • • • The Group Finance Director provides the Board with monthly performance information, which includes key performance indicators Items on risk logs and control logs (which contain details of any control failures) are reported via an escalation protocol to the appropriate level of management board or committee, where rectification procedures and progress are closely monitored Exposure and risk appetite reporting, risk concentrations and solvency and capital adequacy reports are submitted to the relevant Business Unit credit and capital management committees in the normal course of business • • • Our Quarterly Business Review process acts as a key forum for oversight over Business Units and specifically includes discussion and challenge over the risks identified by each Business Unit The Internal Review Committee, a Group forum which provides a robust assessment of financial reporting from Business Units, is central in managing and monitoring risks associated with the financial reporting process The Internal Actuarial Review Committee is a Group forum which provides oversight of the actuarial assumptions utilised by Business Units in the determination of their long-term insurance liabilities. We will continue to enhance risk reporting through the development of Key Risk Indicators and introduction of more formal internal and external loss data analysis. Treasury management The Group operates a treasury function which is responsible for recommending and implementing the funding strategy for the Group, including the management of debt facilities, relationships with banks and ratings agencies and Old Mutual plc's operational cash flow requirements. During the course of 2009, Group Treasury will be adopting greater oversight of Business Unit treasury activities. Economic capital Old Mutual defines its Economic Capital requirement as the value of assets required to ensure that it can meet in full its obligations to policyholders and senior creditors at a 99.93 percent confidence level, which is the probability placed on a target A-rated bond not defaulting in the next year. Economic Capital plays a significant role in risk monitoring and risk control across the Group and is closely linked with the risk appetite framework. The Group's Economic Capital framework has evolved considerably over the last few years and has become a valuable management tool that informs and guides risk and capital management strategy. The following are the main areas where Economic Capital impacts are considered: • • • • • • in risk-based pricing and product development to set pricing terms and charging structures in reinsurance to help set retention levels for new and renewed reinsurance treaties for risk-based capital allocation setting across the Group's business in decisions regarding portfolio management and optimisation; and to measure and monitor performance of Business Units, allowing for risk and the cost of Economic Capital to support that risk. The Economic Capital framework is measured, monitored and reported under a rigorous governance process involving senior executives and the Board. "My ambition is for an integrated global approach to risk management, embedded in everyone's role and purpose, and demonstrated by the quality of strategic, capital allocation and day-to-day business decisions." (Andrew Birrell, Group Risk Director) From the 20 March 2009, Andrew Birrell added the Group Risk Director role to his responsibilities as Group Chief Actuary, giving him an overview of financial and non-financial risks and issues. This will be extremely valuable with regard to our ambition to approach finance, risk and capital management in an integrated way. Initiatives to transform risk management During 2008, Old Mutual embarked on a new programme called iCRaFT, which stands for "integrated Capital, Risk and Financial Transformation". iCRaFT will elevate capital, risk, financial and performance management methodologies, their application and integration, to best practice levels by the end of 2012, while ensuring Solvency II and Basel II compliance. We refer to this as a "culture of managing for value". The programme will build upon and further integrate much of the other work underway across the risk, actuarial, finance and business areas in order to help optimise the financial performance of the Group on a consistent, risk-adjusted basis. The end-state vision for iCRaFT has been agreed and a comprehensive gap analysis has been produced for each of the principal subsidiaries. One of the main objectives of iCRaFT is to ensure that the data and systems we use, the tools we are developing and the way in which we organise ourselves come together in order to provide key business applications in the following areas: • • • • • • • Strategic planning and capital allocation Asset and liability management Risk optimisation and the allocation of risk budgets Solvency and liquidity funding Product design, pricing and underwriting External communication; and Performance management and executive compensation. During 2009, further work will be carried out in order to prioritise the new activities, align with existing activities and to begin to produce tangible business benefits. In addition to our iCRaFT programme, our global finance control project, initiated in 2008, is an important part of achieving our ambition to demonstrate best practice capital and risk management. This project aligns existing financial control practices across the Group with best practice principles to ensure uniform standards. The global finance control project will deliver a more tightly focused, robust and consistent approach to finance reporting, risk and control, and will enhance management oversight in relation to the quality of local and Group financial reporting. One design principle in the development of the financial control framework will be the implementation of technology to support the efficient oversight and management of financial reporting risk. Our commitment to risk management We believe that maintaining the trust and respect of our stakeholders is fundamental. Our Board and Group Executive Committee are absolutely committed to transforming the way we manage risk and capital and we believe our iCRaFT and finance control programmes will take us to new levels of maturity and robustness for our risk management and systems of internal controls. Significant risks facing Old Mutual Business Conditions and General Economic Environment 2008 presented Old Mutual with some extremely challenging market conditions and they are expected to remain difficult during 2009. The impact on the sectors and geographies in which we operate will continue to be one of our main areas of focus. A detailed analysis of financial risks is provided in Notes 47 and 48 to the Consolidated Financial Statements. The most significant risks, including those connected with the current challenging economic environment, are summarised below. KEY RISKS Risk Liquidity Risk Description This is the risk that available liquid assets will be insufficient to meet changing market conditions, liabilities, funding of asset purchases or an increase in client demands for cash. This includes the possibility of market disruption causing normally liquid assets to become illiquid and the risk that counterparties will withdraw or not roll-over funding arrangements. Mitigating actions We aim to maintain a prudent level of liquidity consistent with regulatory expectations. Old Mutual has a Group-wide liquidity policy, which sets out the parameters within which all Business Units must operate in order to identify, measure and manage liquidity risk. The Group Capital Management function reviews capital and liquidity positions, with the Group Risk and Capital Committee providing additional oversight and challenge. Credit exposures are monitored within each Business Unit and limits are in place in each Business Unit, reducing our risk exposure by mandating that counterparties should have a certain credit rating. Credit risk is one of the most significant risk types facing Nedbank and this is managed through Nedbank's credit risk management framework. Management actions to manage impairments include focusing on collections and refining credit assessment policies. The Nedbank Credit Committee is involved with establishing appropriate credit limits and monitoring exposures against these limits. Credit Risk The Group is exposed to the risk of credit defaults. This includes counterparty risk where an asset (in the form of a monetary claim against a counterparty) is not repaid in accordance with the terms of the contract. Credit risk also encompasses lending risk (for example within our banking businesses) where a borrower defaults on repayments. Market Risk The Group is subject to the risk of falling market values of equities and other assets within the Group's portfolios. Our risk profile also includes the risks associated with changing interest rates and their potential impact on the profitability of products we sell and the value of our investments. Our global reach exposes us to the impact arising from currency fluctuations, with the most significant exposures being the South African Rand and US Dollar. Some of our life assurance businesses contain investment guarantees and options. A reduction in interest rates and in equity markets can cause more of these guarantees to be in-the-money. We are exposed to underwriting risk by issuing insurance contracts. The Business Units which incur underwriting risk include Skandia, Old Mutual South Africa and US Life which provide long-term insurance, and Mutual & Federal, which provides general insurance. Business Units have policies in place to manage market risk which take account of the structure of their asset and liability portfolios as well as the local regulatory environment and Group policy requirements. The activities used by individual Business Units to manage market risk include asset-liability matching to manage interest rate risk, and reducing currency risk through the use of currency swaps, currency borrowings and forward foreign exchange contracts. Underwriting Risk Business Risk We operate in a highly competitive environment and in the event that we are not able to compete successfully there is a risk of reduced market share, revenues or profitability. Changes to the distribution environment could have an impact on our business, whether they are driven through regulation or the failure of distribution providers. The profitability of our businesses could also be adversely affected by a worsening of economic conditions. This could manifest itself as reduced product profitability or lower levels of customer activity (for example in savings or life products), leading to failure to meet financial targets. Underperformance of investment funds could have a detrimental impact on new and existing business. We have a Group liability risk policy which sets out the internal controls and processes that Old Mutual must follow with respect to long-term and general insurance risk. Business Units have more detailed underwriting policies. Actuarial modelling is used to calculate premiums and monitor claims patterns and the internal controls designed to mitigate operational risks help ensure that robust data are fed into our models. We offer innovative products to suit different customer needs, enabling us to find opportunities even in these challenging market conditions. Lapse rates and persistency information are closely monitored, enabling us to adapt our business approach. We monitor developments in the distribution sectors across all geographies and, through our strategic planning and research teams, are able to position ourselves to reduce this risk. Each of our Business Units closely monitors investment performance using Key Performance Indicators and in some instances, reports to local Investment Committees as well as to Group executives via a regular business review and challenge process. Old Mutual is diversified across geographies and product lines, minimising the impact of sector or territory-specific economic downturns. The Group Chief Executive, in conjunction with the Board and the Group Executive Committee, has taken a fresh and objective look at our strategy and identified a number of initiatives to position the Group for sustainability and growth for the future. Significant changes have been made, including changes to the operating model of Old Mutual. Historically our operating model has been decentralised, but stronger central oversight is a feature of our new approach, which will be rolled out during 2009. Strategic Risk Old Mutual expanded to its current size and profile during a period of relative global economic stability. The future outlook is less clear and it is appropriate to reconsider strategy in that light. Ensuring that our strategy is clear and will deliver shareholder value has been a top priority for the Board and Group Executive Committee. Compliance Risk The regulatory landscape across all territories in which we operate has seen significant change during 2008, and this trend is likely to continue. Regulatory change could also significantly impact our businesses (including our costs, capital requirements, distribution or products). Human Resources Risk Attraction and retention of talent is a priority for Old Mutual. Loss of key staff and inadequate succession planning could result in significant business disruption through loss of knowledge and expertise. Operational Risk Our businesses rely on their respective systems, operational processes and infrastructure to help process numerous transactions on a daily basis across various different markets. Our operational risk includes the possibility of a breakdown in an operational process (e.g. human error or employee misconduct), a malfunction of systems, or external events beyond our control (such as a natural disaster). We closely monitor regulatory developments through our Group and Business Unit Compliance teams. Group Compliance has been significantly strengthened through additional resource and increased oversight and monitoring activities. A dedicated team for Financial Crime Prevention focuses on areas such as AntiMoney Laundering, Anti-Bribery and Corruption, and Sanctions compliance. Our proactive approach to regulatory change includes participating in Quantitative Impact Surveys for Solvency II. We have established a number of Group-wide initiatives including the Management Development Programme and the Business Development Programme (the latter targeting more senior individuals). 'Rising stars' are identified through talent reviews and a formal succession planning process is in place. The Executive Remuneration Committee was created during 2008 which enables stronger focus on and oversight of incentivisation across the Group. We use scenario analysis to assess our operational risk exposure and progress in mitigating the most significant risks is monitored regularly. Operational risk is one of the four risk appetite metrics and during 2009 all Business Units will report their operational risk exposure against limits set by the Board. An operational risk policy is in place, which sets out methodologies for identification and assessment as well as key principles for specific areas such as outsourcing and project management.