| Thu 4 Nov 2010, 9:01 | | OML - Old Mutual plc Q3 Interim Management Statement |
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OML
OLOML
OML - Old Mutual plc Q3 Interim Management Statement
OLD MUTUAL PLC
ISIN: GB0007389926
SHORT: OLDMUTUAL
CODE: OML
REG NO: 3591559
4 November 2010
Old Mutual plc Q3 Interim Management Statement
Solid Q3 contributing to strong nine-month performance
(All sales and NCCF percentage movements quoted in constant currency)
- Group Funds under Management (FUM) up 8% to GBP307 billion, with good
contributions from Wealth Management and Emerging Markets
- Net client cash flow for Long-Term Savings (LTS) of GBP3.9 billion for
year-to-date
- Positive net client cash flows from every LTS business in the
quarter
- LTS Annual Premium Equivalent (APE) sales up 13% year-to-date, Q3 down 2%
- UK APE sales up 44% year-to-date, Q3 up 10%
- Emerging Markets APE sales up 9% year-to-date, flat for Q3
- Group mutual fund sales growth of 34% to GBP7.5 billion, Q3 up 36%
- US Life sale expected to complete at or around year-end
Julian Roberts, Group Chief Executive, commented:
"We have made good progress so far this year, with rising funds under
management, strong sales and excellent net client cash flows from our Long-
Term Savings business. Sales of unit trusts have been particularly strong.
We remain on track to achieve our cost savings and Return on Equity targets by
2012. We are well advanced in the completion of the sale of the US Life
business, preparations continue for the IPO of US Asset Management and we
continue to work towards our target of reducing our debt by GBP1.5 billion by
2012. We are pleased with Nedbank`s third quarter results and the business is
in good health. Although we were disappointed that the discussions with HSBC
about a possible sale of this business were terminated, we continue to support
the business and management`s successful execution of Nedbank`s strategy.
We expect market conditions to continue to be volatile and customers and asset
allocators to remain cautious, but we firmly believe that there are secular
growth opportunities for those focused on providing customers with attractive
investment returns through flexible products. Our platform and unit-linked
businesses are well positioned to do this."
Business update
GROUP RESULTS
Group Highlights for the Q3 2010 Q3 2009 % Change Q3 2009 %
three months (constan (as Change
to 30 September 2010 t reported
(GBPm) currency )
basis)
Life assurance sales 351 348 1% 326 8%
(APE)
Long-Term Savings life 326 334 (2%) 312 4%
assurance sales (APE)
Emerging Markets 121 122 (1%) 104 16%
Nordic 40 50 (20%) 46 (13%)
Retail Europe 15 15 - 15 -
Wealth Management 150 147 2% 147 2%
US Life - discontinued 25 14 79% 14 79%
operation*
Unit trust / mutual fund 2,922 2,148 36% 2,007 46%
sales
Long-Term Savings unit 2,496 1,838 36% 1,699 47%
trust / mutual fund sales
Emerging Markets 1,112 887 25% 754 47%
Nordic 92 91 1% 85 8%
Retail Europe 5 7 (29%) 7 (29%)
Wealth Management 1,287 853 51% 853 51%
US Asset Management unit 426 310 37% 308 38%
trust / mutual fund sales
Group Highlights as at 30 Q3 2010 30 June % Change 31 Dec %
September 2010 (GBPbn) 2010 2009 Change
Funds under management 306.6 292.3 5% 285.0 8%
(FUM)
Long-Term Savings 122.3 110.7 10% 105.5 16%
Nedbank 10.0 9.0 11% 8.2 22%
Mutual & Federal 0.2 0.2 0% 0.2 0%
US Asset Management 163.8 162.5 1% 161.5 1%
Bermuda 3.0 2.9 3% 2.9 3%
US Life - discontinued 7.3 7.0 4% 6.7 9%
operation*
Group Highlights for the Q3 2010 Q3 2009 Annualised Q3 2009
three months (constan % of
to 30 September 2010 t opening
(GBPbn) currency FUM
basis)
Net Client Cash Flow (0.7) (0.6) (1%) (0.5)
(NCCF)
Long-Term Savings 1.2 0.7 5% 0.8
Nedbank 0.2 0.1 10% 0.1
US Asset Management (2.3) (0.8) (6%) (0.8)
Bermuda - (0.4) - (0.4)
US Life - discontinued 0.2 (0.2) 12% (0.2)
operation*
Note all percentage changes in the above table are shown as rounded sterling
balances.
* US Life has been classified as a discontinued operation, and comparative
Long-Term Savings amounts have been restated for this change.
Group Highlights for the YTD 2010 YTD % YTD 2009 % Change
nine months 2009 Change (as
to 30 September 2010 (GBPm) (consta reported)
nt
currenc
y
basis)
Life assurance sales (APE) 1,165 1,023 14% 962 21%
Long-Term Savings life 1,095 969 13% 908 21%
assurance sales (APE)
Emerging Markets 344 317 9% 269 28%
Nordic 142 194 (27%) 180 (21%)
Retail Europe 47 44 7% 45 4%
Wealth Management 562 414 36% 414 36%
US Life - discontinued 70 52 35% 52 35%
operation*
Bermuda - 2 - 2 -
Unit trust / mutual fund 7,475 5,584 34% 5,199 44%
sales
Long-Term Savings unit 6,456 4,830 34% 4,449 45%
trust / mutual fund sales
Emerging Markets 2,529 2,438 4% 2,072 22%
Nordic 416 231 80% 215 93%
Retail Europe 17 17 - 18 (6%)
Wealth Management 3,494 2,144 63% 2,144 63%
US Asset Management unit 1,019 754 35% 750 36%
trust / mutual fund sales
Group Highlights for the YTD 2010 YTD Annuali YTD 2009
nine months 2009 sed %
to 30 September 2010 (consta of
(GBPbn) nt opening
currenc FUM
y
basis)
Net Client Cash Flow (NCCF) (2.3) (0.4) (1%) (0.3)
Long-Term Savings 3.9 0.7 5% 0.9
Nedbank 0.7 0.3 11% 0.2
US Asset Management (7.5) (0.4) (6%) (0.4)
Bermuda 0.3 (0.7) 14% (0.7)
US Life - discontinued 0.3 (0.3) 6% (0.3)
operation*
Note all percentage changes in the above table are shown as rounded sterling
balances.
* US Life has been classified as a discontinued operation, and comparative
Long-Term Savings amounts have been restated for this change.
Overview
In the nine months to 30 September, sales of insurance products for the Long-
Term Savings Division (`LTS`) on an Annual Premium Equivalent (APE) basis
(`APE sales`) increased by 13% and unit trust sales increased by 34% compared
to the nine months to 30 September 2009. In the third quarter, APE sales in
LTS decreased by 2%, and unit trust sales increased by 36% compared to the
third quarter of 2009 (`the comparative period`). APE sales in Emerging
Markets were flat with good performance in the regular premiums retail market.
This was offset by a managed performance in the single premium market, with
lower sales resulting in an optimal business mix. Sales for the Wealth
Management, Nordic and Retail Europe were somewhat depressed by the summer
holiday period, and very tough comparatives in 2009. In addition, Italian tax
changes and the impact of the Nordic management decision to discontinue an
unprofitable product line in late 2009 have resulted in lower volumes in those
businesses.
The recovery in equity markets in the quarter helped drive renewed sales of
equity-based products. This was most marked in Wealth Management where unit
trust sales increased by 51% to GBP1.3 billion and in Emerging Markets where
unit trust sales increased by 25% to R12.6 billion (GBP1.1 billion).
Our Long-Term Savings division achieved positive net client cash flows
(`NCCF`) in the period, although at an overall Group level we experienced a
net client cash outflow in the quarter as a consequence of outflows in US
Asset Management. In Wealth Management net inflows remained close to GBP1
billion, maintaining the trends of the previous quarters of 2010. Emerging
Markets flows improved markedly relative to the comparative period with NCCF
boosted by the non-South African businesses.
Group Funds under Management increased to GBP306.6 billion from GBP292.3
billion at 30 June, reflecting increased market levels and the benefits of
positive NCCF in the LTS businesses.
Strategic progress
We are proceeding well with the execution of the Group strategy outlined in
March 2010. Although we are only six months into our three-year plan, we
continue to be on track with our cost savings and RoE targets and there is no
change to our 2012 debt reduction target. An update will be provided in the
2010 Preliminary Announcement.
The disposal of US Life to Harbinger Capital Partners is progressing well. The
applications for all necessary regulatory approvals have been submitted, and
all required filings have now been submitted to the Maryland and New York
insurance regulators. We believe we are on track for the regulatory review
process to be completed close to the year-end, with completion at or around
the year-end.
Preparations are continuing for the partial IPO of US Asset Management. We
have been encouraged by the calibre of applicants for the CEO role at this
business, for which we are currently interviewing. We have successfully
established Echo Point as a new affiliate and we continue to make progress
with the other operational changes required prior to launching the IPO.
We are pleased with Nedbank`s third quarter results and the business is in
good health. Although we were disappointed that the discussions with HSBC
about a possible sale of this business were terminated, we continue to support
the business and management`s successful execution of Nedbank`s strategy.
We have received a number of awards recognising our customer service across
the Group, including the prestigious national Orange Ask Afrika award for best
customer service in the South African long-term savings industry which was
awarded to Old Mutual South Africa for the third year in a row. In a
significant milestone for our sustainability journey, Old Mutual South Africa
has been awarded a Level 2 Broad-Based Black Economic Empowerment (BBBEE)
status, and now ranks alongside Nedbank as the only two South African
financial services businesses to have achieved Level 2 status.
Capital and Liquidity
The pro-forma Financial Groups Directive ("FGD") surplus at 30 September 2010
of GBP2.1 billion showed an increase over the surplus of GBP1.7 billion at 30
June 2010. As disclosed in our Interim Results, the Group has followed the
FSA`s requirements, and has given it six months advance notice of Old Mutual
plc`s right to call a GBP300 million Lower Tier 2 instrument at the first call
date of 21 January 2011. As a result of that notice, the Lower Tier 2
instrument has been excluded from the regulatory capital surplus calculations
as at 30 September 2010. Notwithstanding such notice, Old Mutual plc has not
made any decision and is not making any representation to bondholders as to
whether it will call the bond at the first call date. The increase in the
coverage ratio since 31 December 2009 was due to emergence of profits from the
Long-Term Savings businesses and positive foreign exchange movements. All our
businesses remain individually well capitalised and the Group has broadly
maintained its liquidity headroom over the period. At 30 September 2010, the
holding company had total liquidity headroom of GBP1.0 billion (30 June 2010:
GBP1.0 billion).
LONG-TERM SAVINGS: Emerging Markets
Excellent regular premium growth
Sales
Excellent growth in regular premium sales continued, but single premium sales
in South Africa and Namibia slowed. Year-to-date APE of R3,932 million for
Emerging Markets remains comfortably ahead (9%) of 2009 levels, while third
quarter sales were flat compared to the third quarter of 2009.
South Africa
Regular premium sales
South African regular premium sales increased by 17% to R903 million in the
third quarter relative to the comparative period, benefiting from some
significant flows in Corporate. Retail Affluent regular premium sales grew by
16%, evidence of a recovery in the economic environment and that
intermediaries are adjusting to the new commission regulations introduced in
2009.
Year-to-date regular premium sales in South Africa increased by 16% against
the comparable period in the prior year, with strong growth in both protection
and savings products. Growth in the retail segments is mainly influenced by
the economic recovery, and Retail Mass sales further benefited from a
reduction in cancellation rates due to improvements in the premium collection
process. During the third quarter, increased focus on the Retail Mass direct
marketing channel has delivered promising results. Corporate protection sales
have been particularly good, due to a number of new policies sold to large
schemes in the second quarter and savings sales have been boosted by strong
growth in umbrella fund volumes.
Single premium sales
South African single premium APE sales for the quarter decreased by 30% to
R376 million relative to the comparative period, primarily due to lower sales
of the Investment Frontiers Fixed Bond product in the quarter resulting in an
optimal business mix. The comparative quarter in 2009 also included
significant institutional flows in the Corporate business.
On a year-to-date basis, single premium sales were 1% lower compared to the
prior year with lower sales in Corporate not fully offset by strong Investment
Frontiers Fixed Bond sales earlier in the year. Overall annuity sales
increased by 4% in the year-to-date period compared to the first nine months
of 2009 due to an increase in Retail annuity sales. Corporate annuities
remained flat on 2009 levels.
Other Emerging Markets
Namibia achieved excellent growth in regular premium sales of 53% for the
quarter relative to the comparative period as the economy continued to
recover. Year-to-date regular premium sales were flat following continued
pressure on affordability during the first half of the year and lower group
protection and umbrella sales in Corporate. Year-to-date single premium sales
were 12% below the prior year largely due to lower Max Investment sales in
Retail Affluent and lower Absolute Growth Portfolio and Protektor
(preservation) sales in Corporate.
Third quarter and year-to-date sales in our Colombian and Mexican (ColMex)
businesses were up 38% and 39% respectively, driven by the introduction of a
lower regular premium product in the first half of 2010. Year-to date sales in
India grew by 15% with improved performance in all channels. Regular premiums
are up 12% and single premiums increased fivefold from a low base in 2009.
Future sales levels will be affected due to the withdrawal of old products and
new product launches. Strong single premium sales in China accounted for a 23%
increase in year-to-date life sales and the newly launched telemarketing
channel is gaining traction.
Unit Trusts
South Africa unit trust sales for the third quarter increased by 46% relative
to the comparative period, boosted by significant flows into Old Mutual Unit
Trust money market funds during the quarter and improved flows into OMIGSA`s
Marriott affiliate following revised asset allocations. Year-to-date sales,
which were down 4%, reflect lower flows into money market funds and lower
reinvestments in the first half of the year. Year-to-date unit trust sales in
Namibia were 35% ahead of the prior year mainly due to continued strong
inflows into money market funds from corporate clients as a result of
competitive returns offered. Third quarter and year-to-date unit trust sales
in Colombia were 23% and 19% ahead of the prior year respectively, following a
successful marketing campaign and stronger relationships with corporate and
institutional customers. As a result of increased productivity we were able to
achieve greater sales with fewer advisors. In Mexico, sales for the quarter
were 46% above those of the comparative period as a result of a large scheme
acquired in September 2010 and better performance in both fixed income and
equity portfolios. In 2010, domestic fixed income portfolios in Mexico
delivered an impressive performance as a result of low inflation.
Net client cash flow
NCCF of R1.6 billion for the quarter was primarily due to improved unit trust
sales in South Africa and ColMex and increased flows into OMIGSA`s
Futuregrowth affiliate. NCCF across the life businesses has improved due to
lower benefit payments and terminations in Corporate, growth in regular
premiums and improved retention in the retail businesses.
In South Africa, year-to-date net negative client cash flow of R5.9 billion
represented a significant improvement on 2009. Retail Affluent NCCF was
positive, but lower than 2009 mainly as a result of higher non-life outflows
and lower reinvested distributions in 2010. Year-to-date Retail Mass NCCF
remained strongly positive and inflows increased by 11% over the same period
last year due to strong regular premium sales and improving persistency,
particularly at durations greater than two years. Outflows increased largely
due to the anticipated increase in maturity payouts from a specific tranche of
policies sold five years ago. Corporate NCCF improved, with higher inflows due
to sustained growth in regular premiums, while benefits and terminations were
lower than in 2009.
In the rest of Emerging Markets, year-to-date NCCF was ahead of the prior
year. Namibian NCCF increased by R1 billion due to inflows secured from the
rebalancing of investment portfolios by the Government Institutions Pension
Fund, and stronger unit trust sales in Mexico following the rallying of
equities and the acquisition of a large pension fund (1 billion Mexican pesos
(R590 million)) in September 2010.
Funds under Management
FUM improved by 10% to R571 billion from the 31 December 2009 level as a
result of improved equity markets and positive NCCF for the third quarter. In
sterling terms, FUM increased by 20% due to the continued strengthening of the
South African rand.
Old Mutual Investment Group (South Africa) (OMIGSA)
Overall investment performance for the quarter has been steady, with both 12-
month and 3-year positioning of OMIGSA`s funds remaining similar to June 2010.
Notably amongst OMIGSA`s affiliates, Value`s OM High Yield Opportunity Fund,
Marriott`s Dividend Income Fund and the Quant Investments` OM Active Quant
Equity Fund were in the first quartile over the 12 months to September.
Futuregrowth continued to perform strongly relative to both peers and
benchmarks on their range of money market, income and bond funds. Similarly,
the portfolios of our Alternative Investment boutique continued to show steady
gains. Within our multi-asset class range, both Macro Strategy`s OM Real
Income and the Symmetry Balanced unit trust funds ended in the first quartile
for the 12 months to September 2010, with most other retail balanced offerings
remaining ahead of the median. Significant performance fee income was recorded
in the first half of 2010 following strong relative performances of our equity
boutiques in the 12 months to March 2010. We do not anticipate the same level
of performance fees in the second half of 2010, nor the mark-to-market gains
of approximately R70 million recorded in the first half of 2010.
Outlook
Although 2010 has been characterised by improved consumer confidence and
increasing demand, the South African economic recovery has been more subdued
than initially expected as a consequence of an unchanged unemployment rate.
After a strong first half, single premium sales were managed down in Retail
Affluent, however the pipeline remains strong in Corporate and flows are
expected to improve in the fourth quarter. Regular premium business is
expected to continue delivering on the strong performance to date. ColMex,
with the assistance of other parts of LTS, continue to develop innovative
products that are focused on customers` needs and intend to launch these
products in 2011.
LONG-TERM SAVINGS: Nordic
Sales reduced following earlier management action
Sales
Life APE sales of SEK441 million were 20% lower than in the comparative
period. A significant amount of this reduction occurred in the Private
segment due to the discontinuance of the unprofitable Link Regular product and
significantly lower sales of Depa. In October 2010 we launched a new
commission model for Depa and have extended the range of investment
opportunities available to our clients. We expect these changes to benefit
future sales of Depa. Sales in the Corporate segment were also lower than the
comparative period as a result of lower labour mobility and salary increases.
Skandia Denmark grew as a consequence of our focus on increasing the
distribution footprint.
In the year-to-date, Nordic showed substantial growth in mutual fund sales,
with sales of SEK1,040 million contributing to a year-to-date increase of 80%
compared to 2009. The driver behind this growth is the improved retail
investment activity due to rising stock markets, combined with client
preference for flexible wrappers.
Net client cash flow
NCCF for the third quarter of SEK1.1 billion (6% as an annualised percentage
of opening FUM) reflected the discontinuance of Link Regular and the lower
volumes of the single premium Depa product. Higher outflows were also seen in
Depa as a significant portion of the in-force business now has no surrender
penalties. Many clients withdrew the investment growth in their policies by
means of partial surrender, leading to an increase in such surrenders in the
period.
Funds under Management and investment management
Funds under management at 30 September 2010 of SEK136.4 billion reflected a 7%
increase from the 31 December 2009 level. This increase primarily resulted
from positive movements in investment markets and positive net client cash
flows.
Investment performance in the third quarter has been good, with Skandia Link`s
average client enjoying investment performance of 3.0% for the quarter.
Average performance on a weighted index (74% MSCI AC World and 26% OMRX Total
Market) during the same period was -0.6%. Clients have generally increased
their risk exposure, with the majority of all net investments being allocated
to Swedish equity funds, but with the balance showing an appetite for Emerging
Markets exposures.
Outlook
The Nordic economies have recovered from the financial turmoil and the equity
markets have risen rapidly since 2008. However, the occupational pension
market is a significant part of our product mix, and salary increases have
been very limited, hence we anticipate that the business will continue to
experience challenges. We continue to improve our customer propositions and
expect that sales volume in the fourth quarter will show growth over third
quarter levels. We are progressing well with our cost savings programme and
remain confident of reaching our 2012 expense targets.
LONG-TERM SAVINGS: Retail Europe
Rising net client cash flows and positive market developments lead to record
FUM levels
Sales
Life APE sales of Euro18 million in the third quarter increased by 13% over
the comparative period. On a year-to-date basis APE sales increased by 10%.
The Polish business was the main driver of sales as a consequence of new
distribution partnerships. Germany delivered a double-digit growth in APE
compared to the third quarter of 2009, while Austrian APE sales remained at a
consistent level to the comparative period. Performance was particularly
strong in unit-linked products, where we increased market share in Austria,
Germany and Poland.
An innovative single premium product distributed in conjunction with the
Metzler private bank was introduced at the end of the period. We expect this
product to have a positive impact on sales going forward.
Net client cash flow
NCCF of Euro111 million for the quarter equated to 9% of opening FUM on an
annualised basis.
Funds under management and investment management
FUM reached Euro5.4 billion, an increase of 15% from the 31 December 2009
level. This positive performance was a result of the continued inflows and
lower surrenders.
Outlook
We expect further growth in new business in the fourth quarter, and anticipate
a good NCCF outcome over the remainder of the year. We continue to reduce our
level of non-commission acquisition costs via our operational improvement
programme.
The project to move part of the customer service and IT functions to South
Africa remains on track. We have commenced recruiting Polish and German
speaking staff in Cape Town to facilitate this move and expect the majority of
implementation costs associated with this project to emerge in 2011 as
headcount is reduced in Europe.
LONG-TERM SAVINGS: Wealth Management
Continued strong new business performance
Sales
Life APE sales for the third quarter were GBP150 million (Q3 2009: GBP147
million), with the small increase relative to the comparative period
reflecting the particularly strong sales in the comparative period as
investment markets recovered. Although sales of regular premium products were
lower than in the third quarter of 2009, the continuing shift to platform non-
wrapped products delivered substantial mutual fund sales of GBP1,287 million,
an increase of 51% on the comparative period.
Total APE sales for the year-to-date of GBP562 million are 36% better than the
comparative period (GBP414 million), mainly attributable to growth in the UK
platform and in Continental Europe, which have increased by GBP89 million
(101%) and GBP58 million (94%) respectively compared to the same period in
2009. The strong production on our UK platform continues, including switches
from the UK legacy book as well as re-registering activity where IFAs move the
whole of their in-force book onto our platform. We continue to add good-sized
new distributors to our platform and expect this to continue in the fourth
quarter. UK legacy sales volumes are continuing at reasonable levels.
Sales volumes on the UK platform of both single premium business and mutual
funds continue to perform well. We report close to GBP1 billion of UK ISA
gross inflows for the nine-month period and positive NCCF of GBP0.6 billion
for the UK in the third quarter alone. In the UK, changing customer
requirements and new regulation being driven by the Retail Distribution Review
are combining to increase demand for platform services, whilst at the same
time reducing demand for more traditional life products. We have reviewed our
products against this back-drop and as a result, we closed our MultiBond,
Critical Illness and commission-based Personal Pension products to new
business. We will continue to review our remaining UK legacy range in light of
changing customer demand and ahead of the Retail Distribution Review rules
coming into effect in 2013. Skandia UK`s H1 2010 market share was 6.9%
compared to 5.8% at the end of 2009, reflecting the growth in platform volumes
offset by a decline in legacy market share of the total UK savings industry as
a result of the product closures.
Continental Europe APE sales volumes of GBP120 million are strongly ahead of
prior year comparatives of GBP62 million, with very high sales in Italy since
the second half of 2009, although volumes have dropped in the third quarter
due to the holiday season. The high sales in Italy earlier in the year were
partially driven by the changes in tax legislation. Although the period
covered by these tax changes has now expired, we continue to make progress due
to the good relationships with our distributors. French volumes increased
relative to the prior year but overall the unit-linked market is recovering
more slowly than initially expected.
Year-to-date APE sales volumes of GBP170 million in the off-shore
International market are slightly higher than the prior year APE sales of
GBP163 million, with growth in the UK, South African and Latin American
regions offset by reductions in regular premium business in Finland, where
legislative changes occurred in late 2009, and Asia where competitive
pressures have increased.
Net client cash flow
NCCF for the quarter was GBP0.9 billion (8% as an annualised percentage of
opening FUM), a substantial increase on the comparative period in 2009, where
platform flows were GBP0.8 billion. Year-to-date NCCF was more than double
prior year levels driven by the strong contributions from Italy and UK
platform markets, which outweighed surrenders in the UK legacy book.
Funds under Management and investment management
Funds under Management benefited from strong NCCF and the equity market uplift
and ended the period at GBP52.8 billion, an increase of 13% from the 31
December 2009 level.
Outlook
Our outlook for the fourth quarter is optimistic based on continuing positive
investor sentiment, notwithstanding a generally more cautious market in the
third quarter. We anticipate continued strong support for the platform model
in all our markets. With the continued shift in the UK market towards a
simplified investment and pension product suite, we anticipate increasing
pressure on retaining our UK legacy funds. While we have retention strategies
in place for this business, we think that we will continue to see net client
outflows from this book of business in the fourth quarter and in the build up
to the implementation of the changes in 2013 resulting from the Retail
Distribution Review. We expect an update from the UK FSA in late November on
the future for rebates and their views on replacement fee-charging structures.
Our focus on cost reduction is demonstrated by GBP25 million of run-rate
savings delivered to date, and we remain confident that we will meet our 2012
expense targets. Our Wealth Management business model is developing in the
context of ongoing migration from the UK legacy book, lower margin products in
International, regulatory changes in Finland, and taxation changes in Italy.
Nedbank Group (Nedbank)
Improved credit loss ratio and non-interest revenue
The full text of Nedbank`s business update for the three months ended 30
September 2010, released on 18 October 2010, can be accessed on Nedbank`s
website:
http://www.nedbankgroup.co.za/pdfs/quarterlyResults/nedbankGroupLimitedQ32010T
radingUpdate.pdf
The following is an extract from it:
"Nedbank remains solidly profitable and well capitalised. The strategic focus
on areas with strong economic profit potential is showing some early signs of
success, particularly in the growth in core fee and commission income within
non-interest revenue (NIR).
Net interest income (NII) at R12,214 million for the nine months ended
September 2010 ("the period") was slightly up on the prior period (Q3 2009:
R12,198 million). The net interest margin held up better than anticipated at
3.32% for the period (Q3 2009: 3.40%), compared to 3.34% for the six months
ended June 2010. The benefit of increased margins on new advances and widening
of asset margins due to a change in asset mix was largely offset by the
negative endowment impact from falling interest rates on capital and the non-
repricing of current and savings accounts and higher term funding costs as
Nedbank lengthened its funding book earlier this year.
Encouragingly, impairments have continued to slow, reflected in lower levels
of early arrears and reduced inflows into defaulted advances in the retail
portfolio. Consequently, Nedbank`s credit loss ratio has improved from 1.46%
for the six months to June 2010 (Q3 2009: 1.52%) to 1.36% for the period.
Although impairment levels have improved across most of the clusters, Nedbank
remains cautious given the sustained high levels of unemployment, personal
indebtedness and tough operating conditions in the wholesale sector. During
the period the adequacy of impairments (both current and forecast) in the
retail home loan portfolio were reviewed by an independent global risk
management consultancy firm. The results of this review confirmed that current
provisioning is appropriate and that forecast provisioning for the medium term
is in line with Nedbank`s planning assumptions.
NIR grew by 10.2% to R9,413 million (Q3 2009: R8,542 million). Core fee and
commission income grew by 17.1% (13.2% growth including in 2009 the Wealth
joint ventures acquired last year from Old Mutual). Growth resulted from
increased volumes in electronic banking, cash handling, vehicle asset finance,
personal loans and insurance related fee income. Trading income was flat as a
result of low market volatility. Private equity income was impacted by lower
market revaluations on certain investments and NIR was negatively impacted by
R207 million over the period as a result of fair value adjustments from
Nedbank`s subordinated debt unwinding as credit spreads narrowed.
Expenses remain in line with expectations and the guidance given in the 2010
interim results.
Total assets at 30 September 2010 increased by 10.0% (annualised) to R613.4
billion from December 2009. Advances grew by 10.1% (annualised) to R484.2
billion reflecting solid growth across most of the retail asset categories,
with the exception of home loans where market share decreased marginally in
line with Nedbank`s strategy of growing higher economic profit generative
businesses. Credit appetite in the business sector remains subdued due to
excess capacity and public sector spending momentum which has slowed, as
expected, post the FIFA World Cup.
Optimising Nedbank`s funding and liquidity profile remains a key management
focus, with particular emphasis on lengthening the liquidity duration of their
funding profile. The long-term funding ratio improved to in excess of 24% as
at 30 September 2010 (Q3 2009: 21.2%). Deposits increased 8.3% to R498.6
million (annualised) and long-term senior debt grew by 42.9% (annualised) to
R26.5 billion during the period.
Nedbank continues to be well capitalised with capital ratios well above
current regulatory and anticipated Basel III requirements, as well as
Nedbank`s own internal targets.
August 2010 Internal Regulatory
ratio * target range minimum
Core Tier 1 9.8% 7.5% to 9.0% 5.25%
ratio
Tier 1 ratio 11.4% 8.5% to 10.0% 7.00%
Total capital 14.6% 11.5% to 13.0% 9.75%
ratio
* September 2010 capital adequacy ratios will be reported on when Nedbank
releases its Pillar III report in due course.
Nedbank has recently completed its 2011-13 planning process and, given their
current economic outlook, remain confident that they will meet all their
medium- to long-term financial targets by 2013."
The Group`s shareholding in Nedbank at 30 September 2010 was 54% for IFRS AOP
purposes.
Mutual & Federal
Steady progress in highly competitive market
Mutual & Federal delivered very solid returns in the first nine months of the
year, with the third quarter broadly continuing the improved trends of the
first half. Competition in the industry remains intense and economic activity
in the country has not recovered as quickly as initially hoped.
Premiums grew by 4% in the third quarter of 2010 relative to the comparative
period, with both the commercial and personal schemes portfolios growing in
excess of inflation. This improving trend reflected the focus on client
service in recent periods. The credit insurance portfolio also continued to
grow strongly in the third quarter and demand for these products remains very
buoyant.
The claims environment was generally favourable, with a reduced number of
industrial fires and fewer weather-related claims following moderate rainfall
conditions, underscoring the weather-related seasonality of claims. The claims
ratios benefited from a number of initiatives to control claim costs and
vehicle repair costs in particular remained tightly controlled with overall
increases below the level of inflation. The underwriting result continued to
improve during the third quarter.
We are pursuing a number of initiatives to promote growth by servicing
different elements of the market more appropriately and these are expected to
deliver further benefits during 2011. The recent launch of the "iWyze" product
in conjunction with the Old Mutual South Africa Retail Mass business has been
successful with initial sales targets being met.
We have worked hard on improving service standards and were proud to improve
our position in the Ask Afrika survey on short term insurance to second place
in 2010 from fourth place in 2009. We are confident that we will be able to
show further service improvements as a consequence of the investment we have
made in new systems and staff training.
Investment income for the period was impacted by historically low levels of
interest rates. This was somewhat offset by an encouraging recent increase in
the value of listed equities and the overall portfolio has accordingly
delivered a satisfactory return.
US Asset Management
Funds under Management increase by $14.3 billion during the third quarter
Funds under Management at 30 September 2010 were $257.6 billion (GBP163.8
million), an increase of $14.3 billion or 6% from 30 June 2010. Market
appreciation during the quarter was offset by net client outflows due
primarily to rebalancing-related withdrawals from continuing clients. The
management buy-out of the Thomson Horstmann & Bryant affiliate was also
completed during the quarter, resulting in a reduction of $1.7 billion in FUM,
primarily in US core equities. Third quarter net outflows of $3.5 billion
represented 1.3% of the FUM at the start of the year. Although new client
inflows exceeded client terminations by $208 million, there were $3.7 billion
of net withdrawals in the quarter from continuing clients due to rebalancing
and reallocations.
Long-term investment performance of US Asset Management affiliates remains
solid compared to benchmarks. At 30 September 2010, 58% of assets across our
18 affiliates and more than 160 investment strategies had outperformed their
benchmarks over the trailing five-year period, while 36% of assets
outperformed their respective benchmarks over a three-year period. The
difference in three-year and five-year investment performance is largely
attributable to recent underperformance of short-duration assets in Dwight
Asset Management`s stable value product. Management remains confident that its
multi-boutique model, which encourages investment conviction and retention of
investment talent, results in investment outperformance over full market
cycles.
Management fees for the quarter, driven by average FUM, were broadly in line
with the comparative period in 2009. Transaction and performance fees for the
period were also consistent with the third quarter of 2009 and remain at
cyclical lows. Targeted operating expense savings have been realised during
the current year, enabling the business to continue investing for growth in
new investment talent, products and distribution while maintaining overall
operating expense levels. In particular, we continue to expand our global
distribution efforts with additional staff added in Europe and the Middle
East.
Echo Point Investment Management commenced operations as an affiliate on 1
October 2010, launching with $1.7 billion in Funds under Management in
international growth equities. The addition of Echo Point is complementary to
US Asset Management`s existing boutique structure, offering a source of future
growth as investors continue to seek international diversification.
Bermuda
Run-off in line with expectation
The market-consistent valuation of the Guaranteed Minimum Accumulation and
Death Benefit (GMAB/GMDB) liabilities, representing the guarantee riders
attached to certain variable annuity policies, improved to $849 million at 30
September 2010 (30 June 2010: $1,029 million). This market-consistent
valuation is determined with reference to our fund mapping process, which is
updated on a quarterly basis. Over the nine-month period to 30 September 2010
we introduced refinements to the fund mappings to better allocate exposures to
Asian and other emerging markets, which improved the accuracy of liability
determination and reduced hedging basis risk.
Surrenders continued to occur largely in respect of variable annuity contracts
without GMABs and we instituted focused conservation activity in order to
retain as much of this profitable business as possible. Surrender behaviour in
respect of variable annuity contracts with GMABs is directly influenced by the
differential between the value of the underlying funds and the nominal level
of the GMAB, coupled to the financial circumstances of the policyholder. The
recovery in equity markets has resulted in an increase in the number of
contracts where the underlying fund value is greater than the GMAB, which we
expect will result in an increased level of surrenders, accelerating the run-
off of these contracts. This was clearly demonstrated in September and October
2010, where the increase in equity markets led to a marked increase in
surrenders of policies with GMABs.
The hedge strategy remained unchanged over the period. The business continues
to dynamically manage the underlying economics of the hedge programme, in
order to strike a balance between the potential changes in the income
statement, available cash, liquidity and transactional costs arising from
movements in market levels. The level of hedges is monitored closely and
adjusted where considered appropriate via a strict oversight process. The stop-
loss protocol is monitored daily by the Group via reference to the mark-to-
market movement in hedge assets, GMAB liabilities and Value at Risk. This
allows the business and the Group to ensure that they understand the resultant
impact on capital, cash and profit and loss on a timely basis. The aggregate
economic result since the current hedge framework was implemented on 17
September 2009 to 31 October 2010 was a gain of $54 million. Over the period
from 31 July 2010 to 31 October 2010 the aggregate economic result was a gain
of $108 million.
Discontinued operation: US Life
Steady business improvement through managed growth and improved credit outlook
As announced on 6 August 2010, the Old Mutual Group has agreed the sale of US
Life to Harbinger Capital Partners, and the sale is expected to complete at or
around the year-end.
Sales
Total gross sales for the third quarter were $378 million and $994 million for
the year-to-date, compared to $203 million and $623 million for the same
periods in 2009. The sales levels are within the range set for the business
and reflect the approach to managing capital within the business.
Funds under Management and investment management
Funds under Management ended the period at $17.7 billion, up $0.7 billion from
the 30 June 2010 position, primarily due to a $0.5 billion increase in the
market value of the investment portfolio for the period. Year-to-date net
client cash flows improved from prior year, primarily due to lower surrender
activity and higher sales in the current period. Net cash holdings at the end
of the third quarter were $1,046 million.
Investment performance
The net unrealised position on the fixed income security portfolio continued
to improve in the quarter to a net gain of $661 million at 30 September 2010
($138 million net unrealised gain at 30 June 2010 and $497 million net
unrealised loss at 31 December 2009). This reflected lower yields across the
credit spectrum, most significantly in corporate bonds. There continues to be
selective de-risking undertaken by management. IFRS impairments for the first
nine months of 2010 were $25 million, compared to $240 million for the same
period in 2009. There were no defaults in the first nine months of 2010.
To date, US Life has sold $417 million of the total $551 million of specified
securities that are to be liquidated based on the terms of the stock purchase
agreement with Harbinger Capital Partners, and net losses of $41 million were
recognised on these sales.
The estimated Risk-Based Capital position at 30 September 2010 was around
375%.
Material Events and Transactions
Other than as disclosed in this Interim Management Statement, there have been
no material events and transactions since 30 September 2010.
Enquiries
External Communications
Patrick Bowes UK +44 (0)20 7002 7440
Investor Relations
Deward Serfontein SA +27 (0)82 810 5672
Aleida White UK +44 (0)20 7002 7287
Media
Don Hunter (Finsbury) UK +44 (0)20 7251 3801
Notes to Editors:
A conference call for analysts and investors will take place at 9.00am (UK
time), 10.00am (Central European time), 11.00am (South African time) today.
Analysts and investors who wish to participate in the call should dial the
following numbers quoting conference ID 5963423:
UK: +44 (0)20 7806 1956
South Africa: 0800 991 539
Sweden: +46 (0)853 52 6407
US: +1 212 444 0413
International: +44 (0)20 7806 1956
Playback (available until midnight on 18 November 2010), access code:
5963423#:
UK / Standard International: +44 (0)20 7111 1244
US:+1 347 366 9565
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
July to 4 November 2010. The business update is included in this Interim
Management Statement. A Disclosure Supplement relating to the Company`s
business update can be found on our website. This contains key financial data
for the first nine months of 2010 and 2009.
Life assurance APE sales are calculated as the sum of (annualised) new regular
premiums and 10% of the new single premiums written in an annual reporting
period. Our joint ventures in India and China are not consolidated for APE
purposes.
The purchase price for US Life has been guaranteed by Harbinger Capital
Partners Master Fund I, Ltd, which is one of the four funds managed by
Harbinger Capital Partners. In total Harbinger Capital Partners manages over
$7 billion of assets.
Average foreign exchange rates used for constant currency calculations
Q3 2010 Q3 2009 Appreciation / FY 2009 Appreciation /
(depreciation) (depreciation)
of local of local
currency currency
Rand 11.44 13.46 15.01% 13.17 13.14%
USD 1.53 1.54 0.65% 1.57 2.55%
SEK 11.27 12.13 7.09% 11.97 5.85%
Euro 1.17 1.13 (3.54%) 1.12 (4.46%)
As announced with the Company`s interim results, an interim dividend of 1.1p
(or its equivalent in other applicable currencies) for the six months ended 30
June 2010 will be paid on 30 November 2010. The record date for this dividend
payment was the close of business on 15 October 2010 for all the Exchanges
where the Company`s shares are listed, and the shares are now trading ex-
dividend on all Exchanges. Further information about the interim dividend was
included in the Company`s announcement Ref 129/10 dated 6 August 2010.
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 and its subsidiaries` 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 subsidiaries 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.
Sponsor:
Merrill Lynch South Africa (Pty) Limited
Date: 04/11/2010 09:01:01 Produced by the JSE SENS Department.
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