| Wed 6 Aug 2008, 8:01 | | OML/OLM - Old Mutual Plc - Interim Results for the six months ended 30 June 2008 |
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OML
OLOML
OML/OLM - Old Mutual Plc - Interim Results for the six months ended 30 June 2008
Old Mutual Plc
Issuer code: OLOML
JSE share code: OML
NSX share code: OLM
ISIN: GB0007389926
06 August 2008
Old Mutual plc
Interim Results for the six months ended 30 June 2008
Solid progress in turbulent markets
* Net client cash inflows of GBP3.2 billion, 2% of opening funds under
management (FUM) on an annualised basis despite volatile market conditions
* FUM down 7% from 31 December 2007 to GBP259.4 billion, steady in the second
quarter
* Life APE sales up 2% to GBP872 million
* Mutual fund sales down 18% to GBP3,420 million: strong Nordic (up 103%) and
SA growth more than off-set by market declines in UK and US
* Value of new business down 10% at GBP112 million
* Profit before tax from continuing operations (IFRS) down 2% to GBP835
million, with basic earnings per share of 11.2p
* Adjusted operating profit* from continuing operations (IFRS basis) up 3% to
GBP745 million (30 June 2007: GBP721 million)
* Bermuda variable annuity guarantee reserve strengthened, GBP63 million
impacting adjusted operating profit, with a total GBP107 million impact on
IFRS
earnings; remedial management actions under way
* Adjusted operating profit* from continuing operations (EEV basis) up 26% to
GBP937 million (30 June 2007: GBP746 million)
* Adjusted operating earnings per share** (IFRS basis) of 7.7p (30 June 2007:
8.2p)
* Adjusted Embedded Value per share of 143.2p at 30 June 2008 (31 December
2007: 173.3p)
* Interim dividend up 6.5% to 2.45p (34.84 cents***) per share
* Capital position remains strong; GBP1.5 billion pro forma FGD surplus
Jim Sutcliffe, Chief Executive, commented:
"We have maintained our earnings at a similar level to last year despite
extremely difficult market conditions, which is a testament to our strategy. We
have big brands, a leading open architecture business and a track record of
providing good investment returns to our clients.
"I am determined to resolve the difficulties in our US Life business and to
return it to a proper level of profitability.
"We have solid foundations, a clear strategy and a robust business that is
operating well. The dividend increase reflects our strong capital position and
the Board`s confidence in Old Mutual`s prospects."
Enquiries
Investor Relations
Mary Jackets UK +44 (0)20 7002 7149
Aleida White UK +44 (0)20 7002 7287
Deward Serfontein SA +27 (0)82 810 5672
Media
Matthew Gregorowski UK +44 (0)20 7002 7133
Nad Pillay SA +44 (0)20 7002 7237
Finsbury
Mike Smith/Brian Cattell +44 (0)20 7251 3801
Notes
Wherever the terms asterisked in the Financial Highlights are used, whether in
the Financial Highlights, the Chief Executive`s Statement, the Group Finance
Director`s Review or the Business Review, the following definitions apply:
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business, it includes compensation costs in respect of certain
long-term incentive schemes defined as minority interests in accordance with
IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, put revaluations related to
long-term incentive schemes, the impact of closure of unclaimed shares trusts,
profit/(loss) on disposal of subsidiaries, associated undertakings and
strategic investments, dividends declared to holders of perpetual preferred
callable securities, and fair value (profits)/losses on certain Group debt
movements.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and minority interests. It excludes income
attributable to Black Economic Empowerment (BEE) trusts of listed subsidiaries.
The calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and BEE trusts.
*** Indicative only, being the Rand equivalent of 2.45p converted at the
exchange rate prevailing on 4 August 2008. The actual amount to be paid by way
of final dividend to holders of shares on the South African branch register
will be calculated by reference to the exchange rate prevailing at the close of
business on 16 October 2008, as determined by the Company, and will be
announced on 17 October 2008.
Cautionary statement
This announcement has been prepared solely to provide additional information to
shareholders to assess the Group`s strategies and the potential for those
strategies to succeed. It should not be relied on by any other party or for any
other purpose.
This announcement contains forward-looking statements with respect to certain
of Old Mutual plc`s plans and its current goals and expectations relating to
its future financial condition, performance and results. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond Old Mutual plc`s control,
including, among other things, UK domestic and global economic and business
conditions, market-related risks such as fluctuations in interest rates and
exchange rates, policies and actions of regulatory authorities, the impact of
competition, inflation, deflation, the timing and impact of other uncertainties
or of future acquisitions or combinations within relevant industries, as well
as the impact of tax and other legislation and other regulations in territories
where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc`s actual future financial condition, performance
and results may differ materially from the plans, goals and expectations set
forth in Old Mutual plc`s forward-looking statements. Old Mutual plc undertakes
no obligation to update any forward-looking statements contained in this
announcement or any other forward-looking statements that it may make.
Notes to Editors:
A webcast of the presentation and Q&A will be broadcast live at 8.30 a.m. (UK
time), 9.30 a.m. (Central European and South African time) today on the
Company`s website, www.oldmutual.com. Analysts and investors who wish to
participate in the call should dial the following toll-free numbers:
UK (toll-free) 0500 551 078
US (toll-free) 877 491 0064
Sweden (toll-free) 0200 887 651
South Africa (toll-free) 0800 991 468
Playback (available until midnight on 19 August 2008), access code: 804745:
UK (toll-free) 0800 358 1860
US (toll-free) 888 365 0240
Sweden 08 5052 0333
International +44 207 031 4064
Copies of these Interim Results, together with high-resolution images and
biographical details of the Executive Directors of Old Mutual plc, are
available in electronic format to download from the Company`s website at
http://www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company`s Interim Results can
be found on the website. This contains key financial data for 2008 and 2007.
Photographs of management are available at the Visual Media website
www.vismedia.co.uk
Chief Executive`s Statement
Overview
Old Mutual continues to be robust in what are extremely difficult economic
conditions and turbulent global markets. Our business model - specifically the
breadth of our product offerings and our geographic spread - gives us
resilience and provides an excellent foundation for growth. All but one of our
continuing business units have produced good results and earnings have been
maintained at a similar level to last year despite the downturn in markets.
In line with our policy of seeking to achieve steadily increasing returns to
shareholders, the Board has declared a 6.5% dividend increase which reflects
its confidence in the Group`s underlying progress and capital strength.
Net client cash flows remain strong
We have continued our strong investment performance. While most global equity
markets have fallen some 15-20% during the first six months of the year (with
the exception of the JSE) funds under management were down just 7%, an
achievement that will not be lost on our clients. Net client cash inflows, at
2% of opening funds under management on an annualised basis is a good result in
these difficult markets.
We achieved this investment performance as a result of the dynamic investment
strategies adopted by our US affiliates, the early success of Skandia
Investment Group and an improved contribution from Old Mutual Investment Group
South Africa (OMIGSA) as the boutique asset management model becomes more
established.
Steady growth in adjusted operating profit (IFRS basis)
We have continued to maintain a tight control over costs and this has
contributed to an increase in adjusted operating profit. In South Africa,
profits at Nedbank and OMSA grew strongly, up 19% and 13% respectively in local
currency. Based on our "(Assets x Margins) - Expenses" model the delivery of
solid earnings as asset prices decline reflects our focus on margin management
and expense control.
US
The major disappointment in the period relates to the Bermuda book in our US
Life business which has overshadowed an otherwise robust performance by the
Group.
Last year we expanded our sales of offshore variable annuity product, with much
of the new premium invested in Asian oriented unit trusts and sold
predominantly to Asian clients. One of its features, in line with most US style
variable annuity product, was minimum return guarantees. Whilst we believed we
had hedge programmes to cover the guarantees, it has since become clear that
these programmes have only provided, on average, about 60% protection against
exceptional market falls.
The volatility of equity markets, especially in Asia, has proved to be much
higher than predicted when the products were priced, hence the allowance for
the cost of guarantees is inadequate. On 25 June 2008, we announced that we
intended to make an Investment Guarantee Reserve (IGR) provision. The position
grew substantially worse in the last two weeks of June, as well as in early
July. We have therefore decided to take a substantially more defensive position
than we thought appropriate at that time.
We have set up an IGR through adjusted operating profit (IFRS basis) of GBP63
million and we have experienced a great deal of short-term volatility,
resulting in a further GBP44 million which we have treated as short-term
fluctuations in accordance with our long-term investment return policy. We are
seeking ways to limit this volatility and cap the exposure. However, if unit
prices remain unaltered in the second half, we expect to strengthen the IGR by a
further GBP10 million to GBP15 million, and of course the Embedded Value will be
affected by the values of the underlying unit trusts.
In order to cover the reserve strengthening, we have made a capital injection
of GBP150 million into this business. Excluding these factors and after
adjusting prior year for non recurring items, adjusted operating profit on an
IFRS basis was up 14%.
I have set up a far-reaching exercise which is already underway to ensure we
deal with the issue once and for all. US Life is an important part of our Group
and I am determined that we take all the necessary steps to restore it to a
proper level of profitability. We will report on our progress on remedial
actions at the time of our preliminary results announcement in February next
year.
We withdrew the Asian product line in May, and we now intend to withdraw all
other products with guarantees where hedging has proved ineffective, as of
15 August 2008. We are keeping all our other products under close scrutiny.
Jonathan Nicholls, Group Finance Director and Rosie Harris, Group Head of Risk
are leading a project team that will report to me, focussed on reviewing every
aspect of our US Life business, paying particular attention to systems,
management and risk.
We have already made a number of management changes. Bruce Parker was appointed
as CEO of US Life in June and we asked the COO to leave the company. Don Hope,
Group Treasurer is moving across to take control of the Bermuda business and we
have recruited an additional Vice President of hedging and two of our senior
London finance executives have joined the US hedging committee.
We are significantly re-engineering our oversight functions, and have revised
our systems that map our funds and products to the indices in order to improve
our hedge performance. We are also implementing a review of all our product
lines, covering their potential and their risk to introduce the most rigorous
oversight of the future conduct of this business. We have also appointed a
highly experienced external US Executive to join the review team, who brings
significant knowledge of both the industry and turnaround situations.
Longer term, GDP growth in Asian economies should drive a recovery in Asian
markets, and I believe that this business can produce a decent return.
Separately, as a result of the difficult credit markets, impairment losses in
our US Life business have increased which has depressed our investment returns.
Our asset management business by contrast continued to prosper. Investment
performance in the period remained attractive and the business generated
positive net client cash flows in an environment where few have been able to
achieve this.
Skandia - a successful acquisition
The integration of Skandia is complete and the business is delivering against
the targets we set following the acquisition. We are on track to achieve
profits which are three times the 2005 level and we have delivered cost and
revenue synergies of GBP79 million against the initial target of GBP70 million.
We have built a solid foundation from which we can leverage further growth
opportunities and operational excellence. Since the acquisition we have seen
considerable growth in funds under management and have considerably enhanced
our proposition for clients.
Skandia is a leader in the Open Architecture platform model, and we continue to
develop investment solutions to meet changing demands of clients in these
challenging markets. The new Skandia Investment Group (SIG) is transforming the
development of our investment products across Europe. We have launched a number
of new funds in 2008, including European Best Ideas and SIG is in discussion
with other businesses within Old Mutual regarding rolling out the Best Ideas
concept.
South Africa delivering excellent returns
Much has been made of the challenges facing South Africa at the moment, but we
remain confident that the strong economic policies and core approach of a
disciplined orderly administration will persist, and we expect reasonable GDP
growth this year. Our South African businesses continue to adapt and succeed in
the face of the challenges and volatility of the macro-environment.
Our South African business delivered excellent results and is extremely cash
generative. Life sales were up 13% on an APE basis, margins were steady at 14%
and return on capital was an outstanding 28.3%. We continue to successfully
penetrate the retail mass market, which presents good growth opportunities, and
unit trust sales increased 26% on an underlying basis as customers shift
towards money market funds.
Our boutique asset management model is bedding down well and is delivering
improved investment performance and net client cash flows. Meanwhile we
continued to strengthen our investment expertise in both our South African and
US boutique businesses through small specialist bolt-on acquisitions.
Despite the tougher economic climate, Nedbank delivered a 19% increase in
adjusted operating profit (IFRS basis), helped by the profits on the sale of
its shares in Visa. Its wholesale businesses continued to perform well,
although earnings in the retail businesses fell as a result of higher
impairment charges. This impacted on its return on equity, which was slightly
lower than the comparative period but still strong at 18.7% including goodwill.
Its return on equity was also affected by the strengthening of its capital
position, a necessary step in the current market conditions.
As announced on 5 August 2008, we will be initiating a competitive sale process
for Mutual & Federal in September 2008.
Continued growth in Asia
In India, our joint venture business is performing well, we have continued to
build our distribution channels and we have met our branch number target. Our
new regional head office in Hong Kong is fully staffed and operational.
Although markets have been weaker and are becoming more competitive, our team
is focused on growing our geographic presence, distribution capability and
product range, and continues to recruit high quality people. Our Chinese
business faced a more difficult market, and we are busy renovating the product
range to face ever increasing competition.
Outlook
As difficult market conditions continue, we maintain our focus on delivering
organic growth while keeping a tight rein on expenses and improving risk
management. I hope I have left you in no doubt about my own and my team`s
absolute determination to address the issues at our Bermuda business.
Overall, we should not lose sight of the fact that our business has produced a
good result. We have solid foundations, a clear strategy and a robust business
that is operating well, and we look forward with confidence.
Jim Sutcliffe
Chief Executive
6 August 2008
Group Finance Director`s Review
GROUP RESULTS
Group Highlights (GBPm) H1 2008 H1 2007 % Change
Adjusted operating profit from continuing
operations (IFRS basis)(pre-tax) 745 721 3%
Adjusted operating profit from
discontinued operations 1 (IFRS basis)
(pre-tax) 28 36 (22%)
Adjusted operating earnings per share
(IFRS basis) 7.7p 8.2p (6%)
Profit before tax from continuing
operations (IFRS) 835 851 (2%)
Basic earnings per share (IFRS basis) 11.2p 9.6p 17%
Adjusted operating profit from continuing
operations (EEV basis) (pre-tax) 937 746 26%
Adjusted operating profit from
discontinued operations 1 (EEV basis)
(pre-tax) 28 36 (22%)
Adjusted operating earnings per share (EEV
basis) 10.8p 8.7p 24%
Life assurance sales (APE) 872 859 2%
Unit trust / mutual fund sales 3,420 4,171 (18%)
Value of new business 112 124 (10%)
PVNBP 6,668 6,843 (3%)
Net Client Cash Flows (GBPbn) 3.2 11.8 (73%)
Interim dividend 2.45p 2.30p 7%
Group Highlights H1 2008 FY 2007 % Change
Adjusted group embedded value (GBPbn) 7.6 9.4 (19%)
Adjusted group embedded value per share 143.2p 173.3p (17%)
Funds under management (GBPbn) 259.4 278.9 (7%)
Return on equity (annualised basis) 2 11.2% 13.2%
Return on embedded value 14.0% 13.2%
Net client cash flows delivered during period of market volatility
During the six months ended 30 June 2008 ("H1 2008" or "the period"), Old
Mutual delivered strong investment performance in challenging markets with
positive net client cash flows, despite actual flows finishing lower than the
six months ended 30 June 2007 ("H1 2007" or "the comparative period").
Continued momentum in net client cash flows of GBP3.2 billion represented 2% of
opening funds under management on an annualised basis. Despite the challenges
of delivering on absolute investment performance in such volatile markets, our
Skandia businesses achieved GBP1.8 billion of net inflows while the US
businesses produced net inflows of GBP1.6 billion.
Breadth of sales product offering in diverse geographic markets
Life sales on an APE basis were solid overall. In Nordic, we continued to see
the benefits of our investment in the sales channel with strong life APE sales
(up 39% in local currency). South African life sales were up 13% in Rand terms
while in the US, sales were up 20% in local currency. However, UK single
premium sales for the period suffered as a result of market conditions with
lower pension sales.
Whilst unit trust sales in Nordic and South Africa were pleasing, lower sales
in the US, the UK and ELAM more than offset these gains, with weaker Old Mutual
Capital mutual fund sales and OMAM UK unit trust sales directly impacted by the
more difficult selling environment.
1. The results of the Group`s South Africa general insurance business, Mutual &
Federal, are shown as a discontinued operation in these interim financial
statements.
2. Return on equity is calculated using adjusted operating profit after tax and
minority interests on an IFRS basis with allowance for accrued coupon payments
on the Group`s hybrid capital. The average shareholders` equity used in the
calculation excludes hybrid capital.
Value of new business
The value of new business (VNB) was down 10% to GBP112 million but supported by
excellent volumes in Nordic, a solid contribution from OMSA offset by lower
volumes in the UK, ELAM and US Life. The APE profit margin was 13%.
This was steady in the UK over the comparative period, but down marginally in
Nordic and to a greater extent in ELAM where it fell to 10% mainly due to a
change in product mix, after exceeding the margin target in 2007. The US Life
margin was lower because of a reduction in the margin of variable annuities as
a result of increased guarantee costs.
Adjusted operating earnings (IFRS basis)
In spite of the significant impact of Rand currency depreciation and the
headwinds associated with the current market turbulence as well as the
strengthening of the US Life IGR provision as outlined in the Chief Executive`s
statement, the Group delivered adjusted operating profit before tax and
minority interests 3% above that of the comparative period and 8% above on a
constant currency basis.
H1 2007 restated
Group Highlights (GBPm) H1 2008 H1 2007 at 2008 rates
Adjusted operating profit (IFRS
basis) (pre-tax)
Africa 617 572 535
United States 76 106 106
Europe 148 129 135
Other (8) 2 2
833 809 778
Other Shareholders` Expenses (17) (19) (19)
Finance Costs (71) (69) (69)
Adjusted operating profit before
tax & minority interests 745 721 690
Tax (215) (167) (159)
Adjusted operating profit from
continuing operations (post-tax) 530 554 531
Adjusted operating profit from
discontinued operations (post-tax) 23 26 24
Adjusted operating profit after tax 553 580 555
Minority interests (148) (138) (129)
Adjusted operating profit after
tax & minority interests 405 442 426
Adjusted operating EPS (pence) 7.7 8.2 7.9
Assuming constant exchange rates, H1 2007 adjusted operating EPS would have
been 7.9p with the currency impact being negative 0.3p.
Adjusted group embedded value per share 143.2p
The adjusted group embedded value (EEV) per share was 143.2p and adjusted group
EV was GBP7.6 billion at 30 June 2008 (31 December 2007: GBP9.4 billion). This
represents a decrease from 173.3p. The movement in EV per share has been driven
by the net impact of profit flows offset by the impact of weak equity markets
and currency depreciation. The EV per share is after dividend payments and has
also been affected by a reduction in the share price of the listed
subsidiaries.
Return on equity
Return on equity for the Group declined to 11.2% from 13.2% at 31 December 2007
primarily due to the lower US Life profits.
Return on embedded value
Return on embedded value for the Group improved to 14.0% from 13.2% at 31
December 2007. The interim results were positively impacted by the sale of Visa
shares in Nedbank, favourable operating assumption changes in the South African
and Europe life businesses and the reduction in the number of shares following
the share buyback programme. Exchange rate movements, a lower new business
contribution and the reserve strengthening in US Life to allow for the impact
of the volatility inherent in the variable annuity product guarantees
negatively impacted the result.
Long-term Asset
business management Banking
Group Highlights H1 2008 (GBPm)
Adjusted operating profit (IFRS basis)
(pre-tax) 376 124 333
Adjusted operating profit (EEV basis)
(pre-tax) 563 124 333
Profit before tax (IFRS) 329 143 389
Value of new business 112 - -
Life assurance sales (APE) 872 - -
Unit trust/mutual fund sales - 3,420 -
Net client cash flows (GBPbn) 1.4 1.8 -
Funds under management (GBPbn) 75.6 180.5 -
General
Insurance Other
Group Highlights H1 2008 (GBPm)
Adjusted operating profit (IFRS basis) (pre-tax) 28 (88)
Adjusted operating profit (EEV basis) (pre-tax) 28 (83)
Profit before tax (IFRS) 18 (26)
Value of new business - -
Life assurance sales (APE) - -
Unit trust/mutual fund sales - -
Net client cash flows (GBPbn) - -
Funds under management (GBPbn) - 3.3
Long-term Asset
Group Highlights H1 2007 (GBPm) business management Banking
Adjusted operating profit (IFRS basis)
(pre-tax) 369 144 296
Adjusted operating profit (EEV basis)
(pre-tax) 389 144 296
Profit before tax (IFRS) 485 148 296
Value of new business 124 - -
Life assurance sales (APE) 859 - -
Unit trust/mutual fund sales - 4,171 -
Net client cash flows (GBPbn) 2.2 9.6 -
Funds under management (GBPbn)* 82.0 193.3 -
General
Group Highlights H1 2007 (GBPm) Insurance Other
Adjusted operating profit (IFRS basis) (pre-tax) 36 (88)
Adjusted operating profit (EEV basis) (pre-tax) 36 (83)
Profit before tax (IFRS) 47 (78)
Value of new business - -
Life assurance sales (APE) - -
Unit trust/mutual fund sales - -
Net client cash flows (GBPbn) - -
Funds under management (GBPbn)* - 3.6
* FY 2007
Robust capital position
The Group`s gearing level remains within our target range, with senior debt
gearing at 30 June 2008 of 2.8% (1.9% at 31 December 2007) and total gearing,
including hybrid capital, of 24.3% (20.5% at 31 December 2007).
The Group has continued to develop its economic capital programme and a surplus
existed as at 31 December 2007 within each of our South African, US and
European regions. The group economic capital surplus at 31 December 2007 was
GBP3.3 billion.
Capital requirements are set by the Board whilst recognising the need to
maintain appropriate credit ratings and to meet regulatory requirements at both
the Group and local business level.
Capital of GBP45 million was transferred to Old Mutual Bermuda on 31 July 2008.
A further amount of GBP105 million was transferred on 5 August 2008.
Other
The Group is in compliance with the Financial Groups Directive capital
requirements, which apply to all EU-based financial conglomerates. Our
pro forma FGD surplus was GBP1.5 billion at 30 June 2008, including current
year profits.
Our share buy-back programme announced at the beginning of October 2007 was
completed in May 2008 repurchasing approximately 239 million shares through the
London and Johannesburg markets at a total cost of GBP351 million.
Holding company cash generation
The table below shows the cash flows of the Old Mutual plc holding company and
its satellite holding companies. We believe this provides a clear picture of
the cash receipts and payments of the holding companies.
H1 2008 H1 2007
GBPm GBPm
Total net debt at start of period 2,420 2,407
Operational flows
Operational receipts 438 229
Operational expenses (69) (87)
Other expenses - 369 (83) 59
Capital flows
Capital receipts 159 69
Acquisitions - (21)
Organic investment (88) 71 (160) (112)
Debt and equity movements
Old Mutual plc dividend paid (227) (218)
Share repurchase (174) -
New equity issuance 4 3
Other movements (49) (446) 7 (208)
Total net debt at end of period 2,426 2,668
Total net debt within the holding company at the end of H1 2008 was GBP2,426
million. A total of GBP597 million of operational and capital receipts were
received from business units during H1 2008. GBP88 million was invested in the
businesses and GBP227 million was used to pay the 2007 final dividend. In
addition, GBP174 million was spent on repurchasing shares.
Taxation
The Group`s effective adjusted operating profit (IFRS basis) tax rate has
increased to 29% from 23% in the comparative period. This reflects the higher
tax cost of secondary tax on companies in relation to Group. In addition to
this, the non- recognition of deferred tax assets arising from US Life,
combined with changes in overall profit mix from our businesses, has further
increased the overall Group tax rate for the period. Over the year we would
expect the rate to trend down to the 2007 full year rate.
Risks and uncertainties
There are a number of potential risks and uncertainties that could have a
material impact on the Group`s performance over the remaining six months of the
financial year and that could cause actual results to differ materially from
expected and historical results.
We have included our view of these principal risks as well as the impact of
current economic and business conditions, in the Chief Executive`s Statement
and in the Business Review sections of this report. These are primarily:
continued volatility in equity markets, inflationary pressures creating
expectations of higher interest rates and increase in cost of living, the
credit crunch and reduced investor confidence.
Appendix I to this announcement (outlining the Group`s Economic Capital
position) provides additional information relating to the risk types affecting
the Group and the increasing use of Economic Capital measures to inform
business decisions and actions. Further information on the principal long-term
risks and uncertainties facing the Group is included in the Business Review in
the Company`s latest Annual Report (for the year ended 31 December 2007).
Market Consistent Embedded Value (MCEV)
MCEV will be mandatory from year end 2009 and will replace the EEV principles
which underpin our current EV results. Old Mutual intends to adopt the new MCEV
principles for the first time in our 2008 report and accounts. We will advise
the timing of the release of the restated 2007 and first half 2008 results
later in the year. One of the key issues for annuity based business is that
under MCEV the recognition of any liquidity or credit risk premiums in excess
of swap rates is not permitted until such profits have been realised. As a
result, although the underlying profitability is the same, the timing of the
recognition of profits under MCEV is different than under EEV. Therefore, we
are expecting that the adoption of MCEV will result in the EV for our US
annuity business reducing. Against this however, our early calculations show
small increases in EV elsewhere in the Group. Our initial calculations indicate
that at 31 December 2007, the MCEV valuation would be around 5p per share lower
than the valuation under EEV. This is an estimate only at this stage and the
figure has not been audited.
Related party transactions
There have been no related party transactions or changes in the related party
transactions described in the Company`s latest Annual Report during the first
half of 2008 that could have a material effect on the financial position or
performance of the Group.
Dividend
The Directors of Old Mutual plc have declared an interim dividend for the six
months ended 30 June 2008 of 2.45p per share to be paid on Friday, 28 November
2008. The record date for this dividend payment is the close of business on
Friday, 7 November 2008 for all the Exchanges where the Company`s shares are
listed. The last days to trade cum- dividend on the JSE and on the Namibian,
Zimbabwe and Malawi Stock Exchanges will be Friday, 31 October 2008 and
Tuesday, 4 November 2008 for the London Stock Exchange. The shares will trade
ex-dividend from the opening of business on Monday, 3 November 2008 on the JSE
and on the Namibian, Zimbabwe and Malawi Stock Exchanges and from the opening
of business on Wednesday, 5 November 2008 on the London Stock Exchange.
Shareholders on the South African, Zimbabwe and Malawi branch registers and the
Namibian section of the principal register will be paid the local currency
equivalents of the dividend under dividend access trust arrangements
established in each country. Shareholders who hold their shares through VPC AB,
the Swedish nominee, will be paid the equivalent of the dividend in Swedish
Kronor (SEK). Local currency equivalents of the dividend, for all five
territories, will be determined by the Company using exchange rates prevailing
at close of business on Thursday, 16 October 2008 and will be announced by the
Company on Friday, 17 October 2008. Share certificates may not be
dematerialised or re-materialised on the South African branch register between
Monday, 3 November 2008 and Friday, 7 November 2008, both dates inclusive, and
transfers between the registers may not take place during that period.
Jonathan Nicholls
Group Finance Director
6 August 2008
Business Review
EUROPE: UNITED KINGDOM AND OFFSHORE
A stable six months from Skandia UK
Highlights (GBPm) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 91 80 14%
Adjusted operating profit (covered
business) (EEV basis) (pre-tax) 229 120 91%
Return on embedded value (covered business) 18.8% 16.3%
Total life assurance sales (APE) 327 389 (16%)
UK life assurance sales (APE) 185 249 (26%)
Offshore life assurance sales (APE) 142 140 1%
Unit trust / mutual fund sales 1,022 1,291 (21%)
Value of new business 36 42 (14%)
APE margin 11% 11%
PVNBP 2,668 3,377 (21%)
PVNBP margin 1.3% 1.2%
Net client cash flows (GBPbn) 1.1 2.4 (54%)
Highlights (GBPbn) H1 2008 FY 2007 % Change
Funds under management 39.5 41.9 (6%)
Positive net client cash flows and market-led decline in funds under management
Skandia UK continued to deliver strong positive net client cash flows for the
half year with net inflows of GBP1.1 billion representing 5% of opening funds
under management on an annualised basis. Excellent International net inflows,
which remain ahead of the comparative period, have compensated for lower net
inflows in the UK arising from difficult market conditions where investor
confidence remains low as markets continue their adverse volatile trend. The
market downturn resulted in a 6% decrease in funds under management since the
beginning of the year which compared favourably with the 13% drop in the FTSE
100 over the same period.
Investment volatility affects sales
The decline in life assurance sales APE for the period was largely driven by a
reduction in pension sales. Pensions business in the comparative period was
boosted by the lingering benefits of pensions A-day and investor confidence;
business volumes in the period were consistent with the latter part of 2007
with investment volatility over the period driving down investor confidence.
The levels of regular premium business increased 17% over the comparative
period. Key niche areas are continuing to compete well as the market emphasis
on consolidation of existing funds continues, which plays to Skandia`s key
strength.
The market for single premium bonds has also been influenced by the volatility
in the stock markets and the uncertainty over the continued suitability of
bonds following the introduction of an 18% flat rate of CGT confirmed in the
March 2008 Budget. This impacted on bond sales which were lower than the
comparative period. With the platform approach and a full set of product
wrappers, Skandia is better-placed than many competitors as the proposition
supports mutual funds as well as bonds.
The performance of the International business for the period remains strong in
many regions despite difficult market conditions. The effects of the UK CGT
changes, have depressed the institutional portfolio bond market but the retail
market remains positive. Sales within Europe are performing well including a
number of larger cases which reflect the strength of the proposition but are
intermittent in nature. New business in the Middle East has rapidly increased
over the period, due in part to the good market reception to the MSPA (Managed
Savings and Pensions Account) special offer. Like-for-like sales in the Far
East are 5% above the comparative period.
Unit trust performance impacted by revised business mix
Unit trust sales were 21% down on H1 2007. This reduction in sales reflects low
investor confidence which resulted in one of the lowest ISA seasons on record.
Skandia retained its market share in platform business and continued to
increase the investment solutions on the platform to create wider appeal,
especially during periods of market volatility.
Value of new business
VNB decreased 14% to GBP36 million due to the impact of lower new business
volumes. This reduction was partially mitigated by a strengthening of the
assumptions for the amount of fee income that is rebated from fund managers.
The change to the retained rebate assumption has been made in view of the
continued favourable experience and to align more closely with market practice.
This recognition has also been reflected in the new business margin, which
ended the period at 11%.
Strong growth in adjusted operating profit (IFRS basis)
Adjusted operating profit (IFRS basis) increased by 14% to GBP91 million for
the period. Since average funds under management were broadly consistent with
the comparative period, asset based fees have not reduced in the period.
Integration costs of GBP12 million were incurred in H1 2007, and although
integration activity has continued, the direct impact on IFRS earnings is less
significant. Further, significant tax benefits have been emerging in the year
to date as an indirect consequence of the reduction in markets.
Higher adjusted operating profit (covered business) (EEV basis)
Adjusted operating profit (EEV basis) before tax nearly doubled to GBP229
million. This increase includes GBP82 million of positive impact from operating
assumption changes. This was due to increased recognition of retained unit
trust company rebates referred to above (Skandia outsources the investment of
policyholder funds to unit trust companies). Other, less material operating
assumption changes were also made. Experience variances have had a positive
impact, with persistency and expenditure continuing broadly in line with
expectations.
Continued investment innovation
During the period, Skandia Investment Group (SIG) continued its track record of
innovation with the launch of the Skandia Alternative Investments Fund which
provides retail investors with access to a unique collection of alternative
assets for the very first time. At the same time, with markets suffering a very
volatile six months, SIG`s risk controlled range of funds again showed that
well diversified portfolios can offer some protection to rapidly falling
markets. In addition to good relative performance, when assessed on a
risk-adjusted return basis, the majority of these funds are ahead of their
sectors from launch; a facet that will be increasingly important should market
volatility continue. These volatile times have proved to be ideally suited to
UK Strategic Best Ideas Fund as it has the ability to profit from falling share
prices and therefore the relative performance of this fund is looking extremely
strong.
Spectrum Funds launch
SIG also supported the UK business in launching the Spectrum Funds on 28 April
2008. This new range offers an innovative selection of risk-rated funds that
bring greater precision to the investment management decision making process by
matching an appropriate portfolio to a level of risk acceptable to the client.
Since launch date, the funds have attracted over GBP20 million of investment at
30 June 2008.
Continued progress with integration activity
In June 2006, Skandia UK committed to a number of integration activities
arising from the acquisition by Old Mutual delivering value-adding benefits.
Skandia has fulfilled its original integration commitments and has evolved
further to deliver an enhanced proposition for investors whilst reducing unit
costs and increasing revenue potential. The full benefits of these enhanced
initiatives will flow through following migration of Skandia MultiFUNDS
investors on to the new platform.
The Selestia Investment Solutions platform has been renamed Skandia Investment
Solutions to bring greater clarity and a stronger sense of identity in the way
Skandia interacts with both advisers and clients and reflects Skandia`s future
strategy and direction.
Changes in the UK Market
Skandia UK supports the FSA`s proposals on the Retail Distribution Review, as
it believes that the consumer and the market will benefit from a clearer
distinction between "advice" and "sales". Overall, Skandia has publicly stated
that the Retail Distribution Review should create a thriving advice channel
with a better-informed and more engaged consumer, which should lead to higher
levels of business. Skandia`s proposition is most suited to the advice
proposition.
Treating Customers Fairly
Treating Customers Fairly ("TCF") is a major initiative of the FSA. The FSA
confirmed that Skandia met its requirements at the focused visit in March on
progress to date and management information that demonstrates that Skandia is
continually looking to improve outcomes for its customers. Skandia will
continue to work on further embedding TCF into its processes.
Awards
Skandia received two top awards at the FTAdviser.com Online Service Awards.
Five stars awards were received for both Investment Provider and Life & Pension
Provider. Winning these awards reflects the further investment made in
developing investor and adviser focused e-commerce solutions, which is the
cornerstone of Skandia`s brand and proposition.
Skandia also received the Large Employer of the Year award at the LSC South
East Learning and Skills Awards in May 2008. The award was for the Professional
Vocational Qualifications offered to employees through the Apprenticeship
programme. The highly successful apprenticeship programme is a testament to
Skandia`s commitment to high standards in training.
EUROPE: NORDIC
Strong first half with excellent sales performance and strengthened relations
with distributors
Highlights (SEKm) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 480 486 (1%)
Adjusted operating profit (covered
business) (EEV basis) (pre-tax) 1,116 207 439%
Return on embedded value (covered business) 11.7% 8.0%
Life assurance sales (APE) 1,331 959 39%
Unit trust / mutual fund sales 1,667 821 103%
Value of new business 196 143 37%
APE margin 15% 15%
PVNBP 5,905 4,450 33%
PVNBP margin 3.3% 3.2%
Net client cash flows (SEKbn) 3.1 0.8 288%
Highlights (SEKbn) H1 2008 FY 2007 % Change
Funds under management 103.1 116.7 (12%)
Strong net client cash flows
Net client cash flows for the period were a pleasing SEK3.1 billion, equal to
5% of opening funds under management on an annualised basis. The positive
performance was driven by strong net inflows in the life business benefiting
from an excellent sales performance and reduced outflows. However, volatile
equity markets negatively impacted asset growth during the period, with funds
under management at H1 2008 down 12% on FY 2007 to SEK103.1 billion.
Investment performance in Nordic was solid during the second quarter, in line
with the first quarter. Skandia`s Swedish unit-linked business has the best
investment return of all unit-linked companies in Sweden in a three year
timeframe (according to a Risk & Forsakring survey).
Sales performance continued to improve
Nordic continued to deliver excellent growth in sales during the period. Life
sales on an APE basis exceeded the comparative period by 39% due to strong
sales in Sweden and continued growth in Denmark where sales of unit-linked
products were favourable over the comparative period.
In Sweden the second quarter of 2008 saw the highest new sales of any quarter
since 2003. Skandia is now a popular player in the market among brokers
following the launch of the new investment portfolio product, faster speed to
market and a greater focus on broker relationships. This is evidenced through
Skandia recently being ranked in the number one position among distributors.
Within the internal sales force, there has been a continued focus on selling
unit-linked products, which together with several sales initiatives have
contributed to the positive trend in new sales.
Excellent growth was experienced in mutual fund sales of SEK1,667 million, up
103% on the comparative period. The increase was mainly due to deposits in
Skandia`s interest based funds and a newly launched hedge fund, both of which
are popular in times of volatile equity markets.
Margins positively impacted by the improved new sales
VNB of SEK196 million for the period was up 37% on the comparative period,
positively impacted by improved life sales on an APE basis which were offset by
a change in business mix in Sweden, particularly since the Kapitalpension
product tax advantages were removed, and the net negative impact from operating
assumption changes that were mainly due to strengthened persistency assumptions
during 2007. Life new business margin improved from the dip experienced at the
2007 year-end, and at 15% was consistent with that achieved in H1 2007. The
improvement since 2007 year-end can be attributed to positive volume effects
with strong sales coupled with a decrease in expenses. In the medium term, the
new business margin is expected to improve to reach the high teens.
Underlying adjusted operating profits solid despite market turbulence and
higher new sales
Adjusted operating profit (IFRS basis) remained in line with the comparative
period despite the equity market downturn. This was due to the strong underlying
results from lower administrative expenses and SkandiaBanken continuing to
benefit from the current market situation, through an improved interest margin.
H1 2008 includes a positive non-recurring item from refunded VAT costs of SEK44
million in SkandiaBanken. H1 2008 also included adjusted operating profit (IFRS
basis) of SEK28 million from SkandiaBanken`s car finance business divested in
the first quarter.
An excellent performance in the adjusted operating profit (EEV basis), up 439%
on H1 2007, was mainly due to strong sales performance in the unit-linked
business in Sweden and the positive impact of the currency spread assumption
change (SEK338 million pre-tax). Currency spread is a transactional cost for
the policyholder when unit-linked policyholders make switches between funds
that are denominated in different currencies.
H1 2007 included a negative net impact from operating assumption changes of
SEK-562 million pre-tax which was mainly due to lowered fund charges on
"tick-the-box" collective agreements. Experience variances were stable during
the period, but include a negative impact caused by premium reductions due to
new tax deduction rules in Sweden (a new tax legislation where the Swedish tax
deductible amount of pension savings (tax P) has been lowered from SEK27,000
per annum to SEK12,000 per annum for private persons effective 1 January 2008).
Continued growth in banking business benefiting from market conditions with
improved interest margin
Whilst the first half of the year has been characterised by the turbulent
market resulting in lower net commission income, the bank business in Nordic
benefited from an increased net interest margin. SkandiaBanken experienced a
slight increase in impaired loans. However, the credit loss ratio remains on a
low level of only 0.08% and we are confident SkandiaBanken`s conservative
lending policy means it is well positioned to any adverse developments.
Both deposit and loan books at SkandiaBanken increased in H1 2008. Excluding
the divested car finance business, lending increased to SEK42.8 billion, up 8%
since 31 December 2007. The increase related mainly to Sweden where a
successful mortgage campaign in the middle of March together with a highly
competitive floating interest rate, has led to increased lending volumes.
Deposits of SEK53.6 billion were up 6% since 31 December 2007 mainly as a
result of the seasonal effect in Norway which temporarily increased savings in
deposits. The number of customers increased 3% over 31 December 2007.
SkandiaBanken`s operating profit for H1 2008 was SEK156 million, 41% higher
than H1 2007.
Other
As announced on 24 April 2008, Skandia and Livfosakringsaktiebolaget Skandia
(publ) (Skandia Liv) are reviewing the potential benefits to both the Group and
to Skandia Liv policyholders of demutualising Skandia Liv. The review is at a
very preliminary stage and a conclusion is not likely before late 2009.
The sales of SkandiaBanken`s car finance business to DnB NOR was finalised
during H1 2008 resulting in a total realised book profit of SEK1 billion gross
of goodwill.
Skandia Liv has submitted claims to Skandia relating to compensation for
alleged prohibited profit distributions. These distributions relate to the sale
of Skandia Liv`s asset management business by Skandia to Den Norske Bank in
2002. The dispute is in arbitration, a ruling is expected in the latter part of
2008.
EUROPE: EUROPE AND LATIN AMERICA (ELAM)
Strong net inflows despite difficult market conditions
Highlights (EURm) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 22 20 10%
Adjusted operating profit (covered
business) (EEV basis) (pre-tax) 32 60 (47%)
Return on embedded value (covered business) 7.0% 9.7%
Life assurance sales (APE) 119 140 (15%)
Unit trust / mutual fund sales 1,011 1,306 (23%)
Value of new business 12 25 (52%)
APE margin 10% 18%
PVNBP 905 1,112 (19%)
PVNBP margin 1.3% 2.2%
Net client cash flows (EURbn) 0.6 0.8 (25%)
Highlights (EURbn) H1 2008 FY 2007 % Change
Funds under management 11.5 13.0 (12%)
Strong net client cash flows
Net client cash flows for the period represented 9% of opening funds under
management on an annualised like-for-like basis, adjusted for the disposal of
Palladyne - a strong result in the current market conditions, driven by a focus
on retention and persistency programmes to retain clients and assets in the
current difficult conditions. Equity market movements have negatively impacted
the value of funds under management, which decreased 12% from the start of the
year. Excluding Palladyne, which was sold during the period, funds under
management were 5% below 2007 year-end levels.
Life sales under pressure in difficult conditions
The majority of the ELAM countries saw the continuation of a challenging sales
environment. In some markets, a lack of market confidence and capabilities of
distributors to sell in depressed market conditions impacted on sales, while
investors have been favouring non-equity based investments, including cash
deposits. This effect has been more pronounced in our single premium markets
such as France and Italy, while our regular premium business in Central Europe
is proving more resilient. Life sales on an APE basis declined 15% over the
comparative period. Furthermore, the first half of the year saw regulatory and
legislative changes in Germany and Italy, which have preoccupied the market and
negatively impacted sales. We have succeeded in maintaining and growing our
market share in our chosen market segments in a number of countries and are now
ranked third in the market in Poland and first in Austria. In addition, we have
won several awards during the period, reinforcing our position in the market.
Mutual fund sales impacted by market conditions
Mutual fund sales were down 23% over H1 2007 (a 10% reduction when Palladyne is
excluded). As expected, long-term mutual fund business (mainly in Latin
America) were generally stable compared with the prior year, despite market
conditions not being particularly favourable to our core differentiator of
international equities. Continued product developments have provided some
support in this regard.
Value of new business and profit margins down
VNB and profit margins for the half year were down against the comparative
period. This was as a result of a number of factors including a change in the
product mix and business mix, with H1 2008 seeing lower inflows from Poland, at
a comparatively lower margin than the comparative period and a negative impact
from persistency assumption changes. Since we have a predominantly fixed expense
base, if sales volumes were to increase, profit margins would increase
accordingly.
Continued strong adjusted operating profit (IFRS basis) result
Adjusted operating profit (IFRS basis), at 10% above the comparative period,
demonstrated a strong result given the current market conditions. It was driven
by revenues from the in-force book and a focus on expense control.
Specifically, Poland and Colombia produced strong results over the comparative
period.
Adjusted operating profit (EEV basis) suffered from weak new business
contribution and impacted by changes in operating assumptions
Adjusted operating profit (EEV basis) was 47% down on H1 2007 due to the lower
VNB noted above, as well as assumption changes relating to persistency trends
in Austria. In addition, the H1 2008 EEV result is negatively affected by
non-recurring business restructuring activity in Italy.
Business development remains a key focus area
In light of the market downturn, business development remains a key focus area
and a number of important initiatives have been launched which we expect to
contribute towards production and maintained persistency. Initiatives include
the launch of a variable annuity product in Germany, the Life Time umbrella
product in Austria, the cash alternative product, Liberte in France, the
investment product Easy Plan in Switzerland, the launch of SIG`s European Best
Ideas Fund as well as significant expansion of distribution in Italy.
Leveraging operational efficiency
Initiatives continue to leverage operational efficiency across the division and
during the period we successfully moved towards a common operational structure
for Customer Services and IT in Central Europe largely based in Poland. The
Southern Europe businesses have also been fully integrated. We believe these
initiatives will provide a solid foundation for achieving further operational
efficiencies in the future.
Market recognition
Skandia won several awards during the period, reinforcing our position in the
market. These included second place in AssCompact Fondspolicen Award in
Germany, based on feedback from distributors, first place in all categories in
the Fonds Professionell Service Award in Austria and a Gold Pyramid in
Investissement Conseilles Award for life insurance contracts rated by the main
IFA associations.
SOUTH AFRICA: LONG-TERM BUSINESS & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA
(OMSA)
Excellent sales growth despite tightening economic conditions
Highlights (Rm) H1 2008 H1 2007 % Change
Long-term business adjusted operating
profit 1,793 1,714 5%
Asset management adjusted operating profit 557 510 9%
Long-term investment return (LTIR) 1,742 1,413 23%
Adjusted operating profit (IFRS basis)
(pre-tax) 4,092 3,637 13%
Return on allocated capital 28.3% 31.3%
Adjusted operating profit (covered
business) (EEV basis) (pre-tax) 3,237 3,638 (11%)
Return on embedded value (covered
business) (post-tax) 13.3% 14.9%
Life assurance sales (APE) 2,411 2,148 12%
Unit trust/mutual fund sales 9,640* 6,688 44%
Value of new business 332 324 2%
APE margin 14% 15%
PVNBP 16,518 14,007 18%
PVNBP margin 2.0% 2.3%
Net client cash flows (Rbn) (3.9) (9.0) 57%
Highlights (Rbn) H1 2008 FY 2007 % Change
SA client funds under management 429.0 445.0 (4%)
* OMSA Unit trust/mutual fund sales now includes Marriott
Funds under management of R429 billion were 4% lower than the opening position,
with the movement attributable to lower asset values in volatile markets and
net client outflows of R3.9 billion. Retention of third party assets has
improved with the bedding down of the OMIGSA boutique structure, but outflows
remained a challenge, especially in Employee Benefits. In our life business,
benefits payments are higher as a result of higher bonuses declared in 2007 and
early 2008, as well as higher member withdrawals caused by the tougher economic
environment. The volatile equity environment has also introduced some caution
in the investment decision-making process leading to longer sales processes
especially in the institutional market. We have announced the acquisition of
Futuregrowth, one of the leading specialist asset managers in South Africa in
the areas of fixed interest, quantitative equity and socially responsible
investments, subject to Competition Commission approval. This will result in
substantially enhanced fixed income investment capabilities within OMIGSA. We
continue to focus on improving investment performance, improving alignment of
our unit trust fund offering to our boutique capability and allowing the OMIGSA
boutiques to operate with independent investment philosophies and processes.
Life assurance sales APE of R2,411 million, up 12%, showed good growth,
supported by our extensive retail distribution channels and strong product
range. We continue to successfully penetrate the mass market where we see
further opportunity. Sales to that market were up 13% as a consequence of our
growing sales force. This was pleasing considering the current economic climate
where the effect of higher oil and food prices and increasing interest rates
has had a negative effect on available consumer spend. High interest rates have
adversely affected our credit life sales through the banking channel but
conventional annuities, which become cheaper in this environment, have had
strong sales. Unit trust sales of R9,640 million were 44% higher than the
comparative period (up 26% on an underlying basis excluding Marriott) with a
significant shift to money market funds.
VNB of R332 million was up 2% on H1 2007 and the APE margin declined from 15%
to 14%. The decline in the APE margin was primarily as a result of December
2007 operating and economic assumption changes. More competitive pricing for
some products and higher Corporate distribution costs reduced margins, but this
was more than offset by the consequential increase in new business volumes and
improvement in product mix.
Adjusted operating profit (IFRS basis) was 13% higher than H1 2007. Within this
result the LTIR increased 23% after a 100bps increase in the rate applied,
reflecting the high investment returns on shareholder funds achieved over the
past year. This LTIR methodology was introduced in 2007 with an increase in
rate from 15.6% to 16.6% in 2008. In spite of the volatile markets, our
long-term business profits increased by 5%, benefiting from a number of
non-repeating items including the receipt of an insurance claim of R37 million
relating to a previous year, interest of R64 million received from a previous
overpayment to SARS and an IFRS 2 credit of some R74 million compared to a
debit of R21 million in H1 2007. These positive factors were partly offset by
the negative impact of higher interest rates on the value of fixed policy fees,
which has led to an increase in reserves for our traditional Flexi product
book.
Asset management adjusted operating profit was up 9% due to lower expenses
attributable to the impact of a lower Old Mutual share price on incentive
costs.
Adjusted operating profit (EEV basis) before tax declined by 11% from H1 2007,
due to unusually high experience variances in H1 2007 and lower (but still
positive) experience variances in H1 2008. This was as a result of switches to
lower margin Absolute Growth Portfolios in the Corporate Segment and adverse
termination experience in the Retail businesses as a result of the tougher
economic environment.
Retail Mass
Rm H1 2008 H1 2007 % Change
Life sales (APE)
Savings 316 289 9%
Protection 245 206 19%
Total 561 495 13%
Value of new business 136 113 20%
APE margin 24% 23%
Net client cash flows (Rbn) 0.9 0.9 -
Retail Mass sales were up 13% on H1 2007 in line with a larger sales force
distribution reach and substantial growth in broker channel sales. The APE
margin improved by 1% benefiting from the lower corporate tax rate, as well as
the higher proportion of higher margin risk business compared to H1 2007. As a
result, VNB was 20% higher than H1 2007.
Retail Affluent
Rm H1 2008 H1 2007 % Change
Life sales (APE)
Savings 690 628 10%
Protection 483 506 (5%)
Annuity 114 100 14%
Total 1,287 1,234 4%
Life sales (APE)
Single 470 400 18%
Recurring 817 834 (2%)
Unit trust/mutual fund sales 8,266 6,688 24%
Value of new business 133 170 (22%)
APE margin 10% 14%
Net client cash flows (Rbn) (1.7) (1.1) (55%)
Net client cash flows remained negative, despite the growth in inflows, as the
prevailing adverse economic environment increased client withdrawals.
Total Retail Affluent life sales on an APE basis increased 4% compared to H1
2007. Recurring premium sales experienced significant challenges with
inflationary pressures and higher interest rates impacting negatively on
consumer disposable income. Against this backdrop, life recurring premium sales
and credit life sales were both 2% lower as a result of lower Greenlight sales
and lower loan volumes in Nedbank respectively. The shift from life-wrapped
savings business to other wrappers continues with non-life recurring premium
growing at 45% from a relatively low base.
Single premium savings business was up 18% with Investment Frontiers
contributing strongly to this position due to better rates and positioning of
the Fixed Bond portfolio. Living annuities were up 50% on the comparative
period and conventional annuity sales were also strong as a result of continued
competitiveness of our annuity rates, combined with the effect of higher
interest rates. Total annuity sales including living annuities were up 26% on
the comparative period.
Unit trust sales were up 24% compared to H1 2007, recovering from the low sales
of 2007 related to the OMIGSA boutique positioning. Pricing of the Galaxy
offering was improved with the re-launch of Galaxy Elite in April 2008.
VNB decreased to R133 million, with the reduction to a large extent
attributable to an increase in the risk discount rate, introduction of higher
lapses on the Greenlight product and allowance for paid-ups on the Max savings
product at the end of 2007. The lower VNB is also, in part, due to the lower
proportion of higher margin risk business, with sales lower than last year.
Corporate Segment
Rm H1 2008 H1 2007 % Change
Life sales (APE)
Savings 198 100 98%
Protection 68 68 -
Annuity 75 56 34%
Healthcare 81 110 (26%)
Total 422 334 26%
Life sales (APE)
Single 233 144 62%
Recurring 189 190 -
Value of new business 45 31 45%
APE margin 11% 9%
Net client cash flows (Rbn) (2.7) (2.1) (29%)
Despite higher inflows, net client cash flows remained negative for the period.
The offsetting higher outflows were due to the higher bonus declarations made
during 2007 (Coregrowth and Genesis) and early 2008 (Annuities), which
increased the level of normal benefits. In addition to this, a recent trend of
increased benefit withdrawals from funds as a result of current economic
pressures has led to increased outflows.
Total Corporate life sales on an APE basis were 26% higher in H1 2008, driven
by higher sales in Employee Benefits with single premium business continuing to
grow during the period. Risk business had a very good start to the year, but
this has slowed in the last few months. Healthcare sales were below H1 2007 as
this market continues to be very competitive and has been under pressure as
government employees move to the heavily subsidised Government Employees
Medical Scheme (GEMS).
VNB increased significantly relative to the comparative period due to the
higher sales and a better business mix (higher flows into higher margin old
generation smoothed bonus products and annuities), although this was offset by
the lower VNB in Healthcare due to lower sales volumes. Clients continue to
transfer from the old smoothed bonus products to the lower margin, less capital
intensive Absolute Growth Portfolios launched in 2007. Transfers of R19 billion
occurred during the period.
Old Mutual Investment Group South Africa (OMIGSA)
Rm H1 2008 H1 2007 % Change
Life sales (APE) 142 85 67%
Unit trust/mutual fund sales 1,374 - -
Value of new business 18 9 100%
APE margin 13% 11%
Net client cash flows (Rbn) (0.5) (6.7) 93%
Sources of FUM (Rbn) H1 2008 FY 2007 % Change
Life 304 319 (5%)
Unit trusts 47 48 (2%)
Third party 86 88 (2%)
Total OMIGSA managed assets 437 455 (4%)
Managed by external fund managers 34 34 -
Total OMSA FUM 471 489 (4%)
Less: managed by group companies for OMSA (42) (44) 5%
Total OMSA client funds managed in SA 429 445 (4%)
We continue to focus on stabilising the boutique structure and increasing
investors` confidence in individual boutique investment philosophies. The
acquisition of Futuregrowth will result in substantially enhanced fixed income
investment capabilities within the cluster.
Investment performance across our diverse boutiques was mixed, with the
percentage of funds performing above benchmark deteriorating since December
2007, but improved from March 2008. Three year performance slipped as poorer
short-term equity performance fed through to the longer-term performance
numbers. Many of the boutiques had anticipated a market correction from the
second half of 2007 and, generally, the equity and balanced portfolios were
defensively positioned. Overall, 35% of the funds outperformed their benchmarks
over one year and just over half of the funds outperformed their benchmarks
over three years to the end of June.
The overall percentage of funds performing above the median of competing funds
increased from 38% to 41% for one year performance and from 28% to 37% for
three year performance since the end of 2007. The Macro Strategy Investments
boutique`s Profile Balanced Fund was ranked eighth over one year, fifth over
three years and fourth over five years ending 30 June 2008 in the Alexander
Forbes Global Large Manager Watch survey.
Compared to industry median, overall, 55% of unit trust funds were first and
second quartile performers over one year, 31% were first and second quartile
over three years and 50% over five years to the end of June 2008.
Life sales were ahead of the comparative period as a result of good repeat
flows on a higher asset base in Symmetry. Non-life sales (OMIGSA) were lower
than the comparative period as a result of current market volatility impacting
investment decision processes, especially within large institutional clients.
Net client cash outflows were concentrated in the low margin index-tracking
business Umbono.
SOUTH AFRICA: BANKING - NEDBANK GROUP (NEDBANK)
Tough macro-economic environment impacts retail but continued good performance
in wholesale
The full text of Nedbank`s interim results for the six months ended 30 June
2008, released on 6 August 2008, can be accessed on Nedbank`s website
http://www.nedbankgroup.co.za
Highlights (Rm) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 5,086 4,277 19%
Headline earnings* 2,943 2,775 6%
Net interest income* 7,960 6,568 21%
Non-interest revenue* 4,954 4,742 4%
Net interest margin* 3.83% 3.90%
Cost to income ratio* 51.5% 55.2%
ROE* 18.7% 21.2%
ROE* (excluding goodwill) 21.3% 24.7%
* As reported by Nedbank in their interim report to shareholders as at 30 June
2008
Banking environment
The South African economic environment continued to deteriorate during the
first half of 2008. Supply-side inflationary pressures led to further interest
rate increases in April and June 2008, adding to the credit stress levels of
consumers. The resultant slowdown in economic growth was reflected in lower
retail sales, vehicle sales and house price growth. Credit provisioning levels
have increased in Nedbank Retail and Imperial Bank. Nedbank`s wholesale banking
bias has provided support within the current environment. Corporate advances
growth remained resilient, boosted by the downstream activity from increasing
fixed investment.
In June 2008 the Competition Commission released a summary of its findings on
the inquiry into bank charges in South Africa. Nedbank generally supports the
recommendations that have been made by the Banking Enquiry Panel.
Financial performance
In the context of a tougher economic environment, Nedbank`s wholesale
businesses continued to perform well, but earnings in the retail businesses
reduced as a result of higher impairment charges. In February this year,
Nedbank cautioned that the deteriorating macroeconomic outlook was likely to
make 2008 significantly more challenging for the South African economy and the
banking sector. Underlying growth in assets and net interest income has
remained solid, but impairment levels, arising mainly from the retail
portfolios, have now risen above Nedbank`s through-the-cycle expectations.
To manage the business through the current high interest rate cycle, Nedbank
has for some time been strengthening collection and risk processes, controlling
cost growth and improving capital ratios. At the same time, Nedbank continues
to focus on and invest in areas with medium to long term growth potential and
capitalise on the opportunities created by more volatile market conditions.
Adjusted operating profit (IFRS basis) was up 19% to R5,086 million. Diluted
Headline Earnings per share increased 7% from 673 cents to 719 cents. Diluted
earnings per share grew 30% from 678 cents in H1 2007 to 879 cents for the
period.
Nedbank`s return on average ordinary shareholders` equity (ROE) excluding
goodwill, reduced to below the medium to long term target, declining from 24.7%
to 21.3% for the period. This decline was due to a reduction in gearing as
Nedbank increased its core Tier 1 capital adequacy to position the bank in the
current environment, and from a lower return on assets caused mainly by higher
retail impairment levels. ROE declined from 21.2% to 18.7%.
Headline earnings was up 6% to R2,943 million for the period with basic
earnings up 29% to R3,597 million (H1 2007: R2,798 million).
Nedbank`s wholesale businesses increased headline earnings, benefiting from
favourable trading conditions and good client volumes. However, Nedbank`s
financial performance was unfavourably impacted by retail impairment levels
rising above its through-the-cycle expectations. In addition, negative equity
and property market movements have impacted private equity valuations. Basic
earnings benefited from an after-tax profit of R637 million on the disposal of
Nedbank`s shares in Visa. Following the introduction of BEE and management
shareholders into Bond Choice, Nedbank reduced its investment in the mortgage
originator from 62.0% to 25.5%. Consequently Bond Choice is no longer
classified as a subsidiary of Nedbank with effect from 1 January 2008.
Net interest income (NII)
NII grew 21% to R7,960 million with the increase mainly driven by the 23%
growth in average interest-earning banking assets. The net interest margin
declined to 3.83% from 3.90% for the comparative period which was in line with
our expectations as deposit margins were negatively impacted by strong
competition for funding. Furthermore, the cost of the bank`s funding increased
as the proportion of assets funded through wholesale versus retail deposits
continued to increase and as the maturity profile of liabilities was
lengthened.
Margins on advances declined during the period. This was due to asset mix
changes with the growth of lower risk, lower margin assets, particularly within
the personal loans portfolio. The pressure on home loan margins has begun to
slow and wholesale margins on new assets are improving. This pressure on
deposit and asset spreads was partially offset by the endowment benefits of
higher interest rates.
Impairment charge on loans and advances
The impairment charge to the income statement increased by 86% to R1,894
million (H1 2007: R1,016 million) resulting in the credit loss ratio increasing
from 0.62% in June 2007 to 0.96%. While the credit loss ratios in both Nedbank
Corporate and Nedbank Capital remained within through-the-cycle target levels,
Nedbank Retail and Imperial Bank`s credit loss ratios deteriorated further as a
result of rising interest rates and increased levels of consumer indebtedness
and are now above targeted through-the-cycle ranges.
Non-interest revenue (NIR)
NIR increased by 4% to R4,954 million for the period. Excluding Bond Choice`s
commission and sundry income in 2007, NIR grew by 11% on a like-for-like basis.
The sale of Bond Choice reduced commission and fee income by R261 million.
Commission and fee income (excluding Bond Choice) grew by 12%. In transactional
banking, cheque processing fees continued to decline as clients shifted to more
secure electronic banking systems. Cash handling fees and transactional banking
volumes grew strongly due to an increase in customer numbers as a result of the
Nedbank`s investment in delivery channels from 2006 onwards.
Nedbank`s retail Bancassurance & Wealth division performed well, with headline
earnings up 20% to R194 million for the period. Trading income for the period
was up 56% to R813 million, benefiting from good client flows as a result of
increased volatility in the currency and interest rate markets and improved
equity trading. Private equity income declined sharply from R493 million to R53
million, reflecting the reduced prices in equity and property markets.
Expenses
Despite high inflation and the increased distribution footprint, expenses
continued to be tightly controlled, up 7% to R6,651 million (H1 2007: R6,238
million). On a like-for-like basis, excluding Bond Choice, expenses increased
10%. The efficiency ratio improved from 55.2% in H1 2007 (excluding Bond Choice
54.7%) to 51.5% for the period. The `jaws` ratio improved to 7.6% from 3.6% in
the comparative period as a result of revenue growth of 14.2% exceeding expense
growth of 6.6%.
Associate income
Associate income decreased from R179 million in the comparative period to R84
million. This was primarily as a result of Nedbank`s R65 million share of the
profit on the sale of JSE Limited shares by BoE Private Clients joint venture
in the comparative period as well as the sale of Nedbank`s interests in
Whirlprops and Kimberley Clark during 2007.
Non-trading and capital items
Income after taxation from non-trading and capital items increased from R23
million in H1 2007 to R654 million for the period. The main sources of this
income accounted for as a non-headline item related to the profit on the sale
of Visa shares from the Visa initial public offering (IPO) in March 2008 and
the subsequent disposal of Nedbank`s remaining Visa shares in June 2008,
resulting in a profit of R637 million after tax. In accordance with Old
Mutual`s accounting policies, this profit is included in adjusted operating
profit for the purposes of these interim financial statements. Also, in Bond
Choice, the sale of 26.5% to Kapela Investment Holdings and 10% to an employee
trust realised a net capital profit of R14.5 million after tax.
Nedbank continues to be well-capitalised, with a Tier 1 capital adequacy ratio
of 8.7% (FY 2007: 8.0% pro forma Basel II) and a total capital adequacy ratio
of 11.7% (FY 2007: 11.2% pro forma Basel II), both within the upper half of
target ranges. The core Tier 1 capital adequacy ratio was 7.4% (FY 2007: 6.9%
pro forma Basel II). The profit from non-trading and capital items, headline
earnings and the R1.2 billion Tier 1 capital raised as at 30 June 2008,
together with ongoing initiatives to enhance risk weighted asset calculations,
all helped to boost Nedbank`s capital ratios.
Advances and deposits
Advances increased by 18% (on an annualised basis) to R408 billion, with strong
asset growth across all business units. Overall deposits increased by 26% (on
an annualised basis) from R385 billion at 31 December 2007 to R435 billion at
30 June 2008, with higher interest rates increasing demand for savings and
investment products.
Despite strong growth in retail funding, deposit growth was still largely
concentrated in the wholesale market. Management has remained focused on
optimising the funding mix and profile of the bank, through utilising alternate
funding sources, a focused effort on the retail and business banking deposit
bases and pricing competitively for term deposits. Nedbank`s liquidity position
and funding franchise remains strong.
Prospects
There are a number of factors likely to influence Nedbank`s performance in the
second half of 2008 including continued slowing of economic growth in South
Africa, a slowing growth in retail advances, Corporate Banking advances growth
remaining more resilient, Business Banking starting to show signs of slowing
advances growth, and an endowment benefit in the margin resulting from interest
rate increases, offset by margin compression in certain categories of advances
and continued reliance on wholesale funding. Further, credit loss ratios in the
retail portfolios will stabilise unless market conditions deteriorate further
and worsening credit loss ratios in the Business Banking area. Wholesale credit
loss ratios are likely to remain below through-the-cycle levels and retail
credit loss ratios are likely to remain above through-the-cycle levels. Nedbank
will continue to focus on cost control and its ongoing capital management
activities.
Nedbank currently expects to show positive earnings growth for the full year.
However, in 2008 it is unlikely that Nedbank will meet its medium- to long-term
target of a growth in diluted HEPS of at least average CPIX plus GDP growth
plus 5% and an ROE (excluding goodwill) of 10% above the group`s monthly
weighted average cost of ordinary shareholders` equity.
SOUTH AFRICA: GENERAL INSURANCE - MUTUAL & FEDERAL
Challenging trading conditions
The full text of Mutual & Federal`s interim results for the six months ended 30
June 2008, released on 5 August 2008, can be accessed on Mutual & Federal`s
website http://www.mf.co.za
Highlights (Rm) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 427 509 (16%)
Gross premiums* 4,689 4,594 2%
Earned premiums* 3,914 3,813 3%
Claims ratio* 71.4% 68.8%
Combined ratio* 100.6% 97.1%
Solvency ratio* 43% 49%
Return on capital* (3 year average) 25.5% 31.7%
* As reported by Mutual & Federal in their interim report to shareholders as at
30 June 2008
Mutual & Federal reported weaker results in the context of a difficult trading
environment and a continuing decline in the underwriting cycle.
The underwriting account was negatively impacted during the period by a number
of large commercial and industrial fire claims, as well as substantial
weather-related claims in the personal portfolio. The annualised investment
return for the period was 9% which was satisfactory in light of the highly
volatile investment environment. The solvency margin at 30 June 2008 was 43%,
which was largely unchanged from the figure at 31 December 2007.
Growth
Gross premiums grew by 2% over the comparative period. Whilst growth within the
commercial portfolio was in line with inflation, the personal portfolio
contracted following the cancellation of a number of underperforming group
schemes. Risk finance premiums also declined following lower levels of
reinsurance received from insurers in the retail sector.
Deterioration in underwriting result
Mutual & Federal recorded an underwriting deficit of R23 million (H1 2007:
surplus of R109 million), or a ratio of -0.6% to earned premiums (H1 2007:
2.9%). Although the 2007 result was flattered by R48 million following changes
to estimation methods used in providing for claims, the deterioration remains
highly disappointing and management have already taken corrective action to
remedy the situation.
Return on capital in line with objectives
Despite the inclusion of R28 million arising from a change in the long-term
investment return rate from 15.6% to 16.6%, the adjusted operating profit
declined by 16%. The return on capital in 2008 was 25.5% which exceeded Mutual
& Federal`s targeted return of 20%.
Other
As announced on 5 August 2008, we will be initiating a competitive sale process
for Mutual & Federal in September 2008.
UNITED STATES: US LIFE
Strong sales offset by investment volatility
Highlights ($m) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 12 60 (80%)
Return on equity (annualised basis) (2.5%) 3.7%*
Adjusted operating profit (covered
business) (EEV basis) (pre-tax) (12) (105) 89%
Return on embedded value (covered business) (1.3%) 0.9%
Life assurance sales (APE) 346 288 20%
Value of new business 52 55 (5%)
APE margin 15% 19%
PVNBP 3,279 2,661 23%
PVNBP margin 1.6% 2.1%
Net client cash flows ($bn) 1.4 0.5 180%
Highlights ($bn) H1 2008 FY 2007 % Change
Funds under management 23.6 24.1 (2%)
* Restated due to change in ROE methodology
Funds under management
Net client cash flows were 12% of opening funds under management on an
annualised basis. Funds under management of $23.6 billion at H1 2008 were down
2% from the opening position, primarily due to a 6% decrease in the market
value of funds under management, mainly as a result of unfavourable fixed
income and equity market conditions. However, this was partially offset by
positive net client cash flows of $1.4 billion, driven by Old Mutual Bermuda
variable annuity sales.
Sales driven by variable annuities
Total life sales were $3.2 billion on a gross basis, up 25% over the
comparative period. Total life sales on an APE basis were $346 million, a 20%
increase over the comparative period. Sales by Old Mutual Bermuda were the
largest contributor, representing 64% of APE sales in the US Life business, an
increase of 76% or $96 million over the comparative period. Fixed indexed
annuity sales were down 36% on an APE basis from the comparative period. As a
consequence of high guarantee costs in the current volatile environment we have
withdrawn the guaranteed variable annuity products effective 15 August 2008. We
intend to restructure and relaunch the product later this year.
Review of reserving basis
During the period, we conducted a review of our reserving bases and the hedging
strategy on our guaranteed products. As a result, and in light of the current
investment market conditions, we have strengthened our reserving basis which
has had a downward impact on the Adjusted Net Worth, Value of In Force and VNB.
The Return on Embedded Value, IFRS and EV earnings reduced accordingly in the
period.
Underlying IFRS results
Adjusted operating profit (IFRS basis) decreased $48 million in period over the
comparative period. In 2007, we recorded $60 million for assumption and
modelling changes while in the current period, difficult credit markets
resulted in higher impairment losses and volatile equity markets increased the
costs associated with the guaranteed benefits on our variable annuity
contracts. The impairment losses depressed our adjusted investment return. The
current year charges included a $125 million adjustment for variable annuity
guarantee reserves to pre-tax adjusted operating profits which was part of a
total IFRS pre-tax charge of $212 million. Excluding these impacts, H1 2008
adjusted operating profit was up 14% primarily due to higher average variable
annuity asset levels.
Embedded Value results
Adjusted operating profit (EEV basis) and returns increased in the period over
the comparative period. In 2007, various assumption and modelling changes
recorded in H1 2007 comprised of $195 million pre-tax in respect of annuitant
mortality assumptions and other modelling changes of $30 million pre-tax which
were included within EV adjusted operating profit. In 2008, the assumption and
modelling changes comprised $175 million pre-tax in respect of guarantee
reserves. VNB reduced slightly as a result of increased prudence in the
valuation assumptions in respect of the guaranteed variable annuity business.
The economic assumptions were strengthened in the light of the current
environment by means of an increase in the credit default rate and increase of
100 basis points in the risk discount rate to allow for non-modelled risks. The
effect of these changes was a loss of $127 million after tax.
Finally, negative investment variances of $349 million after tax arose
primarily due to impairments and realised losses of $253 million and hedging
losses of $59 million.
Credit update
The markets continue to experience fallout from the housing crisis and
inflation fears as general lack of confidence overshadows the financial
markets. Negative impacts to credit valuations broadly affected whole
categories of bonds, often with little regard to the underlying fundamentals of
specific securities.
US Life`s fixed income portfolio aggregate credit experience continues to be
affected by poor economic and financial market conditions. First half
impairments total $149 million on 21 securities with two of the 21 being
subprime asset- backed securities and another ten indirectly linked to subprime
or monoline insurer exposures. 3.6% of US Life`s general account portfolio of
$20 billion has direct exposure to sub-prime mortgage collateral. The sub-prime
exposure is highly rated (85% is AAA, 99% is AA and higher, and 100% is A and
higher) with a 78% fair value-to-book value ratio.
Approximately 3.0% of US Life`s general account portfolio has exposure to
monoline insurers, of which $530 million (89% of the total exposure) is
indirect (wrapped) exposure, with an 86% fair value-to-book value ratio, and
$66 million is direct (unsecured) exposure, with a 71% fair value-to-book value
ratio. The indirect exposures include $202 million of sub-prime asset-backed
securities which are wrapped by monoline guarantees.
Additional impairments during the second half of the year may be required if
poor economic and financial market conditions persist.
Raising brand awareness in the US
The US brand advertising campaign continued to gather momentum with
sponsorships of Major League Baseball and Thoroughbred Racing on high profile,
national television networks. Additionally, as a sponsor of Trevor Immelman,
the Group was thrilled with the talented golfer`s win at the 2008 Master`s
Tournament. The "So Old Mutual" consumer campaign achieved its highest traffic
numbers in June to the website - www.sayoldmutual.com - since the December 2007
launch. With the forthcoming November 2008 US presidential election, the focus
will shift to a combination of news and lifestyle media programs to ensure
potential viewer numbers are maximised throughout the lead up to election
night.
UNITED STATES: US ASSET MANAGEMENT
Results dampened due to poor equity markets, however net client cash flows
continue to be positive
Highlights ($m) H1 2008 H1 2007 % Change
Adjusted operating profit (IFRS basis)
(pre-tax) 139 149 (7%)
Operating margin 26% 28%
Unit trust / mutual fund sales 1,179 2,219 (47%)
Net client cash flows ($bn) 1.9 17.2 (89%)
Highlights ($bn) H1 2008 FY 2007 % Change
Funds under management 314.7 332.6 (5%)
Poor equity markets drive decline in funds under management
Our member firms continued to deliver strong long-term investment performance
during this period of volatile global equity markets. At 30 June 2008, 65% of
institutional assets had outperformed their benchmarks and 56% of institutional
assets were ranked above the median of their peer group over the trailing three-
year period.
Positive net client cash flows of $1.9 billion for the period were encouraging
given the net outflows being experienced across the industry due to market
volatility. The half year result was driven by positive flows at Heitman,
Ashfield Capital Partners, Acadian Asset Management and Rogge Global Partners,
partially offset by outflows at OMAM UK, Dwight Asset Management Company and
Clay Finlay. Funds under management decreased 5% over the year end 2007
position to end at $314.7 billion, with the net inflows offset by a negative
market impact of $19.8 billion. Our diversified asset mix helped to lessen the
impact with fixed income products, which comprised 34% of total funds under
management at the end of the period, being less volatile in periods of market
instability.
Weaker Retail sales
Old Mutual Capital mutual fund sales and OMAM UK unit trust sales for the
period were $446 million and $733 million respectively, down a combined $1,040
million (47%) on the comparative period as a result high redemptions in an
unstable market. At H1 2008, 14 of Old Mutual Capital`s mutual funds carried
four or five star rankings by Morningstar, and we remain confident in the
competitiveness of the underlying products on offer.
Adjusted operating profit (IFRS basis) down 7%
Adjusted operating profit for the period was down 7% over the comparative
period. The decrease is primarily as a result of lower performance fees, which
were negatively impacted by the volatile markets. The operating margin, which
is calculated inclusive of minority interest expense, also declined from the
comparative period due to the impact of equity plans. Expense management
remains a key area of management focus during this current operating climate.
Product development
We continue to maintain our position as a leader in the fast growing short
extension space. During the period, Analytic Investors won a sub advisory
mandate for assets in excess of $500 million within 130/30 strategy. Analytic
performed pioneering work which helped lead to the adoption of short extension
strategies within the industry.
We encourage new product development in the institutional space via an
extensive seeding programme. Clients are increasingly looking for global
strategies from bottom-up fundamental managers. Recognising this, we have
recently seeded Global Equity and International Small Cap Value products with
our affiliate Thompson, Siegel & Walmsley.
Acquisition of ING Ghent
On 1 July 2008, Rogge Global Partners acquired ING Ghent, which has funds under
management of $1.5 billion. This acquisition will permit US Asset Management to
broaden its fixed income capabilities to include below investment grade
securities.
OTHER: ASIA PACIFIC
Continued focus on developing scale
Highlights (GBPm) H1 2008 H1 2007 % Change
Adjusted operating loss (IFRS basis)
(pre-tax) (8) (1) (700%)
Australia unit trust/mutual fund sales 185 318 (42%)
Australia institutional sales 19 82 (77%)
Skandia:BSAM (China) Gross Premiums* 19 53 (64%)
KMOM (India) Gross Premiums* 150 82 83%
Highlights (GBPbn) H1 2008 FY 2007
Funds under management 6.0 6.5 (8%)
* This represents 100% of the businesses; OM owns 50% of Skandia:BSAM and 26%
of KMOM
Old Mutual is committed to the development of a credible portfolio of
businesses in the Asia Pacific region. The new regional head office in Hong
Kong is now fully staffed and operational. The team are focusing on growing the
current portfolio of businesses as well as ensuring continued geographical and
distribution expansion.
The current portfolio of businesses consists of a retail mutual funds platform
and institutional asset manager in Australia, a joint venture with the Beijing
State-owned Asset Management Company in China selling unit-linked products
(Skandia:BSAM) and a 26% holding in a life assurance venture in India (Kotak
Mahindra Old Mutual).
A combination of stock market volatility and increased competition has resulted
in tough business conditions for the period. Sales and net fund inflows have
been disappointing, primarily as a result of the lower equity markets. Funds
under management have reduced accordingly, partially offset by the
strengthening of local underlying currencies against the pound sterling.
The focus in the second half of the year will be on improving infrastructure,
increasing distribution footprint and broadening product range.
Financial Information
Index to the financial Information
Statement of directors responsibilities in respect of the
half-yearly financial statements 32
Independent review report by KPMG Audit Plc to Old Mutual plc 33
Consolidated income statement 34
Adjusted operating profit 35
Consolidated balance sheet 36
Condensed consolidated cash flow statement 37
Consolidated statement of changes in equity 38
Notes to the consolidated financial statements
1 Basis of preparation 44
2 Foreign currencies 45
3 Segment information 45
4 Operating profit adjusting items 54
5 Income tax expense 60
6 Earnings and earnings per share 61
7 Dividends 63
8 Discontinued operations, assets and liabilities held-for-sale 63
9 Borrowed funds 65
10 Commitments and contingent liabilities 67
11 Post balance sheet events 67
European embedded value basis supplementary information
Income statement on a European embedded value basis 68
Notes to the European embedded value basis supplementary information
1 Basis of preparation 70
2 Adjustments applied in determining adjusted operation profit 70
3 Reconciliation of movements in Group embedded value 70
4 Components of Group embedded value 71
5 Components of adjusted Group embedded value 71
6 Reconciliation of Group embedded value of the covered business to the
adjusted Group embedded value 72
7 Components of embedded value of the covered business 73
8 Analysis of covered business embedded value results (after tax) 74
9 Value of new business (after tax) 82
10 Product analysis of new covered business premiums 83
11 Drivers of new business 84
12 Assumptions 86
13 Sensitivity tests 90
Statement of directors responsibilities in respect of the half-yearly financial
statements
For the six months ended 30 June 2008
We confirm that to the best of our knowledge:
* the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU;
* the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last annual report that could do so.
Jim Sutcliffe Jonathan Nicholls
Chief Executive Group Finance Director
6 August 2008 6 August 2008
Independent Review Report by KPMG Audit Plc to Old Mutual plc
For the six months ended 30 June 2008
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June
2008 which comprises the Consolidated income statement, the Adjusted operating
profit, the Consolidated balance sheet, the Condensed consolidated cash flow
statement, the Consolidated statement of changes in equity and the related
explanatory notes and to review the European embedded value basis supplementary
information for the six months ended 30 June 2008 as set out on pages 34 to 90
("the Supplementary Information").
We have read the other information contained in the half-yearly financial
report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set of financial
statements or the Supplementary Information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK`s Financial Services Authority
("the UK FSA") and also to provide a review conclusion to the company on the
Supplementary Information. Our review of the condensed set of financial
statements has been undertaken so that we might state to the company those
matters we are required to state to it in this report and for no other purpose.
Our review of the Supplementary Information has been undertaken so that we
might state to the company those matters we have been engaged to state in this
report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have reached.
Directors` responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FSA. The
directors have accepted responsibility for preparing the Supplementary
Information contained in the half-yearly financial report in accordance with
the European Embedded Value Principles issued in May 2004 by the European CFO
Forum and supplemented by the Additional Guidance on European Embedded Value
Disclosures issued in October 2005 (together the "EEV Principles") and for
determining the methodology and assumptions used in the application of those
principles.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the EU. The condensed set of
financial statements included in this half-yearly financial report has been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU.
The Supplementary Information has been prepared in accordance with the EEV
Principles, using the methodology and assumptions set out in notes 1 and 12 to
the Supplementary Information. The Supplementary Information should be read in
conjunction with the group`s condensed financial statements which are set out
below.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements and the Supplementary Information in the
half-yearly financial report based on our review.
Scope of review
We conducted our reviews in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
and Supplementary Information consists of making enquiries, primarily of
persons responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially less in scope
than an audit conducted in accordance with International Standards on Auditing
(UK and Ireland) and consequently does not enable us to obtain assurance that
we would become aware of all significant matters that might be identified in an
audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half- yearly
financial report for the six months ended 30 June 2008 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR
of the UK FSA.
Based on our review, nothing has come to our attention that causes us to
believe that the Supplementary Information for the six months ended 30 June
2008 is not prepared, in all material respects, in accordance with the EEV
Principles, using the methodology and assumptions set out in notes 1 and 12 to
the Supplementary Information.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
8 Salisbury Square
London EC4Y 8BB
6 August 2008
Consolidated income statement
For the six months ended 30 June 2008
6 months ended
30 June
Notes 2008
Revenue
Gross earned premiums 3(iii) 2,560
Outward reinsurance (119)
Net earned premiums 2,441
Investment return (non-banking) (4,092)
Banking interest and similar income 1,894
Banking trading, investment and similar income 70
Fee and commission income, and income from
service activities 1,181
Other income 185
Share of associated undertakings` (loss)/profit
after tax (2)
Profit on disposal of subsidiaries, associated
undertakings
and strategic investments 4(i) 62
Total revenues 1,739
Expenses
Claims and benefits (including change in
insurance contract provisions) (1,802)
Reinsurance recoveries 111
Net claims and benefits incurred (1,691)
Change in investment contract liabilities 3,842
Losses on loans and advances (126)
Finance costs (9)
Banking interest payable and similar expenses (1,302)
Fee and commission expense, and other acquisition
costs (331)
Other operating and administrative expenses (1,321)
Change in third party interest in consolidated funds 210
Amortisation of PVIF and other acquired intangibles (176)
Total expenses (904)
Profit before tax 835
Total income tax expense 5(i) (163)
Profit from continuing operations after tax 672
Profit from discontinued operations after tax 8(i) 13
Profit after tax for the financial period 685
Profit for the financial period attributable to:
Equity holders of the parent 6(ii) 549
Minority interests
Ordinary shares 110
Preferred securities 26
Profit after tax for the financial period 685
Earnings per share
Based on profit from continuing operations (pence) 11.0
Based on profit from discontinued operations (pence) 0.2
Basic earnings per ordinary share (pence) 6(i) 11.2
Based on profit from continuing operations (pence) 10.3
Based on profit from discontinued operations (pence) 0.2
Diluted earnings per ordinary share (pence) 6(i) 10.5
Weighted average number of shares - millions 6(i) 4,771
6 months ended GBPm
Year ended
30 June 31 December
2007
Restated 2007
Revenue
Gross earned premium 2,202 4,941
Outward reinsurance (105) (201)
Net earned premiums 2,097 4,740
Investment return (non-banking) 5,298 6,071
Banking interest and similar income 1,450 3,190
Banking trading, investment and similar
income 90 170
Fee and commission income, and income from
service activities 1,148 2,457
Other income 106 212
Share of associated undertakings`
(loss)/profit after tax 2 (1)
Profit on disposal of subsidiaries,
associated undertakings
and strategic investments 7 25
Total revenues 10,198 16,864
Expenses
Claims and benefits (including change in
insurance contract provisions) (3,475) (6,612)
Reinsurance recoveries 84 184
Net claims and benefits incurred (3,391) (6,428)
Change in investment contract liabilities (2,877) (2,618)
Losses on loans and advances (74) (157)
Finance costs (47) (50)
Banking interest payable and similar expenses (928) (2,053)
Fee and commission expense, and other
acquisition costs (358) (650)
Other operating and administrative expenses (1,269) (2,724)
Change in third party interest in
consolidated funds (220) (156)
Amortisation of PVIF and other acquired
intangibles (183) (360)
Total expenses (9,347) (15,196)
Profit before tax 851 1,668
Total income tax expense (276) (479)
Profit from continuing operations after tax 575 1,189
Profit from discontinued operations after tax 36 57
Profit after tax for the financial period 611 1,246
Profit for the financial period attributable to:
Equity holders of the parent 483 972
Minority interests
Ordinary shares 104 224
Preferred securities 24 50
Profit after tax for the financial period 611 1,246
Earnings per share
Based on profit from continuing operations (pence) 9.0 18.3
Based on profit from discontinued operations (pence) 0.6 0.9
Basic earnings per ordinary share (pence) 9.6 19.2
Based on profit from continuing operations (pence) 8.5 17.3
Based on profit from discontinued operations (pence) 0.5 0.8
Diluted earnings per ordinary share (pence) 9.0 18.1
Weighted average number of shares - millions 4,880 4,894
Adjusted operating profit
For the six months ended 30 June 2008
Reconciliation of adjusted operating profit to profit after tax
6 months ended
30 June
Notes 2008
South Africa 3(ii) 617
United States 3(ii) 76
Europe 3(ii) 148
Other 3(ii) (8)
833
Finance costs (71)
Other shareholders` expenses (17)
Adjusted operating profit* before tax 745
Adjusting items 4(i) 156
Profit for the financial period before tax
(excluding policyholder tax) 901
Total income tax expense 5(i) (163)
Income tax attributable to policyholder returns (66)
Profit from continuing operations after tax 672
Profit from discontinued operations after tax 8(i) 13
Profit after tax for the financial period 685
6 months ended GBPm
30 June Year ended
2007 31 December
Restated 2007
South Africa 572 1,165
United States 106 260
Europe 129 268
Other 2 2
809 1,695
Finance costs (69) (119)
Other shareholders` expenses (19) (41)
Adjusted operating profit* before tax 721 1,535
Adjusting items 24 73
Profit for the financial period before tax
(excluding policyholder tax) 745 1,608
Total income tax expense (276) (479)
Income tax attributable to policyholder
returns 106 60
Profit from continuing operations after tax 575 1,189
Profit from discontinued operations after tax 36 57
Profit after tax for the financial period 611 1,246
Adjusted operating profit after tax attributable to ordinary equity holders
6 months ended
30 June
Notes 2008
Adjusted operating profit* before tax 745
Tax on adjusted operating profit 5(iii) (215)
Adjusted operating profit* after tax from
continuing operations 530
Adjusted operating profit* after tax from
continuing operations 530
Adjusted operating profit* after tax from
discontinued operations 8(iii) 23
Adjusted operating profit* after tax 553
Minority interest - ordinary shares (122)
Minority interest - preferred securities (26)
Adjusted operating profit* after tax attributable
to ordinary equity holders 405
6 months ended GBPm
30 June Year ended
2007 31 December
Restated 2007
Adjusted operating profit* before tax 721 1,535
Tax on adjusted operating profit (167) (390)
Adjusted operating profit* after tax from
continuing operations 554 1,145
Adjusted operating profit* after tax from
continuing operations 554 1,145
Adjusted operating profit* after tax from
discontinued operations 26 61
Adjusted operating profit* after tax 580 1,206
Minority interest - ordinary shares (114) (242)
Minority interest - preferred securities (24) (50)
Adjusted operating profit* after tax
attributable to ordinary equity holders 442 914
Adjusted weighted average number of
ordinary shares - (millions) 6(ii) 5,245 5,407 5,411
Based on adjusted operating profit from
continuing operations** (pence) 6(ii) 7.4 7.8 16.1
Based on adjusted operating profit from
discontinued operations** (pence) 6(ii) 0.3 0.4 0.8
Adjusted operating earnings per share**
(pence) 6(ii) 7.7 8.2 16.9
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain
long-term incentive schemes defined as minority interests in accordance with
IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, revaluations of put options
related to long-term incentive schemes, the impact of closure of unclaimed
shares trusts, profit/(loss) on disposal of subsidiaries, associated
undertakings and strategic investments, dividends declared to holders of
perpetual preferred callable securities, and fair value profits/(losses) on
certain Group debt movements.
** Adjusted operating earnings per ordinary share is calculated on the same
basis as adjusted operating profit. It is stated after tax attributable to
adjusted operating profit and minority interests. It excludes income
attributable to Black Economic Empowerment trusts of listed subsidiaries. The
calculation of the adjusted weighted average number of shares includes own
shares held in policyholders` funds and Black Economic Empowerment trusts.
Consolidated balance sheet
At 30 June 2008
At
30 June
Notes 2008
Assets
Goodwill and other intangible assets 5,453
Mandatory reserve deposits with central banks 610
Property, plant and equipment 549
Investment property 1,265
Deferred tax assets 764
Investments in associated undertakings and joint ventures 69
Deferred acquisition costs 2,728
Reinsurers` share of long-term business policyholder
liabilities 1,411
Reinsurers` share of general insurance liabilities -
Deposits held with reinsurers 898
Loans and advances 29,890
Investments and securities 83,789
Current tax receivable 47
Client indebtedness for acceptances 201
Other assets 2,531
Derivative financial instruments - assets 3,149
Cash and cash equivalents 3,129
Non-current assets held-for-sale 8(v) 566
Total assets 137,049
Liabilities
Long-term business policyholder liabilities 78,954
General insurance liabilities -
Third party interests in consolidation of funds 2,674
Borrowed funds 9 2,236
Provisions 429
Deferred revenue 521
Deferred tax liabilities 1,389
Current tax payable 206
Other liabilities 5,622
Liabilities under acceptances 201
Amounts owed to bank depositors 32,033
Derivative financial instruments - liabilities 3,062
Non-current liabilities held-for-sale 8(vi) 368
Total liabilities 127,695
Net assets 9,354
Shareholders` equity
Equity attributable to equity holders of the parent 7,802
Minority interests
Ordinary shares 849
Preferred securities 703
Total minority interests 1,552
Total equity 9,354
At GBPm
30 June At
2007 31 December
Restated 2007
Assets
Goodwill and other intangible assets 5,340 5,459
Mandatory reserve deposits with central banks 546 615
Property, plant and equipment 493 608
Investment property 1,361 1,479
Deferred tax assets 574 683
Investments in associated undertakings and joint
ventures 100 81
Deferred acquisition costs 1,908 2,253
Reinsurers` share of long-term business
policyholder liabilities 1,368 1,394
Reinsurers` share of general insurance liabilities 63 -
Deposits held with reinsurers 344 806
Loans and advances 27,545 30,687
Investments and securities 87,297 89,627
Current tax receivable 103 83
Client indebtedness for acceptances 188 165
Other assets 3,460 2,181
Derivative financial instruments - assets 758 1,527
Cash and cash equivalents 3,438 3,469
Non-current assets held-for-sale 573 1,617
Total assets 135,459 142,734
Liabilities
Long-term business policyholder liabilities 79,963 84,251
General insurance liabilities 288 -
Third party interests in consolidation of funds 3,589 3,547
Borrowed funds 2,301 2,353
Provisions 519 499
Deferred revenue 381 462
Deferred tax liabilities 1,443 1,413
Current tax payable 220 320
Other liabilities 7,710 6,180
Liabilities under acceptances 188 165
Amounts owed to bank depositors 28,382 31,817
Derivative financial instruments - liabilities 981 1,716
Non-current liabilities held-for-sale 553 414
Total liabilities 126,518 133,137
Net assets 8,941 9,597
Shareholders` equity
Equity attributable to equity holders of the parent 7,359 7,961
Minority interests
Ordinary shares 879 933
Preferred securities 703 703
Total minority interests 1,582 1,636
Total equity 8,941 9,597
Condensed consolidated cash flow statement
for the six months ended 30 June 2008
6 months ended
30 June
Notes 2008
Cash flows from operating activities
Profit before tax from continuing operations 835
Profit before tax from discontinued operations 8(i) 18
Total profit before tax 853
Non-cash movements in profit before tax 1,083
Changes in working capital 811
Taxation paid (262)
Net cash inflow from operating activities 2,485
Cash flows from investing activities
Acquisition of financial investments (2,388)
(Acquisition)/disposal of investment properties (19)
Net acquisition of property, plant & equipment (64)
Net acquisition of intangible assets (2)
Acquisition of interests in subsidiaries (65)
Disposal of interests in subsidiaries, associated
undertakings and strategic investments 1,133
Net cash outflow from investing activities (1,405)
Cash flows from financing activities
Dividends paid to:
Equity holders of the Company 7 (227)
Equity minority interests and preferred security
interests (109)
Interest payable (excluding banking interest payable) (61)
Net proceeds from issue of ordinary shares
(including by subsidiaries to minority interests) (226)
Net receipts from unclaimed shares trust -
Issue of subordinated debt 76
Other debt repaid (13)
Net cash (outflow)/inflow from financing activities (560)
Net (decrease)/increase in cash and cash equivalents 520
Effects of exchange rate changes on cash and cash equivalents (235)
Cash and cash equivalents at beginning of the period 3,596
Cash and cash equivalents at end of the period 3,881
Consisting of:
Cash and cash equivalents 3,129
Mandatory reserve deposits with central banks 610
Other cash equivalents 1,084
Cash and cash equivalents subject to consolidation
of funds (942)
Total 3,881
6 months ended GBPm
30 June Year ended
2007 31 December
Restated 2007
Cash flows from operating activities
Profit before tax from continuing operations 851 1,668
Profit before tax from discontinued
operations 47 82
Total profit before tax 898 1,750
Non-cash movements in profit before tax (1,400) (1,155)
Changes in working capital 2,646 4,368
Taxation paid (303) (563)
Net cash inflow from operating activities 1,841 4,400
Cash flows from investing activities
Acquisition of financial investments (1,786) (3,896)
(Acquisition)/disposal of investment properties 15 (26)
Net acquisition of property, plant & equipment (50) (186)
Net acquisition of intangible assets (34) (67)
Acquisition of interests in subsidiaries (175) (278)
Disposal of interests in subsidiaries,
associated undertakings and strategic investments 1 106
Net cash outflow from investing activities (2,029) (4,347)
Cash flows from financing activities
Dividends paid to:
Equity holders of the Company (218) (333)
Equity minority interests and preferred
security interests (92) (205)
Interest payable (excluding banking interest payable) (25) (83)
Net proceeds from issue of ordinary shares
(including by subsidiaries to minority interests) 199 42
Net receipts from unclaimed shares trust 90 95
Issue of subordinated debt 430 699
Other debt repaid (277) (356)
Net cash (outflow)/inflow from financing activities 107 (141)
Net (decrease)/increase in cash and cash equivalents (81) (88)
Effects of exchange rate changes on cash and
cash equivalents (45) 50
Cash and cash equivalents at beginning of the period 3,634 3,634
Cash and cash equivalents at end of the period 3,508 3,596
Consisting of:
Cash and cash equivalents 3,438 3,469
Mandatory reserve deposits with central banks 546 615
Other cash equivalents 671 808
Cash and cash equivalents subject to
consolidation of funds (1,147) (1,296)
Total 3,508 3,596
Cash flows presented in this statement include all cash flows relating to
policyholders` funds for the long-term business.
Cash and cash equivalents subject to consolidation of funds are not included in
the cash flow as they relate to the minority holding in the funds.
Management do not consider that there are material amounts of cash and cash
equivalents which are not available for use by the Group.
Consolidated statement of changes in equity
For the six months ended 30 June 2008
Millions
Number of
shares Attributable to
issued and equity holders
Six months ended 30 June 2008 Notes fully paid of the parent
Equity holders` funds at beginning
of the period 5,510 7,961
Change in equity arising in the period
Fair value gains/(losses):
Property revaluation - 6
Available for sale investments:
Fair value losses - (528)
Recycled to income statement - 85
Shadow accounting - 227
Currency translation
differences/exchange differences
on translating
foreign operations - (145)
Other movements - (16)
Aggregate tax effect of items
taken directly to or transferred from equity - 67
Net income recognised directly in equity - (304)
Profit for the period - 549
Total recognised income and
expense for the period - 245
Dividends for the period 7 - (249)
Net purchase of treasury shares - (5)
Shares repurchased in the buy-back programme - (174)
Issue of ordinary share capital by the Company - 4
Change in participation in subsidiaries - -
Exercise of share options 4 3
Fair value of equity settled share options - 17
Equity holders` funds at end of
the period 5,514 7,802
GBPm
Total minority Total
Six months ended 30 June 2008 interest equity
Equity holders` funds at beginning of the period 1,636 9,597
Change in equity arising in the period
Fair value gains/(losses):
Property revaluation - 6
Available for sale investments:
Fair value losses - (528)
Recycled to income statement - 85
Shadow accounting - 227
Currency translation differences/exchange
differences on translating
foreign operations (119) (264)
Other movements 2 (14)
Aggregate tax effect of items taken directly to
or transferred from equity - 67
Net income recognised directly in equity (117) (421)
Profit for the period 136 685
Total recognised income and expense for the period 19 264
Dividends for the period (87) (336)
Net purchase of treasury shares - (5)
Shares repurchased in the buy-back programme - (174)
Issue of ordinary share capital by the Company - 4
Change in participation in subsidiaries (16) (16)
Exercise of share options - 3
Fair value of equity settled share options - 17
Equity holders` funds at end of the period 1,552 9,354
Share
Six months ended 30 June 2008 capital Share
Notes premium
Attributable to equity holders of the parent
at beginning of the period 551 757
Changes in equity arising in the period:
Fair value gains/(losses):
Property revaluation - -
Available for sale investments:
Fair value losses - -
Recycled to income statement - -
Shadow accounting - -
Currency translation differences/exchange
differences
on translating foreign operations - -
Other movements - 2
Aggregate tax effect of items taken directly to
or transferred from equity - -
Net income recognised directly in equity - 2
Profit for the period - -
Total recognised income and expense for the
period - 2
Dividends for the period 7 - -
Net purchase of treasury shares - -
Shares repurchased in the buy-back programme - -
Issue of ordinary share capital by the Company - 4
Exercise of share options - 3
Fair value of equity settled share options - -
Attributable to equity holders of the
parent at end of the period 551 766
Six months ended 30 June 2008 Other Translation Retained
reserves reserve earnings
Attributable to equity holders of the
parent
at beginning of the period 2,908 (304) 3,361
Changes in equity arising in the
period:
Fair value gains/(losses):
Property revaluation 6 - -
Available for sale investments:
Fair value losses (528) - -
Recycled to income statement 85 - -
Shadow accounting 227 - -
Currency translation
differences/exchange differences
on translating foreign operations - (145) -
Other movements (9) - (9)
Aggregate tax effect of items taken
directly to
or transferred from equity 61 - 6
Net income recognised directly in
equity (158) (145) (3)
Profit for the period - - 549
Total recognised income and expense
for the period (158) (145) 546
Dividends for the period - - (249)
Net purchase of treasury shares - - (5)
Shares repurchased in the buy-back
programme - - (174)
Issue of ordinary share capital by
the Company - - -
Exercise of share options - - -
Fair value of equity settled share
options 17 - -
Attributable to equity holders of the
parent at end of the period 2,767 (449) 3,479
Perpetual
preferred
Six months ended 30 June 2008 callable GBPm
securities Total
Attributable to equity holders of the parent
at beginning of the period 688 7,961
Changes in equity arising in the period:
Fair value gains/(losses):
Property revaluation - 6
Available for sale investments:
Fair value losses - (528)
Recycled to income statement - 85
Shadow accounting - 227
Currency translation differences/exchange differences
on translating foreign operations - (145)
Other movements - (16)
Aggregate tax effect of items taken directly to
or transferred from equity - 67
Net income recognised directly in equity - (304)
Profit for the period - 549
Total recognised income and expense for the period - 245
Dividends for the period - (249)
Net purchase of treasury shares - (5)
Shares repurchased in the buy-back programme - (174)
Issue of ordinary share capital by the Company - 4
Exercise of share options - 3
Fair value of equity settled share options - 17
Attributable to equity holders of the
parent at end of the period 688 7,802
GBPm
At
30 June
Other reserves 2008
Merger reserve 2,716
Available for sale reserve (180)
Property revaluation reserve 75
Share-based payments reserve 156
Attributable to equity holders of the parent at end of the period 2,767
Retained earnings have been reduced by GBP550 million at 30 June 2008 in
respect of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings. Included in the dividend for
the period is GBP22 million of dividends declared to holders of perpetual
preferred callable securities. Included within other reserves is the merger
reserve for the additional share consideration made in respect of the Skandia
acquisition, being the difference between the market value of the shares on the
date of issue and the nominal value included as share capital.
Millions
Number of Attributable to
shares issued equity holders of
Six months ended 30 June 2007 Notes and fully paid the parent
Equity holders` funds at
beginning of the period 5,501 7,237
Change in equity arising in
the period
Fair value gains/(losses):
Property revaluation - 5
Net investment hedge - 31
Available for sale
investments
Fair value losses - (177)
Shadow accounting - 93
Currency translation
differences/exchange
differences on translating
foreign operations - (162)
Other movements - (16)
Aggregate tax effect of
items taken directly to or
transferred from equity - 29
Net expense recognised
directly in equity - (197)
Profit for the period - 483
Total recognised income and
expense for the period - 286
Dividends for the period 7 - (240)
Net sale of treasury shares - 55
Change in participation in
subsidiaries - -
Exercise of share options 4 3
Fair value of equity settled
share options - 18
Equity holders` funds at end
of the period 5,505 7,359
GBPm
Total minority Total
Six months ended 30 June 2007 interest equity
Equity holders` funds at beginning of the period 1,526 8,763
Change in equity arising in the period
Fair value gains/(losses):
Property revaluation - 5
Net investment hedge - 31
Available for sale investments
Fair value losses - (177)
Shadow accounting - 93
Currency translation differences/exchange
differences on translating
foreign operations (33) (195)
Other movements (4) (20)
Aggregate tax effect of items taken directly to
or transferred from equity - 29
Net expense recognised directly in equity (37) (234)
Profit for the period 128 611
Total recognised income and expense for the period 91 377
Dividends for the period (70) (310)
Net sale of treasury shares - 55
Change in participation in subsidiaries 35 35
Exercise of share options - 3
Fair value of equity settled share options - 18
Equity holders` funds at end of the period 1,582 8,941
Share Share Other
Six months ended 30 June 2007 Notes capital premium reserves
Attributable to equity holders
of the parent at
beginning of the period 550 746 2,901
Changes in equity arising in the
period:
Fair value gains/(losses):
Property revaluation - - 5
Net investment hedge - - -
Available for sale investments
Fair value losses - - (177)
Shadow accounting - - 93
Currency translation
differences/exchange differences
on translating foreign operations - - -
Other movements - - (12)
Aggregate tax effect of items
taken directly to or
transferred from equity - - 27
Net expense recognised directly
in equity - - (64)
Profit for the period - - -
Total recognised income and
expense for the period - - (64)
Dividends for the period 7 - - -
Net sale of treasury shares - - -
Exercise of share options - 3 -
Fair value of equity settled
share options - - 18
Attributable to equity holders
of the parent at end of the
period 550 749 2,855
GBPm
Perpetual
preferred
Translation Retained callable
Six months ended 30 June reserve earnings securities Total
2007
Attributable to equity
holders of the parent at
beginning of the period (421) 2,773 688 7,237
Changes in equity arising
in the period:
Fair value gains/(losses):
Property revaluation - - - 5
Net investment hedge 31 - - 31
Available for sale
investments
Fair value losses - - - (177)
Shadow accounting - - - 93
Currency translation
differences/exchange
differences
on translating foreign
operations (162) - - (162)
Other movements - (4) - (16)
Aggregate tax effect of
items taken directly to or
transferred from equity (5) 7 - 29
Net expense recognised
directly in equity (136) 3 - (197)
Profit for the period - 483 - 483
Total recognised income
and expense for the period (136) 486 - 286
Dividends for the period - (240) - (240)
Net sale of treasury shares - 55 - 55
Exercise of share options - - - 3
Fair value of equity
settled share options - - - 18
Attributable to equity
holders of the parent at
end of the period (557) 3,074 688 7,359
GBPm
At
30 June
Other reserves 2007
Merger reserve 2,716
Available for sale reserve (33)
Investment property revaluation reserve 48
Share-based payments reserve 124
Attributable to equity holders of the parent at end of the period 2,855
Retained earnings have been reduced by GBP649 million at 30 June 2007 in
respect of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings. Included in the dividend for
the period is GBP22 million of dividends declared to holders of perpetual
preferred callable securities. Included within other reserves is the merger
reserve for the additional share consideration made in respect of the Skandia
acquisition, being the difference between the market value of the shares on the
date of issue and the nominal value included as share capital.
Millions
Number of
shares
issued Attributable to
and fully equity holders
Year ended 31 December 2007 Notes paid of the parent
Equity holders` funds at beginning
of the year 5,501 7,237
Change in equity arising in the year
Fair value gains/(losses):
Property revaluation - 95
Net investment hedge - (13)
Available for sale investments:
Fair value losses - (197)
Recycled to income statement - 36
Shadow accounting - 25
Currency translation
differences/exchange differences on translating
foreign operations - 129
Other movements - (4)
Aggregate tax effect of items taken
directly to or transferred from equity - 34
Net income recognised directly in equity - 105
Profit for the year - 972
Total recognised income and expense
for the year - 1,077
Dividends for the year 7 - (373)
Net sale of treasury shares - 149
Shares repurchased in the buyback
programme - (177)
Issue of ordinary share capital by
the Company - 3
Change in participation in subsidiaries - -
Exercise of share options 9 9
Fair value of equity settled share options - 36
Equity holders` funds at end of the year 5,510 7,961
GBPm
Total minority Total
Year ended 31 December 2007 interest equity
Equity holders` funds at beginning of the year 1,526 8,763
Change in equity arising in the year
Fair value gains/(losses):
Property revaluation 1 96
Net investment hedge - (13)
Available for sale investments:
Fair value losses - (197)
Recycled to income statement - 36
Shadow accounting - 25
Currency translation differences/exchange
differences on translating
foreign operations 4 133
Other movements - (4)
Aggregate tax effect of items taken directly to
or transferred from equity - 34
Net income recognised directly in equity 5 110
Profit for the year 274 1,246
Total recognised income and expense for the year 279 1,356
Dividends for the year (165) (538)
Net sale of treasury shares - 149
Shares repurchased in the buyback programme - (177)
Issue of ordinary share capital by the Company - 3
Change in participation in subsidiaries (4) (4)
Exercise of share options - 9
Fair value of equity settled share options - 36
Equity holders` funds at end of the year 1,636 9,597
Share Share Other
Year ended 31 December 2007 Notes Capital premium reserves
Attributable to equity holders
of the parent
at beginning of the year 550 746 2,901
Changes in equity arising in the
year:
Fair value gains/(losses):
Property revaluation - - 95
Net investment hedge - - -
Available for sale investments:
Fair value losses - - (197)
Recycled to income statement - - 36
Shadow accounting - - 25
Currency translation
differences/exchange differences
on translating foreign operations - - -
Other movements - - (10)
Aggregate tax effect of items
taken directly to
or transferred from equity - - 22
Net income recognised directly
in equity - - (29)
Profit for the year - - -
Total recognised income and
expense for the year - - (29)
Dividends for the year 7 - - -
Net sale of treasury shares - - -
Shares repurchased in the
buyback programme - - -
Issue of ordinary share capital
by the Company - 3 -
Exercise of share options 1 8 -
Fair value of equity settled
share options - - 36
Attributable to equity holders
of the
parent at end of the year 551 757 2,908
Perpetual GBPm
preferred
Translation Retained callable
Year ended 31 December reserve earnings securities Total
2007
Attributable to equity
holders of the parent
at beginning of the year (421) 2,773 688 7,237
Changes in equity arising
in the year:
Fair value gains/(losses):
Property revaluation - - - 95
Net investment hedge (13) - - (13)
Available for sale
investments:
Fair value losses - - - (197)
Recycled to income
statement - - - 36
Shadow accounting - - - 25
Currency translation
differences/exchange
differences
on translating foreign
operations 129 - - 129
Other movements (2) 8 - (4)
Aggregate tax effect of
items taken directly to
or transferred from equity 3 9 - 34
Net income recognised
directly in equity 117 17 - 105
Profit for the year - 972 - 972
Total recognised income
and expense for the year 117 989 - 1,077
Dividends for the year - (373) - (373)
Net sale of treasury
shares - 149 - 149
Shares repurchased in the
buyback programme - (177) - (177)
Issue of ordinary share
capital by the Company - - - 3
Exercise of share options - - - 9
Fair value of equity
settled share options - - - 36
Attributable to equity
holders of the
parent at end of the year (304) 3,361 688 7,961
GBPm
At
31 December
Other reserves 2007
Merger reserve 2,716
Available for sale reserve (30)
Property revaluation reserve 75
Share-based payments reserve 147
Attributable to equity holders of the parent at end of the year 2,908
Retained earnings have been reduced by GBP588 million at 31 December 2007 in
respect of own shares held in policyholders` funds, ESOP trusts, Black Economic
Empowerment trusts and other related undertakings. Included in the dividend for
the year is GBP40 million of dividends declared to holders of perpetual
preferred callable securities. Included within other reserves is the merger
reserve for the additional share consideration made in respect of the Skandia
acquisition, being the difference between the market value of the shares on the
date of issue and the nominal value included as share capital.
Notes to the consolidated financial statements
For the six months ended 30 June 2008
1 Basis of preparation
Old Mutual plc ("the Company") is a company incorporated in England and Wales.
These interim consolidated financial statements comprise the results of the
Company and its subsidiaries (together referred to as the "Group") and equity
account the Group`s interest in associates and jointly controlled entities.
These interim consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS) IAS 34
Interim Financial Reporting. They do not include all of the information
required for a full set of consolidated financial statements.
These consolidated interim financial statements were approved by the Board of
Directors on 6 August 2008.
The accounting policies applied by the Group in these consolidated interim
financial statements are the same as those applied by the Group in its
consolidated financial statements as at and for the year ended 31 December
2007, presented in accordance with IFRS as adopted by the EU.
The interim consolidated financial statements are prepared on the historical
cost basis except that the following assets and liabilities are stated at their
fair value: derivative financial instruments, financial instruments classified
as fair valued through the income statement or as available for sale,
owner-occupied property and investment property. Non-current assets and
disposal groups held-for-sale are stated at the lower of previous carrying
amount and fair value less costs to sell.
The results for the six months ended 30 June 2008 and 2007 are unaudited, but
have been reviewed by the Auditors whose report is presented on page 33. The
comparative figures for the financial year ended 31 December 2007 are not the
company`s statutory accounts for that financial year. Those accounts have been
reported on by the company`s auditors and delivered to the Registrar of
Companies. The report of the auditors was (i) unqualified, (ii) did not include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report and (iii) did not contain a statement
under section 237(2) or (3) of the Companies Act 1985. Consequently these
interim financial statements should be read in conjunction with the consolidated
financial statements of the Group as at and for the year ended 31 December 2007.
Revised and new reporting standards
The Group had previously chosen to adopt IFRS 8 `Operating Segments` in
preparing its financial statements for the year ended 31 December 2007.
Estimates
The preparation of interim financial statements requires management to make
judgements, estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income and
expenses. Actual results may differ from these estimates.
In preparing these consolidated interim financial statements, the significant
judgements made by management in applying the Group`s accounting policies and
the key sources of estimation uncertainty were the same as those that applied
to the consolidated financial statements as at and for the year ended 31
December 2007.
Further commentary on management`s reassessment of estimates made during the
six months ended 30 June 2008 is provided in the Business Review
Financial and insurance risk management
The Group`s financial and insurance risk management objectives and policies are
consistent with that disclosed in the consolidated financial statements as at
and for the year ended 31 December 2007.
Restatement of comparative information
The Group has made certain restatements of comparative information to reflect
Mutual & Federal as a discontinued operation and to reflect changes in
presentation of the income statement and balance sheet line items that were
made in the Group`s annual report for the year ended 31 December 2007 following
the adoption of IFRS 7 `Financial Instruments: Disclosures`. Reclassifications
have also been made to income and expense items to more appropriately reflect
the nature of these items.
2 Foreign currencies
The principal exchange rates used to translate the operating results, assets
and liabilities of key foreign business operations to Sterling are:
Income
statement Balance sheet
(average rate) (closing rate)
30 June 2008
Rand 15.1008 15.5673
US Dollars 1.9746 1.9908
Swedish Krona 12.1128 12.0009
Euro 1.2903 1.2651
30 June 2007
Rand 14.1123 14.1677
US Dollars 1.9703 2.0071
Swedish Krona 13.6668 13.7266
Euro 1.4820 1.4826
31 December 2007
Rand 14.1109 13.6043
US Dollars 2.0014 1.9827
Swedish Krona 13.5253 12.8320
Euro 1.4602 1.3596
3 Segment information
(i) Basis of segmentation
The Group`s results are analysed across four geographic segments. This is
consistent with the way the Group manages the business. The four geographic
segments, based on the Group`s management structure, are South Africa, United
States, Europe and Other. Within the geographic segments, the Group generates
revenue from four principal lines of business: long-term business, asset
management, banking and general insurance. For IFRS purposes, the general
insurance line of business has been discontinued during the 2007 financial
year, however for the purposes of reporting adjusted operating profit, the
result of the general insurance line of business is included in the following
analyses.
The income statement information that follows is based on the Group`s
geographical management structure with revenue and expenses allocated to the
lines of business. This follows the same format as the Consolidated income
statement and is reconciled to Adjusted Operating Profit which is one of the
key measures reported to the Group`s chief operating decision makers for their
consideration in the allocation of resources to and the review of performance
of the segments. The Group utilises additional measures to assess the
performance of each of the segments. These measures are also presented and
include an analysis of gross earned premiums and funds under management.
The basis of segmentation and the basis of measurement of segment profit or
loss applied by the Group in these consolidated financial statements are the
same as those applied by the Group in its consolidated financial statements as
at and for the year ended 31 December 2007.
(ii) Income statement - segment information six months ended 30 June 2008
South Africa
Long-term Asset
business management Banking
Revenue
Gross earned premiums 790 - -
Outward reinsurance (24) - -
Net earned premiums 766 - -
Investment return (non-banking) 29 58
Banking interest and similar income - - 1,765
Banking trading, investment and
similar income - - 68
Fee and commission income, and income
from service activities 53 77 227
Other income 36 26 60
Share of associated undertakings`
profit/(loss) after tax 4 - 3
Profit/(loss) on disposal of
subsidiaries, associated undertakings and
strategic investments (13) - 1
Inter-segment revenues 86 14 8
Total revenue 961 175 2,132
Expenses
Claims and benefits (including change
in insurance contract provisions) (288) - -
Reinsurance recoveries 35 - -
Net claims and benefits incurred (253) - -
Change in investment contract
liabilities 44 - -
Losses on loans and advances - - (125)
Finance costs - - -
Banking interest payable and similar
expenses - - (1,213)
Fee and commission expense, and other
acquisition costs (71) 1 -
Other operating and administrative
expenses (199) (64) (449)
Change in third party interest in
consolidated funds - - -
Amortisation of PVIF and other
acquired intangibles - - -
Inter-segment expenses (22) (57) (24)
Total expenses (501) (120) (1,811)
Profit/(loss) before tax 460 55 321
Adjusting items (214) - (1)
Income tax attributable to
policyholder returns (4) - -
Adjusted operating profit/(loss)
before tax 242 55 320
United States
Long-term Asset
business management
Revenue
Gross earned premiums 1,644 -
Outward reinsurance (51) -
Net earned premiums 1,593 -
Investment return (non-banking) (223) 10
Banking interest and similar income - -
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities - 250
Other income 23 8
Share of associated undertakings` profit/(loss)
after tax - -
Profit/(loss) on disposal of subsidiaries,
associated undertakings and
strategic investments - (1)
Inter-segment revenues - 4
Total revenue 1,393 271
Expenses
Claims and benefits (including change in insurance
contract provisions) (1,446) -
Reinsurance recoveries 54 -
Net claims and benefits incurred (1,392) -
Change in investment contract liabilities 3 -
Losses on loans and advances - -
Finance costs - -
Banking interest payable and similar expenses - -
Fee and commission expense, and other acquisition
costs (40) (5)
Other operating and administrative expenses (35) (192)
Change in third party interest in consolidated
funds - -
Amortisation of PVIF and other acquired intangibles (13) -
Inter-segment expenses (5) -
Total expenses (1,482) (197)
Profit/(loss) before tax (89) 74
Adjusting items 95 (4)
Income tax attributable to policyholder returns - -
Adjusted operating profit/(loss) before tax 6 70
Europe Other Group
Long-term Asset Asset
business management Banking management Corporate
126 - - - -
(44) - - - -
82 - - - -
(3,797) 8 - - 7
- - 129 - -
- - 2 - -
375 166 13 19 -
14 3 4 - -
- - - (3) (6)
- 17 58 - -
111 11 8 - 7
(3,215) 205 214 16 8
(68) - - - -
22 - - - -
(46) - - - -
3,795 - - - -
- - (1) - -
- - - - (9)
- - (89) - -
(120) (51) - (6) -
(249) (61) (33) (17) (22)
- - - - -
(158) (2) (3) - -
(49) (69) (20) (1) (3)
3,173 (183) (146) (24) (34)
(42) 22 68 (8) (26)
100 (15) (55) - (62)
70 - - - -
128 7 13 (8) (88)
Group GBPm
Inter-segment Total
(revenues)/ continuing Discontinued
expenses operations operations Total
- 2,560 301 2,861
- (119) (45) (164)
- 2,441 256 2,697
(184) (4,092) 18 (4,074)
- 1,894 - 1,894
- 70 - 70
1 1,181 - 1,181
16 190 - 190
- (2) - (2)
- 62 - 62
(254) (5) 5 -
(421) 1,739 279 2,018
- (1,802) (221) (2,023)
- 111 38 149
- (1,691) (183) (1,874)
- 3,842 - 3,842
- (126) - (126)
- (9) - (9)
- (1,302) - (1,302)
(39) (331) (50) (381)
(4) (1,325) (24) (1,349)
210 210 - 210
- (176) - (176)
254 4 (4) -
421 (904) (261) (1,165)
- 835 18 853
- (156) 10 (146)
- 66 - 66
- 745 28 773
(ii) Income statement - segment information six months ended 30 June 2007
South Africa
Long-term Asset
business management
Banking
Revenue
Gross earned premiums 730 - -
Outward reinsurance (20) - -
Net earned premiums 710 - -
Investment return (non-banking) 2,216 29 -
Banking interest and similar income - - 1,352
Banking trading, investment and
similar income - - 71
Fee and commission income, and income
from service activities 52 83 218
Other income 37 30 24
Share of associated undertakings`
profit/(loss) after tax 7 - 7
Profit on disposal of subsidiaries,
associated undertakings and
strategic investments - 1 -
Inter-segment revenues 61 15 22
Total revenue 3,083 158 1,694
Expenses
Claims and benefits (including change
in insurance contract provisions) (1,865) - -
Reinsurance recoveries 16 - -
Net claims and benefits incurred (1,849) - -
Change in investment contract
liabilities (534) - -
Losses on loans and advances - - (73)
Finance costs - - -
Banking interest payable and similar
expenses - - (869)
Fee and commission expense, and other
acquisition costs (71) (2) -
Other operating and administrative
expenses (192) (61) (430)
Change in third party interest in
consolidated funds - - -
Goodwill impairment - - -
Amortisation of PVIF and other
acquired intangibles - - -
Inter-segment expenses (19) (40) (34)
Total expenses (2,665) (103) (1,406)
Profit/(loss) before tax 418 55 288
Adjusting items (127) (1) -
Income tax attributable to
policyholder returns (61) - -
Adjusted operating profit/(loss)
before tax 230 54 288
United States
Long-term Asset
business management
Revenue
Gross earned premiums 1,355 -
Outward reinsurance (50) -
Net earned premiums 1,305 -
Investment return (non-banking) 340 3
Banking interest and similar income - -
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities - 250
Other income (1) 13
Share of associated undertakings` profit/(loss)
after tax - -
Profit on disposal of subsidiaries, associated
undertakings and
strategic investments - 6
Inter-segment revenues - 6
Total revenue 1,644 278
Expenses
Claims and benefits (including change in insurance
contract provisions) (1,558) -
Reinsurance recoveries 58 -
Net claims and benefits incurred (1,500) -
Change in investment contract liabilities - -
Losses on loans and advances - -
Finance costs - -
Banking interest payable and similar expenses - -
Fee and commission expense, and other acquisition
costs (96) (5)
Other operating and administrative expenses (28) (191)
Change in third party interest in consolidated
funds - -
Goodwill impairment - -
Amortisation of PVIF and other acquired intangibles (18) -
Inter-segment expenses (7) -
Total expenses (1,649) (196)
Profit/(loss) before tax (5) 82
Adjusting items 35 (6)
Income tax attributable to policyholder returns - -
Adjusted operating profit/(loss) before tax 30 76
Europe Other Group
Long-term Asset Asset
business management Banking management Corporate
117 - - - -
(35) - - - -
82 - - - -
2,427 1 - - 7
- - 98 - -
- - 19 - -
344 168 13 20 -
10 4 1 1 4
- - - (1) (11)
- - - - -
64 6 10 1 5
2,927 179 141 21 5
(52) - - - -
10 - - - -
(42) - - - -
(2,343) - - - -
- - (1) - -
- - - - (47)
- - (59) - -
(92) (47) - (5) -
(217) (70) (37) (13) (33)
- - - - -
- - - - -
(161) (2) (2) - -
- (51) (34) (1) (3)
(2,855) (170) (133) (19) (83)
72 9 8 2 (78)
82 3 - - (10)
(45) - - - -
109 12 8 2 (88)
Group GBPm
Inter-segment Total
(revenues)/ continuing Discontinued Total
expenses operations operations Restated
- 2,202 302 2,504
- (105) (48) (153)
- 2,097 254 2,351
275 5,298 39 5,337
- 1,450 - 1,450
- 90 - 90
- 1,148 - 1,148
1 124 - 124
- 2 - 2
- 7 - 7
(208) (18) 18 -
68 10,198 311 10,509
- (3,475) (206) (3,681)
- 84 36 120
- (3,391) (170) (3,561)
- (2,877) - (2,877)
- (74) - (74)
- (47) - (47)
- (928) - (928)
(40) (358) (49) (407)
(16) (1,288) (25) (1,313)
(220) (220) - (220)
- - (1) (1)
- (183) - (183)
208 19 (19) -
(68) (9,347) (264) (9,611)
- 851 47 898
- (24) (11) (35)
- (106) - (106)
- 721 36 757
(ii) Income statement - segment information year ended 31 December 2007
South Africa
Long-term Asset
business management Banking
Revenue
Gross earned premiums 1,563 - -
Outward reinsurance (41) - -
Net earned premiums 1,522 - -
Investment return (non-banking) 3,203 89 -
Banking interest and similar income - - 2,979
Banking trading, investment and
similar income - - 167
Fee and commission income, and income
from service activities 108 161 474
Other income 77 36 52
Share of associated undertakings`
profit/(loss) after tax 11 - 8
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - 1
Inter-segment revenues 144 49 39
Total revenue 5,065 335 3,720
Expenses
Claims and benefits (including change
in insurance contract provisions) (2,981) - -
Reinsurance recoveries 39 - -
Net claims and benefits incurred (2,942) - -
Change in investment contract
liabilities (767) - -
Losses on loans and advances - - (154)
Finance costs - - -
Banking interest payable and similar
expenses - - (1,928)
Fee and commission expense, and other
acquisition costs (153) - -
Other operating and administrative
expenses (410) (153) (940)
Change in third party interest in
consolidated funds - - -
Goodwill impairment - - -
Amortisation of PVIF and other
acquired intangibles - - -
Inter-segment expenses (63) (84) (75)
Total expenses (4,335) (237) (3,097)
Profit/(loss) before tax 730 98 623
Adjusting items (222) - (1)
Income tax attributable to
policyholder returns (63) - -
Adjusted operating profit/(loss)
before tax 445 98 622
United States
Long-term Asset
business management
Revenue
Gross earned premiums 3,148 -
Outward reinsurance (88) -
Net earned premiums 3,060 -
Investment return (non-banking) 528 13
Banking interest and similar income - -
Banking trading, investment and similar income - -
Fee and commission income, and income from service
activities - 570
Other income 9 12
Share of associated undertakings` profit/(loss)
after tax - -
Profit on disposal of subsidiaries, associated
undertakings and strategic
investments - 8
Inter-segment revenues - 12
Total revenue 3,597 615
Expenses
Claims and benefits (including change in insurance
contract provisions) (3,480) -
Reinsurance recoveries 95 -
Net claims and benefits incurred (3,385) -
Change in investment contract liabilities - -
Losses on loans and advances - -
Finance costs - -
Banking interest payable and similar expenses - -
Fee and commission expense, and other acquisition
costs (102) (10)
Other operating and administrative expenses (54) (424)
Change in third party interest in consolidated
funds - -
Goodwill impairment - -
Amortisation of PVIF and other acquired intangibles (24) -
Inter-segment expenses (13) -
Total expenses (3,578) (434)
Profit/(loss) before tax 19 181
Adjusting items 79 (19)
Income tax attributable to policyholder returns - -
Adjusted operating profit/(loss) before tax 98 162
Europe Other Group
Long-term Asset Asset
business management Banking management Corporate
230 - - - -
(72) - - - -
158 - - - -
2,019 - - - 8
- - 211 - -
- - 3 - -
730 345 27 42 -
8 23 2 3 -
- - - (3) (17)
- - 16 - -
178 27 13 2 15
3,093 395 272 44 6
(151) - - - -
50 - - - -
(101) - - - -
(1,851) - - - -
- - (3) - -
- - - - (50)
- - (125) - -
(201) (103) - (11) -
(468) (137) (80) (30) (56)
- - - - -
- - - - -
(326) (5) (5) - -
(73) (132) (32) (1) (3)
(3,020) (377) (245) (42) (109)
73 18 27 2 (103)
152 8 (13) - (57)
3 - - - -
228 26 14 2 (160)
Group GBPm
Inter-segment Total
(revenues)/ continuing Discontinued
expenses operations operations Total
- 4,941 625 5,566
- (201) (92) (293)
- 4,740 533 5,273
211 6,071 56 6,127
- 3,190 - 3,190
- 170 - 170
- 2,457 - 2,457
23 245 - 245
- (1) - (1)
- 25 - 25
(512) (33) 33 -
(278) 16,864 622 17,486
- (6,612) (390) (7,002)
- 184 52 236
- (6,428) (338) (6,766)
- (2,618) - (2,618)
- (157) - (157)
- (50) - (50)
- (2,053) - (2,053)
(70) (650) (110) (760)
(8) (2,760) (53) (2,813)
(156) (156) - (156)
- - (3) (3)
- (360) - (360)
512 36 (36) -
278 (15,196) (540) (15,736)
- 1,668 82 1,750
- (73) 7 (66)
- (60) - (60)
- 1,535 89 1,624
(iii) Gross earned premiums
GBPm
Six months ended South United
30 June 2008 Africa States Europe Other Total
Long-term business -
insurance contracts 526 1,644 126 - 2,296
Long-term business -
investment contracts with
discretionary
participation features 264 - - - 264
Gross earned premiums 790 1,644 126 - 2,560
Long-term business - other
investment contracts
recognised as deposits 597 116 3,938 - 4,651
GBPm
South United
Africa States Europe Other Total
Six months ended 30 June
2007
Long-term business -
insurance contracts 518 1,355 117 - 1,990
Long-term business -
investment contracts with
discretionary
participation features 212 - - - 212
Gross earned premiums 730 1,355 117 - 2,202
Long-term business - other
investment contracts
recognised as deposits 556 83 4,431 - 5,070
GBPm
South United
Year ended 31 December 2007Africa States Europe Other Total
Long-term business -
insurance contracts 1,048 3,148 230 - 4,426
Long-term business -
investment contracts with
discretionary
participation features 515 - - - 515
Gross earned premiums 1,563 3,148 230 - 4,941
Long-term business - other
investment contracts
recognised as deposits 1,315 177 8,450 - 9,942
(iv) Funds under management
GBPm
South United
At 30 June 2008 Africa States Other Total
Europe
Long-term business
policyholder funds 18,808 13,937 42,665 167 75,577
Unit trusts and mutual
funds 5,639 4,878 13,249 2,346 26,112
Third party client funds 9,317 141,613 - 3,453 154,383
Total client funds
under management 33,764 160,428 55,914 5,966 256,072
Shareholder funds 1,838 176 1,348 - 3,362
Total funds under
management 35,602 160,604 57,262 5,966 259,434
GBPm
South United
At 30 June 2007 Africa States Other Total
Europe
Long-term business
policyholder funds 20,195 14,056 42,496 72 76,819
Unit trusts and mutual
funds 5,782 5,577 11,703 2,468 25,530
Third party client
funds 12,480 138,470 1,926 4,064 156,940
Total client funds
under management 38,457 158,103 56,125 6,604 259,289
Shareholder funds 2,167 233 1,437 - 3,837
Total funds under
management 40,624 158,336 57,562 6,604 263,126
GBPm
South United
At 31 December 2007 Other Total
Africa States Europe
Long-term business
policyholder funds 22,469 14,822 44,674 122 82,087
Unit trusts and mutual
funds 6,693 5,260 14,416 2,535 28,904
Third party client
funds 10,517 149,850 - 3,833 164,200
Total client funds
under management 39,679 169,932 59,090 6,490 275,191
Shareholder funds 2,042 191 1,454 - 3,687
Total funds under
management 41,721 170,123 60,544 6,490 278,878
4 Operating profit adjusting items
(i) Summary of adjusting items
In determining the adjusted operating profit of the Group adjustments are made
to profit before tax to reflect the directors` view of the underlying long-term
performance of the Group. These items are summarised below:
Six months ended 30 June 2008 Notes South Africa United States
Income/(expense)
Goodwill impairment and impact
of acquisition accounting 4(ii) - (13)
Profit/(loss) on disposal of
subsidiaries, associated
undertakings and strategic
investments 4(iii) (12) (1)
Short-term fluctuations in
investment return 4(iv) 77 (82)
Investment return adjustment for
Group equity and debt
instruments held in life funds 4(v) 150 -
Dividends declared to holders of
perpetual preferred callable
securities 4(vi) - -
US Asset Management equity plans
and minority holders 4(viii) - 5
Fair value gains on Group debt
instruments 4(ix) - -
Total adjusting items 215 (91)
Tax on adjusting items 5(iii) (8) (7)
Minority interest in adjusting items 13 (5)
Total adjusting items after tax
and minority interests 220 (103)
GBPm
Six months ended 30 June 2008 Europe Corporate Total
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (114) - (127)
Profit/(loss) on disposal of subsidiaries,
associated undertakings and strategic
investments 75 - 62
Short-term fluctuations in investment return 9 - 4
Investment return adjustment for Group
equity and debt instruments held in life funds - - 150
Dividends declared to holders of perpetual
preferred callable securities - 22 22
US Asset Management equity plans and
minority holders - - 5
Fair value gains on Group debt instruments - 40 40
Total adjusting items (30) 62 156
Tax on adjusting items 18 (17) (14)
Minority interest in adjusting items - - 8
Total adjusting items after tax and minority
interests (12) 45 150
Six months ended 30 June 2007 Notes South Africa United States
Income/(expense)
Goodwill impairment and impact of
acquisition accounting 4(ii) - (18)
Profit on disposal of
subsidiaries, associated
undertakings and strategic
investments 4(iii) 1 6
Short-term fluctuations in
investment return 4(iv) 125 (17)
Investment return adjustment for
Group equity and debt instruments
held in life funds 4(v) 2 -
Dividends declared to holders of
perpetual preferred callable
securities 4(vi) - -
Closure of unclaimed shares trusts4(vii) - -
Total adjusting items 128 (29)
Tax on adjusting items 5(iii) (23) 10
Minority interest in adjusting items 11 -
Total adjusting items after tax
and minority interests 116 (19)
GBPm
Six months ended 30 June 2007 Europe Corporate Total
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (92) - (110)
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments - - 7
Short-term fluctuations in investment return 7 - 115
Investment return adjustment for Group
equity and debt instruments held in life funds - - 2
Dividends declared to holders of perpetual
preferred callable securities - 22 22
Closure of unclaimed shares trusts - (12) (12)
Total adjusting items (85) 10 24
Tax on adjusting items 17 (7) (3)
Minority interest in adjusting items - - 11
Total adjusting items after tax and minority
interests (68) 3 32
Notes South Africa United States
Year ended 31 December 2007
Income/(expense)
Goodwill impairment and impact
of acquisition accounting 4(ii) - (24)
Profit on disposal of
subsidiaries, associated
undertakings and strategic
investments 4(iii) 1 8
Short-term fluctuations in
investment return 4(iv) 195 (55)
Investment return adjustment for
Group equity and debt
instruments held in life funds 4(v) 14 -
Dividends declared to holders of
perpetual preferred callable
securities 4(vi) - -
Closure of unclaimed shares
trusts 4(vii) 13 -
US Asset Management equity plans
and minority holders 4(viii) - 11
Fair value gains on Group debt
instruments 4(ix) - -
Total adjusting items 223 (60)
Tax on adjusting items 5(iii) (101) 30
Minority interest in adjusting items 23 (11)
Total adjusting items after tax
and minority interests 145 (41)
GBPm
Europe Corporate Total
Year ended 31 December 2007
Income/(expense)
Goodwill impairment and impact of
acquisition accounting (218) - (242)
Profit on disposal of subsidiaries,
associated undertakings and strategic
investments 16 - 25
Short-term fluctuations in investment return 55 - 195
Investment return adjustment for Group
equity and debt instruments held in life funds - - 14
Dividends declared to holders of perpetual
preferred callable securities - 40 40
Closure of unclaimed shares trusts - (12) 1
US Asset Management equity plans and
minority holders - - 11
Fair value gains on Group debt instruments - 29 29
Total adjusting items (147) 57 73
Tax on adjusting items 51 (9) (29)
Minority interest in adjusting items - - 12
Total adjusting items after tax and minority
interests (96) 48 56
(ii) Goodwill impairment and impact of acquisition accounting
In applying acquisition accounting in accordance with IFRS deferred acquisition
costs and deferred revenue are not recognised. These are reversed in the
acquisition balance sheet and replaced by goodwill, other intangible assets and
the value of the acquired present value of in-force business (`acquired PVIF`).
In determining its adjusted operating profit the Group recognises deferred
revenue and acquisition costs in relation to policies sold by acquired
businesses pre-acquisition, and excludes the impairment of goodwill and the
amortisation of acquired other intangibles and acquired PVIF.
Goodwill impairment and acquisition accounting adjustments to adjusted
operating profit are summarised below:
Six months ended 30 June 2008 South Africa United States Europe
Amortisation of acquired PVIF
Long-term business - 13 126
Amortisation of acquired deferred
costs and revenue
Long-term business - - (45)
Amortisation of other acquired
intangible assets
Long-term business - - 32
Asset management - - 2
Banking - - 3
Release of acquisition balance
sheet provisions
Long-term business - - (4)
- 13 114
GBPm
Six months ended 30 June 2008 Corporate Total
Amortisation of acquired PVIF
Long-term business - 139
Amortisation of acquired deferred costs and revenue
Long-term business - (45)
Amortisation of other acquired intangible assets
Long-term business - 32
Asset management - 2
Banking - 3
Release of acquisition balance sheet provisions
Long-term business - (4)
Six months ended 30 June 2007 South Africa United States Europe
Amortisation of acquired PVIF
Long-term business - 18 132
Amortisation of acquired deferred
costs and revenue
Long-term business - - (65)
Asset management - - 3
Amortisation of other acquired
intangible assets
Long-term business - - 29
Asset management - - 2
Banking - - 2
Release of acquisition balance
sheet provisions
Long-term business - - (7)
Asset management - - (2)
Banking - - (2)
- 18 92
GBPm
Six months ended 30 June 2007 Corporate Total
Amortisation of acquired PVIF
Long-term business - 150
Amortisation of acquired deferred costs and revenue
Long-term business - (65)
Asset management - 3
Amortisation of other acquired intangible assets
Long-term business - 29
Asset management - 2
Banking - 2
Release of acquisition balance sheet provisions
Long-term business - (7)
Asset management - (2)
Banking - (2)
- 110
Year ended 31 December 2007 South Africa United States Europe
Amortisation of acquired PVIF
Long-term business - 24 266
Amortisation of acquired deferred
costs and revenue
Long-term business - - (112)
Asset management - - 6
Amortisation of other acquired
intangible assets
Long-term business - - 60
Asset management - - 5
Banking - - 5
Release of acquisition balance
sheet provisions
Long-term business - - (7)
Asset management - - (3)
Banking - - (2)
- 24 218
GBPm
Year ended 31 December 2007 Corporate Total
Amortisation of acquired PVIF
Long-term business - 290
Amortisation of acquired deferred costs and revenue
Long-term business - (112)
Asset management - 6
Amortisation of other acquired intangible assets
Long-term business - 60
Asset management - 5
Banking - 5
Release of acquisition balance sheet provisions
Long-term business - (7)
Asset management - (3)
Banking - (2)
- 242
(iii) Profit on disposal of subsidiaries, associated undertakings and strategic
investments On 11 June 2008, the Group completed the disposal of its
controlling shareholding in Palladyne, a European asset management business,
resulting in a profit on disposal of GBP17 million.
Part of the Europe banking business, Skandia`s Nordic vehicle finance
operation, SkandiaBanken Bilfinans, was sold during the six months ended 30
June 2008, resulting in a profit on disposal of GBP58 million.
During 2007 the Europe banking subsidiary sold its Danish operation. An
accounting profit on sale of GBP16 million was recognised. The US Asset
Management business disposed of its interests in certain affiliate asset
managers, resulting in a profit on disposal of GBP8 million in 2007.
The Group has closed its project to develop a direct financial services
capability in South Africa due to adverse market conditions. Costs relating to
the closure amounting to GBP13 million have been excluded from the adjusted
operating profit.
Profits on the disposal of subsidiaries, associated undertakings and strategic
investments are analysed below:
GBPm
Six
months
ended 30
June 2008 South Africa United States Europe Corporate Total
Long-term
business (13) - - - (13)
Asset
managemen
t - (1) 17 - 16
Banking 1 - 58 - 59
GBPm
Six
months
ended 30
June 2007 South Africa United States Europe Corporate Total
Long-term
business 1 6 - - 7
GBPm
Year
ended 31
December
2007 South Africa United States Europe Corporate Total
Long-term
business - 8 - - 8
Banking 1 - 16 - 17
(iv) Long-term investment return
Profit before tax includes actual investment returns earned on the shareholder
assets of the Group. Adjusted operating profit is stated after recalculating
shareholder asset investment returns based on a long-term investment return
rate. The difference between the actual and the long-term investment returns
are short-term fluctuations in investment return.
Long-term rates of return are based on achieved real rates of return
appropriate to the underlying asset base, adjusted for current inflation
expectations and consensus economic investment forecasts, and are reviewed
frequently, usually annually, for appropriateness. These rates of return have
been selected with a view to ensuring that returns credited to adjusted
operating profit are consistent with the actual returns expected to be earned
over the long-term.
For the South Africa long-term business, the return is applied to an average
value of investible shareholders` assets. For US and Europe long-term
businesses, the return is applied to average investible assets.
For all businesses mis-matches attributed to the timing of the recognition of
policyholder tax and related receipts from policyholders are eliminated with
reference to the historic net gains/(losses) in respect of this item.
6 months ended 6 months ended Year ended
30 June 30 June 31 December
Long-term investment rates 2008 2007 2007
South Africa long-term
business 16.6% 15.6% 15.6%
United States long-term
business 5.9% 6.0% 5.7%
Europe long-term business 4.8% 4.8% 4.9%
Analysis of short-term fluctuations in investment return
GBPm
Six
months
ended 30
June 2008 South Africa United States Europe Corporate Total
Long-term
business
Actual
investment
return
attributable to
shareholders 197 90 14 - 301
Less:
long-term
investment
return (120) (172) (5) - (297)
Total
short-term
fluctuations in
investment
return 77 (82) 9 - 4
GBPm
Six
months
ended 30
June 2007 South Africa United States Europe Corporate Total
Long-term
business
Actual
investment
return
attributable
to
shareholders 229 309 10 - 548
Less:
long-term
investment
return (104) (326) (3) - (433)
Total
short-term
fluctuations
in
investment
return 125 (17) 7 - 115
GBPm
Year
ended 31
December
2007 South Africa United States Europe Corporate Total
Long-term
business
Actual
investment
return
attributable
to
shareholders 416 527 61 - 1,004
Less:
long-term
investment
return (221) (582) (6) - (809)
Total
short-term
fluctuations
in
investment
return 195 (55) 55 - 195
The actual investment return attributable to shareholders for the US long-term
business reflects total investment income, as a distinction is not drawn
between shareholder and policyholder funds.
(v) Investment return adjustment for Group equity and debt instruments held in
life funds Adjusted operating profit includes investment returns on
policyholder investments in Group equity and debt instruments by the Group`s
life funds. These include investments in the Company`s ordinary shares, and the
subordinated liabilities and ordinary securities of the Group`s South Africa
banking subsidiary. These investment returns are eliminated within the
consolidated income statement in arriving at profit before tax, but are
included in adjusted operating profit. For the six months ended 30 June 2008
the investment return adjustment decreased adjusted operating profit by GBP150
million (six months ended 30 June 2007: decrease of GBP2 million, year ended 31
December 2007: decrease of GBP14 million).
(vi) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group`s perpetual preferred callable
securities were GBP22 million for the six months ended 30 June 2008 (six months
ended 30 June 2007: GBP22 million, year ended 31 December 2007: GBP40 million).
These are recognised in finance costs on an accruals basis for the purpose of
determining adjusted operating profit. In the IFRS financial statements this
cost is recognised in equity.
(vii) Closure of unclaimed shares trusts
During 2006 Old Mutual announced the closure of the Old Mutual South Africa
Unclaimed Shares Trust (UST) and similar trusts set up in Namibia, Zimbabwe,
Malawi and Bermuda. Proceeds of sale of the Old Mutual plc shares held by those
trusts were remitted to Old Mutual plc in 2006 and 2007. Old Mutual intends to
use substantially all of the proceeds realised to discharge late claims in cash
for a further period of three years (to 31 August 2009), to fund good causes in
the jurisdictions of the trust concerned or to enhance benefits for certain
specific groups of policyholders of the Group`s South African and Namibian life
businesses. Provisions are held in this regard.
During 2007 payments of the proceeds were made by the trusts to Old Mutual plc.
These payments resulted in the realisation of foreign exchange losses of GBP14
million in the year ended 31 December 2007. Furthermore, as a result of
remeasurement of certain provisions for obligations, an amount of GBP13 million
was released in the year ended 31 December 2007. Consistent with the treatment
of the original sales proceeds and costs in 2006, these amounts were excluded
from adjusted operating profit. During 2008 the capital gains payable by the
unclaimed share trusts were settled.
(viii) US Asset Management equity plans and minority interests
During 2007, US Asset Management entered into a number of new long-term
incentive arrangements with certain of its asset management affiliates.
In accordance with IFRS requirements the cost of these schemes is disclosed as
being attributable to minority interests. However, this is treated as a
compensation expense in determining adjusted operating profit. The amount
recognised in relation to this for the six months ended 30 June 2008 was GBP5
million (six months ended 30 June 2007: nil, year ended 31 December 2007: GBP11
million).
The Group has issued put options to employees as part of some of its US
affiliate incentive schemes. The impact of revaluing these instruments is
recognised in accordance with IFRS, but excluded from adjusted operating
profit. As at 30 June 2008 these instruments were revalued, the impact of which
was less than GBP1 million (six months ended 30 June 2007: less than GBP1
million, year ended 31 December 2007: less than GBP1 million).
(ix) Fair value gains/losses on Group debt instruments
The significant widening of credit spreads since the second half of 2007 has
led to a reduction in the market price of the Group`s debt instruments. This
decline in market price has resulted in a gain of GBP40 million (six months
ended 30 June 2007: nil, year ended 31 December 2007: GBP29 million gain) being
recorded in the Group`s income statement for those instruments that are
recorded at fair value.
In the directors` view, these gains are not reflective of the underlying
performance of the Group and will reverse over time. The gains/losses have
therefore been excluded from adjusted operating profit.
5 Income tax expense
(i) Analysis of total income tax expense
GBPm
6 months ended
6 months ended 30 June Year ended
30 June 2007 31 December
2008 Restated 2007
Current tax
United Kingdom tax -
Corporation tax 96 56 436
- Double tax relief (93) (28) (399)
Overseas tax - South Africa 129 117 379
- United States (7) 7 26
- Europe 39 30 73
Secondary Tax on
Companies (STC) 4 5 65
Prior year adjustments 18 2 (25)
Total current tax 186 189 555
Deferred tax
Origination of temporary
differences (45) 97 (58)
Changes in tax rates/bases (5) (11) (13)
Write down/(recognition)
of deferred tax assets 27 1 (5)
Total deferred tax (23) 87 (76)
Total income tax expense 163 276 479
(ii) Reconciliation of total income tax expense
GBPm
6 months ended
6 months ended 30 June Year ended
30 June 2007 31 December
2008 2007
Restated
Profit before tax 835 851 1,668
Tax at standard average
rate of 28.5% (2007: 30%) 238 255 500
Different tax rate or
basis on overseas
operations 8 (7) (20)
Untaxed and low taxed
income (128) (69) (154)
Disallowable expenses 23 17 88
Net movement on deferred
tax assets not recognised 34 (5) (38)
Effect on deferred tax of
changes in tax rates (5) (10) (18)
STC 41 11 47
Income tax attributable
to policyholder returns (46) 81 51
Other (2) 3 23
Total income tax expense 163 276 479
(iii) Income tax on
adjusted operating profit GBPm
6 months ended
30 June Year ended
6 months ended
30 June 2007 31 December
2007
2008 Restated
Total income tax expense 163 276 479
Tax on adjusting items
Impact of acquisition
accounting 20 22 65
Profit on disposal of
subsidiaries, associated
undertakings and
strategic investments 1 - (10)
Short-term fluctuations
in investment return (18) (18) (40)
Income tax attributable
to policyholders returns 66 (106) (60)
STC on dividends paid - - (35)
Tax on dividends declared
to holders of perpetual
preferred callable
securities recognised in equity (6) (7) (9)
Fair value gains on group
debt instruments (11) - -
Income tax on adjusted
operating profit 215 167 390
6 Earnings and earnings per share
(i) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the financial
period attributable to ordinary equity shareholders by the weighted average
number of ordinary shares in issue during the period excluding own shares held
in policyholder funds, ESOP trusts, Black Economic Empowerment trusts and other
related undertakings.
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2007
2008 2007
Profit for the financial
period attributable to
equity holders of the
parent from continuing operations 539 456 929
Profit for the financial
period attributable to
equity holders of the
parent from discontinued
operations 10 27 43
Profit for the financial
period attributable to
equity holders of the parent 549 483 972
Dividends declared to
holders of perpetual
preferred callable
securities (16) (15) (31)
Profit attributable to
ordinary equity holders 533 468 941
Total dividends declared to holders of perpetual preferred callable securities
of GBP22 million (six months ended 30 June 2007: GBP22 million, year ended 31
December 2007: GBP40 million) for the six months ended 30 June 2008 are stated
net of tax credits of GBP6 million (six months ended 30 June 2007: GBP7
million, year ended 31 December 2007: GBP9 million).
GBPm
6 months ended 6 months ended Year ended
30 June 30 June
2008 2007 31 December 2007
Weighted average
number of ordinary
shares in issue 5,311 5,503 5,492
Shares held in
charitable
foundations (21) (20) (20)
Shares held in ESOP
trusts (45) (76) (61)
Adjusted weighted
average number of
ordinary shares 5,245 5,407 5,411
Shares held in life
funds (239) (292) (282)
Shares held in Black
Economic Empowerment
trusts (235) (235) (235)
Weighted average
number of ordinary
shares 4,771 4,880 4,894
Basic earnings per
ordinary share from
continuing
operations (pence) 11.0 9.0 18.3
Basic earnings per
ordinary share from
discontinued
operations (pence) 0.2 0.6 0.9
Basic earnings per
ordinary share
(pence) 11.2 9.6 19.2
Diluted earnings per share recognises the dilutive impact of share options held
in ESOP trusts and Black Economic Empowerment trusts which are currently in the
money in the calculation of the weighted average number of shares, as if the
relevant shares were in issue for the full period.
Millions
6 months ended 6 months ended Year ended
30 June 30 June
31 December 2007
2008 2007
Weighted average
number of ordinary shares 4,771 4,880 4,894
Adjustments for
share options held
by ESOP trusts 51 69 63
Adjustments for
shares held in Black
Economic Empowerment trusts 235 235 235
5,057 5,184 5,192
Diluted earnings per
ordinary share from
continuing
operations (pence) 10.3 8.5 17.3
Diluted earnings per
ordinary share from
discontinued
operations (pence) 0.2 0.5 0.8
Diluted earnings per
ordinary share (pence) 10.5 9.0 18.1
(ii) Adjusted operating earnings per ordinary share
Adjusted operating earnings per ordinary share is determined based on adjusted
operating profit. Adjusted operating profit represents the directors` view of
the underlying long-term performance of the Group. For long-term and general
insurance business adjusted operating profit is based on a long-term investment
return. It includes investment returns on life funds` investments in Group
equity and debt instruments and is stated net of income tax attributable to
policyholder returns. For the US Asset Management business it includes
compensation costs in respect of certain long-term incentive schemes defined as
minority interests in accordance with IFRS. For all businesses, adjusted
operating profit excludes goodwill impairment, the impact of acquisition
accounting, revaluations of put options related to long-term incentive schemes,
the impact of closure of unclaimed shares trusts, profit/(loss) on disposal of
subsidiaries, associated undertakings and strategic investments, dividends
declared to holders of perpetual preferred callable securities,
income/(expense) from closure of unclaimed shares trusts and fair value gains
on Group debt instruments.
The reconciliation of profit for the financial period to adjusted operating
profit after tax attributable to ordinary equity holders is as follows:
GBPm
Continuing Discontinued
Six months ended 30 June 2008 operations operations Total
Profit for the financial period
attributable to equity holders of
the parent 539 10 549
Adjusting items (156) 10 (146)
Tax on adjusting items 14 - 14
Minority interest on adjusting items (8) (4) (12)
Adjusted operating profit after tax
attributable to ordinary equity
holders 389 16 405
Adjusted weighted average number of
ordinary shares (millions) 5,245
Adjusted operating earnings per
ordinary share (pence) 7.4 0.3 7.7
GBPm
Continuing Discontinued
Six months ended 30 June 2007 operations operations Total
Profit for the financial period
attributable to equity holders of
the parent 456 27 483
Adjusting items (24) (11) (35)
Tax on adjusting items 3 1 4
Minority interest on adjusting items (11) 1 (10)
Adjusted operating profit after tax
attributable to ordinary equity holders 424 18 442
Adjusted weighted average number of
ordinary shares (millions) 5,407
Adjusted operating earnings per
ordinary share (pence) 7.8 0.4 8.2
GBPm
Continuing Discontinued
Year ended 31 December 2007 operations operations Total
Profit for the financial year
attributable to equity holders of
the parent 929 43 972
Adjusting items (73) 7 (66)
Tax on adjusting items 29 (3) 26
Minority interest on adjusting items (12) (6) (18)
Adjusted operating profit after tax
attributable to ordinary equity holders 873 41 914
Adjusted weighted average number of
ordinary shares (millions) 5,411
Adjusted operating earnings per
ordinary share (pence) 16.1 0.8 16.9
7 Dividends
Dividends declared and paid were as follows:
GBPm
6 months ended 6 months ended
30 June 30 June Year ended
2007 31 December 2007
2008
2006 Final dividend
paid - 4.15p per 10p share - 218 218
2007 Interim
dividend paid - 2.3p
per 10p share - - 115
2007 Final dividend
paid - 4.55p per 10p share 227 - -
Dividends to
ordinary equity
holders 227 218 333
Dividends declared
to holders of
perpetual preferred
callable securities 22 22 40
Dividend payments
for the period 249 240 373
Dividends paid to ordinary equity holders, as above, are calculated using the
number of shares in issue at the record date, less treasury shares held in ESOP
trusts, life funds of Group companies, Black Economic Empowerment trusts and
related undertakings.
As a consequence of the exchange control arrangements in place in certain
African territories, dividends to ordinary equity holders on the branch
registers of those countries (or, in the case of Namibia, the Namibian section
of the principal register) are settled through Dividend Access Trusts
established for that purpose.
The directors have declared a 2008 interim dividend of 2.45p per share (2007
interim: 2.3p per share), which will be paid on 28 November 2008 to all
ordinary equity holders on the register at the close of business on 7 November
2008, being the record date for the dividend. In accordance with IFRS
requirements, no provision has been recognised in respect of this dividend.
In March 2008, GBP22 million was declared and paid to holders of perpetual
preferred callable securities (March 2007: GBP22 million, November 2007: GBP18
million).
8 Discontinued operations, assets and liabilities held-for-sale
Discontinued operations
The results of the Group`s South Africa general insurance business, Mutual &
Federal, are shown as a discontinued operation in these interim financial
statements. The Group is actively seeking a buyer for Mutual & Federal which is
expected to result in the sale of a controlling interest in Mutual & Federal.
An analysis of the results of Mutual & Federal is shown in the segmental income
statement in note 3 to the Group financial statements.
Further analysis of the results of discontinued operations is given below.
(i) Reconciliation of adjusted operating profit from discontinued operations to
profit after tax from discontinued operations
GBPm
6 months ended 6 months ended
30 June 30 June Year ended
2007 31 December 2007
2008
Adjusted operating
profit from
discontinued
operations 28 36 89
Adjusting items from
discontinued
operations (10) 11 (7)
Profit for the
financial year
before tax from
discontinued
operations 18 47 82
Income tax expense
on discontinued
operations (5) (11) (25)
Profit for the
financial period
after tax on
discontinued
operations 13 36 57
(ii) Adjusting items from discontinued operations
GBPm
6 months ended 6 months ended
30 June 30 June Year ended
2007 31 December 2007
2008
Goodwill impairment
and impact of
acquisition
accounting - (1) (3)
Short-term
fluctuations in
investment return (10) 12 (4)
Total adjusting
items from
discontinued
operations (10) 11 (7)
Tax on adjusting items - (1) 3
Minority interest in
adjusting items 4 (1) 6
Adjusting items from
discontinued
operations after tax
and minority
interests (6) 9 2
(iii) Adjusted operating profit from discontinued operations attributable to
ordinary equity holders
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2007
2008 2007
Adjusted operating profit
from discontinued
operations 28 36 89
Tax on adjusted operating
profit from discontinued
operations (5) (10) (28)
Adjusted operating profit
after tax from
discontinued operations 23 26 61
Minority interests -
ordinary shares (7) (8) (20)
Adjusted operating profit
after tax from
discontinued operations
attributable to ordinary
equity holders 16 18 41
(iv) Net cash flows from discontinued operations
GBPm
6 months ended 6 months ended Year ended
30 June 30 June
2007 31 December 2007
2008
Operating activities 15 67 66
Investing activities (10) (48) (28)
Financing activities 7 (32) (61)
Net cash
inflow/(outflow) 12 (13) (23)
(v) Non-current assets held-for-sale
GBPm
6 months ended 6 months ended
30 June 30 June Year ended
2007 31 December 2007
2008
Loans and advances 3 365 994
Investments and
securities 327 144 359
Other assets 197 39 232
Derivative financial
instruments - 3 -
Cash and cash
equivalents 39 22 32
566 573 1,617
(vi) Non-current liabilities held-for-sale
GBPm
6 months ended 6 months ended
30 June 30 June Year ended
2007 31 December 2007
2008
General insurance
liabilities 291 - 299
Amounts owed to
other depositors - 502 -
Other liabilities 77 51 115
368 553 414
Europe vehicle finance business
Skandia`s Nordic vehicle finance operation, SkandiaBanken Bilfinans, was sold
to DnB NOR during the six months ended 30 June 2008. As at 31 December 2007 the
assets and liabilities were classified as held-for-sale.
South Africa general insurance business
The assets and liabilities of Mutual & Federal have been shown as non-current
assets and liabilities held-for-sale as at 30 June 2008 and 31 December 2007.
9 Borrowed funds
GBPm
At
At 30 June
30 June 2007 At
Notes 2008 Restated 31 December 2007
Senior debt securities
and term loans 9(i) 449 570 461
Mortgage backed
securities 9(ii) 91 - 103
Subordinated debt
securities 9(iii) 1,696 1,731 1,789
Borrowed funds 2,236 2,301 2,353
(i) Senior debt securities and term loans
GBPm
At
At 30 June
30 June 2007 At
2008 Restated 31 December 2007
Floating rate notes1 75 147 151
Fixed rate notes2 46 57 44
Revolving credit facility3 192 249 161
Term loan and other loans 23 11 26
Investment fund borrowings 113 106 79
Total senior debt securities and
term loans 449 570 461
Senior debt securities and term loans comprise:
1 Floating rate notes:
- GBP12 million note repayable in December 2010, with holders having the option
to elect for early redemption every 6 months with coupon referenced against 6
month LIBOR less 0.50%.
- US$150 million repayable September 2014 at 3 month LIBOR plus 0.63%, repaid 9
June 2008.
- US$50 million repayable September 2011 at 3 month LIBOR plus 0.50%.
- US$10 million repayable September 2009 at 3 month LIBOR plus 0.35%.
- SEK100 million repayable March 2009 at 3 month STIBOR plus 0.20%.
- EUR22 million repayable January 2010 at 3 month EURIBOR plus 0.35%.
- SEK50 million repayable March 2010 at 3 month STIBOR plus 0.38%.
2 Fixed rate notes:
- EUR30 million Euro bond repayable July 2010, capital and interest swapped into
fixed rate US Dollars at 5.28%.
- EUR10 million Euro bond repayable December 2010, capital and interest swapped
into floating rate US Dollars at 3 month LIBOR plus 0.95%.
- EUR20 million Euro bond repayable August 2013, capital and interest swapped
into floating rate US Dollars at 3 month LIBOR plus 1.30%.
The total fair value of the swap derivatives associated with the Senior Notes
is GBP11 million (six months ended 30 June 2007: GBP5 million, year ended 31
December 2007: GBP8 million).
3 Revolving credit facility
The Group has a GBP1,250 million five year multi-currency revolving credit
facility, which had an original maturity date of September 2010. On 18 August
2007 syndicate banks agreed to extend the maturity date of GBP1,232 million
until September 2012. At 30 June 2008 GBP443 million (six months ended 30 June
2007: GBP424 million, year ended 31 December 2007: GBP413 million) of this
facility was utilised, GBP192 million (six months ended 30 June 2007:
GBP249 million, year ended 31 December 2007: GBP161million) in the form of
drawn debt and GBP264 million (six months ended 30 June 2007: GBP175 million,
year ended 31 December 2007: GBP252m) in the form of irrevocable letters of
credit.
(ii) Mortgage backed securities
GBPm
At At At
30 June 30 June 31 December
2008 2007 2007
R291 million notes (class A1) repayable
18 November 2039 (11.467%)1 19 - 21
R1.4 billion notes (class A2A)
repayable 18 November 2039
(11.817%)1 64 - 73
R98 million notes (class B note)
repayable 18 November 2039 (12.067%)1 5 - 5
R76 million notes (class C note)
repayable 18 November 2039 (12.317%)1 3 - 4
91 - 103
1 Issued on 10 December 2007 by the Group`s South African banking business and
are callable on 18 November 2012.
(iii) Subordinated debt securities
GBPm
At At At
30 June 30 June 31 December
2008 2007 2007
Banking
US$18 million repayable 31 August 2009
(6 month LIBOR less 1.5%)1 9 9 9
R4.0 billion repayable 9 July 2012
(13.0%) - Repaid - 300 -
R1.5 billion repayable 24 April 2016
(7.85%)2 86 100 103
R1.8 billion repayable 20 September
2018 (9.84%)3 107 131 135
R515 million repayable on 4 December
2008 (13.5%)4 33 38 39
R500 million repayable on 30 December
2010 (8.38%)5 28 34 34
R650 million repayable 8 February 2017
(9.03%)6 39 46 47
R1.7 billion repayable 8 February 2019
(8.9%)7 98 119 123
R2.0 billion repayable 6 July 2022 (3
month JIBAR plus 0.47%)8 132 - 151
R500 million repayable 15 August 2017
(3 month JIBAR plus 0.45%)9 33 - 37
R1.0 billion repayable 17 September
2015 (10.54%)10 61 - 77
R500 million repayable 14 December 2017
(3 month JIBAR plus 0.70%) 11 32 - 37
R120 million repayable 14 December 2017
(10.38%)12 7 - 9
R487 million repayable 20 November 2018
(15.05%)13 30 - -
R700 million repayable 20 November 2018
(JIBAR plus 4.75%)14 46 - -
741 777 801
Other
R3.0 billion repayable 27 October 2020
(8.9%)15 193 212 220
GBP300 million repayable 21 January
2016 (5.0%)16 273 286 291
R250 million preference shares
repayable 9 June 2011 17 16 18 18
750 million repayable 18 January 2017
(4.5%)18 522 492 519
1,004 1,008 1,048
Less: banking subordinated debt
securities held by other Group
companies (49) (54) (60)
Total subordinated liabilities 1,696 1,731 1,789
The subordinated notes rank behind the claims against the Group depositors and
other unsecured, unsubordinated creditors. None of the Group`s subordinated
notes are secured.
1 This instrument is matched either by advances to clients or covered against
exchange rate fluctuations
2 Unsecured secondary callable note was issued 24 April 2005 with a call date
of 24 April 2011
3 Unsecured secondary callable note was issued 20 September 2006 at R1.5bn with
a call date of 20 September 2013. On 18 May 2007 an additional R0.3bn was
issued.
4 Unsecured callable bonds issued 10 June 2002
5 Unsecured callable bonds issued 30 March 2006
6 Unsecured secondary callable note was issued 8 February 2007 with a call date
of 8 February 2012
7 Unsecured secondary callable note was issued 8 February 2007 at R1.0bn. On 19
March 2007 an additional R0.7bn was issued.
8 Unsecured secondary capital callable note issued 6 July 2007 and has a call
date of 6 July 2017
9 This bond issued on 15 August 2007 is an unsecured secondary capital callable
floating rate note with a call date 15 August 2012
10 This bond issued on 17 September 2007 is an unsecured fixed rate note with a
term of 13 years (non-call 8).
11 This bond issued on 14 December 2007 is a 10 year (non-call 5) floating rate
note. After its call date on 14 December 2012 its terms become JIBAR plus 1.70%
until maturity.
12 This bond issued on 14 December 2007 is a 10 year (non-call 5) fixed rate
note. After its call date its terms become floating 3 month JIBAR plus initial
margin over mid swaps plus 1.0% until maturity.
13 This bond issued on 20 May 2008 is a perpetual (non-call 10 year) fixed rate
note with a call date on 20 November 2018
14 This bond issue on 20 May 2008 is a perpetual (non-call 10 year) floating
rate note with a call date of 20 November 2018
15 These bonds have a maturity date of 27 October 2020 and pay a coupon of
8.92% to 27 October 2015 and 3 month JIBAR plus 1.59% thereafter. The Group has
the option to repay the bonds at par on 27 October 2015 and at 3 monthly
intervals thereafter.
16 These bonds, issued on 20 January 2006, have a maturity date of 21 January
2016 and pay a coupon of 5.0% to 21 January 2011 and 6 month LIBOR plus 1.13%
thereafter. The coupon on the bonds was swapped into floating rate of 6 month
STIBOR+0.50%. The Group has the option to repay the bonds at par on 21 January
2011 and at 6 monthly intervals thereafter.
17 These preference shares are redeemable on 9 June 2011 and pay a variable
cumulative coupon of 61.0% of the Prime Rate as quoted by Nedbank Limited. The
Group has the option to redeem the shares at par at any time before the final
redemption date but after giving an agreed period of notice.
18 This bond, issued on 16 January 2007, has a maturity date of 18 January 2017
and pays a coupon of 4.5 per cent to 17 January 2012 and six month EURIBOR plus
0.96 per cent thereafter. The principal and coupon on the bond was swapped
equally into Sterling and US Dollars with coupons of six month LIBOR plus
0.3425 per cent and six month US LIBOR plus 0.3095 per cent respectively.
The Group has the option to repay the bonds at par on 17 January 2012 and at
six monthly intervals thereafter.
10 Commitments and contingent liabilities
GBPm
At At At
30 June 30 June 31 December
2008 2007 2007
Guarantees and assets pledged as
collateral security 1,315 1,361 1,489
Irrevocable letters of credit 286 398 426
Secured lending 1,038 804 1,052
Other contingent liabilities 151 296 136
Nedbank structured financing
Historically a number of the Group`s South Africa banking businesses entered
into structured finance transactions with third parties using the tax base of
these companies. Pursuant to the terms of the majority of these transactions,
the underlying third party has contractually agreed to accept the risk of any
tax being imposed by the South African Revenue Service (SARS), although the
obligation to pay in the first instance rests with the Group`s companies. It is
only in limited cases where, for example, the credit quality of a client
becomes doubtful, or where the client has specifically contracted out of the
re-pricing of additional taxes, that the recovery from a client could be less
than the liability that could arise on assessment, in which case provisions are
made. SARS has examined the tax aspects of some of these types of structures
and SARS could assess these structures in a manner different to that initially
envisaged by the contracting parties. As a result Group companies could be
obliged to pay additional amounts to SARS and recover these from clients under
the applicable contractual arrangements.
Skandia Liv
Livoasakringsaktiebolaget Skandia (publ) (Skandia Liv) has submitted claims to
Skandia relating to compensation for alleged prohibited profit distributions.
These distributions relate to the sale of Skandia Liv`s asset management
business by Skandia to Den Norske Bank in 2002. The dispute is in arbitration,
a ruling is expected in the latter part of 2008.
American Skandia
The sale of American Skandia to Prudential Financial contained customary
representations and warranties. The indemnity in respect of this is limited to
US$1 billion. Investigations by various US regulators have given rise to
potential settlements and claims in relation to market timing. American
Skandia`s exposure to market timing is part of a wider investigation of the US
industry. The exposure is covered by the aforementioned indemnity which also
covers the matter of American Skandia`s failure to administer the annuitisation
provisions contained in certain contracts. This was an administrative error
made by the American Skandia business between 1996 and 2003.
The exposures referred to above as Skandia Liv and American Skandia have been
provided for in the acquisition accounting.
11 Post balance sheet events
On 1 July 2008, Rogge Global Partners acquired ING Ghent which has funds under
management of $1.5 billion.
European Embedded Value basis supplementary information
For the six months ended 30 June 2008
Income statement on a European embedded value basis
GBPm
6 months ended
6 months ended 30 June Year ended
30 June 2007 31 December
2008 Restated 2007
South Africa
Covered business 224 267 345
Asset management 55 54 98
Banking 320 288 622
599 609 1,065
United States
Covered business (6) (54) 63
Asset management 70 76 162
64 22 225
Europe
Covered business 345 176 350
Asset management 7 12 26
Banking 13 8 14
365 196 390
Other (8) 2 2
1,020 829 1,682
Finance costs (71) (69) (119)
Other shareholders`
income/(expenses) (12) (14) (31)
Adjusted operating profit
before tax* 937 746 1,532
Adjusting items (556) 176 315
EEV profit before tax
(net of income tax
attributable to
policyholder returns) 381 922 1,847
Income tax attributable
to shareholders (42) (164) (472)
EEV profit for the
financial period after
tax from continuing
operations 339 758 1,375
EEV profit for the
financial period after
tax from discontinued
operations 13 36 57
EEV profit for the
financial period after
tax 352 794 1,432
EEV profit for the
financial period
attributable to:
Equity holders of the
parent 216 667 1,155
Minority interests
Continuing ordinary shares 107 94 213
Discontinued ordinary
shares 3 9 14
Preferred securities 26 24 50
EEV profit for the
financial period after
tax 352 794 1,432
* For long-term business and general insurance businesses, adjusted operating
profit is based on a long-term investment return, includes investment returns
on life funds` investments in Group equity and debt instruments, and is stated
net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain
long-term incentive schemes defined as minority interests in accordance with
IFRS. For all businesses, adjusted operating profit excludes goodwill
impairment, the impact of acquisition accounting, put revaluations related to
long-term incentive schemes, the impact of closure of unclaimed shares trusts,
profit/(loss) on disposal of subsidiaries, associated undertakings and
strategic investments, dividends declared to holders of perpetual preferred
callable securities, and fair value (profits)/losses on certain Group debt
movements.
GBPm
6 months ended
6 months ended 30 June Year ended
30 June 2007 31 December
Adjusted operating profit
after tax attributable to
ordinary equity holders
2008 Restated 2007
Adjusted operating profit
before tax 937 746 1,532
Tax on adjusted operating
profit (243) (165) (366)
Adjusted operating profit
after tax from continuing
operations 694 581 1,166
Adjusted operating profit
after tax from
discontinued operations 23 26 61
Adjusted operating profit
after tax 717 607 1,227
Minority interests
Continuing ordinary shares (115) (106) (225)
Discontinued ordinary
shares (7) (8) (20)
Preferred securities (26) (24) (50)
Adjusted operating profit
after tax attributable to
ordinary equity holders 569 469 932
Adjusted operating
earnings per share
Based on adjusted
operating profit from
continuing operations
(pence) 10.5 8.3 16.5
Based on adjusted
operating profit from
discontinued operations
(pence) 0.3 0.4 0.7
Adjusted operating
earnings per share*
(pence) 10.8 8.7 17.2
Basic EEV earnings per
share
Based on EEV profit from
continuing operations
(pence) 4.1 12.4 21.5
Based on EEV profit from
discontinued operations
(pence) 0.2 0.5 0.8
Basic EEV earnings per
ordinary share (pence) 4.3 12.9 22.3
Adjusted weighted average
number of shares -
millions 5,245 5,407 5,411
Weighted average number
of shares - millions 5,010 5,172 5,176
Adjusted operating profit
of the covered business
Adjusted operating profit
for the covered business 563 389 758
South Africa 224 267 345
United States (6) (54) 63
Europe 345 176 350
Tax on adjusted operating
profit for the covered
business 165 75 154
South Africa 54 75 75
United States 30 (18) 21
Europe 81 18 58
Adjusted operating profit
after tax for the covered
business 398 314 604
South Africa 170 192 270
United States (36) (36) 42
Europe 264 158 292
Tax on adjusted operating
profit comprises
Covered business 165 75 154
Other business 78 90 212
Tax on adjusted operating
profit 243 165 366
* Adjusted operating earnings per share is calculated on the same basis as
adjusted operating profit, but is stated after tax and minority interests. It
excludes income attributable to Black Economic Empowerment trusts of listed
subsidiaries. The calculation of the adjusted weighted average number of shares
includes own shares held in policyholders` funds and Black Economic Empowerment
trusts.
Notes to the European embedded value basis supplementary information
For the six months ended 30 June 2008
1 Basis of preparation
This supplementary information has been prepared in accordance with the
European Embedded Value (EEV) Principles issued in May 2004 by the European CFO
Forum and the additional EEV guidance issued in October 2005. The directors
acknowledge their responsibility for the preparation of this supplementary
information.
The results for the six months ended 30 June 2008 and the position at that date
(other than where stated) have been prepared on the same basis as that used in
the 31 December 2007 EEV supplementary statements.
2 Adjustments applied in determining adjusted operating profit
GBPm
6 months ended
6 months ended 30 June Year ended
30 June 2007 31 December
Analysis of adjusting
items 2008 Restated 2007
Income/(expense)
Goodwill impairment and
amortisation of
non-covered business
acquired
intangible
assets (5) 5 (11)
Profit on disposal of
subsidiaries, associated
undertakings and
strategic
investments 62 7 25
Short-term fluctuations
in investment returns
(including economic
assumption
changes) for the covered
business (679) 151 206
Cost of capital
methodology and modelling
changes (1) 3 14
Material revision to
actuarial models - - -
Dividends declared to
holders of perpetual
preferred callable
securities 22 22 40
Closure of unclaimed
share trusts - (12) 1
US Asset Management
equity plans and minority
holders 5 - 11
Fair value gains on Group
debt instruments 40 - 29
Adjusting items (556) 176 315
3 Reconciliation of movements in Group embedded value
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2008 2007 2007
Group embedded value at
beginning of the period 7,869 7,117 7,117
Opening adjustments (67) (67)
Restated Group embedded
value at beginning of the
period 7,869 7,050 7,050
Change in equity arising
in the period
Fair value gains/(losses) (2) 2 21
Net investment hedge (5) 31 (13)
Currency translation
differences/exchange
differences on
translating foreign
operations (414) (212) 116
Aggregate tax effects of
items taken directly to
or transferred from
equity 6 2 13
Other movements (48) 60 29
Net income recognised
directly into equity (463) (117) 166
Profit for the period 216 667 1,155
Total recognised income
and expense for the
period (247) 550 1,321
Dividend for the period (249) (220) (373)
Share buy back (174) - (177)
Net issue of ordinary
share capital by the
Company 4 - 3
Exercise of share options 3 3 9
Fair value equity settled
share options 17 18 36
Group embedded value at
end of the period 7,223 7,401 7,869
4 Components of Group embedded value
GBPm
At At At
30 June 30 June 31 December
2007
2008 2007
Adjusted net worth attributable to
ordinary equity holders of the parent 3,106 3,106 3,431
Equity 7,802 7,359 7,961
Adjustment to include long-term
business on a statutory solvency basis:
South Africa 141 142 147
United States (527) (665) (621)
Europe (2,584) (2,411) (2,581)
Adjustment for market value of life
funds` investments in Group equity and
debt instruments
held in life funds 230 491 428
Adjustment to remove perpetual
preferred callable securities and
accrued dividends (688) (688) (688)
Adjustment to exclude acquisition
goodwill from the covered business:
United States (57) (56) (60)
Europe (1,211) (1,066) (1,155)
Value of in-force business 4,117 4,295 4,438
Value of in-force business before items
listed below 4,565 4,712 4,872
Additional time-value of financial
options and guarantees (50) (49) (50)
Cost of required capital (392) (342) (378)
Minority interest in value of in-force (6) (26) (6)
Group embedded value 7,223 7,401 7,869
Group embedded value per share (pence) 136.9 134.5 145.6
Return on Group embedded value (ROEV)
per annum 14.0% 14.5% 13.2%
Number of shares in issue - millions 5,275 5,505 5,405
The adjustments to include long-term business on a statutory solvency basis
reflect the difference between the net worth of each business on the statutory
basis (as required by the local regulator) and their portion of the Group`s
consolidated equity shareholders` funds. In South Africa, these values exclude
items that are eliminated or shown separately on consolidation (such as
Nedbank, Mutual & Federal and inter company loans). For some European
territories this adjustment excludes the write-off of deferred acquisition
costs, which remain part of adjusted net worth for EEV purposes.
The ROEV is calculated as the adjusted operating profit after tax and minority
interests of GBP569 million (six months ended 30 June 2007: GBP469 million,
year ended 31 December 2007: GBP932 million) divided by the opening group
embedded value. The operating assumption changes of GBP33 million (six months
ended 30 June 2007: GBP84 million) are not annualised.
The impact of marking all debt to market value is an increase of GBP241
million, i.e. 4.6p per share (six months ended 30 June 2007: GBP122 million,
i.e.2.2p per share, year ended 31 December 2007: GBP120 million, i.e. 2.2p per
share).
5. Components of adjusted Group embedded value
GBPm
At At
30 June 30 June At
2008 2007 31 December 2007
Pro forma adjustments to bring
Group investments to market value
Group embedded value 7,223 7,401 7,869
Adjustment to bring listed
subsidiaries to market value 111 1,163 1,163
South Africa banking business 25 951 957
South Africa general insurance
business 86 212 206
Adjustment for present value of
Black Economic Empowerment scheme
deferred
consideration 135 179 179
Adjustment for value of own shares
in ESOP schemes* 83 153 158
Adjusted Group embedded value 7,552 8,896 9,369
Adjusted Group embedded value per
share (pence) 143.2 161.6 173.3
Number of shares in issue -
millions 5,275 5,505 5,405
* Includes adjustment for value of excess own shares in employee share scheme
trusts.
6 Reconciliation of Group embedded value of the covered business to the
adjusted Group embedded value
GBPm
At At At
30 June 30 June 31 December
2008 2007 2007
Embedded value of the covered business 6,153 6,820 6,861
Adjusted net worth* 2,036 2,525 2,423
Value of in-force business** 4,117 4,295 4,438
Adjusted net worth of the asset
management business 1,705 1,556 1,637
South Africa 233 205 232
United States 1,297 1,209 1,245
Europe 175 142 160
Value of the banking business 1,666 2,443 2,716
South Africa (market value) 1,435 2,178 2,411
Europe (adjusted net worth) 231 265 305
Market value of the general insurance
business
South Africa 268 420 405
Net other business 14 (78) (35)
Adjustment for present value of Black
Economic Empowerment scheme deferred
consideration 135 179 179
Adjustment for value of own shares in
ESOP schemes 83 153 158
Perpetual preferred securities (US$
denominated) (458) (458) (458)
Perpetual preferred callable securities (688) (688) (688)
GBP denominated (350) (350) (350)
Euro denominated (338) (338) (338)
Debt (1,326) (1,451) (1,406)
Rand denominated (193) (212) (221)
USD denominated (482) (496) (408)
GBP denominated (323) (325) (272)
SEK denominated (328) (418) (505)
Adjusted Group embedded value 7,552 8,896 9,369
* Adjusted net worth is after the elimination of inter company loans.
** Net of minority interests.
7 Components of embedded value of the covered business
GBPm
At
At At 31
30 June 30 June December
2008 2007 2007
Embedded value of the covered business 6,153 6,820 6,861
Adjusted net worth 2,036 2,525 2,423
Value of in-force business 4,117 4,295 4,438
South Africa
Adjusted net worth 1,203 1,600 1,470
Required capital 1,040 1,131 1,159
Free surplus 163 469 311
Value of in-force business 988 1,178 1,207
Value of in-force business before items
listed below 1,168 1,350 1,392
Additional time-value of financial options
and guarantees - - -
Cost of required capital (174) (167) (179)
Minority interest in value of in-force (6) (5) (6)
United States
Adjusted net worth 340 442 505
Required capital 434 429 424
Free surplus * (94) 13 81
Value of in-force business 451 584 564
Value of in-force business before items
listed below 613 710 703
Additional time-value of financial options
and guarantees (48) (48) (48)
Cost of required capital (114) (78) (91)
Europe
Adjusted net worth 493 483 448
Required capital 342 330 324
Free surplus 151 153 124
Value of in-force business 2,678 2,533 2,667
Value of in-force business before items
listed below 2,784 2,653 2,777
Additional time-value of financial options
and guarantees (2) (1) (2)
Cost of required capital (104) (98) (108)
Minority interest in value of in-force - (21) -
* Capital of GBP45 million was transferred to Old Mutual Bermuda on 31 July
2008. A further amount of GBP105 million was transferred on 5 August 2008.
Adjusted net worth of the covered business excludes acquired intangibles and
goodwill.
8 Analysis of covered business embedded value results (after tax)
Required Free Adjusted
capital surplus net worth
Embedded value of the covered business
at beginning of the period 1,907 516 2,423
Opening fair value adjustments - - -
1,907 516 2,423
New business contribution 100 (299) (199)
Expected return on existing business
return on value of in-force - - -
Expected return on existing business
transfer to net worth - 385 385
Expected release of required capital
transfer to free surplus (108) 108 -
Experience variances 24 (72) (48)
Operating assumption changes - (47) (47)
Recalibration of risk-margins - - -
Expected return on adjusted net worth 42 37 79
Adjusted operating profit after tax 58 112 170
Investment return variances on in-force
business (17) 23 6
Investment return variances on adjusted
net worth - 50 50
Effect of economic assumption changes - (17) (17)
Methodology changes impacting cost of
required capital 2 (2) -
Profit after tax 43 166 209
Exchange rate movements (134) (37) (171)
Change in minority interest - - -
Net transfers from covered business - (425) (425)
Embedded value of the covered business
at end of the period 1,816 220 2,036
GBPm
6 months ended
30 June
2008
Value of
in-force Total
Embedded value of the covered business at
beginning of the period 4,438 6,861
Opening fair value adjustments - -
4,438 6,861
New business contribution 311 112
Expected return on existing business return on
value of in-force 189 189
Expected return on existing business transfer
to net worth (385) -
Expected release of required capital transfer
to free surplus - -
Experience variances 33 (15)
Operating assumption changes 80 33
Recalibration of risk-margins - -
Expected return on adjusted net worth - 79
Adjusted operating profit after tax 228 398
Investment return variances on in-force business (387) (381)
Investment return variances on adjusted net
worth - 50
Effect of economic assumption changes (119) (136)
Methodology changes impacting cost of required
capital (1) (1)
Profit after tax (279) (70)
Exchange rate movements (41) (212)
Change in minority interest (1) (1)
Net transfers from covered business - (425)
Embedded value of the covered business at end
of the period 4,117 6,153
6 months ended
30 June
2007 *
Adjusted Value of Required
net worth in-force Total capital
2,281 4,172 6,453
(181) 114 (67)
2,100 4,286 6,386 1,903
(203) 327 124 193
- 178 178 -
369 (369) - -
- - - (226)
(24) 48 24 36
13 (97) (84) 4
- - - -
72 - 72 116
227 87 314 123
6 94 100 2
148 - 148 (27)
(5) (97) (102) 15
- 3 3 (117)
376 87 463 (4)
(59) (81) (140) 10
(2) 3 1 (2)
110 - 110 -
2,525 4,295 6,820 1,907
GBPm
Year ended
31 December
2007
Free Adjusted Value of
surplus net worth in-force Total
2,281 4,172 6,453
(181) 114 (67)
197 2,100 4,286 6,386
(601) (408) 674 266
- - 351 351
685 685 (685) -
226 - - -
60 96 (111) (15)
(20) (16) (102) (118)
- - (15) (15)
19 135 - 135
369 492 112 604
25 27 (1) 26
229 202 - 202
(17) (2) (80) (82)
117 - 13 13
723 719 44 763
5 15 85 100
3 1 23 24
(412) (412) - (412)
516 2,423 4,438 6,861
* No reconciliation of the Required capital and Free surplus for the six months
ended 30 June 2007 is available as the enhanced disclosure was introduced for
the first time as at 31 December 2007.
South Africa covered business
Required Free Adjusted
capital surplus net worth
Embedded value of the covered business
at beginning of the period 1,159 311 1,470
New business contribution 33 (44) (11)
Expected return on existing business
return on value of in-force - - -
Expected return on existing business
transfer to net worth - 88 88
Expected release of required capital
transfer to free surplus (54) 54 -
Experience variances - 11 11
Operating assumption changes - 2 2
Recalibration of risk-margins - - -
Expected return on adjusted net worth 44 13 57
Adjusted operating profit after tax 23 124 147
Investment return variances on in-force
business 2 (4) (2)
Investment return variances on adjusted
net worth - 133 133
Effect of economic assumption changes - (15) (15)
Methodology changes impacting cost of
required capital 3 (3) -
Profit after tax 28 235 263
Exchange rate movements (147) (36) (183)
Change in minority interest - - -
Net transfers from covered business - (347) (347)
Embedded value of the covered business
at end of the period 1,040 163 1,203
Return on embedded value (ROEV)%
GBPm
6 months ended
30 June
2008
Value of
in-force Total
Embedded value of the covered business at
beginning of the period 1,207 2,677
New business contribution 36 25
Expected return on existing business return on
value of in-force 67 67
Expected return on existing business transfer
to net worth (88) -
Expected release of required capital transfer
to free surplus - -
Experience variances (5) 6
Operating assumption changes 13 15
Recalibration of risk-margins - -
Expected return on adjusted net worth - 57
Adjusted operating profit after tax 23 170
Investment return variances on in-force business (57) (59)
Investment return variances on adjusted net
worth - 133
Effect of economic assumption changes (33) (48)
Methodology changes impacting cost of required
capital (1) (1)
Profit after tax (68) 195
Exchange rate movements (150) (333)
Change in minority interest (1) (1)
Net transfers from covered business - (347)
Embedded value of the covered business at end
of the period 988 2,191
Return on embedded value (ROEV)% 13.5%
Experience variances were positively impacted by higher risk profits and
one-off tax profits offset by switches to lower margin absolute growth
portfolios in the Corporate segment and adverse retention in the retail
businesses as a result of the tougher economic environment.
The main operating assumption changes are a reduction in the corporate tax rate
from 29 per cent to 28 per cent slightly offset by some small corrections in
valuation methodology.
The net transfers from covered business for the six months ended 30 June 2008
mainly include special and normal dividend payments (net of dividends received
from Nedbank and Mutual & Federal), tax on the special dividend, the purchase
of additional shares in Nedbank, as well as head office expenses.
The embedded value for South Africa is after the adjustment for market value of
life funds` investments in Group equity and debt instruments.
Return on embedded value is the annualised adjusted operating profit after tax
divided by opening embedded value in local currency. The operating assumption
changes are not annualised.
6 months ended
30 June
2007 *
Adjusted Value of Required Free
net worth in-force Total capital surplus
1,408 1,160 2,568 1,249 159
(9) 36 27 67 (78)
- 65 65 - -
87 (87) - - 172
- - - (93) 93
10 21 31 (33) 33
(4) 18 14 - (22)
- -
- - -
55 - 55 99 13
139 53 192 40 211
9 31 40 (3) 22
145 - 145 - 225
(4) (32) (36) (13) 11
- 7 7 (117) 117
289 59 348 (93) 586
(50) (41) (91) 3 6
(2) (2) - (3)
-
(45) (45) - (437)
-
1,600 1,178 2,778 1,159 311
14.8%
GBPm
Year ended
31 December
2007
Adjusted Value of
net worth in-force Total
1,408 1,160 2,568
(11) 72 61
- 133 133
172 (172) -
- - -
- (15) (15)
(22) 1 (21)
- - -
112 - 112
251 19 270
19 41 60
225 - 225
(2) (39) (41)
- 19 19
493 40 533
9 8 17
(3) (1) (4)
(437) - (437)
1,470 1,207 2,677
10.8%
* No reconciliation of the Required capital and Free surplus for the six months
ended 30 June 2007 is available as the enhanced disclosure was introduced for
the first time as at 31 December 2007.
United States covered business
Required Free Adjusted
capital surplus net worth
Embedded value of the covered business
at beginning of the period 424 81 505
New business contribution 57 (64) (7)
Expected return on existing business
return on value of in-force - - -
Expected return on existing business
transfer to net worth - 49 49
Expected release of required capital
transfer to free surplus (52) 52 -
Experience variances - (85) (85)
Operating assumption changes - (50) (50)
Recalibration of risk-margins - - -
Expected return on adjusted net worth - 7 7
Adjusted operating profit after tax 5 (91) (86)
Investment return variances on in-force
business - - -
Investment return variances on adjusted
net worth - (81) (81)
Effect of economic assumption changes - - -
Material revision to actuarial models - - -
Methodology changes impacting cost of
required capital - - -
Profit after tax 5 (172) (167)
Exchange rate movements 5 (4) 1
Net transfers to covered business - 1 1
Embedded value of the covered business
at end of the period 434 (94) 340
Return on embedded value (ROEV)%
GBPm
6 months ended
30 June
2008
Value of
in-force Total
Embedded value of the covered business at
beginning of the period 564 1,069
New business contribution 33 26
Expected return on existing business return on
value of in-force 27 27
Expected return on existing business transfer
to net worth (49) -
Expected release of required capital transfer
to free surplus - -
Experience variances 48 (37)
Operating assumption changes (9) (59)
Recalibration of risk-margins - -
Expected return on adjusted net worth - 7
Adjusted operating profit after tax 50 (36)
Investment return variances on in-force business (96) (96)
Investment return variances on adjusted net
worth - (81)
Effect of economic assumption changes (64) (64)
Material revision to actuarial models - -
Methodology changes impacting cost of required
capital - -
Profit after tax (110) (277)
Exchange rate movements (3) (2)
Net transfers to covered business - 1
Embedded value of the covered business at end
of the period 451 791
Return on embedded value (ROEV)% (1.3%)
The segment results of United States include Old Mutual Reassurance (Ireland)
Limited (OMRe), which provides reinsurance to the United States life companies,
and Old Mutual (Bermuda) Limited.
Capital of GBP45 million was transferred to Old Mutual Bermuda on 31 July 2008.
A further amount of GBP105 million was transferred on 5 August 2008.
The experience variances were largely driven by a one-off tax loss that arose
in Old Mutual (Bermuda) Limited.
The main operating assumption changes related to an additional provision made
in respect of investment volatility on guaranteed products. Several changes
were made to the economic assumptions due to the current adverse investment
environment: the credit default assumption was increased by 4 basis points, and
the risk discount rate was increased from 7.4 per cent to 8.4 per cent to allow
for an additional risk margin.
Return on embedded value is the annualised adjusted operating profit after tax
divided by opening embedded value in local currency. The operating assumption
changes are not annualised.
6 months ended
30 June
2007 *
Adjusted Value of Required Free
net worth in-force Total capital surplus
454 690 1,144 390 64
(28) 56 28 108 (193)
- 32 32 - -
65 (65) - - 98
- - - (120) 120
(53) 33 (20) 46 10
17 (98) (81) 23 4
- - - - -
5 - 5 9 2
6 (42) (36) 66 41
- (9) (9) - -
(6) - (6) (27) (6)
- (35) (35) - -
- - - - -
- (4) (4) - -
- (90) (90) 39 35
(11) (16) (27) (5) -
(1) - (1) - (18)
442 584 1,026 424 81
0.9%
GBPm
Year ended
31 December
2007
Adjusted Value of
net worth in-force Total
454 690 1,144
(85) 157 72
- 61 61
98 (98) -
- - -
56 (81) (25)
27 (104) (77)
- - -
11 - 11
107 (65) 42
- (36) (36)
(33) - (33)
- (11) (11)
- - -
- (4) (4)
74 (116) (42)
(5) (10) (15)
(18) - (18)
505 564 1,069
3.8%
* No reconciliation of the Required capital and Free surplus for the six months
ended 30 June 2007 is available as the enhanced disclosure was introduced for
the first time as at 31 December 2007.
Europe covered business
Required Free Adjusted
capital surplus net worth
Embedded value of the covered business
at beginning of the period 324 124 448
Opening fair value adjustments for
Skandia - - -
324 124 448
New business contribution 10 (191) (181)
Expected return on existing business
return on value of in-force - - -
Expected return on existing business
transfer to net worth - 248 248
Expected release of required capital
transfer to free surplus (2) 2 -
Experience variances 24 2 26
Operating assumption changes - 1 1
Recalibration of risk-margins - - -
Expected return on adjusted net worth (2) 17 15
Adjusted operating profit after tax 30 79 109
Investment return variances on in-force
business (19) 27 8
Investment return variances on adjusted
net worth - (2) (2)
Effect of economic assumption changes - (2) (2)
Methodology changes impacting cost of
required capital (1) 1 -
Profit after tax 10 103 113
Exchange rate movements 8 3 11
Minority interest - - -
Net transfers to covered business - (79) (79)
Embedded value of the covered business
at end of the period 342 151 493
Return on embedded value (ROEV)%
GBPm
6 months ended
30 June
2008
Value of
in-force Total
Embedded value of the covered business at
beginning of the period 2,667 3,115
Opening fair value adjustments for Skandia - -
2,667 3,115
New business contribution 242 61
Expected return on existing business return on
value of in-force 95 95
Expected return on existing business transfer
to net worth (248) -
Expected release of required capital transfer
to free surplus - -
Experience variances (10) 16
Operating assumption changes 76 77
Recalibration of risk-margins - -
Expected return on adjusted net worth - 15
Adjusted operating profit after tax 155 264
Investment return variances on in-force business (234) (226)
Investment return variances on adjusted net
worth - (2)
Effect of economic assumption changes (22) (24)
Methodology changes impacting cost of required
capital - -
Profit after tax (101) 12
Exchange rate movements 112 123
Minority interest - -
Net transfers to covered business - (79)
Embedded value of the covered business at end
of the period 2,678 3,171
Return on embedded value (ROEV)% 14.5%
The segmental results of Europe include the Skandia Life companies in the
United Kingdom, Nordic region, Europe and Latin America.
The experience variances mainly arose from a higher level of fee income than
that assumed and a contribution from profits not valued, which was partially
offset by negative persistency variances.
The main operating assumption changes are the introduction of modelling of
currency spread transactional revenue, recognition of trail commission and
changes to the recognition of fee income. The transfers from covered business
include internal financing arrangements and allocation of head office expenses.
Return on embedded value is the annualised adjusted operating profit after tax
divided by opening embedded value. The operating assumption changes are not
annualised.
6 months ended
30 June
2007 *
Adjusted Value of Required Free
net worth in-force Total capital surplus
419 2,321 2,740
(181) 114 (67)
238 2,435 2,673 264 (26)
(166) 235 69 18 (330)
- 81 81 - -
217 (217) - - 415
- - - (13) 13
19 (6) 13 23 17
- (17) (17) (19) (2)
- - - - -
12 - 12 8 4
82 76 158 17 117
(3) 72 69 5 3
9 - 9 - 10
(1) (30) (31) 29 (29)
- - - - -
87 118 205 51 101
2 (23) (21) 12 (1)
- 3 3 (3) 7
156 - 156 - 43
483 2,533 3,016 324 124
12.3%
GBPm
Year ended
31 December
2007
Adjusted Value of
net worth in-force Total
419 2,321 2,740
(181) 114 (67)
238 2,435 2,673
(312) 445 133
- 157 157
415 (415) -
- - -
40 (15) 25
(21) 1 (20)
- (15) (15)
12 - 12
134 158 292
8 (6) 2
10 - 10
_ (30) (30)
- (1) (1)
152 121 273
11 87 98
4 24 28
43 - 43
448 2,667 3,115
10.9%
* No reconciliation of the Required capital and Free surplus for the six months
ended 30 June 2007 is available as the enhanced disclosure was introduced for
the first time as at 31 December 2007.
9 Value of new business (after tax)
The tables below set out the geographic analysis of the value of new business
(VNB) after tax. Annual premium equivalent (APE) is calculated as recurring
premiums plus 10 per cent of single premiums. New business profitability is
measured by both the ratio of the VNB to the APE as well as to the present
value of new business premiums (PVNBP), and shown under APE margin and PVNBP
margin below. PVNBP is defined as the present value of regular premiums plus
single premiums for any given period and is calculated on the same assumptions
as for the value of new business contribution.
GBPm
6 months ended 6 months ended Year ended
30 June 30 June 31 December
2007
2008 2007
Recurring premiums
South Africa 109 113 237
United States 18 22 39
Europe 248 199 415
375 334 691
Single premiums
South Africa 592 466 1,115
United States 1,575 1,238 2,962
Europe 2,808 3,548 6,607
4,975 5,252 10,684
APE
South Africa 168 159 348
United States 175 146 335
Europe 529 554 1,077
872 859 1,760
PVNBP
South Africa 1,150 1,039 2,323
United States 1,661 1,351 3,150
Europe 3,857 4,453 8,405
6,668 6,843 13,878
VNB
South Africa 25 27 61
United States 26 28 72
Europe 61 69 133
112 124 266
APE margin
South Africa 15% 17% 18%
United States 15% 19% 21%
Europe 12% 13% 12%
13% 14% 15%
PVNBP margin
South Africa 2.2% 2.6% 2.7%
United States 1.6% 2.1% 2.3%
Europe 1.6% 1.6% 1.6%
1.7% 1.8% 1.9%
The value of new individual unit trust linked retirement annuities and pension
fund asset management business written by the South Africa long-term business,
which amounted to GBP145 million (six months ended 30 June 2007: GBP173
million, year ended 31 December 2007: GBP435 million) for the six months ended
30 June 2008, is excluded as the profits on this business arise in the asset
management business. The value of new business also excludes premium increases
arising from indexation arrangements in respect of existing business, as these
are already included in the value of in-force business.
The value of new institutional investment platform pensions business written in
the United Kingdom, the gross premium of which amounted to GBP155 million (six
months ended 30 June 2007: GBP71 million, year ended 31 December 2007: GBP165
million) for the six months ended 30 June 2008, is excluded as this is more
appropriately classified as mutual fund business.
10 Product analysis of new covered business premiums
GBPm
6 months ended
30 June
2008
South Africa product analysis Recurring Single Recurring
Total business 109 592 113
Individual business 96 332 99
Savings 24 253 25
Protection 33 2 37
Annuity - 76 -
Retail mass market 39 1 37
Group business 13 260 14
Savings 3 206 1
Protection 5 1 5
Annuity - 53 -
Healthcare 5 - 8
South Africa contract analysis
Total business * 109 592 113
Individual business 96 332 99
Insurance contracts 56 76 57
Investment contracts with discretionary
participating features 21 25 22
Other investment contracts 19 231 20
Group business 13 260 14
Insurance contracts 10 48 13
Investment contracts with discretionary
participating features 3 82 1
Other investment contracts - 130 -
United States product analysis
Total business 18 1,575 22
Fixed deferred annuity - 94 -
Fixed indexed annuity - 342 -
Variable annuity - 1,066 -
Life 18 8 22
Immediate annuity - 65 -
United States contract analysis
Total business * 18 1,575 22
Insurance contracts 18 1,447 22
Other investment contracts - 128 -
GBPm
6 months ended Year ended
30 June 31 December
2007 2007
South Africa product analysis Single Recurring Single
Total business 466 237 1,115
Individual business 296 208 641
Savings 220 50 494
Protection 3 77 5
Annuity 72 - 141
Retail mass market 1 81 1
Group business 170 29 474
Savings 130 5 394
Protection 1 11 1
Annuity 39 - 79
Healthcare - 13 -
South Africa contract analysis
Total business * 466 237 1,115
Individual business 296 208 641
Insurance contracts 67 123 132
Investment contracts with
discretionary participating features 16 44 35
Other investment contracts 213 41 474
Group business 170 29 474
Insurance contracts 40 24 80
Investment contracts with
discretionary participating features 50 5 160
Other investment contracts 80 - 234
United States product analysis
Total business 1,238 39 2,962
Fixed deferred annuity 20 - 97
Fixed indexed annuity 535 - 960
Variable annuity 620 - 1,757
Life - 39 18
Immediate annuity 63 - 130
United States contract analysis
Total business * 1,238 39 2,962
Insurance contracts 1,155 39 2,790
Other investment contracts 83 - 172
GBPm
6 months ended
30 June
2008
Europe product analysis Recurring Single Recurring
Total business 248 2,808 198
Unit-linked assurance 248 2,807 197
Life - 1 1
GBPm
6 months ended Year ended
30 June 31 December
2007 2007
Europe product analysis Single Recurring Single
Total business 3,548 415 6,607
Unit-linked assurance 3,546 413 6,601
Life 2 2 6
* Within the preceding contract analysis the classification of insurance
contracts, investment contracts with discretionary participating features and
other investment contracts is in accordance with the primary financial
statements definitions. All categories of business are subject to EEV
accounting.
11 Drivers of new business value GBPm
6 months ended Year ended
30 June 31 December
2007
2008
APE PVNBP APE PVNBP
Total covered
business Margin % Margin % Margin % Margin %
Margin at the end
of the comparative
period 14.0 1.8 16.2 2.1
Change in volume +0.8 +0.2 (0.7) (0.1)
Change in product mix (0.8) (0.1) (0.4) (0.1)
Change in country mix (0.1) - +0.6 +0.1
Change in
operating
assumptions (0.8) (0.1) (0.4) -
Change in economic
assumptions (0.6) (0.1) +0.2 -
Exchange rate
movements +0.5 - (0.3) (0.1)
Margin at the end
of the period 13.0 1.7 15.2 1.9
APE APE
Margin PVNBP Margin PVNBP
South Africa covered business
% Margin % % % Margin
Margin at the end of the
comparative period 16.6 2.6 18.7 2.8
Change in volume +0.7 - +0.6 +0.2
Change in product mix (0.4) (0.1) +0.4 -
Change in operating assumptions (1.2) (0.2) (2.1) (0.3)
Change in economic assumptions (0.7) (0.1) - -
Margin at the end of the period 15.0 2.2 17.6 2.7
The APE and PVNBP per cent margin changes are calculated in local currency.
APE APE
PVNBP Margin PVNBP
Margin
United States covered business % Margin % % Margin %
Margin at the end of the
comparative period 19.1 2.1 18.3 2.0
Change in volume +0.1 (0.1) - (0.2)
Change in product mix +0.2 +0.1 +3.1 +0.5
Change in operating assumptions (4.3) (0.5) - -
Margin at the end of the period 15.1 1.6 21.4 2.3
The APE and PVNBP per cent margin changes are calculated in local currency.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six
months ended 30 June 2007 are available as the enhanced disclosure was
introduced for the first time as at 31 December 2007.
GBPm
6 months ended Year ended
30 June 31 December
2008 2007
APE PVNBP
Margin
Europe covered business % Margin %
Margin at the end of
the comparative period 12.6 1.6 15.5 1.8
Opening adjustment - - (0.6) (0.1)
Adjusted prior year 12.6 1.6 14.9 1.7
Change in volume - +0.2 (2.5) (0.2)
Change in product mix (1.2) (0.2) (1.7) (0.2)
Change in country mix (0.2) - +0.9 +0.1
Change in operating
assumptions +0.5 +0.1 +0.1 +0.1
Change in economic
assumptions (0.8) (0.1) +0.3 -
Exchange rate movements +0.8 - +0.3 +0.1
Margin at the end of
the period 11.7 1.6 12.3 1.6
The 2007 opening new business margins in Nordic have been restated to
incorporate the impact of the Liv-Link agreement negotiated in 2007.
APE and PVNBP per cent margin changes are calculated in Sterling.
No comparative reconciliations of APE Margin % and PVNBP Margin % for the six
months ended 30 June 2007 are available as the enhanced disclosure was
introduced for the first time as at 31 December 2007.
12 Assumptions
Introduction
The principal assumptions used in the calculation of the value of in-force
business and VNB are set out below. The assumptions are best estimate and
actively reviewed.
> Adjusted operating profit is calculated on closing operating assumptions and
opening economic assumptions.
> The effect of increases in premiums over the period for policies in-force has
been included in the value of in-force business only where such increases are
associated with indexation arrangements. Other increases in premiums of
existing policies are included in the value of new business.
> New schemes written on which recurring single premiums are expected to be
received on a regular basis are treated as new business. The annualised premium
is recognised as recurring premium new business at inception of the scheme and
is determined by annualising the actual premiums received during the year in
question. Subsequent recurring single premiums received in future years are not
treated as new business, as these have already been provided for in calculating
the value of in-force business.
> The value of new business has been based on opening economic assumptions and
closing operating assumptions accumulated to the period end.
> The sensitivity of the value of in-force and value of new business to changes
in the risk discount rate is set out in note 13.
Economic assumptions
The pre-tax investment and economic assumptions are updated every six months to
reflect the economic conditions prevailing on the valuation date. Risk-free
rates have a duration similar to that of the underlying liabilities. Equity and
property risk premiums incorporate both historical relationships and the
directors` view of future projected returns in each geography.
> The risk-margins reflect the distinctive risks of the products in the
respective business units. These risk-margins do not include the risk
associated with financial options and guarantees. The risk-margins were
recalibrated as at 31 December 2007. The risk-margin for the United States
business was increased by 100 basis points as at 30 June 2008 to allow for the
volatility inherent in the business.
> Where applicable, rates of future bonuses or crediting rates have been set at
levels consistent with the investment return assumptions. Projected company
taxation is based on the current tax basis that applies in each country.
> For the South Africa business projected taxation is based on the current tax
basis that applies in each country. Full allowance has been made for secondary
tax on companies (STC) at a rate of 10 per cent that may be payable in South
Africa. Full account has been taken of the impact of capital gains tax. It has
been assumed that 10 per cent of the equity portfolio (excluding Group
subsidiaries) will be traded each year. The effective tax rate was 33 per cent
for South Africa and 0 per cent for Namibia, except for the investment return
on capital for which the attributed tax was derived from the primary accounts.
> For the United States business full allowance has been made for existing tax
attributes of the companies, including the use of existing carry-forwards and
preferred tax credit investments. The effective rate was 33 per cent.
> For the Europe businesses, projected tax is based on the current tax rate
that applies in each country. In Sweden, no allowance has been made for
additional tax on dividends remitted to the UK. Tax has however been allowed
for on dividends to be remitted to the UK from the Isle of Man. The effective
tax rates for Nordic, United Kingdom and the balance of Europe were a range of
2 per cent to 28 per cent, 12 per cent to 28 per cent and a range of 19 per
cent to 49 per cent.
At At At
30 June 30 June 31 December
South Africa 2008 2007 2007
Risk-free rate (10-year Government bond) 11.0% 8.6% 8.5%
Cash return 9.0% 6.6% 6.5%
Equity return 14.5% 12.1% 12.0%
Property return 12.5% 10.1% 10.0%
Expense inflation 8.0% 5.6% 5.5%
13.7% 11.4% 11.2%
Traditional embedded value risk
discount rate 1
Risk-free rate 11.0% 8.6% 8.5%
Risk-margin2 2.1% 2.0% 2.1%
Cost of financial options and
guarantees 3 - - -
Cost of required capital in excess of
statutory minimum 4 0.6% 0.8% 0.6%
United States
Risk-free rate (10- year Treasury yield) 4.0% 4.9% 4.0%
Expense inflation 3.0% 3.0% 3.0%
New money yield assumed* 5.3% 6.8% 5.8%
Net portfolio earned rate 6.1% 5.8% 6.0%
10.3% 10.0% 9.3%
Traditional embedded value risk
discount rate 1
Risk-free rate 4.0% 4.9% 4.0%
Risk-margin2 4.4% 3.0% 3.4%
Cost of financial options and
guarantees 3 0.9% 1.0% 0.9%
Cost of required capital in excess of
statutory minimum 4 1.0% 1.1% 1.0%
* The new money yield assumed in the first two months was 6.2 per cent.
1 This is the risk discount rate that would be applicable on a traditional
embedded value basis if the calculations did not allow for the time-value of
options and guarantees and required capital in excess of the statutory minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial
options and guarantees and for the required capital in excess of statutory
minimum. The risk-margin in the United States was increased by 100 basis points
to allow for the volatility inherent in the business.
3 This is the time-value of financial options and guarantees not allowed for in
statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the
statutory minimum.
At At At
30 June 30 June 31 December
Europe 2008 2007 2007
United Kingdom
Risk-free rate (10 year Government
bond) 5.2% 5.5% 4.6%
Cash return 4.2% 3.7% 3.6%
Equity return 8.1% 8.4% 7.5%
Property return 6.6% 7.0% 6.6%
Expense inflation 5.3% 4.7% 4.6%
Traditional embedded value risk
discount rate1 7.9% 8.0% 7.6%
Risk-free rate 5.2% 5.5% 4.6%
Risk-margin2 2.2% 2.1% 2.2%
Cost of financial options and
guarantees3 - - -
Cost of required capital in excess
of statutory minimum4 0.5% 0.4% 0.8%
Sweden
Risk-free rate (10 year Government
bond) 4.5% 4.5% 4.4%
Cash return 3.5% 3.5% 3.4%
Equity return 7.5% 7.5% 7.4%
Property return 6.0% 7.0% 5.9%
Expense inflation 3.7% 3.3% 3.6%
Traditional embedded value risk
discount rate1 7.9% 7.5% 7.7%
Risk-free rate 4.5% 4.4% 4.4%
Risk-margin2 3.4% 3.1% 3.4%
Cost of financial options and
guarantees3 - - -
Cost of required capital in excess
of statutory minimum4 - - -
Rest of Europe
Risk-free rate (10 year Government
bond) 3.3%-6.1% 3.2%-5.5% 3.1%-5.7%
Cash return 2.3%-5.1% 2.2%-4.5% 2.1%-4.7%
Equity return 6.3%-9.1% 6.2%-7.8% 6.1%-8.7%
Property return 4.8%-7.6% 4.7%-7.0% 4.6%-7.2%
Expense inflation 2.5%-3.0% 2.5%-3.0% 2.5%-5.0%
Traditional embedded value risk
discount rate1 4.0%-8.1% 4.6%-7.8% 4.0%-7.7%
Risk-free rate 3.3%-6.1% 3.2%-5.5% 3.1%-5.5%
Risk-margin 0.9%-2.9% 1.4%-3.0% 0.9%-2.9%
Cost of financial options and
guarantees3 - - -
Cost of required capital in excess
of statutory minimum4 0.0%-3.0% 0.0%-3.0% 0.0%-3.0%
1 This is the risk discount rate that would be applicable on a traditional
embedded value basis if the calculations did not allow for the time-value of
options and guarantees and required capital in excess of the statutory minimum.
2 Risk-margin is net of the risk allowance for the time-value of financial
options and guarantees and for the required capital in excess of statutory
minimum.
3 This is the time-value of financial options and guarantees not allowed for in
statutory reserves.
4 This is the margin for the cost of holding required capital in excess of the
statutory minimum.
Non-economic assumptions
> The assumed future mortality, morbidity and voluntary discontinuance rates
have been based as far as possible on analyses of recent operating experience.
Allowance has been made where appropriate for the effect of expected AIDS-
related claims.
> The management expenses attributable to life assurance business have been
analysed between expenses relating to the acquisition of new business and the
maintenance of business in-force. The future expenses attributable to life
assurance business include 36 per cent of the Group holding company expenses,
with 14 per cent allocated to South Africa, 4 per cent allocated to United
States and 18 per cent allocated to Europe.
> The allocation of these expenses aligns to the proportion that the management
expenses incurred by the business bears to the total management expenses
incurred in the Group.
> No allowance has been made for future productivity improvements in the
expense assumptions.
> Future investment expenses are based on the current scales of fees payable by
the life assurance companies to the asset management subsidiaries. To the
extent that these fees include profit margins for the asset management
subsidiaries, these margins have not been included in the value of in-force
business or the value of new business.
> The embedded value makes no provision for future development costs. However,
provision is included within certain business units for project costs where
these are known with sufficient certainty.
Required capital
> For the South Africa business, the required capital is calculated for each of
the major business units. The non-investment items are based on a multiple of
the non-investment components of the local Statutory Capital Adequacy
Requirements set out in PGN104 issued by the Actuarial Society of South Africa
(ASSA). The investment item is based on internal models developed for capital
allocation and pricing purposes. The models project assets and liabilities for
the business forward for 10 years using stochastically determined investment
returns on a realistic basis. Bonus rates and adjustments to non- vested
bonuses are determined using a consistent formula based on a weighted average
of past returns and the level of the Bonus Smoothing Account (BSA) at the time.
To the extent that the BSA falls to lower than normally allowable minimum
levels, the shareholder is considered to be required to provide support to the
business. The capital requirement, based on the discounted value of the maximum
shareholder support required, is determined using a conditional tail
expectation at the 97.5 percentile level. The required capital is invested in
local equities, local cash and international cash. The asset allocation as at
30 June 2008 is 60, 33 and 7 per cent (six months ended 30 June 2007: 60, 33
and 7 per cent, 31 December 2007: 60, 33 and 7 per cent) respectively. In
aggregate required capital is subject to a minimum of 130 per cent of the
statutory capital requirement. The level of required capital was 136 per cent
of the minimum statutory requirements as at 30 June 2008 (six months ended 30
June 2007: 137 per cent, 31 December 2007: 134 per cent).
> For the United States business, the required capital is based on the multiple
of the local Risk Based Capital (RBC) requirement that management deems
necessary to maintain the desired credit rating for the company in question.
The multiple is 300 per cent (six months ended 30 June 2007: 260 per cent, 31
December 2007: 296 per cent) as at 30 June 2008. The required capital for Old
Mutual (Bermuda) Limited is based on the level of capital considered by
management appropriate to manage the business, which is calculated as 125 per
cent of United States RBC calculated on local reserves, subject to a minimum of
local statutory requirements. The required capital for Old Mutual Reassurance
(Ireland) Limited is based on the level of capital considered by management
appropriate to manage the business which is based on 125 per cent of the new
Irish Capital Requirements. The required capital for the United States business
is invested in fixed interest assets.
> For the Europe businesses the required capital reflects the level of capital
considered by management appropriate to manage the business, allowing for local
minimum statutory requirements. In certain regions, for example Nordic,
statutory capital is partially covered by the deferred acquisition costs which
are implicitly included in the value of in-force business rather than the
adjusted net worth. The required capital is invested in short and medium-term
fixed interest assets. The required capital as a per cent of minimum statutory
capital is 180 per cent for the United Kingdom, 73 per cent for Nordic, 200 per
cent for the Isle of Man and ranging from 0 per cent to 139 per cent for the
balance of Europe.
13 Sensitivity tests
The tables below for South Africa, United States and Europe show the
sensitivity of the value of in-force at 30 June 2008 and the value of new
business for the period ended 30 June 2008 to changes in the discount rate.
30 June 2008 GBPm
Value of
in-force
business Value of new business
South Africa
Central assumptions 988 25
Effect of:
Central discount rate increasing by
1 per cent 869 20
United States
Central assumptions 451 26
Effect of:
Central discount rate increasing by
1 per cent 404 21
Europe
Central assumptions 2,678 61
Effect of:
Central discount rate increasing by
1 per cent 2,510 49
Appendix I
Old Mutual plc Economic Capital at 31 December 2007
The Old Mutual Group Economic Capital position (based on a target `A` rating)
as at 31 December 2007 is GBP4.6 billion. This compares favourably with the
Available Financial Resources (AFR) of the Group of GBP7.9 billion and
represents a solvency margin of 73%. The total diversification benefit,
allowing for diversification both between and within regional businesses, is
39%.
This is the second time that Old Mutual has disclosed its Economic Capital
position. In the first disclosure, as at 31 December 2006, Economic Capital
stood at GBP4.1 billion. The corresponding AFR of the Group was GBP7.1 billion,
giving an economic surplus of 73%.
Methodology
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% confidence level, which is the probability
placed on a target A-rated bond not defaulting in the next year. Old Mutual has
adopted a one-year Value-at-Risk approach, which is common market practice and
is consistent with current Solvency II proposals.
The Old Mutual approach is to examine the impact of possible risk events on its
economic balance sheet, by performing a number of stress tests (or "shocks"),
where each shock has been calibrated to a 99.93% confidence level. A number of
the more material risks (for example, interest rate risk and equity risk) are
typically assessed using stochastic modelling, based on simulations obtained
from an Economic Scenario Generator. Less material risks, and in particular,
non-economic risks are modelled deterministically.
The calculated capital requirements for each risk are then combined using a
correlation matrix to reflect the fact that all of the risks are not expected
to occur simultaneously (i.e. are not perfectly correlated). The assumed
correlations between each pair of risks are those that may occur under stressed
scenarios, which may differ, typically adversely, from those that are exhibited
under more normal conditions.
Available Financial Resources ("AFR")
The Group`s AFR is defined as the value of assets held by the Group in excess
of its economic liabilities, and which could be used over the coming year to
meet its Economic Capital requirements. In principal, for banking, general
insurance and asset management business, AFR is the initial Net Asset Value.
For life business, AFR is the initial embedded value of the business.
For the purpose of assessing the Group`s capital strength, cross-shareholdings
between business units are unwound to remove `double-counting` and to
understand the capitalisation of each, in isolation, relative to its risk
exposure.
Old Mutual companies included in the result
The following businesses are included in Old Mutual`s Group Economic Capital
figures.
SEE PRESS FOR GRAPHS
Risk Types
The Economic Capital requirement has been calculated through a detailed process
of identifying, quantifying and aggregating the impact of risks across the
Group`s principal business units. Risks are classified into six categories -
Market, Credit, Liability, Business, Operational, and Currency.
Nedbank has a different risk classification, based on Basel II, so these risks
have been reclassified for inclusion within Old Mutual`s aggregated Group
results. The diagram below shows the breakdown of sub-risks by key risk
category.
SEE PRESS FOR GRAPHS
Definitions for each of the key risk categories are as follows:
Market Risk
This captures the worst case value change over the one-year time period as a
result of changes in specified financial risk factors (for example, equity and
real estate returns, and yield curve shifts), where the changes are applied to
policyholder liabilities, assets backing these liabilities and the assets not
directly backing these liabilities.
Credit Risk
This captures the worst case value change over the one-year time period as a
result of credit defaults, rating changes and spread moves, where the changes
are applied to fixed interest holdings and receivables of the company.
Liability Risk
This captures the worst case value change over the one-year time period as a
result of fluctuations in current insurance claims experience and revisions to
estimates of future insurance claims experience.
For life insurance, this relates to the fluctuations in the incidence of
mortality, longevity, morbidity and insured accident and disability events.
For general insurance, this relates to the adequacy of existing reserves to
meet claims arising from elapsed exposure periods, and of earned premiums over
the scenario period to meet claims arising from that period of exposure
(including claims arising from catastrophes).
Business Risk
This is the fundamental risk associated with `being in business`. It captures
the worst case value change over the one- year time period due to fluctuations
in volume, margin, expenses and lapse experience (including only non-market
related lapses).
Operational Risk
This captures the worst case value change over the one-year time period due to
the occurrence of unexpected one-off events (internal or external) in relation
to people, processes or systems. Examples include systems failure, process
errors, control failures, fraud, litigation, staffing issues, regulatory breach
and external disruption. Old Mutual has adopted a bottom-up scenario analysis
through its business units to assess the capital to be held to mitigate this
risk.
Group Currency Risk
We test the solvency of each region separately to the same Group standard, in
order to ensure solvency on a standalone basis per region. In addition, we
recognise the risk that exchange rates move adversely should capital be
transferred across the Group. The Group diversification benefit is reduced
accordingly to allow for this.
Liquidity Risk
This reflects the risk that Old Mutual does not have sufficient cash flow
available to meet its financial obligations as they fall due. Group and
business unit treasury teams monitor and control liquidity risk within the Old
Mutual Group. An Economic Capital requirement is not calculated to meet this
risk, since Old Mutual believes that holding capital is not an effective and
efficient way to manage liquidity risk.
Limitations
Old Mutual recognises that the risks captured within an Economic Capital
framework cannot capture all possible risks that may occur over the following
12 month period. In particular, the risk of capital loss owing to decisions yet
to be taken, e.g. strategic risks, cannot realistically be modelled.
Our Economic Capital model is becoming increasingly robust. During the last
year we have carried out a thorough review of risk coverage, assumptions and
governance processes.
The results continue to show that a substantial margin exists between the Group
AFR and Economic Capital requirement, supporting the view that the Group is
strongly capitalised on an economic basis.
Group Results
Old Mutual`s Group Economic Capital requirement as at 31 December 2007 is
GBP4.6 billion. The corresponding AFR of the Group was GBP7.9 billion, giving
an economic surplus of 73%.
As at 31 December 2006, Old Mutual`s Group Economic Capital stood at GBP4.1
billion, when the AFR of the Group was GBP7.1 billion - also giving an economic
surplus of 73%.
The progression of these financial results is as follows:
SEE PRESS FOR GRAPHS
Economic Capital has increased from 2006 to 2007 largely due to enhanced
recognition of the underlying risk profile, updates in assumptions and revised
methodology.
AFR has increased largely due to an increase in retained earnings.
The results confirm that the Group is strongly capitalised on an economic
basis. A comfortable surplus also exists within each of our South African, US
and European regions, meaning that the Group is not reliant for its economic
solvency on the need to transfer capital between geographies.
The Economic Capital requirement is split as follows:
SEE PRESS FOR GRAPHS
Market risk represents the largest element of group Economic Capital split by
risk type. This includes the impact of both assets backing policyholder
liabilities and shareholder assets. Liability risks constitute relatively
little of the Group Economic Capital since they are relatively weakly
correlated with other risks. The mix of other risks is well spread.
The pre-diversified Economic Capital split by region remains broadly unchanged
from the 2006 position.
Diversification benefit
Old Mutual benefits from the diversification of its Group business segments and
the territories in which it operates. Consequently the Group Economic Capital
requirement is lower than the sum of the standalone Economic Capital
requirements of the separate business units.
This diversification benefit of 39% as at 31 December 2007 arises since risks
in different business units are highly unlikely to crystallise at exactly the
same time and because of the benefit of operating in diverse territories. If
the diversification benefit had been defined as only diversification across but
not within business units, the resultant figure would have been 17% as at 31
December 2007.
Ongoing developments
Old Mutual continues to refine its Economic Capital methodology in line with
emerging best practice, and looks for ways to make enhancements to its models
in order to further improve the robustness of the results being produced. The
stress tests applied in calculating Economic Capital are regularly reviewed and
revised if necessary.
The European Commission is continuing to develop its Solvency II framework for
insurance companies and Old Mutual monitors developments in line with emerging
Solvency II practice. Significant developments are fed back into Old Mutual`s
Economic Capital models, and Old Mutual continues to prepare for Solvency II.
How does Old Mutual use Economic Capital
Old Mutual is increasingly using Economic Capital in a number of ways to inform
business decisions and actions.
Economic Capital plays a significant role in risk monitoring and control in the
Group, providing the key measurement tool used in Old Mutual`s developing risk
appetite framework. The risk appetite framework will set targets and monitor
risk exposures for capital at risk, earnings at risk, cash flow at risk and
operational risk at both business unit and group level.
Old Mutual uses Economic Capital to measure and monitor performance of business
units allowing for risk and the cost of Economic Capital required to support
that risk. The 2009-2011 business plans will contain both projected Economic
Capital and risk-adjusted performance targets for each business unit for the
first time.
Old Mutual is currently making good progress in implementing a
market-consistent methodology for the calculation of its Embedded Value for the
year ending 31st December 2008. As part of the revised methodology, Economic
Capital will form an input into the required capital and non-hedgeable risk
components of the market-consistent Embedded Value.
Economic Capital is also playing an increasingly important role in risk-based
pricing across the Group, with a number of examples where Economic Capital is
one measure on which metrics for new product development and pricing are based.
Business units within the Group have also started considering Economic Capital
in decisions around reinsurance retention levels.
Governance
Economic Capital at Old Mutual is measured, monitored and reported under a
rigorous governance process involving senior executives as well as the Board.
The diagram overleaf shows the sign-off process for the setting of Group
Economic Capital policy and assumptions and the production of results.
SEE PRESS FOR GRAPHS
The Group Economic Capital methodology provides a framework to establish a
common yardstick for measuring and managing risk and capital. This methodology
is intended as a foundation, based on which each business unit has its own
methodology, consistent with the Group framework.
The Chief Financial Officer of each business unit and at Group level, with
assistance from the Chief Risk Officer and Chief Actuary as appropriate, has
responsibility for the ownership and sign-off of Economic Capital requirements.
The Group Actuarial function is responsible for recommending assumption changes
to the Economic Capital Implementation Committee 1 , reviewing and challenging
business unit submissions and producing the aggregated Group result and
associated reports. The Group result is signed off by the Economic Capital
Implementation Committee and ultimately the Group Audit Committee and Board.
The Group Risk function is responsible for agreeing the methodology for
assessing operational risk and reviewing business unit operational risk
assessments. The Group Actuarial and Group Risk functions also advise the
Economic Capital Implementation Committee in setting policy for the Group.
Economic Capital results are also reported to the Group Capital Management
Committee, chaired by the Group Finance Director.
1 The committee is chaired by the Group Finance Director, and including the
Group Risk Director, Group Chief Actuary and business unit CFOs as members
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