| Thu 6 Nov 2008, 9:00 | | OML - Old Mutual plc - Interim Management Statement for the nine months ended |
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OML
OLOML
OML - Old Mutual plc - Interim Management Statement for the nine months ended
30 September 2008
Old Mutual plc
ISIN CODE: GB0007389926
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSUER CODE: OLOML
Interim Management Statement for the nine months ended 30 September 2008
Operational and Financial Highlights
- Pleasing net client cash flows, with good performance in UK, Nordic and
ELAM offset by outflows in other regions
- Funds under management down 9% from 31 December 2007 to GBP254.4
billion; robust third quarter performance
- Life APE sales down 4%* to GBP1,245 million
UK down 18%*: single premiums affected by market
- Nordic up 35%*: continued excellent growth
- SA up 16%*: positive sales momentum continues
- US down 6%*: variable annuity products withdrawn from sale
- Mutual fund sales down 23%* to GBP4,796 million: strong growth in SA (up
36%) more than offset by market declines in UK, ELAM and US
- Value of new business (excluding US Life)** down 10%* to GBP125 million
- Strong capital position maintained with pro-forma FGD surplus of GBP1.1
billion at 30 September (GBP0.8 billion at 31 October rates)
- Major progress in addressing issues in US Life business
- New experienced management team appointed
- Significantly improved hedging in place
- Innovative offer to de-risk Bermuda book launched yesterday
Julian Roberts, Chief Executive, commented:
We have delivered a resilient performance in what have been extremely
challenging market conditions with our South African and Nordic businesses
continuing to deliver excellent results. Despite the fall in equity markets
and movement in exchange rates we remain well capitalised and we have
liquidity which is in excess of our needs for the foreseeable future.
"Since my appointment as Group Chief Executive eight weeks ago, we have taken
further major steps towards de-risking the US Life business including
launching an initial offer to Bermuda clients which should provide greater
certainty about the liabilities in that business.
"While we expect market conditions to remain difficult in the balance of the
year, I am confident that the Group as a whole remains resilient and our
businesses are well positioned to deal with the challenges. Over the next few
months I will take a fresh and objective look at all parts of the Group."
* For the nine months to 30 September 2008, with comparisons to the nine
months to 30 September 2007
** US Life VNB numbers not included since the products and pricing
assumptions are under review
GROUP RESULTS
Group Highlights at 30 September 2008 Q3 YTD Q3 YTD % Change
(GBPm) 2008 2007
Life assurance sales (APE) 1,245 1,294 (4%)
Europe 746 808 (8%)
South Africa 271 248 9%
US 228 238 (4%)
Asia Pacific - -
Unit trust / mutual fund sales 4,796 6,192 (23%)
Europe 2,697 3,343 (19%)
South Africa 1,030 801 29%
US 814 1,570 (48%)
Asia Pacific 255 478 (47%)
Value of new business 125 139 (10%)
Europe 82 97 (15%)
South Africa 43 42 2%
US* n/a n/a
Asia Pacific - -
Group Highlights at 30 September 2008 Q3 2008 FY 2007 % Change
(GBPbn)
Funds under management 254.4 278.9 (9%)
Europe 52.9 60.6 (13%)
South Africa 37.8 41.7 (9%)
US 159.8 170.1 (6%)
Asia Pacific 3.9 6.5 (40%)
Q3 YTD Q3 YTD Annualised
2008 2007 % of
opening
FUM
Net Client Cash Flows 0.0 17.0 -
Europe 2.3 4.1 5%
South Africa (0.3) (1.2) (1%)
US (0.4) 14.1 0%
Asia Pacific (1.6) 0.0 (33%)
* US Life VNB numbers not included since the products and
pricing assumptions are under review
Overview
We have delivered a resilient performance in what have been extremely
challenging market conditions. Our South African and Nordic businesses, which
enjoy dominant market positions with strong brands, have again delivered an
excellent performance.
Net client cash flows are neutral for the nine months to 30 September 2008
("the period") which is a pleasing performance in this economic climate.
Total life sales on an APE basis remained robust with a small decline of 4%
when compared with the nine months to 30 September 2007 ("the comparative
period").
Skandia
In Europe, our UK and Offshore business produced a resilient performance
despite the poorer market conditions for the types of product we offer.
Positive net client cash flows of GBP1.4 billion were strong. Despite our
funds under management falling by 13% since 31 December 2007, this compares
favourably with a drop of 24% in the FTSE 100 index. Although single premium
sales were lower, we believe our UK business is in a stronger place than many
of our competitors because our proposition supports mutual funds as well as
bonds. Our Nordic business continued to perform strongly with net client cash
flows of SEK4.6 billion produced from excellent life sales on an APE basis
which were up 35% in local currency over the comparative period. In ELAM,
performance in continental Europe has been challenging with customers moving
to traditional life and non-equity investments rather than unit-linked
products. This has mainly affected our single premium business.
South Africa
In South Africa, sales growth was excellent with life sales on an APE basis
up 16% in rand terms due to sales force growth, increased productivity and a
swing to life single premium sales. Capital remains very strong, covering the
statutory capital requirement 3.7 times.
Although the current global economic environment has been especially
challenging in the banking environment, Nedbank continued to grow its net
interest income to R12.1 billion and improved its efficiency ratio to 52.5%
from 54.6% in the comparative period. Strong deposit growth of 28% was above
annualised advances growth of 19%. Whilst impairments have risen above medium-
to long-term target levels, the credit loss ratio of 1.02% compares well with
Nedbank`s South African banking peers. The total capital adequacy ratio
remains solid and has increased since 31 December 2007 from 11.2% to 11.7%.
US
In the US, our solid sales performance, where life sales on an APE basis
reduced by 6% in dollar terms over the comparative period, has been
overshadowed by the reserving problems in our Old Mutual Bermuda business and
by the level of asset impairments in the US Life onshore business. On 5
November 2008, we commenced an offer to policyholders in our Bermuda business
with products that carry a guarantee, to accelerate the receipt of the
guarantee in exchange for topping up their funds balance to 85% of original
premiums. We believe this is an attractive offer in the current climate and
that the cost of policyholders accepting the offer will be covered by the
current guarantee provisions made. In the onshore business, due to the
volatile markets, impairments on the bond portfolio have significantly
exceeded expectations with $531 million recorded in the year to date. The
business remains well capitalised with the Risk Based Capital multiple at 30
September 2008 improving slightly since 30 June 2008 and remaining within our
operating target range.
Our US asset management business continued to produce a strong long-term
investment performance. Excluding the outflows due to a cessation of
securities lending, net client cash flows were $4.2 billion for the period,
which is an excellent performance in these market conditions.
Financial Position
Our capital position remains strong with a pro-forma Financial Groups
Directive ("FGD") surplus at 30 September 2008 of GBP1.1 billion. Applying 31
October 2008 currency and market positions to this would equate to a surplus
of GBP0.8 billion. Sensitivities to market movements, although not linear,
are that a 1% fall in South African rand against sterling is broadly
equivalent to an GBP11 million reduction in FGD, with a 1% fall in the JSE
broadly equivalent to GBP8 million decline in FGD and a 1% gain in the US
dollar against sterling is broadly equivalent to a GBP17 million fall in FGD.
Other global market movements do not materially impact FGD in the short term.
Our FGD position has been positively underpinned by the de-risking of the
South African shareholder assets implemented over the last year, which is
discussed later. In current markets, we consider an FGD surplus in excess of
GBP750 million to be a sufficient buffer against further adverse market
developments.
Each of our businesses maintains sufficient capital and liquidity to support
their individual regulatory and operational needs. The Group`s overall
capital position also remains comfortable, with gearing in line with the
target required to support a single `A` senior credit rating. The Group
continues to retain liquidity headroom over and above that required to meet
anticipated funding flows.
Mutual & Federal
The process whereby Old Mutual intends to dispose of its shareholding in
Mutual & Federal is progressing well and we are pleased with the level of
interest we have received. The process has progressed to the next phase, with
a short list of bidders selected. Old Mutual is currently considering
proposals from those bidders that have been shortlisted and expects that an
announcement with regard to the disposal will be made before the end of the
year.
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
anticipate releasing the restated 2007 full year results together with 2008
full year results at the time of our Preliminary Announcement.
Management Changes
On 29 September we announced the appointment of Chris Chapman as CEO of the
US Life onshore business. Today we announce that Bob Head will assume the
role of Regional Director of Old Mutual Europe (the Skandia branded
businesses). Separately we have announced the appointment of Philip Broadley
as Group Finance Director. He will succeed Jonathan Nicholls, who is leaving
Old Mutual in order to pursue interests outside the life insurance sector.
Material Events and Transactions
Other than disclosed in the relevant business units in this Interim
Management Statement, there have been no material events and transactions
since 30 September 2008.
EUROPE: UNITED KINGDOM AND OFFSHORE
Resilient performance despite volatile market conditions
Despite the adverse market conditions, Skandia UK continued to attract
positive net client cash flows of GBP1.4 billion in the period, representing
5% of opening funds under management on an annualised basis. Funds under
management were impacted by the continued market downturn resulting in a 13%
decrease since the beginning of the year to GBP36.3 billion. However, this
compares favourably with the 24% fall in the FTSE 100 over the equivalent
period. Funds under management have held up particularly well in the
International business due in part to the diversity of investments with a
significant proportion of assets held in cash and deposits.
Life sales on an APE basis were GBP464 million, down 18% over the comparative
period, largely driven by a reduction in sales of single premium pensions and
bonds which reflects the lack of investor confidence being experienced across
the entire long-term savings market. Regular premiums have held up better and
were up 10% over the comparative period. In the UK, uncertainty over the
suitability of bonds continues following the introduction of the 18% flat
rate of CGT in the March 2008 Budget. With our platform approach and a full
set of product wrappers, Skandia is better placed than many competitors in
the market because our proposition supports mutual funds as well as bonds.
Unit trust sales of GBP1.4 billion were down 25% over the comparative period.
As a result of one of the lowest ISA seasons on record for the whole
industry, sales (excluding institutional investment business) were down 31%.
Offsetting this, institutional mutual fund business of GBP205 million was up
48% over the comparative period.
As a result of lower new business volumes, VNB was down 17% to GBP49 million.
These lower volumes are only partially reflected in expenses due to the semi-
variable nature of acquisition costs. The reduction in VNB was partially
mitigated by a strengthening of the assumptions for the amount of fee income
that is rebated from fund managers as communicated at the Interim Results,
adding GBP9 million for the period. The new business margin ended the period
at 11%, up from 10% for the comparative period.
International business performance was solid, despite the difficult market
conditions, due to its geographic diversity and full open-architecture
investment proposition. This, combined with the Singapore branch now being
open for business, means the outlook continues to look relatively positive,
though clearly the current economic climate may dampen prospects in the short
term.
Skandia Investment Group`s range of risk-controlled Spectrum Funds which
provide a solution for customers of a risk-rated portfolio and launched on 28
April 2008, have been well received by the market. The methodology behind the
Spectrum Funds is that it is specifically designed for investors to have more
confidence to invest during bear markets by selecting the fund that matches
the investors` attitude to loss. Following the communication of the
investment proposition, sales have increased rapidly during the third quarter
with over GBP61 million invested since launch.
The FSA will be publishing their Consultation Paper on the Retail
Distribution Review ("RDR") on 25 November 2008. It is widely expected that
this paper will require the remuneration system on long-term savings to
fundamentally change from providers paying advisers commission, to advisers
agreeing "fees" with customers, with the ability of the fees being deductible
from the product. Skandia UK announced a new pricing structure in September
which removed the initial charge on platform sales. This move introduces a
simpler and transparent charging structure and has been positively received
by Financial Advisers. It also puts Skandia UK in good shape to manage the
likely change in remuneration that the RDR may introduce. On 3 November 2008
Skandia UK announced that it is ending its membership of the Association of
British Insurers ("ABI"). Skandia is clearly differentiated from old style
life and pensions companies and finds little alignment of interests with the
broader ABI membership.
EUROPE: NORDIC
Despite turbulent financial markets, Nordic continuing to deliver excellent
growth in sales during the period
Net client cash flows were an exceptional SEK4.6 billion in light of market
conditions, representing 5% of opening funds under management on an
annualised basis. The positive performance was driven by strong net inflows
in the life business as a result of an excellent sales performance and
reduced outflows. Net outflows were experienced in the non-life business as a
consequence of high withdrawals due to the market turbulence. Volatile equity
markets had a negative impact on asset growth, with funds under management at
the end of the period down 18% on the position at 31 December 2007 to SEK95.6
billion.
Nordic continued to deliver excellent growth in sales during the period. Life
sales on an APE basis exceeded the comparative period by 35% due to strong
sales in Sweden. The very strong trend in new sales continued throughout the
third quarter of 2008, following a steady increase taking place since the
last quarter of 2007. So far there are no signs of any negative effect from
the turbulent financial markets. The broker sales channel accounted for the
largest part of the increase over the comparative period as a result of
strengthened relationships supported by the new investment portfolio product
and faster introduction of new funds to the market. There has been a
continued focus throughout the internal sales force on the selling of unit
linked products, which together with several sales initiatives, have
contributed to the positive trend resulting in higher new sales over the
comparative period.
Nordic produced solid growth in mutual fund sales of SEK2.3 billion, up 2%
over the comparative period. The increase was mainly due to deposits in fixed
income and money market funds and a newly launched hedge fund.
VNB of SEK281 million for the period, up 43% over the comparative period, was
positively impacted by higher new sales on an APE basis, the introduction of
currency spreads and tighter cost controls. This compensated for the change
in business mix in Sweden in 2008 (particularly since the Kapitalpension
product tax advantages were removed) as well as the net negative impact from
operating assumption changes (strengthened paid-up/surrender assumptions and
the negative economic assumption changes in 2007).
The new business margin of 15% has continued to improve since the downward
trend in 2007, where the margin was 14% in the comparative period. The
improvement was attributable to positive volume effects as new sales were
higher and expenses decreased. In the medium term, the new business margin is
expected to improve to reach the high teens. This will be achieved through
continued growth in sales leading to economies of scale, product development
and good cost control and we are already demonstrating that we are on the
right track to deliver the margin target.
SkandiaBanken is completely funded by deposits hence has a unique liquidity
position and has been able to benefit from the current market situation with
an improved interest margin. SkandiaBanken has sufficient surplus liquidity
and further actions have been taken to ensure that the liquidity position
remains stable. The capital ratio as at 30 September 2008 was 14.25% (under
Basel II, pillar one). SkandiaBanken`s lending portfolio is comprised 95% of
mortgages with excellent credit worthiness due to sound lending practices.
The average loan-to-value in the portfolio at the end of the period was
approximately 40 to 50%. As a consequence, the bank has so far only
marginally been affected by the market turbulence with only a slight increase
in provisions for credit losses. The credit loss ratio (credit losses as a
percentage of the opening lending balance) remains low at only 0.09%.
As announced on 3 October 2008, a ruling has been passed in respect of the
arbitration proceedings between Skandia AB and Skandia Liv. The arbitration
board did not accept Skandia Liv`s claim to any part of the purchase price
paid, but ruled that Skandia AB is obliged to pay Skandia Liv a total sum of
SEK580 million (GBP47 million) plus interest by way of compensation in
relation to fees under the asset management agreement which Skandia Liv
deemed to be higher than prevailing market rates. Old Mutual had already set
aside SEK500 million (GBP41 million) to cover the arbitration within our pre-
acquisition balance sheet.
EUROPE: EUROPE AND LATIN AMERICA (ELAM)
Customer focus and innovation resulting in good net client cash flows
Our ongoing focus on business development and persistency management, coupled
with resilient regular premium business, has resulted in good net client cash
flows of Euro0.8 billion achieved in current market conditions. This
represented a pleasing 8% of opening funds under management on an annualised
basis. Across our businesses, our strong relative net client cash flow
performance is reflected in market statistics, notably in Italy, where we
believe we were one of the few life companies to achieve positive net client
cash flows during the third quarter.
Funds under management of Euro11.1 billion reflect the global market
volatility and were down 9% against 31 December 2007 on a like-for-like basis
(excluding Palladyne which was sold during the period). Net market movements
on opening funds under management accounted for a 14% reduction in funds
under management for the period, a resilient result when compared to deeply
negative developments across the global equity indices. At 30 September 2008,
equity investments represented 38% of funds under management, compared with
43% at 31 December 2007, while fixed income and guarantee funds increased
from 22% and 12% to 31% and 16% respectively. This trend reflects the shift
in investor preference away from equity-based towards lower volatility
investments.
New sales volumes have been under significant pressure in the context of the
global financial crisis, with investor confidence shifting away from equity
and unit-linked investments towards traditional life, non-equity investments
and cash deposits. Our single premium business continues to experience this
more severely than regular premium business which has been relatively
resilient to the market volatility. Life sales on an APE basis of Euro164
million were 19% lower than the comparative period. Regular premium business
was 10% below 2007 levels, while single premium new sales were 30% lower than
the comparative period.
VNB of Euro13 million was down 63% over the comparative period, mainly as a
result of lower sales in 2008 in light of the market crisis as well as a
change in the business mix from 2007, where Poland was a stronger relative
contributor with higher margins in the first half of that year. The period
end APE margin has deteriorated to 8% from 17% in the comparative period. The
reduction in margin is attributed to decreased APE sales, a shift in new
business mix to lower average premiums, and acquisition expense over-runs
encountered by the more recently established businesses. In addition the
Polish business experienced strong sales in 2007 which were not sustained.
Product innovations have continued to support business development in the
third quarter. Several product and service innovations have been launched so
far this year and are supporting our position in the market and are
positioning us well for the future. For example, the launch of a simple
variable annuity product in Germany, distributor-specific products in Italy
and France, a dollar cost averaging feature in Italy and rebalancing features
in Poland.
We continue to look for development opportunities to create new business
inflows, whilst reassuring our current and potential clients during these
extremely challenging times. We continue to receive favourable feedback from
customers and distributors on our offerings and service levels through survey
results and industry awards. This underlines our commitment to creating
sustainable, long term relationships and meeting customer needs.
SOUTH AFRICA: LONG-TERM BUSINESS & ASSET MANAGEMENT - OLD MUTUAL SOUTH AFRICA
(OMSA)
Continuing strong life sales growth despite tightening economic conditions
Although net client cash flows have improved over the comparative period, we
continued to have small net outflows. This is despite a significant
improvement in retention of third party assets, having bedded down the OMIGSA
boutiques. Outflows were affected by higher bonuses declared in 2007 and
early 2008 which increased the level of normal benefit payments, particularly
in Employee Benefits, as well as higher member withdrawals from pension funds
as a result of the economic environment. The lower non-life sales also
adversely impacted the net client cash flow position. Funds under management
were R439 billion, down 1% on 31 December 2007. This was a result of negative
market movements combined with net client cash outflows offset by the
inclusion of the acquisition of Futuregrowth`s R35 billion of funds under
management. The acquisition of Futuregrowth has resulted in an expanded set
of fixed income products available to the Old Mutual client base.
Sales have continued to show strong growth during the third quarter,
particularly life single premium sales, with slowing growth in unit trust
sales. Life assurance sales on an APE basis of R3.9 billion were up 15% over
the comparative period driven by sales force growth, increased productivity
and a swing to life single premium products. This improvement is reflected
across all the customer segments and was particularly pleasing considering
the effect of the current economic climate on available consumer spend. We
expect the negative sentiment of the global financial crisis to impact sales
growth for the remainder of the year.
Life recurring premium sales grew moderately, at 6%. Sales of recurring
premium savings products increased 15% over the comparative period driven by
an investment in expanding the Retail Mass segment sales force as well as
customers in the Corporate segment opting to invest in smoothed bonus
products (where Old Mutual has highly competitive offerings) as a result of
the high level of uncertainty in global markets. Retail Affluent sales of the
Max Investments recurring premium savings product saw strong growth of 13%
with the trend towards the non-life (LISP) wrapped product continuing. Sales
of risk products have grown by a modest 2% with a decline in the Retail
Affluent market offset by a stronger contribution from the Retail Mass
segment. Risk sales were lower in the Retail Affluent market because of lower
credit life sales off low lending volumes as a result of high interest rates,
tightening liquidity and financially squeezed middle income customers
resulting in flat sales of Greenlight product sales and lower voluntary
premium increases on old generation products.
Excellent growth was experienced in life single premium sales, up 37% over
the comparative period. Savings products sales have grown by 33% as investors
opt for more conservative fund options. Annuities sales were up 54% with some
good flows in the Corporate Segment`s term certain annuities. Unit Trust
sales of R14.4 billion continued to show strong growth albeit at lower levels
as investors moved to lower risk money market funds. Other non-life sales
(mainly third party asset management sales) declined by 17% as flows from
institutional investors slowed because of investor caution in the volatile
markets despite substantial activity in terms of sales pitches. Compared to
industry median, overall, 62% of unit trust funds were above median over one
year, 38% over three years and 50% over five years to the end of September
2008.
VNB of R557 million increased 6% as a result of the higher sales, but was
partially offset by a decrease in the APE margin. Although there has been an
improvement in the proportion of higher margin products sold during the
period, the APE margin has declined by 1.3% points over the comparative
period primarily due to the strengthening of economic and lapse assumptions
made at December 2007. The VNB margin was also adversely affected by the
expected increase in opportunity cost of holding capital as a result of
expected lower investment return and higher tax after the reduction in the
proportion of capital invested in equities. We anticipate VNB to come under
further pressure from worsening lapse experiences and lower sales of higher
margin products as customers feel the impact of the current economic
environment.
Old Mutual South Africa`s capital position remains strong in spite of
turbulent markets. As at 30 June 2008, OMLACSA had admissible capital of R42
billion, which exceeded its statutory capital requirement of R11.9 billion by
a multiple of 3.5 times. This was the same as the statutory capital cover at
the end of December 2007. At 30 September 2008, the statutory capital
requirement had reduced to R11.3 billion due to the change in the allocation
of shareholder assets backing the capital adequacy requirement, effected by
sales of equities over the last year (including cash realised from the sale
of the majority of our stake in Assore in June 2008). Admissible capital at
30 September 2008 is estimated to have reduced marginally to R41.5 billion,
covering the statutory capital requirement 3.7 times, and is virtually
unchanged over the quarter. This result was achieved since the general
decline in equity values has been largely offset by the increase in the
Nedbank share price, the effect of a hedge that was put in place on part of
the remaining local shareholder equities and the appreciation of foreign
assets. The market declines subsequent to 30 September 2008 have been largely
mitigated by the same factors of asset profile applicable to shareholders
assets and hedging on local equities.
The third quarter was a period of extreme market turmoil, with the South
Africa equity market (JSE All Share Index) falling 22% over the quarter. The
outperformance of resources during the six months to the end of June reversed
abruptly in the third quarter, with resources down 38% relative to a positive
12% return from financial stocks. Compelling valuations in the financial
sector meant that a number of OMIGSA boutiques have been underweight
resources and overweight financials from the last quarter of 2007. This
positioning led to improved performance over the third quarter of 2008, with
some of the ground lost since September 2007 regained.
SOUTH AFRICA: BANKING - NEDBANK GROUP (NEDBANK)
Conservative stance taken in tough macro-economic environment
The full text of Nedbank`s business update for the nine months ended 30
September 2008, released on 4 November 2008, can be accessed on Nedbank`s
website http://www.nedbankgroup.co.za
In an environment of unprecedented challenges for financial services
businesses globally, Nedbank remained solidly profitable in the third
quarter, although earnings growth rates have slowed. Liquidity remains sound
and capital levels are at the top end of Nedbank`s target ranges. While the
retail businesses continue to experience cyclical impairment increases and
investment banking revenues are slowing, the corporate businesses have
continued to perform well.
Following the knock-on effect from global markets, the South African economic
environment continued to deteriorate during the third quarter of 2008,
particularly on the consumer front. The prime lending rate remained
unchanged, but longer term interest rates fell by approximately 2% over the
quarter. Food prices have started to stabilise and, importantly, the oil
price declined. These are hopefully leading indicators that inflation has
reached its peak and will start to decline into early 2009. This is currently
expected to result in the prime interest rate decreasing during 2009.
However, the volatility and rapid deterioration in the value of the rand
against major currencies in recent weeks could impact negatively on this
inflation and interest rate outlook.
Throughout the period, rand liquidity in South Africa has remained stable,
with the interbank market operating normally. Banks in South Africa have
therefore been able to finance new assets in the normal course of business.
Nedbank has no direct exposure to the foreign subprime market or any of the
related derivative instruments. Nedbank has strong retail, business and
corporate banking deposit franchises that performed well during the third
quarter and liquidity remained sound.
Net interest income grew by 17% over the comparative period to R12.1 billion.
The net interest margin reduced to 3.75% for the period end (Q3 2007: 3.94%),
reflecting the higher cost of term funding together with changes to the asset
mix. Asset pricing continues to be a key focus for improving margins, with
higher margins being generated on new assets. This, however, will take some
time to filter through to the overall margin.
Nedbank`s impairment charge of R3.1 billion for the period was up 89% over
the comparative period. The credit loss ratio deteriorated 1.02% at the end
of September (Q2 2008: 0.96%). Retail credit loss ratios have worsened since
June and remain above expected through-the-cycle levels largely as a result
of continued increases in defaulted advances in the Home Loan and Vehicle and
Asset Finance Divisions. Wholesale banking credit loss ratios remain below
expected through-the-cycle levels, although the credit loss ratio in Business
Banking has increased marginally as expected. No large defaults were
experienced in the quarter. While Nedbank`s credit loss ratio is anticipated
to remain above the medium- to long-term target range of between 0.55% and
0.85% for both 2008 and 2009, the credit loss ratio compares well with that
of Nedbank`s South African banking peers.
Non-interest revenue (NIR), excluding Bond Choice`s commission and sundry
income from the 2007 base, grew by 1% on a like-for-like basis. Total NIR
(including Bond Choice in the 2007 base) for the period decreased by 5% to
R7.1 billion (Q3 2007: R7.5 billion). Increases in commission and fee income
of 13% (excluding Bond Choice) were offset by lower trading and private
equity income in Nedbank Capital as unrealised gains in historic private
equity investments and equity profit sharing arrangements reduced in line
with market benchmarks.
Nedbank`s efficiency ratio improved to 52.5% for the quarter, compared with
the 54.6% reported in the comparative period. This is above the 51.5%
reported at June 2008, owing largely to slower NIR growth in the third
quarter. Good cost discipline across the businesses made it possible to keep
expenses below budgeted levels, resulting in Nedbank maintaining a positive
`jaws` ratio of 4.1% (3.0% excluding Bond Choice) for the period.
Total assets increased by an annualised 20% to R563 billion at 30 September
2008. Advances were 19% (annualised) higher at R427 billion, largely
resulting from growth in term loans. Growth in average interest-earning
banking assets slowed to 23% (Q3 2007: 31%). Advances growth is expected to
continue slowing, particularly in retail and business banking asset classes.
Corporate Banking advances growth remains resilient.
Deposits have grown by a strong 28% (annualised) to R465 billion since
December 2007, exceeding the growth in advances.
Income after taxation from non-trading and capital items increased to R634
million for the period from R37 million in the comparative period. The main
contributions have been the R622 million after-tax profit on the sale of Visa
shares and the R13 million profit on the sale of 36.5% in Bond Choice, both
of which were reported at the Interim Results.
Capital adequacy ratios are robust and have continued to increase in line
with Nedbank`s conservative stance in the current environment. Nedbank`s Tier
1 capital adequacy ratio increased to 8.8% in September 2008 from 8.0% in
December 2007 and the total capital adequacy increased to 11.7% from 11.2%
over the respective periods. These ratios are close to the top end of the
group`s current target ranges of 8% to 9% for the Tier 1 capital adequacy
ratio and 11% to 12% for the total capital adequacy ratio.
Recent international developments have again highlighted that the appropriate
level of capital for a bank is a function of its individual risk appetite and
existing risk profile, including the proportion of fair-value assets in the
overall portfolio. Nedbank has low levels of lending assets that are subject
to the volatility of fair-value accounting, and current capital levels are
considered appropriate in the context of our risk appetite, stress and
scenario testing, and Nedbank not holding excess capital for acquisitions.
On 11 July 2008 Fitch Ratings reaffirmed the ratings of Nedbank Group and
Nedbank Limited and on 6 October 2008, the ratings of Imperial Bank Limited
were also reaffirmed.
In these challenging times Nedbank continued to focus on appropriate balance
sheet positioning and applied risk-based measurement techniques in seeking to
optimise economic profit. Nedbank is currently taking a conservative stance
rather than seeking to maximise short-term profitability that could hamper
longer-term sustainability.
The economic environment remains uncertain. Pressures on the domestic
economy, together with heightened market volatility, global uncertainty and
the potential for an extended global recession, increase forecast risk.
Increasing impairments and reducing transaction volumes continue to affect
earnings growth negatively in Nedbank Retail and
Imperial Bank and investment banking revenues have slowed in Nedbank Capital.
Growth in Nedbank Corporate`s earnings remains solid, although impacted by
lower levels of property private equity earnings as anticipated. Nedbank
currently expects headline earnings for the full year to 31 December 2008 to
be at similar levels to or slightly lower than those of 2007. Basic earnings
for the full year are currently expected to be slightly higher than those of
2007.
SOUTH AFRICA: GENERAL INSURANCE - MUTUAL & FEDERAL
Challenging trading conditions
The full text of Mutual & Federal`s trading update for the nine months ended
30 September 2008, released on 6 November 2008, can be accessed on Mutual &
Federal`s website http://www.mf.co.za
Mutual & Federal has successfully undertaken an internal staff and
infrastructure reorganisation, reducing headcount by 21%, which amounted to
more than 600 people. Whilst the overall expense savings in 2008 will be
offset by the costs of the reorganisation, expense ratios will benefit in
future years from the action taken.
Mutual & Federal achieved positive trading results despite a softer insurance
market than the comparative period. A substantial number of group schemes
were cancelled due to unsatisfactory performance whilst premiums on risk
finance business declined following changes to insurance practices in the
retail environment. Gross premiums for the period nevertheless remained
steady relative to the comparative period.
Although underwriting results were negatively influenced by the group schemes
portfolio and increases in the frequency and severity of commercial fire
claims in the first half of the year, a significant improvement was achieved
in the third quarter. Premium rates on fire risks were reviewed and this,
together with remedial action on group schemes, has returned the business to
underwriting profitability for the year to date.
Interest and dividend returns for the period were offset by losses on the
revaluation of listed shares following the decline in global equity markets.
In addition, certain non-operational expenses related to the restructure, as
well as costs to exploit alternate distribution channels, were written off at
30 September 2008. The solvency margin (the ratio of net assets to net
premiums) at the end of the period declined accordingly to 39% from 42% as at
31 December 2007. This remains within our target range of 30% to 40%.
UNITED STATES: US LIFE
Decrease in sales driven by withdrawal of guarantees on Bermuda variable
annuities
Despite the turbulent markets, net client cash flows of $1.6 billion were
achieved, equating to 9% of opening funds under management on an annualised
basis. Funds under management were $21.8 billion as at 30 September 2008,
down 10% from the position at 31 December 2007 primarily due to a 20%
decrease in the market value of funds under management on an annualised basis
(comprised of a decrease in the fixed income portfolio and separate account
assets). This decrease was mainly the result of unfavourable fixed income and
equity market conditions.
Total life sales on an APE basis were $443 million, a 6% decrease over the
comparative period. Sales by Old Mutual Bermuda were the largest year to date
contributor to APE. However as a consequence of the high cost of guarantees
in the current volatile environment, we withdrew the guaranteed variable
annuity riders effective 15 August 2008, and therefore the Bermuda sales in
the month of September were significantly lower.
Fixed index annuity sales continue to be affected by difficult market and
regulatory conditions, with sales on an APE basis down 37% over the
comparative period. However, fixed annuity sales of $29 million were up 320%
over the comparative period, following the industry trend as customers seek
fixed interest guarantees during this period of extreme equity market
volatility and economic instability.
US Life Offshore Update
Our US Life offshore business is conducted through Old Mutual Bermuda.
Continuing market volatility and a significant strengthening of the US dollar
have led to further increases in guarantee reserves in respect of variable
annuity contracts. In the nine months to 30 September 2008, the business
recognised $474 million in respect of these reserves. Capital of $425 million
has been transferred to Old Mutual Bermuda during the period to 30 September
2008 with $157 million transferred in October 2008 This utilises the $300
million announced at the Interim Results, together with the $250 million
announced on 10 September 2008 with an additional $32 million injected in
October 2008.
Old Mutual Bermuda offers variable annuities under which clients can select a
wide range of funds to invest in. These funds cover equities, fixed interest
and alternative asset classes, across a wide range of geographies. Old Mutual
Bermuda has offered guarantee riders which provide a guarantee in US dollars
of 105% of original premium after five years and 120% of original premium
after 10 years. A further option is offered that enhances the guarantee at
year ten should the account value on any preceding policy anniversary be
greater than 120%. The range of funds offered, have very broad investment
mandates and have experienced considerable volatility under recent market
conditions. Although we run a hedging programme in order to limit the cost of
guarantees, given basis risk, market and currency volatility, the cost of
providing the guarantees has increased substantially over the period.
A number of actions have been taken to limit Old Mutual Bermuda`s exposure to
further investment guarantee costs. These include withdrawing the problematic
guarantee riders as previously announced, introducing currency hedges,
improving fund mapping to reduce basis risk and reviewing actions available
to de-risk the in-force book.
We have also made management changes, strengthened risk management and
product guarantee approval processes and begun to initiate actions to de-risk
the back book. On 5 November 2008 we announced an offer permitting direct
customers of Old Mutual Bermuda with the UGO guarantee riders (excluding the
fronted Hong Kong book) - many of whom have seen their initial investments
fall substantially - to accelerate the guarantees under these riders. If
selected, clients will not have to wait the remainder of the 5 or 10 years
from the inception of their policy to receive the benefit of their guarantee,
but can receive an immediate top-up to their account value to 85% of their
initial investment (less any subsequent redemptions). In return, all
guarantees will be terminated and all fees associated with these guarantees
will no longer be charged. We believe this to be an opportunity for customers
to position themselves for stronger returns should markets recover, or
immediately access their capital on far better terms than would have been the
case had the offer not been made. The offer is open for a two week window
until 19 November 2008.
To the extent that clients accept the offer and their guarantees terminate,
Old Mutual Bermuda will be able to reduce uncertainty in respect of future
guarantee costs and release guarantee reserves held in respect of these
clients. The release of guarantee reserves is expected to be broadly
equivalent to the cost of topping up client account values to 85% of their
original premium (less any subsequent redemptions). Old Mutual will be
required to continue reserving for investment guarantees in respect of
clients who do not accept the offer. The guarantee reserves have been funded
to date and have not resulted in a cash outflow from the Group, since
policies have not yet reached the five or ten year date at which the
guarantees are payable.
US Life Onshore Update
On 29 September 2008 we announced the appointment of Chris Chapman as CEO of
the US Life onshore business, and he has initiated a transformational
exercise, which is reviewing a number of different operating scenarios. These
range from continuing with the current product and distribution strategy to
scaling back product lines and rationalising distribution, which would lead
to lower sales, new business strain and operating expense levels in the
upcoming year. The work required to select the preferred option is drawing to
a close, and the implementation actions required are intended to be in place
early in the second quarter of 2009. The preferred outcome will be to allow
the business to focus on the distribution channels and products which are
most efficient and profitable, such as its fixed annuity products. Key
activities for the remainder of the year include managing the corporate bond
portfolio to reduce weightings in finance and banking sectors and related
risk of losses.
Multiple large, high profile financial firms suffered failures and regulatory
interventions during the third quarter, resulting in creditor losses, almost
completely illiquid credit markets, dramatically wider credit spreads and
lower bond prices in all sectors. Our fixed income portfolio aggregate credit
experience and current unrealised loss position have been affected by these
events and market conditions. US Life`s fixed income portfolio of $18.5
billion recorded impairments of $381 million in the third quarter of 2008,
contributing to total impairments of $531 million for the year to date. The
main components of this were public fixed income stock losses principally in
respect of American International Group ($64 million), Washington Mutual ($58
million), Lehman Brothers ($50 million) and write-offs of preferred stock
($183 million) of which Freddie Mac and Fannie Mae was the majority ($143
million). US Life`s net unrealised losses increased from $1,209 million at 30
June 2008 to $2,329 million at 30 September 2008 reflecting the market-wide
re-pricing of credit spreads and other risks which do not relate to specific
factors within the US Life portfolio.
3.5% of US Life`s general account portfolio of $20 billion has direct
exposure to sub-prime mortgage collateral. The sub-prime exposure ratings and
market value have declined substantially (67% is AAA, 91% is AA and higher,
and 100% is BBB and higher) with a 74% fair value-to-book value ratio.
An additional capital injection of $100 million from Group was made to
maintain the Risk Based Capital in line with the operating target. For the
purposes of this Interim Management Statement, we have disclosed neither the
value of new business nor APE margins for the US Life onshore and offshore
businesses since the products and pricing assumptions are under review.
UNITED STATES: US ASSET MANAGEMENT
Net flows and assets impacted by market turbulence
Aggregate long-term investment performance from our member firms was robust.
At 30 September 2008, 36% of assets had outperformed their benchmarks and 29%
of assets were ranked above the median of their peer group over the trailing
three year period. Our member firms deploy disciplined investment processes,
based on sound valuation and business fundamentals. Recent volatile markets
have not rewarded some of these investment techniques in the near term.
Although net client cash outflows were $2.5 billion in the period, we
performed well in gathering cash flows relative to peers. During the third
quarter, given recent market instability, Dwight Asset Management made the
decision to suspend its securities lending business, which contributed $6.7
billion to the total net cash outflows for the period. Excluding this impact,
net cash inflows for the period were $4.2 billion, at 1.7% of opening funds
under management on an annualised basis. Given the difficult market
conditions and the net outflows being experienced across the industry, the
result for the period was encouraging, driven by positive flows at Acadian
Asset Management, Rogge Global Partners, Heitman, and Ashfield Capital
Partners. Old Mutual affiliates were also ranked in the top 15 for
institutional net cash flows for the six months to 30 June 2008 within 11 of
the 17 product categories tracked by Callan Associates. Our track record of
investment performance coupled with our diverse multi-boutique model
positions us well to continue to attract net inflows despite the current
climate.
Funds under management were $279.7 billion as at 30 September 2008, down 16%
during the period, $52 billion of which was due to negative market returns.
Our diversified asset mix helped to lessen the impact with fixed income and
alternatives, which comprise approximately half of the total funds under
management at the end of the period, being less volatile and correlated in
periods of market instability. On 1 July 2008, Rogge Global Partners acquired
ING Ghent, which contributed $1.5 billion to funds under management during
the period.
OMAM UK unit trust sales and Old Mutual Capital mutual fund sales for the
period were $932 million and $653 million respectively, down a combined 49%
on the comparative period as a result of the depressed selling environment.
We remain committed to the delivery of unique and innovative investment
options. Recent product focus has included asset allocation and risk-adjusted
return objectives which have positioned us well in the current market
environment. Specifically, we recently launched Old Mutual Target Plus
Portfolios, the only target-retirement mutual funds with three risk-specific
asset allocation strategies. Amongst these, the Conservative series of funds
has distinguished itself from peers. Other recent products have capitalised
on the movement of industry asset flows towards both global and alternative
products.
OTHER: ASIA PACIFIC
Continued focus on developing scale
We continue to develop our existing portfolio of businesses in Asia-Pacific.
These include, 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 insurance products (Skandia:BSAM) and a
26% holding in a life assurance venture in India (Kotak Mahindra Old Mutual).
Continued 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.
Enquiries
Investor Relations
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
SA
Finsbury
Mike Smith / Brian Cattell UK +44 (0)20 7251 3801
Notes to Editors:
A conference call for analysts and investors will take place at 9.00 a.m. (UK
time), 10.00 a.m. (Central European) and 11:00am (South African time) today.
Analysts and investors who wish to participate in the call should dial the
following toll-free numbers quoting conference ID 67635029:
UK (free call) 0800 694 0257
UK (local) 0844 493 3800
South Africa (free call) 0800 980 759
Sweden (free call) 0200 890 171
US (free call) 1866 966 9439
International +44 (0)1452 555 566
Playback (available until midnight on 19 November 2008), access code:
67635029#:
UK (free call) 0800 953 1533
US (free call) 1866 247 4222
International +44 (0)1452 550 000
Copies of this update, 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.
This Interim Management Statement has been prepared in accordance with
section 4.3 of the Disclosure and Transparency Rules (DTR) and covers the
period 1 January to 5 November 2008. The nine months business update is
included in this Interim Management Statement.
A Financial Disclosure Supplement relating to the Company`s nine month
business update can be found on the website. This contains key financial data
for the first nine months of 2008 and 2007.
Photographs of management are available at the Visual Media website
www.vismedia.co.uk
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.
06 November 2008
Sponsor: Merrill Lynch
Date: 06/11/2008 09:00:03 Produced by the JSE SENS Department.
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